UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended March 31, 2009




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from  
 to




COMMISSION
FILE NUMBER 000-50813








St.
Bernard Software, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
            20-0996152(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)




15015
Avenue of Science, San Diego, CA 92128


(Address
of principal executive offices)




(858)
676-2277


(Registrant’s
telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports
      required to be filed by Section 13 or 15(d) of the Securities
      Exchange Act of 1934 during the preceding 12 months (or for such
      shorter period that the registrant was required to file such reports); and
      (2) has been subject to such filing requirements for the past
      90 days.




Yes  
      þ
            No  
       ̈




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




Large
      accelerated filer    ̈
            Accelerated
      filer   ̈
            Non-accelerated
      filer    ̈
            Smaller
      Reporting Company   þ





Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange
Act).





Yes  
       ̈
            No  
      þ





The
      registrant had 14,838,940 shares of its common stock, par value $0.01 per
      share, outstanding at May 5, 2009.











ST.
BERNARD SOFTWARE, INC.




INDEX
TO FORM 10-Q




PagePART I—FINANCIAL
      INFORMATIONITEM 1.
                                          CONSOLIDATEDFINANCIAL STATEMENTS
                                          1CONSOLIDATED
      BALANCE SHEETS  AS OF MARCH 31, 2009 (UNAUDITED) ANDDECEMBER 31,
      2008
                                          1UNAUDITED
      CONSOLIDATED STATEMENTS OF INCOME  FOR THE THREE MONTHS ENDED MARCH
      31, 2009 AND MARCH 31, 2008
                                          2UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
      DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2009
                                          3UNAUDITED CONSOLIDATED STATEMENTS OF CASH
      FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31,
      2008
                                          4NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                          5ITEM
      2.
                                          MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                          12ITEM
      3.
                                          QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                          19ITEM
      4.
                                          CONTROLS
      AND PROCEDURES
                                          19PART
      II—OTHER INFORMATIONITEM 1.
                                          LEGAL
      PROCEEDINGS
                                          19ITEM 1A.
                                          RISK
      FACTORS
                                          19ITEM
      2.
                                          UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                          20ITEM
      3.
                                          DEFAULTS
      UPON SENIOR SECURITIES
                                          20ITEM
      4.
                                          SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                          20ITEM
      5.
                                          OTHER
      INFORMATION
                                          20ITEM
      6.
                                          EXHIBITS
                                          20











PART
I – FINANCIAL INFORMATION





Item 1.  Consolidated Financial
Statements




St.
      Bernard Software, Inc.Consolidated
      Balance SheetsMarch
      31,
                                                      2009
                                                    
                                                    
                                                    December
      31,
                                                      2008(Unaudited)AssetsCurrent
      AssetsCash
      and cash equivalents
                                                    
                                                    $
                                                    930,000
                                                    
                                                    
                                                    $
                                                    2,051,000Accounts
      receivable - net of allowance for doubtful accounts of$50,000
      and $52,000 at March 31, 2009 and December 31, 2008,respectively
                                                    
                                                    
                                                    2,599,000
                                                    
                                                    
                                                    
                                                    3,170,000Inventories
      - net
                                                    
                                                    
                                                    437,000
                                                    
                                                    
                                                    
                                                    364,000Prepaid
      expenses and other current assets
                                                    
                                                    
                                                    607,000
                                                    
                                                    
                                                    
                                                    381,000Total
      current assets
                                                    
                                                    
                                                    4,573,000
                                                    
                                                    
                                                    
                                                    5,966,000Fixed
      Assets - Net
                                                    
                                                    
                                                    787,000
                                                    
                                                    
                                                    
                                                    828,000Other
      Assets
                                                    
                                                    
                                                    439,000
                                                    
                                                    
                                                    
                                                    281,000Goodwill
                                                    
                                                    
                                                    7,568,000
                                                    
                                                    
                                                    
                                                    7,568,000Total
      Assets
                                                    
                                                    $
                                                    13,367,000
                                                    
                                                    
                                                    $
                                                    14,643,000Liabilities
      and Stockholders’ DeficitCurrent
      LiabilitiesShort-term
      borrowings
                                                    
                                                    $
                                                    2,100,000
                                                    
                                                    
                                                    $
                                                    2,462,000Accounts
      payable
                                                    
                                                    
                                                    1,537,000
                                                    
                                                    
                                                    
                                                    1,270,000Accrued
      compensation expenses
                                                    
                                                    
                                                    951,000
                                                    
                                                    
                                                    
                                                    1,361,000Accrued
      expenses and other current liabilities
                                                    
                                                    
                                                    603,000
                                                    
                                                    
                                                    
                                                    518,000Warranty
      liability
                                                    
                                                    
                                                    179,000
                                                    
                                                    
                                                    
                                                    195,000Current
      portion of capitalized lease obligations
                                                    
                                                    
                                                    124,000
                                                    
                                                    
                                                    
                                                    147,000Deferred
      revenue
                                                    
                                                    
                                                    10,178,000
                                                    
                                                    
                                                    
                                                    10,469,000Total
      current liabilities
                                                    
                                                    
                                                    15,672,000
                                                    
                                                    
                                                    
                                                    16,422,000Deferred
      Rent
                                                    
                                                    
                                                    89,000
                                                    
                                                    
                                                    
                                                    118,000Capitalized
      Lease Obligations, Less Current Portion
                                                    
                                                    
                                                    3,000
                                                    
                                                    
                                                    
                                                    22,000Deferred
      Revenue
                                                    
                                                    
                                                    6,982,000
                                                    
                                                    
                                                    
                                                    7,152,000Total
      liabilities
                                                    
                                                    
                                                    22,746,000
                                                    
                                                    
                                                    
                                                    23,714,000Stockholders’
      DeficitPreferred
      stock, $0.01 par value; 5,000,000 sharesauthorized;
      no shares issued and outstanding
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Common
      stock, $0.01 par value; 50,000,000 shares authorized;14,838,940
      and 14,783,090 shares issued and outstanding atMarch
      31, 2009 and December 31, 2008, respectively
                                                    
                                                    
                                                    148,000
                                                    
                                                    
                                                    
                                                    148,000Additional
      paid-in capital
                                                    
                                                    
                                                    40,633,000
                                                    
                                                    
                                                    
                                                    40,308,000Accumulated
      deficit
                                                    
                                                    
                                                    (50,160,000
                                                    )
                                                    
                                                    
                                                    (49,527,000
                                                    )Total
      stockholders’ deficit
                                                    
                                                    
                                                    (9,379,000
                                                    )
                                                    
                                                    
                                                    (9,071,000
                                                    )Total
      Liabilities and Stockholders’ Deficit
                                                    
                                                    $
                                                    13,367,000
                                                    
                                                    
                                                    $
                                                    14,643,000The
      accompanying notes are an integral part of these consolidated financial
      statements.
  1
  St.
      Bernard Software, Inc.Unaudited
      Consolidated Statements of OperationsThree
      months ended March 31,2009
                                
                                
                                2008RevenuesSubscription
                                
                                $
                                3,689,000
                                
                                
                                $
                                3,304,000Appliance
                                
                                
                                754,000
                                
                                
                                
                                601,000License
                                
                                
                                6,000
                                
                                
                                
                                4,000Total
      Revenues
                                
                                
                                4,449,000
                                
                                
                                
                                3,909,000Cost
      of RevenuesSubscription
                                
                                
                                574,000
                                
                                
                                
                                556,000Appliance
                                
                                
                                536,000
                                
                                
                                
                                425,000License
                                
                                
                                2,000
                                
                                
                                
                                1,000Total
      Cost of Revenues
                                
                                
                                1,112,000
                                
                                
                                
                                982,000Gross
      Profit
                                
                                
                                3,337,000
                                
                                
                                
                                2,927,000Operating
      ExpensesSales
      and marketing
                                
                                
                                1,660,000
                                
                                
                                
                                1,816,000Research
      and development
                                
                                
                                1,035,000
                                
                                
                                
                                753,000General
      and administrative
                                
                                
                                1,194,000
                                
                                
                                
                                1,198,000Total
      Operating Expenses
                                
                                
                                3,889,000
                                
                                
                                
                                3,767,000Loss
      from Operations
                                
                                
                                (552,000
                                )
                                
                                
                                (840,000
                                )Other
      IncomeInterest
      expense - net
                                
                                
                                92,000
                                
                                
                                
                                143,000Gain
      on sale of assets
                                
                                
                                -
                                
                                
                                
                                (320,000
                                )Other
      income
                                
                                
                                (16,000
                                )
                                
                                
                                (264,000
                                )Total
      Other Income
                                
                                
                                76,000
                                
                                
                                
                                (441,000
                                )Loss
      Before Income Taxes
                                
                                
                                (628,000
                                )
                                
                                
                                (399,000
                                )Income
      tax expense
                                
                                
                                (5,000
                                )
                                
                                
                                -Net
      Loss
                                
                                $
                                (633,000
                                )
                                
                                $
                                (399,000
                                )Loss
      Per Common Share - Basic and Diluted
                                
                                $
                                (0.04
                                )
                                
                                $
                                (0.03
                                )Weighted
      Average Shares Outstanding
                                
                                
                                14,837,699
                                
                                
                                
                                14,771,825The
      accompanying notes are an integral part of these consolidated financial
      statements.
   2
  St.
      Bernard Software, Inc.Unaudited
      Consolidated Statement of Stockholders' DeficitAdditionalCommon Stock
                            
                            
                            Paid-in
                            
                            
                            AccumulatedShares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Deficit
                            
                            
                            TotalBalance
      at December 31, 2008
                            
                            
                            14,783,090
                            
                            
                            $
                            148,000
                            
                            
                            $
                            40,308,000
                            
                            
                            $
                            (49,527,000
                            )
                            
                            $
                            (9,071,000
                            )Common
      stock issued under the employee stock purchase plan
                            
                            
                            55,850
                            
                            
                            
                            -
                            
                            
                            
                            9,000
                            
                            
                            
                            -
                            
                            
                            
                            9,000Stock-based
      compensation expense
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            357,000
                            
                            
                            
                            -
                            
                            
                            
                            357,000Reclassification
      of warrants to warrant derivative liability
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (41,000
                            )
                            
                            
                            -
                            
                            
                            
                            (41,000
                            )Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (633,000
                            )
                            
                            
                            (633,000
                            )Balance
      at March 31, 2009
                            
                            
                            14,838,940
                            
                            
                            $
                            148,000
                            
                            
                            $
                            40,633,000
                            
                            
                            $
                            (50,160,000
                            )
                            
                            $
                            (9,379,000
                            )The
      accompanying notes are an integral part of these consolidated financial
      statements.
    3
  St.
      Bernard Software, Inc.Unaudited
      Consolidated Statements of Cash FlowsThree
      months ended March 31,2009
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    2008Cash
      Flows From Operating ActivitiesNet
      loss
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    (633,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    (399,000
                                                                                                                                    )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    104,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    164,000Allowance
      for doubtful accounts
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (2,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (22,000
                                                                                                                                    )Gain
      on sale of assets
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (320,000
                                                                                                                                    )Gain
      on change in fair value of warrant derivative liability
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (16,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -Stock-based
      compensation expense
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    357,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    58,000Noncash
      interest expense
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    38,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    61,000Increase
      (decrease) in cash resulting from changes in:Accounts
      receivable
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    573,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    717,000Inventories
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (73,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (113,000
                                                                                                                                    )Prepaid
      expenses and other assets
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (421,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (172,000
                                                                                                                                    )Accounts
      payable
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    267,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (921,000
                                                                                                                                    )Accrued
      expenses and other current liabilities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (361,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (148,000
                                                                                                                                    )Deferred
      rent
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (19,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    115,000Warranty
      liability
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (16,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    12,000Deferred
      revenue
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (461,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (389,000
                                                                                                                                    )Net
      cash used in operating activities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (663,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (1,357,000
                                                                                                                                    )Cash
      Flows From Investing ActivitiesPurchases
      of fixed assets
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (63,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -Proceeds
      from the sale of assets
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    320,000Net
      cash provided (used) by investing activities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (63,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    320,000Cash
      Flows From Financing ActivitiesProceeds
      from the sales of stock under the employee stock purchase
    plan
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    9,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    6,000Principal
      payments on capitalized lease obligations
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (42,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (37,000
                                                                                                                                    )Net
      increase (decrease) in short-term borrowings
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (362,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    605,000Net
      cash provided (used) by financing activities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (395,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    574,000Net
      Decrease in Cash and Cash Equivalents
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (1,121,000
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (463,000
                                                                                                                                    )Cash
      and Cash Equivalents at Beginning of Period
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    2,051,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1,297,000Cash
      and Cash Equivalents at End of Period
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    930,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    834,000Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for:Interest
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    34,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    108,000Income
      taxes
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    3,000
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    -
  Non
Cash Investing and Financing Activities:
 In
January 2009, the Company reclassified 463,500 warrants with an estimated fair
value of $41,000 from equity to warrant derivative liability.
  In July
2008, the Company issued warrants to purchase up to 450,000 shares of the
Company's common stock in connection with a loan agreement.  Deferred
debt issuance costs of $125,000 were recorded based on the estimated fair value
of the warrants.  See Note 3.
 
 In
January 2008, the Company issued warrants to purchase up to 140,350 shares of
the Company's common stock in connection with the amendment of a loan
agreement.  Deferred debt issuance costs of $58,000 were recorded
based on the estimated fair value of the warrants. See Note 3.
 
 In
January 2008, the Company issued warrants to purchase up to 463,500 shares of
the Company's common stock in connection with a loan agreement.  Debt
discount of $151,000 was recorded based on the estimated relative fair value of
the warrants.  See Note 3.
 The
accompanying notes are an integral part of these consolidated financial
statements.
 4
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 
 
  1.
Summary of Significant Accounting Policies
  St. Bernard Software, Inc., a
Delaware corporation (“we,” “us,”  “our,” the “Company,” or “St.
Bernard”) is a software development company that designs, develops, and markets
Secure Content Management (“SCM”) and policy compliance solutions to small,
medium, and enterprise class customers. The Company sells its products through
distributors, dealers, and original equipment manufacturers (“OEMs”), and
directly to network managers and administrators worldwide.
  Basis of
presentation
  The
consolidated balance sheet as of March 31, 2009, the consolidated statements of
operations for the three months ended March 31, 2009 and 2008, the consolidated
statement of stockholders’ deficit for the three months ended March 31, 2009,
and the consolidated statements of cash flows for the three months ended March
31, 2009 and 2008, are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations, stockholders’
deficit, and cash flows for the interim periods presented. The consolidated
balance sheet as of December 31, 2008 was derived from the Company’s audited
financial statements. Operating results for the interim periods presented are
not necessarily indicative of results to be expected for the fiscal year ending
December 31, 2009. These consolidated financial statements should be read in
conjunction with the Company’s December 31, 2008 consolidated financial
statements and notes thereto included in the Company’s Annual Report filed on
Form 10-K with the Securities and Exchange Commission on March 11,
2009.
  Use
of estimates
  The
preparation of the consolidated financial statements in conformity with U.S
generally accepted accounting principles (“U.S. GAAP”) requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Significant estimates used in preparing the consolidated financial statements
include those assumed in computing revenue recognition, the allowance for
doubtful accounts, warranty liability, the valuation allowance on deferred tax
assets, testing goodwill for impairment, and stock-based
compensation.
  Liquidity
  As of
March 31, 2009, the Company had approximately $930,000 in cash and cash
equivalents and a working capital deficit of $11.1
million.  Approximately $10.2 million of our current liability balance
at March 31, 2009 consisted of deferred revenues, which represents amounts that
are expected to be amortized into revenue as they are earned in future periods.
The Company also had a stockholders’ deficit of approximately $9.4 million at
March 31, 2009.
  The
Company has a history of losses and has not yet been able to achieve
profitability. For the three months ended March 31, 2009 and 2008, the Company
incurred net losses of $633,000 and $399,000, respectively. Losses from
operations decreased from $840,000 in the first quarter of 2008 to $552,000 in
the respective period in 2009. The accumulated deficit was approximately $50.2
million and $50.0 million as of March 31, 2009 and 2008, respectively. In an
effort to achieve profitability, the Company has made and continues to make
substantial changes to the cost structure of its business. These changes include
the closure of its sales and marketing offices in Europe and Australia, reducing
headcount to be in line with the current size of its business, renegotiating
vendor contracts, and refocusing its marketing strategy around its core
business. During February 2009, the Company also extended to May 15, 2010 the
maturity date of the Loan and Security Agreement (the “SVB Loan Agreement”) with
Silicon Valley Bank. (“SVB”) and also negotiated a significant reduction in the
interest rate.
  The
Company believes that its existing cash resources, combined with projected
collections on billings, reduced expenditures based on implemented cost
reductions, and borrowing availability under existing credit facilities, will
provide sufficient liquidity for the Company to meet its continuing obligations
for the next twelve months. However, there can be no assurances that projected
revenue will be achieved or the improvement in operating results will occur. In
the event cash flow from operations is not sufficient, the Company may require
additional sources of financing in order to maintain its current operations.
These additional sources of financing may include public or private offerings of
equity or debt securities. Whereas management believes it will have access to
these financing sources, no assurance can be given that additional sources of
financing will be available on acceptable terms, on a timely basis, or at
all.
 
 5
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
(Continued)
 
  Loss
per common share
  Basic
loss per common share is calculated by dividing the net loss for the period by
the weighted average number of shares of common stock outstanding during the
period. Diluted loss per common share includes the components of basic loss per
common share and also gives effect to dilutive common stock equivalents.
Potentially dilutive common stock equivalents include stock options and warrants
(See Notes 2 and 9). No dilutive effect was calculated for the three months
March 31, 2009 and 2008 as the Company reported a net loss in each period and
the effect would have been anti-dilutive.
  New
accounting standards
  In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock”
(“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company's own stock and (b) classified in stockholders' equity in the statement
of financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer's own stock
and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception.
The Company’s adoption of EITF 07-5 effective January 1, 2009, resulted in the
identification of certain warrants that were determined to be ineligible for
equity classification because of certain provisions that may result in an
adjustment to their exercise price. Accordingly, these warrants were
reclassified as liabilities upon the effective date of EITF 07-5 and re-measured
at fair value as of March 31, 2009 with changes in the fair value recognized in
other income for the quarter ended March 31, 2009 (See Note 5).
  In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). Under FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years and requires retrospective application. The Company has adopted
EITF 03-6-1 during the first quarter of 2009. The adoption did not have a
material impact on the Company’s financial position, cash flows, or results of
operation.
  In April
2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FAS
142, “Goodwill and Other
Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure
related to the determination of intangible asset useful lives. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008 and is to be
applied prospectively to intangible assets acquired after the effective
date.  The Company has adopted FSP FAS 142-3 during the first quarter
of 2009. The adoption of FSP FAS 142-3 did not have a material impact on its
financial position, cash flows, or results of operations.
 
 6
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
(Continued)
 
  In
September 2006, FASB issuedSFAS No. 157,
“Fair Value Measurements”(“SFAS 157”). This Statement defines fair value, establishes a framework
for measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements. This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
Board has previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change the current practice. In February
2008, the FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157
for all non-financial assets and liabilities, except those items recognized or
disclosed at fair value on an annual or more frequent recurring basis, until
years beginning after November 15, 2008.  The Company’s adoption of
SFAS 157 for its financial assets and liabilities on January 1, 2008 did not
have a material impact on the Company’s consolidated financial position, cash
flows, or results of operations.  The Company has determined that the
adoption of FSP FAS 157-2 during the first quarter of 2009 related to its
non-financial assets and liabilities did not have a material impact on its
financial position, cash flows, or results of operations.
  Reclassifications
  Certain
prior year reclassifications have been made for consistent presentation. These
reclassifications have no effect on previously reported net income.
  2.
Stock-based Compensation Expense
  Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of Statement of Financial Accounting Standards, or SFAS, No. 123R (revised
2004), “Share-based Payment”(“SFAS 123R”) using the modified prospective method. Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006 are based upon the grant date fair value estimated in
accordance with SFAS 123R.
  The
Company has non-qualified and incentive stock option plans (together, the
“Plans”) providing for the issuance of options to employees and others as deemed
appropriate by the Board of Directors. Terms of options issued under the Plans
include an exercise price equal to the estimated fair value (as determined by
the Board of Directors) at the date of grant, vesting periods generally between
three and five years, and expiration dates not to exceed ten years from the date
of grant. The determination of fair value of the Company’s stock is derived
using the stock price at the grant date.
  Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected life of the stock options granted, the
expected stock price volatility factor, and the pre-vesting option forfeiture
rate. The fair value of options granted during the quarters ended March 31, 2009
and 2008 was calculated using the Black-Scholes option pricing model using the
valuation assumptions in the table below. The Company estimates the expected
life of stock options granted based upon management’s consideration of the
historical life of the options and the vesting and contractual period of the
options granted. The Company estimates the expected volatility factor based on
the weighted average of the historical volatility of three publicly traded
surrogates of the Company and the Company’s implied volatility from its common
stock price. The Company applies its risk-free interest rate based on the U.S.
Treasury yield in effect at the time of the grant. The Company has no history or
expectation of paying any cash dividends on its common
stock.  Forfeitures were estimated based on historical
experience.
  
 Three
      Months Ended
                    
                    Three
      Months EndedMarch
      31, 2009
                    
                    March
      31, 2008Average
      expected life (years)
                    
                    6.5
                    
                    6.5Average
      expected volatility factor
                    
                    74.1
                    %
                    74.4
                    %Average
      risk-free interest rate
                    
                    2.6
                    %
                    3.6
                    %Average
      expected dividend yield
                    
                    0
                    
                    0
   Total
stock-based compensation expense was approximately $357,000 and $58,000 for the
three months ended March 31, 2009 and 2008, respectively. The stock-based
compensation expenses were charged to operating expenses. The effect on loss per
share as a result of the stock based compensation expense was approximately
$0.02 and $0.00 for the three months ended March 31, 2009 and 2008,
respectively. The tax effect was immaterial.
 
 7
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
(Continued)
 
  The
following is a summary of stock option activity under the Plans as of
December 31, 2008 and changes during the three months ended March 31,
2009:
  Number
      of
                          Shares
                          Outstanding
                        
                        
                        Weighted
                          Average
                          Exercise
                          PriceOptions
      outstanding at December 31, 2008
                        
                        
                        2,562,976
                        
                        
                        $
                        1.29Granted
                        
                        
                        11,500
                        
                        
                        $
                        0.22Exercised
                        
                        
                        —
                        
                        
                        $
                        —Forfeited
                        
                        
                        (307,222
                        )
                        
                        $
                        1.56Options
      outstanding at March 31, 2009
                        
                        
                        2,267,254
                        
                        
                        $
                        0.59Options
      vested and expected to vest at March 31, 2009
                        
                        
                        2,028,887
                        
                        
                        $
                        0.63Options
      exercisable at March 31, 2009
                        
                        
                        1,198,033
                        
                        
                        $
                        0.89
 
 On
February 9, 2009, the Board of Directors of St. Bernard approved an amendment to
its outstanding non-qualified stock option grants issued by St. Bernard to all
current employees and directors under its 2005 Stock Plan reducing the exercise
price of the unexercised stock options to the fair market price of St. Bernard’s
common stock on the close of business on February 10, 2009 of $0.25 per share.
The intention of St. Bernard’s Board of Directors in approving the amendment is
to reestablish the incentive and retentive value of the stock options for the
affected employees and directors, as all of the relevant options had been left
significantly “out-of-the-money” due to recent declines in the price of St.
Bernard’s common stock. The amendment affects options to purchase a total of up
to 1,787,999 shares with a weighted average price per share of approximately
$1.09 of St. Bernard common stock, including options granted to executive
officers and directors of the Company. The amendment to the options did not
change any other terms of the original option grants. In accordance with the
provisions of SFAS 123R, the reduction of the option exercise price is being
accounted for as a modification of the original award.  Accordingly,
incremental compensation cost of approximately $85,000, determined based on the
difference between the fair value of the modified award over the fair value of
the original award immediately before the modification, will be recognized over
the remaining vesting period of the grant.
  Additional
information regarding options outstanding as of March 31, 2009 is as
follows:
 
 Exercise
                Prices
              
              Number
      of
                Shares
                Outstanding
              
              Weighted
                Average
                Remaining
                Contractual
                Life in Years
              
              Weighted
                Average
                Exercise
                Price
              
              Number
                Exercisable
              
              Weighted
                Average
                Exercise
                Price$0.19
              
              
              6,500
              
              9.77
              
              $
              0.19
              
              —
              
              $
              —$0.25
              
              
              1,792,999
              
              8.02
              
              $
              0.25
              
              730,278
              
              $
              0.25$0.59
              
              
              13,097
              
              0.11
              
              $
              0.59
              
              13,097
              
              $
              0.59$1.90
              
              
              133,000
              
              —
              
              $
              1.90
              
              133,000
              
              $
              1.90$1.95
              
              
              321,658
              
              —
              
              $
              1.95
              
              321,658
              
              $
              1.952,267,254
              
              6.37
              
              $
              0.59
              
              1,198,033
              
              $
              0.89
 
  The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2009 was approximately $0. The aggregate intrinsic value of options
outstanding and options exercisable at March 31, 2008 was approximately $18,000
and $385, respectively. The aggregate intrinsic value represents the total
intrinsic value based upon the stock price of $0.13 at March 31,
2009.
 
 8
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
(Continued)
 
  As of
March 31, 2009, there was approximately $1.2 million of total unrecognized
compensation expense related to unvested share-based compensation arrangements
granted under the option plans. The cost is expected to be recognized over a
weighted average period of 2.03 years.
  3.
Credit Facilities
  Silicon
Valley Bank
  On May
15, 2007, the Company entered into a Loan and Security Agreement with SVB (the
“SVB Loan Agreement”) which provides for a credit facility not to exceed $2.0
million, subject to a borrowing base formula, as described below. The SVB Loan
Agreement was amended on February 27, 2009 (the “SVB Loan Amendment”). Pursuant
to the terms of the SVB Loan Amendment, among other things, SVB
(i) decreased the interest rate on the revolving line of credit to 3.50%
(from 3%) over the greater of the prime rate or 7.5% (from 10.5%),
(ii) modified the tangible net worth covenant to no less than negative
seventeen million dollars ($17,000,000) at all times, increasing quarterly by
fifty percent (50%) of net income and monthly by fifty percent (50%) of
issuances of equity after January 31, 2009 and the principal amount of
subordinated debt received after January 31, 2009, (iii) modified the
borrowing base to seventy percent (70%) of eligible accounts and the lesser of
sixty percent (60%) of advanced billing accounts or six hundred thousand dollars
($600,000) as determined by SVB; provided, however, that SVB may, with notice to
the Company, decrease the foregoing percentage in its good faith business
judgment based on events, conditions, contingencies, or risks which, as
determined by SVB, may adversely affect collateral, and (iv) extended the
revolving line maturity date to May 15, 2010. At March 31, 2009, total
availability under the SVB Loan Agreement was $2.0 million, of which $1.4
million was outstanding, and the applicable interest rate was 7.5%. The Company
was in compliance with the above stated covenants and restrictions. The
obligations under the SVB Loan Agreement are secured by substantially all of St.
Bernard’s assets.
  In
connection with the execution of a previous SVB Loan Amendment dated January 25,
2008, St. Bernard issued warrants to SVB, which allows SVB to purchase up to
140,350 shares of St. Bernard common stock at an exercise price of $0.57 per
share. The warrants expire on the seventh anniversary of their issue date. The
Company recorded deferred debt issuance costs in the amount of $58,000, based on
the estimated fair value allocated to the warrants using the following
assumptions; 75.35% volatility, risk free interest rate of 3.61%, an expected
life of seven years and no dividends.  Amortization of the debt
issuance costs, including amounts recorded as a debt discount for warrants
previously issued for the three months ended March 31, 2009 and 2008, which is
being recorded as interest expense, was approximately $23,000 and $29,000,
respectively. Furthermore, St. Bernard agreed to grant SVB certain piggyback
registration rights with respect to the shares of common stock underlying the
warrants.
  Partners
for Growth II, LP
  On July
21, 2008, the Company entered into a Loan Agreement with Partners for Growth II,
LP (“PFG”) (the “PFG Loan Agreement”), which became effective on July 23, 2008
and which provides for a credit facility not to exceed $1.5 million. The PFG
Loan Agreement was subsequently amended on February 27, 2009. The annual
interest rate on the PFG Loan is set at the Prime Rate, quoted by SVB as its
Prime Rate from time to time, plus 3% (the “Applicable Rate”).  At
March 31, 2009, the effective interest rate was 7%. The PFG Loan Agreement will
terminate on July 20, 2010, on which date all principal, interest and other
outstanding monetary obligations must be repaid to PFG. The obligations under
the PFG Loan Agreement are secured by a security interest in collateral
comprised of substantially all of St. Bernard’s assets, subordinated to the SVB
Loan Agreement.
  The PFG
Loan Agreement contains affirmative, negative and financial covenants customary
for credit facilities of this type, including, among other things, limitations
on indebtedness, liens, sales of assets, mergers, investments, and
dividends.  The PFG Loan Agreement also requires that St. Bernard
maintain a Modified Net Income (as defined in the PFG Loan Agreement) greater
than zero. PFG eliminated the Modified Net Income covenant for the reporting
periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement
contains events of default customary for credit facilities of this type (with
customary grace or cure periods, as applicable) and provides that upon the
occurrence and during the continuance of an event of default, among other
things, the interest rate on all borrowings will be increased, the payment of
all borrowings may be accelerated, PFG’s commitments may be terminated and PFG
shall be entitled to exercise all of its rights and remedies, including remedies
against collateral.    At March 31, 2009, the Company was in
compliance with the above stated covenants.
 
 9
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
(Continued)
 
  In
connection with the execution of the PFG Loan Agreement, St. Bernard received
approximately $1,000 from PFG, and as a result, issued a warrant to PFG on July
21, 2008 (the “Warrant”), which allows PFG to purchase up to 450,000 shares of
St. Bernard common stock at an exercise price equal to $0.46 per share. The
Warrant expires on July 20, 2013.  The Company recorded deferred debt
issuance costs in the amount of $125,000, based on the estimated fair value
allocated to the warrants using the following assumptions; 69.07% volatility,
risk free interest rate of 4.09%, an expected life of five years and no
dividends. Amortization of the debt issuance costs for the three months ended
March, 2009, which is being recorded as interest expense, was approximately
$16,000. As of March 31, 2009, the balance on the PFG Loan Agreement was
$750,000.
  4.
Warrants
  As of
March 31, 2009 and December 31, 2008, a total of 9,373,850 shares of common
stock, respectively, were reserved for issuance for the exercise of warrants at
exercise prices ranging from $0.46 to $5.00 per share.  During the year
ended December 31, 2008, warrants to purchase an aggregate of 1,053,850 shares
of common stock at exercise prices of $0.46 to $0.57 per share were granted in
connection with the loan agreements described in Note 3 above and 430,104
warrants expired at December 31, 2008. There were no warrants that were granted,
exercised, or expired during the three months ended March 31, 2009.
  5.Warrant
Derivative Liability
  Effective
January 1, 2009, upon the adoption of EITF 07-05, the Company reclassified
463,500 outstanding warrants that were previously classified as equity to a
derivative liability.  This reclassification was necessary as the
Company determined that certain terms included in these warrant agreements
provided for a possible future adjustment to the warrant exercise price, and
accordingly, under the provisions of EITF 07-05, these warrants did not meet the
criteria for being considered to be indexed to the Company’s
stock.  As such, these warrants no longer qualified for the exception
to derivative liability treatment provided for in paragraph 11(a) of SFAS No.
133.  The estimated fair value of warrants upon reclassification at
January 1, 2009 was determined to be $41,000.  At March 31, 2009, the
estimated fair value of the warrants, which is included in accrued expenses and
other current liabilities in the accompanying balance sheet, was determined to
be $25,000.  The change in the estimated fair value of the warrant
derivative liability of $16,000 is included in other income in the accompanying
statement of operations for the three months ended March 31, 2009.
   
 10
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
(Continued)
 The
following weighted average assumptions were used to estimate the fair value
information presented, with respect to warrants utilizing the Black-Scholes
option pricing model:
  Risk-free
      interest rate
                    
                    2.51
      - 2.71
                    %Average
      expected life (years)
                    
                    6.0Expected
      volatility
                    
                    75.3
      - 78.6
                    %Expected
      dividends
                    
                    None
  
 6.  Fair
Value Measurements
 
 Fair
value is defined in SFAS 157 as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  Fair value measurements are to
be considered from the perspective of a market participant that holds the assets
or owes the liability.  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 three levels of inputs that may be used to measure fair
value:
 
 Level 1:
Quoted prices in active markets for identical or similar assets and
liabilities.
 
 Level
2:  Quoted prices for identical or similar assets and liabilities in
markets that are not active or observable inputs other than quoted prices in
active markets for identical or similar assets and 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.
 
 At March
31, 2009 the Company had outstanding warrants to purchase common shares of our
stock that are classified as warrant derivative liabilities with a fair value of
$25,000.  The warrants are valued using Level 3 inputs because there
are significant unobservable inputs associated with them. The following table
reconciles the warrant derivative liability measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the three
months ended March 31, 2009:
 
 Balance
      at January 1, 2009
                      
                      $
                      -Reclassification
      from equity
                      
                      
                      41,000Gain
      on change in fair value included in net loss
                      
                      
                      (16,000
                      )Balance
      at March 31, 2009
                      
                      $
                      25,000
 
  6.
Litigation
  The
Company successfully appealed the San Diego Superior Court for the County of San
Diego’s denial of its motion to compel arbitration with a stockholder that filed
an action against the Company seeking money damages asserting claims of
intentional misrepresentation, negligent misrepresentation, fraudulent
concealment, and negligence (the “Claim”).  Effective March 31, 2009,
the Company and the stockholder entered into a Settlement Agreement, pursuant to
which the parties released and forever discharged each other from any and all
claims and causes of action, in connection with the Claim.  There was no
cash outlay by the Company as part of the settlement and the settlement was not
material to the Company’s financial condition or operating results.




11




Item 2.Management’s Discussion
and Analysis of Financial Condition and Results of
Operations




The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this Quarterly Report on
Form 10-Q. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Quarterly Report on Form 10-Q.




OVERVIEW




Our
Business




We
design, develop, and market Internet security appliances and services to SME
class customers. These solutions enable our customers to manage their employee
usage policy across multiple messaging protocols, which include Internet access,
e-mail, and IM. These solutions are delivered in a suite of appliances, which
scale to meet the needs of any size organization.




Our
customers include more than 5,000 enterprises, educational institutions, SMBs,
and government agencies. Customers can purchase our solutions directly from us,
through our 1-tier and 2-tier reseller network, and through OEMs. Appliance
purchases typically consist of an initial hardware purchase and maintenance
subscription. Our primary customers are IT managers, directors, and
administrators.




Our
Financial Results




We
reported revenues of $4.4 million for the three months ended March 31, 2009,
compared to $3.9 million in the same period in 2008, an increase of 13.8%
resulting from our refocused marketing efforts and our continued effort to
upsell our current customers; a net loss for the three months ended March 31,
2009 of $649,000, compared to a net loss of $399,000 in the same period in 2008;
and net basic and diluted loss per share for the three months ended March 31,
2009 of $0.4, compared to a net basic and diluted loss per share of $0.3
reported in the same period in 2008. The increase in the basic and diluted loss
per share was primarily attributable to an increase in operating expenses and
cost of revenues of $252,000, offset by an increase in total revenues for the
three months ended March 31, 2009 of $4.4 million compared to $3.9 million for
the same period in 2008.




Cash used
in operations was $663,000 and $1.4 million for the three months ended March 31,
2009 and 2008, respectively. The net decrease in use of cash was due primarily
to changes in our operating asset and liability accounts.




On
February 27, 2009, we amended our line of credit agreement with SVB which was
established on May 15, 2007. See section below titled, “Credit Facilities” for
the terms of the original and amended agreement with SVB. The outstanding
balance on the line of credit with SVB was $1.4 million as of March 31,
2009.




We also
amended our Loan Agreement with PFG on February 27, 2009, which was established
on July 23, 2008. See section below titled, “Credit Facilities” for the terms of
the original and amended agreement with PFG. The outstanding balance on the line
of credit with PFG was $0.8 million as of March 31, 2009.




During
the quarter ended March 31, 2009, we continued to invest in product development.
Our efforts have been directed toward new feature enhancements in parallel to
the continual improvement of our secure content management appliances and system
protection products. Our development efforts were primarily focused on
delivering additional security features for our product lines while employing a
cost-reduction strategy.




Critical
Accounting Policies and Estimates




There are
several accounting policies that involve management’s judgments and estimates
and are critical to understanding our historical and future performance as these
policies and estimates affect the reported amounts of revenue and other
significant areas in our reported financial statements.




·
            revenue
      recognition;


·
            allowance
      for doubtful accounts;


·
            impairment
      of goodwill and long-lived assets;


·
            accounting
      for income taxes;


·
            warranty
      obligation; and


·
            accounting
      for stock options.




Please
refer to the “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” located within our 10-K filed on March 11, 2009 for the
year ended December 31, 2008 for further discussion of our  “Summary
of Significant Accounting Policies and Estimates”. There have been no material
changes to these accounting policies during the three months ended March 31,
2009.




12




Results
of Operations




Comparisons
of the Three Months Ended March 31, 2009 and 2008 (in thousands, except
percentages)




Revenues
 For
      the
                                      Three
      Months Ended
                                      March
      31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    % ChangeTotal
      revenues
                                    
                                    $
                                    4,449
                                    
                                    
                                    $
                                    3,909
                                    
                                    
                                    
                                    13.8%




Revenues
increased $540,000 for the three months ended March 31, 2009, compared to the
same period in 2008. See discussion of changes in subscription revenues and
appliance revenues below.




Subscription
Revenues


For
      the
                                      Three
      Months Ended
                                        March
      31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    % ChangeSubscription
      revenues
                                    
                                    $
                                    3,689
                                    
                                    
                                    $
                                    3,304
                                    
                                    
                                    
                                    11.7%As
      a percentage of total revenues
                                    
                                    
                                    82.9
                                    %
                                    
                                    
                                    84.5
                                    %





For the
first quarter of 2009, our subscription revenues increased approximately
$385,000 compared to the first quarter of 2008 due to increases to our customer
base. The subscription renewal rates for our products traditionally range from
75% to 95%.




Appliance
Revenues


For the
                                      Three
      Months Ended
                                      March
      31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    % ChangeAppliance revenues
                                    
                                    $
                                    754
                                    
                                    
                                    $
                                    601
                                    
                                    
                                    
                                    25.5%As
      a percentage of total revenues
                                    
                                    
                                    16.9
                                    %
                                    
                                    
                                    15.4
                                    %


For the
three months ended March 31, 2009, appliance revenues increased approximately
$153,000 compared with the respective period in 2008. The increase in revenue is
attributed to the higher selling price of our h-series appliances and a
noticeable shift in customer demand toward the higher-end models during 2009. We
expect appliance revenue to continue to increase in future periods due to the
increased efforts of our sales team to upsell our customers these appliances,
which are designed to enhance the iPrism web filtering
capabilities.




Cost of Revenues


For the
                                        Three
      Months Ended
                                        March
      31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      % ChangeTotal
      cost of revenues
                                      
                                      $
                                      1,112
                                      
                                      
                                      $
                                      982
                                      
                                      
                                      
                                      13.2%Gross
      margin percentage
                                      
                                      
                                      75.0
                                      %
                                      
                                      
                                      74.9
                                      %


Cost of
revenues consist primarily of the cost of contract manufactured hardware,
royalties paid to third parties under technology licensing agreements, packaging
costs, fee-based technical support costs and freight. Cost of revenues increased
$130,000 for the three months ended March 31, 2009 compared to the same period
in 2008. See the discussion of changes in the cost of subscription and appliance
revenues below.






13




Cost of Subscription
Revenues


For the
                                          Three
      Months Ended
                                          March
      31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        % ChangeCost
      of subscription revenues
                                        
                                        $
                                        574
                                        
                                        
                                        $
                                        556
                                        
                                        
                                        
                                        3.2%Gross
      margin percentage
                                        
                                        
                                        84.4
                                        %
                                        
                                        
                                        83.2
                                        %


The cost
of subscription revenues includes the technical operations group that maintains
the various databases and the technical support group.




Cost of Appliance
Revenues


For the
                                          Three
      Months Ended
                                          March
      31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        % ChangeCost
      of appliance revenues
                                        
                                        $
                                        536
                                        
                                        
                                        $
                                        425
                                        
                                        
                                        
                                        26.1%Gross
      margin percentage
                                        
                                        
                                        28.9
                                        %
                                        
                                        
                                        29.3
                                        %




The cost
of appliance revenues, which includes contract manufactured equipment, packaging
and freight, increased $111,000  for the three months ended March 31,
2009 compared to the same period in 2008 as a result of an increase in our
appliance revenues.




Sales and Marketing
Expense


For the
                                          Three
      Months Ended
                                          March
      31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        % ChangeSales
      and marketing expense
                                        
                                        $
                                        1,660
                                        
                                        
                                        $
                                        1,816
                                        
                                        
                                        
                                        (8.6)%As
      a percentage of total revenues
                                        
                                        
                                        37.3
                                        %
                                        
                                        
                                        46.5
                                        %


Sales and
marketing expense consists primarily of salaries, related benefits, commissions,
consultant fees, advertising, lead generation and other costs associated with
our sales and marketing efforts. For the three months ended March 31, 2009,
sales and marketing expense decreased 8.6%, or $156,000, over the same period in
2008 mainly attributable to our successful cost reduction efforts.




Research and Development
Expense


For the
                                            Three
      Months Ended
                                            March
      31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          % ChangeResearch
      and development expense
                                          
                                          $
                                          1,035
                                          
                                          
                                          $
                                          753
                                          
                                          
                                          
                                          37.5%As
      a percentage of total revenues
                                          
                                          
                                          23.3
                                          %
                                          
                                          
                                          19.3
                                          %




Research
and development expense consists primarily of salaries, related benefits,
third-party consultant fees and other engineering related costs. The increase of
$282,000 for the first quarter of 2009 compared to the same period in 2008 was
primarily the result of a net increase in compensation and consultant
fees.  Management believes that a significant investment in research
and development is required to remain competitive and we expect to continue to
invest in research and development activities.




We
anticipate research and development expenses to increase in 2009 compared to
2008, as we extend the core functionality and features within our
products.






14




General and Administrative
Expense


For the
                                        Three
      Months Ended
                                        March
      31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      % ChangeGeneral
      and administrative expense
                                      
                                      $
                                      1,194
                                      
                                      
                                      $
                                      1,198
                                      
                                      
                                      
                                      (0.3)%As
      a percentage of total revenues
                                      
                                      
                                      26.8
                                      %
                                      
                                      
                                      30.6
                                      %
  General
and administrative expense, which consists primarily of salaries and related
benefits, and fees for professional services, such as legal and accounting
services, remained unchanged for the first quarter of 2009 compared to the first
quarter of 2008 due primarily to a decrease in compensation and consulting
costs, offset by an increase in FAS 123R expenses.




Interest and Other Income,
Net


For the
                                            Three
      Months Ended
                                            March
      31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          % ChangeInterest
      and other income, net
                                          
                                          $
                                          (76
                                          )
                                          
                                          $
                                          121
                                          
                                          
                                          
                                          (162.8)%As
      a percentage of total revenues
                                          
                                          
                                          (1.7
                                          )%
                                          
                                          
                                          3.1
                                          %


Interest
and other income, net, includes interest expense, interest income, and other
income. The decrease for the three months ended March 31, 2009 over the same
period in 2008 was the result of a decrease in interest expense related to
short-term borrowings and a gain on the change in fair value of the warrant
derivative liability offset by a decrease in settlement of trade
payables.




Gain on Sale of
Assets


For the
                                            Three
      Months Ended
                                            March
      31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          % ChangeGain
      on sale of assets
                                          
                                          $
                                          0.0
                                          
                                          
                                          $
                                          320
                                          
                                          
                                          
                                          (100.0)%As
      a percentage of total revenues
                                          
                                          
                                          0.0
                                          %
                                          
                                          
                                          8.2
                                          %


The gain
for the first quarter of 2008 consisted of a gain from the excess renewal fees
collected by Shavlik and from the release of the first half of funds from an
indemnification from EVault.




15




Recent
Accounting Pronouncements




In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity's Own Stock” (“EITF 07-5”).
EITF 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company's own stock and (b) classified in stockholders' equity in the statement
of financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer's own stock
and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception.
The Company’s adoption of EITF 07-5 effective January 1, 2009, resulted in the
identification of certain warrants that were determined to be ineligible for
equity classification because of certain provisions that may result in an
adjustment to their exercise price. Accordingly, these warrants were
reclassified as liabilities upon the effective date of EITF 07-5 and re-measured
at fair value as of March 31, 2009 with changes in the fair value recognized in
other income for the quarter ended March 31, 2009 (See Note 5).




In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). Under FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years and requires retrospective application.  The Company has
adopted EITF 03-6-1 during the first quarter of 2009. The adoption did not
have a material impact on the Company’s financial position, cash flows, or
results of operation.




In April
2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FAS
142, “Goodwill and Other
Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure
related to the determination of intangible asset useful lives. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008 and is to be
applied prospectively to intangible assets acquired after the effective date.
The Company has adopted FSP FAS 142-3 during the first quarter of 2009. The
adoption of FSP FAS 142-3 did not have a material impact on its financial
position, cash flows, or results of operations.




In
September 2006, FASB issuedSFAS No. 157,
“Fair Value Measurements”(“SFAS 157”). This Statement defines fair value, establishes a framework
for measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements. This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
board of directors has previously concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Accordingly, this
statement does not require any new fair value measurements. However, for some
entities, the application of this Statement will change the current practice. In
February 2008, the FASB issued FSP FAS 157-2 which defers the effective date of
SFAS 157 for all non-financial assets and liabilities, except those items
recognized or disclosed at fair value on an annual or more frequent recurring
basis, until years beginning after November 15, 2008.  The Company’s
adoption of SFAS 157 for its financial assets and liabilities on January 1, 2008
did not have a material impact on the Company’s financial position, cash flows,
or results of operations.  The Company has determined that the
adoption of FSP FAS 157-2 during the first quarter of 2009 related to its
non-financial assets and liabilities did not have a material impact on its
financial position, cash flows, or results of operations.




Liquidity
and Capital Resources




Cash
Flows




Our
largest source of operating cash flows is cash receipts from our customers from
purchases of products, subscription, maintenance and technical
support.  Our standard payment terms for both subscription and support
invoices are net 30 days from the date of invoice but from time to time we enter
into payment terms that are greater then 30 days.  The recurring
subscription portion of our business provides predictable cash flow but new
sales fluctuate due to seasonal buying behavior and sales and marketing
effectiveness.  Our primary uses of cash for operating activities
include cost associated with appliance sales and appliance warranty, costs to
maintain our subscription services, personnel, facilities, sales and marketing,
research and development, and general and administrative expenses.




16





Cash used
in operations for the period ended March 31, 2009 was $663,000 compared to $1.4
million for the same period in 2008.  This decrease was primarily due
to lower operating losses and substantial improvements to the cost structure of
our business.





For the
three months ended March 31, 2009, cash used in investing activities was $63,000
for purchases of fixed assets.  Cash provided by investing activities
for the respective period in 2008 totaled $320,000 and represented amounts
received pursuant to previous sales of two product lines.





Cash
flows used by financing activities for the first quarter of 2009 was $420,000,
mainly the result of paying down the balance on our line of credit with
SVB.  For the same period in 2008 financing activities provided cash
of $574,000 primarily a result of drawing on our line of credit.  The
outstanding balance of short term borrowings was $2.1 million as of March 31,
2009 compared to $2.5 million as of March 31, 2008.





As a result of the foregoing, the net
decrease in cash and cash equivalents was $1.1 million for the three months
ended March 31, 2009 as compared to a net decrease of approximately $463,000 for
the comparable period in 2008.




Credit
Facilities




Silicon
Valley Bank




On May
15, 2007, the Company entered into a Loan Agreement with SVB which provides for
a credit facility not to exceed $2.0 million, subject to a borrowing base
formula, as described below. The SVB Loan Agreement was amended on February 27,
2009 (the “Loan Amendment”). Pursuant to the terms of the Loan Amendment, among
other things, SVB (i) decreased the interest rate on the revolving line of
credit to 3.50% (from 3%) over the greater of the prime rate or 7.5% (from
10.5%), (ii) modified the tangible net worth covenant to no less than
negative seventeen million dollars ($17,000,000) at all times, increasing
quarterly by fifty percent (50%) of net income and monthly by fifty percent
(50%) of issuances of equity after January 31, 2009 and the principal amount of
subordinated debt received after January 31, 2009, (iii) modified the
borrowing base to seventy percent (70%) of eligible accounts and the lesser of
sixty percent (60%) of advanced billing accounts or six hundred thousand dollars
($600,000) as determined by SVB; provided, however, that SVB may, with notice to
the Company, decrease the foregoing percentage in its good faith business
judgment based on events, conditions, contingencies, or risks which, as
determined by SVB, may adversely affect collateral, and (iv) extended the
revolving line maturity date to May 15, 2010. At March 31, 2009, total
availability under the SVB Loan Agreement was $2.0 million, of which $1.4
million was outstanding, and the applicable interest rate was 7.5%. The Company
was in compliance with the above stated covenants and restrictions. The
obligations under the SVB Loan Agreement are secured by substantially all of St.
Bernard’s assets.




In
connection with the execution of a previous SVB Loan Amendment dated January 25,
2008, St. Bernard issued warrants to SVB which allows SVB to purchase up to
140,350 shares of our common stock at an exercise price of $0.57 per share. The
warrants expire on the seventh anniversary of their issue date. We recorded
deferred debt issuance costs in the amount of $58,000, based on the estimated
fair value allocated to the warrants using the following assumptions; 75.35%
volatility, risk free interest rate of 3.61%, an expected life of seven years
and no dividends.  Amortization of the debt issuance costs, including
amounts recorded as a debt discount for warrants previously issued for the three
months ended March 31, 2009 and 2008, which is being recorded as interest
expense, was approximately $23,000 and $29,000, respectively. Furthermore, St.
Bernard agreed to grant SVB certain piggyback registration rights with respect
to the shares of common stock underlying the warrants.




Partners
for Growth II, LP




On July
21, 2008, the Company entered into a Loan Agreement with PFG (the “PFG Loan
Agreement”), which became effective on July 23, 2008 and which provides for a
credit facility not to exceed $1.5 million. The PFG Loan Agreement was
subsequently amended on February 27, 2009.  The annual interest rate
on the PFG Loan is set at the Prime Rate, quoted by SVB as its Prime Rate from
time to time, plus 3% (the “Applicable Rate”).  At March 31, 2009, the
effective interest rate was 7%. The PFG Loan Agreement will terminate on July
20, 2010, on which date all principal, interest and other outstanding monetary
obligations must be repaid to PFG. The obligations under the PFG Loan Agreement
are secured by a security interest in collateral comprised of substantially all
of St. Bernard’s assets, subordinated to the SVB Loan Agreement.




The PFG
Loan Agreement contains affirmative, negative and financial covenants customary
for credit facilities of this type, including, among other things, limitations
on indebtedness, liens, sales of assets, mergers, investments, and
dividends.  The PFG Loan Agreement also requires that St. Bernard
maintain a Modified Net Income (as defined in the PFG Loan Agreement) greater
than zero. PFG eliminated the Modified Net Income covenant for the reporting
periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement
contains events of default customary for credit facilities of this type (with
customary grace or cure periods, as applicable) and provides that upon the
occurrence and during the continuance of an event of default, among other
things, the interest rate on all borrowings will be increased, the payment of
all borrowings may be accelerated, PFG’s commitments may be terminated and PFG
shall be entitled to exercise all of its rights and remedies, including remedies
against collateral.  At March 31, 2009, the Company was in compliance
with the above stated covenants.




17




In
connection with the execution of the PFG Loan Agreement, St. Bernard received
approximately $1,000 from PFG, and as a result, issued a warrant to PFG on July
21, 2008 (the “Warrant”), which allows PFG to purchase up to 450,000 shares of
St. Bernard common stock at an exercise price equal to $0.46 per share. The
Warrant expires on July 20, 2013.  The Company recorded deferred debt
issuance costs in the amount of $125,000, based on the estimated fair value
allocated to the warrants using the following assumptions; 69.07% volatility,
risk free interest rate of 4.09%, an expected life of five years and no
dividends. Amortization of the debt issuance costs for the three months ended
March, 2009, which is being recorded as interest expense, was approximately
$16,000. As of March 31, 2009, the balance on the PFG Loan Agreement was
$750,000.




Losses
from Operations – Liquidity




As of
March 31, 2009, the Company had approximately $930,000 in cash and cash
equivalents and a working capital deficit of $11.0
million.  Approximately $10.2 million of our current liability balance
at March 31, 2009 consisted of deferred revenues, which represents amounts that
are expected to be amortized into revenue as they are earned in future periods.
The Company also had a stockholders’ deficit of approximately $9.4 million at
March 31, 2009.




The
Company has a history of losses and has not yet been able to achieve
profitability. For the three months ended March 31, 2009 and 2008, the Company
incurred net losses of $649,000 and $399,000, respectively. Losses from
operations decreased from $840,000 in the first quarter of 2008 to $552,000 in
the respective period in 2009. The accumulated deficit was approximately $50.2
million and $50.0 million as of March 31, 2009 and 2008, respectively. In an
effort to achieve profitability, the Company has made and continues to make
substantial changes to the cost structure of its business. These changes include
the closure of its sales and marketing offices in Europe and Australia, reducing
headcount to be in line with the current size of its business, renegotiating
vendor contracts, and refocusing its marketing strategy around its core
business. During February 2009, the Company also extended to May 15, 2010 the
maturity date of the Loan and Security Agreement (the “SVB Loan Agreement”) with
Silicon Valley Bank. (“SVB”) and also negotiated a significant reduction in the
interest rate.




The
Company believes that its existing cash resources, combined with projected
collections on billings, reduced expenditures based on implemented cost
reductions, and borrowing availability under existing credit facilities, will
provide sufficient liquidity for the Company to meet its continuing obligations
for the next twelve months. However, there can be no assurances that projected
revenue will be achieved or the improvement in operating results will occur. In
the event cash flow from operations is not sufficient, the Company may require
additional sources of financing in order to maintain its current operations.
These additional sources of financing may include public or private offerings of
equity or debt securities. Whereas management believes it will have access to
these financing sources, no assurance can be given that additional sources of
financing will be available on acceptable terms, on a timely basis, or at
all.




Off-Balance
Sheet Arrangements




Except
for the commitments arising from our operating lease arrangements, we have no
other off-balance sheet arrangements that are reasonably likely to have a
material effect on our financial statements.




Forward-Looking
Statements





This
Quarterly Report on Form 10-Q and the information incorporated herein by
reference contain forward-looking statements that involve a number of risks and
uncertainties. Although our forward-looking statements reflect the good faith
judgment of our management, these statements can only be based on facts and
factors currently known by us. Consequently, these forward-looking statements
are inherently subject to risks and uncertainties, and actual results and
outcomes may differ materially from results and outcomes discussed in the
forward-looking statements. For a summary of such risks and uncertainties,
please see Risk Factors located in our Annual Report on Form 10-K for the year
ended December 31, 2008 filed with the Securities and Exchange Commission
on March 11, 2009.




Forward-looking
statements can be identified by the use of forward-looking words such as
“believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,”
“could,” “should,” “would,” “continue,” “seeks,” “pro forma,” or “anticipates,”
or other similar words (including their use in the negative), or by discussions
of future matters such as the development of new products, technology
enhancements, possible changes in legislation and other statements that are not
historical.




18
  The
cautionary statements made in this report are intended to be applicable to all
related forward-looking statements wherever they may appear in this report. We
urge you not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we assume
no obligation to update our forward-looking statements, even if new information
becomes available in the future.




Item 3.  Quantitative
and Qualitative Disclosures About Market Risk




As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.




Item 4.  Controls
and Procedures




Evaluation
of Disclosure Controls




We
maintain "disclosure controls and procedures," as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer / Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognizes that
disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Additionally, in designing
disclosure controls and procedures, our management was required to apply its
judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls and procedures is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.




Based on
his evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q and subject to the foregoing, our Chief Executive Officer / Chief
Financial Officer has concluded that our disclosure controls and procedures were
effective.




Changes
in Internal Control over Financial Reporting




During
the period covered by this report, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.






PART
II – OTHER INFORMATION




Item 1.  Legal
Proceedings




In the
normal course of business, the Company is occasionally named as a defendant in
various lawsuits. On March 14, 2007, a stockholder filed an action against the
Company seeking money damages in the San Diego Superior Court for the County of
San Diego, asserting claims of intentional misrepresentation, negligent
misrepresentation, fraudulent concealment, and negligence. The Company has
successfully appealed the Superior Court's denial of its motion to compel
arbitration.  Effective March 31, 2009, the Company and the stockholder
entered into a Settlement Agreement, pursuant to which the parties released and
forever discharged each other from any and all claims and causes of action, in
connection with the Claim.  There was no cash outlay by the Company as part
of the settlement and the settlement was not material to the Company’s financial
condition or operating results.




Item 1A.  Risk
Factors




As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.






19




Item 2.  Unregistered
Sales of Equity Securities and Use of Proceeds




None.




Item 3.  Defaults
Upon Senior Securities




None.




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




None.




Item 5.  Other
Information




None.





Item 6.  Exhibits




3.1
              
              Amended
      and Restated Certificate of Incorporation of St. Bernard Software, Inc.
      (formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated
      herein by reference to Exhibit 3.1.1 to the Company’s Registration
      Statement on Form S-4 initially filed with the Securities and Exchange
      Commission on December 16, 2005).3.2
              
              Amended
      and Restated Bylaws of St. Bernard Software, Inc. (formerly known as Sand
      Hill IT Security Acquisition Corp.) (incorporated herein by reference to
      Exhibit 3.1 to the Company’s Current Report on Form 8-K initially filed
      with the Securities and Exchange Commission on April 5,
    2007).4.1
              
              Specimen
      Unit Certificate of St. Bernard Software, Inc. (formerly known as Sand
      Hill IT Security Acquisition Corp.) (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Amendment No. 2 to the Registration
      Statement on Form S-1 (File No. 333-114861) filed with the Securities and
      Exchange Commission on June 23, 2004).4.2
              
              Specimen
      Common Stock Certificate of St. Bernard Software, Inc. (formerly known as
      Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference
      to Exhibit 4.2 to the Company’s Amendment No. 2 to the Registration
      Statement on Form S-1 (File No. 333-114861) filed with the Securities and
      Exchange Commission on June 23, 2004).4.3
              
              Specimen
      Warrant Certificate of St. Bernard Software, Inc. (formerly known as Sand
      Hill IT Security Acquisition Corp.) (incorporated herein by reference to
      Exhibit 4.3 to the Company’s Amendment No. 2 to the Registration Statement
      on Form S-1 (File No. 333-114861) filed with the Securities and Exchange
      Commission on June 23, 2004).4.4
              
              Unit
      Purchase Option No. UPO-2 dated July 30, 2004, granted to Newbridge
      Securities Corporation (incorporated herein by reference to Exhibit 4.4.1
      to the Company’s Annual Report on Form 10-KSB filed with the Securities
      and Exchange Commission on March 31, 2005).4.5
              
              Unit
      Purchase Option No. UPO-3 dated July 30, 2004, granted to James E.
      Hosch (incorporated herein by reference to Exhibit 4.4.2 to the Company’s
      Annual Report on Form 10-KSB filed with the Securities and Exchange
      Commission on March 31, 2005).4.6
              
              Unit
      Purchase Option No. UPO-4 dated July 30, 2004, granted to Maxim Group, LLC
      (incorporated herein by reference to Exhibit 4.4.3 to the Company’s Annual
      Report on Form 10-KSB filed with the Securities and Exchange Commission on
      March 31, 2005).4.7
              
              Unit
      Purchase Option No. UPO-5 dated July 30, 2004, granted to Broadband
      Capital Management, LLC (incorporated herein by reference to Exhibit 4.4.4
      to the Company’s Annual Report on Form 10-KSB filed with the Securities
      and Exchange Commission on March 31, 2005).4.8
              
              Unit
      Purchase Option No. UPO-6 dated July 30, 2004, granted to I-Bankers
      Securities Incorporated (incorporated herein by reference to Exhibit 4.4.5
      to the Company’s Annual Report on Form 10-KSB filed with the Securities
      and Exchange Commission on March 31, 2005).4.9
              
              Warrant
      issued by St. Bernard Software, Inc. on May 16, 2007 to Silicon Valley
      Bank (incorporated herein by reference to Exhibit 4.1 to the Company’s
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on May 23, 2007).





20
  4.10
                  
                  Warrant
      issued by St. Bernard Software, Inc. on January 25, 2008 to Agility
      Capital, LLC (incorporated herein by reference to Exhibit 4.1 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on January 31, 2008).4.11
                  
                  Warrant
      issued by St. Bernard Software, Inc. on January 25, 2008 to Silicon Valley
      Bank (incorporated herein by reference to Exhibit 4.2 to the Company’s
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on January 31, 2008).4.12
                  
                  Warrant
      issued by St. Bernard Software, Inc. on July 21, 2008 to Partners for
      Growth II, L.P. (incorporated herein by reference to Exhibit 4.1 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 28, 2008).4.13
                  
                  Warrant
      Purchase Agreement between St. Bernard Software, Inc. and Partners for
      Growth II, L.P. dated July 21, 2008 (incorporated herein by reference to
      Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on July 28, 2008).4.14
                  
                  Warrant
      Purchase Agreement among Humphrey P. Polanen and Newbridge Securities
      Corporation and I-Bankers Securities Incorporated (incorporated herein by
      reference to Exhibit 10.13 to the Company’s Registration Statement on Form
      S-1 (File No. 333-114861) filed with the Securities and Exchange
      Commission on April 26, 2004.)4.15*
                  
                  St.
      Bernard Software, Inc. Amended and Restated 2005 Stock Option Plan
      (incorporated herein by reference to Exhibit 99.1 to the Company’s Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      January 4, 2008).4.16*
                  
                  AgaveOne,
      Inc. (dba Singlefin) 2005 Stock Incentive Plan (incorporated herein by
      reference to Exhibit 4.4 to the Company’s Registration Statement on Form
      S-8 filed with the Securities and Exchange Commission on December 28,
      2006).4.17*
                  
                  St.
      Bernard Software, Inc. 2006 Employee Stock Purchase Plan (incorporated
      herein by reference to Exhibit 10.1 to the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission on
      December 22, 2006).10.1
                  
                  Loan
      and Security Agreement between St. Bernard Software, Inc. and Silicon
      Valley Bank dated May 11, 2007 (incorporated herein by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on May 23, 2007).10.2
                  
                  Asset
      Purchase Agreement between St. Bernard Software, Inc. and EVault, Inc.
      dated August 13, 2007 (incorporated herein by reference to Exhibit 10.1 to
      the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on August 17, 2007).10.3
                  
                  Third
      Amendment to Loan and Security Agreement between St. Bernard Software,
      Inc. and Silicon Valley Bank dated January 25, 2008 (incorporated herein
      by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on January 31,
      2008).10.4
                  
                  Loan
      Agreement between St. Bernard Software, Inc. and Agility Capital, LLC
      dated January 25, 2008 (incorporated herein by reference to Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on January 31, 2008).10.5
                  
                  Intellectual
      Property Security Agreement between St. Bernard Software, Inc. and Agility
      Capital, LLC dated January 25, 2008 (incorporated herein by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on January 31,
2008).10.6
                  
                  Subordination
      Agreement between Agility Capital, LLC and Silicon Valley Bank dated
      January 25, 2008 (incorporated herein by reference to Exhibit 10.3 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on January 31, 2008).10.7
                  
                  Intellectual
      Property Security Agreement between St. Bernard Software, Inc. and Silicon
      Valley Bank dated January 25, 2008 (incorporated herein by reference to
      Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on January 31,
  2008).
 
 21
  10.8
                  
                  St.
      Bernard Software, Inc. 2008 Variable (Bonus) Compensation Plan
      (incorporated herein by reference to the Company’s Current Report on Form
      8-K filed with the Securities and Exchange Commission on April 28,
      2008).10.9*
                  
                  Employment
      Agreement between St. Bernard Software, Inc. and Steve Yin executed
      September 22, 2008 (incorporated herein by reference to Exhibit 10.1 to
      the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on September 24, 2008).10.10*
                  
                  Separation
      Agreement and Release between St. Bernard Software, Inc. and Vince Rossi
      executed December 2, 2008 (incorporated herein by reference to Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed with the Securities
      and Exchange Commission on December 5, 2008).10.11*
                  
                  Employment
      Agreement between St. Bernard Software, Inc. and Louis E. Ryan executed
      February 10, 2009 (incorporated herein by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on February 11, 2009).10.12
                  
                  Fifth
      Amendment to Loan and Security Agreement between St. Bernard Software,
      Inc. and Silicon Valley Bank dated February 27, 2009 (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on March 6,
      2009).10.13
                  
                  First
      Amendment to Loan Agreement between St. Bernard Software, Inc. and
      Partners for Growth II, L.P. dated February 27, 2009 (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on March 6,
      2009).10.14*
                  
                  Amendment
      to the pricing of stock options grants under the 2005 Stock Option Plan
      (incorporated herein by reference to the Company’s Current Report on Form
      8-K filed with the Securities and Exchange Commission on February 11,
      2009).10.15*
                  
                  Amended
      Employment Agreement between St. Bernard Software, Inc. and Steve Yin
      executed April 2, 2009 (incorporated herein by reference to Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 7, 2009).10.16*
                  
                  Consulting
      Agreement between St. Bernard Software, Inc. and Softworks Group Pty Ltd
      executed January 7, 2009 (incorporated herein by reference to Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on April 15, 2009).14.1
                  
                  Amended
      Code of Business Conduct and Ethics adopted April 1, 2009 (incorporated
      herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form
      10-KSB filed with the Securities and Exchange Commission on March 20,
      2008).31.1
                  
                  Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) or
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                  
                  Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) or
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                  
                  Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                  
                  Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


___________________


*
            Management
      contract or compensatory plan or
arrangement











22














SIGNATURES




In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




ST.
      BERNARD SOFTWARE, INC.Dated:
      May 5, 2009
            
            
            
            
            
            By:
            
            /s/
      Louis E. RyanLouis
      E. Ryan
              Chief
      Executive Officer,
              Chief
      Financial Officer, and
              Chairman
      of the Board of Directors






































23