UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


___________________




FORM
10-Q/A


Amendment No.
1


__________________





(Mark
One)


x  QUARTERLY REPORT
UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2008.





o  TRANSITION REPORT
UNDER 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 Small Business Issuer as Specified in Its Charter)





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





15015
Avenue of Science


San
Diego, California


(Address
of Principal Executive Office)





(858)
676-2277


(Issuer’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 ý  No o




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
(Check one):






Large accelerated
      filer o
            Accelerated filer
      o
            Non-accelerated
      filer o
            Smaller
      reporting companyx




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o  No x





As of
August 12, 2008 there were 14,783,090 shares of the registrant’s common stock
outstanding.















EXPLANATORY
NOTE






This
Amendment No. 1 to Form 10-Q is being filed to amend the Quarterly Report on
Form 10-Q for the period ended June 30, 2008 of St. Bernard Software, Inc. (“St.
Bernard” or the “Company”), originally filed on August 12, 2008, solely to
correct a typographical error of $122,000 made by our financial printers for
“Noncash interest expense” that should have been included in the “Cash Flows
From Operating Activities” section of the Company’s Unaudited Consolidated
Statement of Cash Flows.  The “Net cash used in operating activities”
remains unchanged at approximately $2.1 million, but the omitted line item
within the cash flow statement has been inserted to correct the
omission.
  Except as
described above, no other changes have been made to the Original Filing. The
Original Filing, as amended, continues to speak as of the date of the Original
Filing.  As part of the Amended Filing, Exhibits 31.1 and 31.2
containing the certifications of our Chief Executive Officer and Acting Chief
Financial Officer that were filed as exhibits to the Original Filing have been
re-executed and re-filed as of the date of this Amended
Filing.






2






ST.
BERNARD SOFTWARE, INC.


For the
Quarter Ended June 30, 2008


Form
10-Q


INDEX




PART I – Financial Information
            4Item 1.
            Consolidated Financial Statements
            4Item 6.
            Exhibits
            13Signatures
            16
























3




PART I – FINANCIAL INFORMATION




Item 1. Consolidated
Financial Statements


St.
Bernard Software, Inc.




Consolidated
Balance Sheets


June
      30, 2008
            
            
            December
      31, 2007(Unaudited)AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            376,000
            
            
            $
            1,297,000Accounts
      receivable - net of allowance for doubtfulaccounts
      of $70,000 and $59,000 at June 30, 2008 and
            
            
            3,769,000
            
            
            
            3,255,000December
      31, 2007, respectivelyInventories
      - net
            
            
            345,000
            
            
            
            158,000Prepaid
      expenses and other current assets
            
            
            405,000
            
            
            
            440,000Total
      current assets
            
            
            4,895,000
            
            
            
            5,150,000Fixed
      Assets - Net
            
            
            1,016,000
            
            
            
            1,301,000Other
      Assets
            
            
            180,000
            
            
            
            215,000Goodwill
            
            
            7,568,000
            
            
            
            7,568,000Total
      Assets
            
            $
            13,659,000
            
            
            $
            14,234,000Liabilities
      and Stockholders’ DeficitCurrent
      LiabilitiesShort-term
      borrowings
            
            $
            2,462,000
            
            
            $
            1,566,000Accounts
      payable
            
            
            2,115,000
            
            
            
            3,026,000Accrued
      compensation expenses
            
            
            885,000
            
            
            
            1,188,000Accrued
      expenses and other current liabilities
            
            
            506,000
            
            
            
            406,000Current
      portion of capitalized lease obligations
            
            
            161,000
            
            
            
            153,000Deferred
      revenue
            
            
            9,885,000
            
            
            
            9,589,000Total
      current liabilities
            
            
            16,014,000
            
            
            
            15,928,000Deferred
      Rent
            
            
            157,000
            
            
            
            232,000Capitalized
      Lease Obligations, Less Current Portion
            
            
            88,000
            
            
            
            170,000Deferred
      Revenue
            
            
            6,146,000
            
            
            
            5,860,000Total
      liabilities
            
            
            22,405,000
            
            
            
            22,190,000Commitments
      and ContingenciesStockholders’
      DeficitPreferred
      stock, $0.01 par value; 5,000,000 sharesauthorized;
      no shares issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.01 par value; 50,000,000 sharesauthorized;
      14,772,367 and 14,760,052 shares issuedand
      outstanding at June 30, 2008 and December 31, 2007,respectively
            
            
            148,000
            
            
            
            148,000Additional
      paid-in capital
            
            
            39,628,000
            
            
            
            39,079,000Accumulated
      deficit
            
            
            (48,522,000
            )
            
            
            (47,183,000
            )Total
      stockholders’ deficit
            
            
            (8,746,000
            )
            
            
            (7,956,000
            )Total
      Liabilities and Stockholders’ Deficit
            
            $
            13,659,000
            
            
            $
            14,234,000


The
accompanying notes are an integral part of these consolidated financial
statements.


4


St.
Bernard Software, Inc.
  Unaudited
Consolidated Statements of Operations
 Three
      months ended June 30,
                
                
                Six
      months ended June 30,2008
                
                
                2007
                
                
                2008
                
                
                2007RevenuesSubscription
                
                $
                3,427,000
                
                
                $
                3,600,000
                
                
                $
                6,731,000
                
                
                $
                7,372,000Appliance
                
                
                1,161,000
                
                
                
                882,000
                
                
                
                1,762,000
                
                
                
                1,627,000License
                
                
                12,000
                
                
                
                559,000
                
                
                
                16,000
                
                
                
                1,415,000Total
      Revenues
                
                
                4,600,000
                
                
                
                5,041,000
                
                
                
                8,509,000
                
                
                
                10,414,000Cost
      of RevenuesSubscription
                
                
                557,000
                
                
                
                1,023,000
                
                
                
                1,113,000
                
                
                
                2,099,000Appliance
                
                
                811,000
                
                
                
                779,000
                
                
                
                1,236,000
                
                
                
                1,337,000License
                
                
                4,000
                
                
                
                18,000
                
                
                
                5,000
                
                
                
                50,000Total
      Cost of Revenues
                
                
                1,372,000
                
                
                
                1,820,000
                
                
                
                2,354,000
                
                
                
                3,486,000Gross
      Profit
                
                
                3,228,000
                
                
                
                3,221,000
                
                
                
                6,155,000
                
                
                
                6,928,000Sales
      and marketing expenses
                
                
                2,065,000
                
                
                
                3,414,000
                
                
                
                3,881,000
                
                
                
                7,474,000Research
      and development expenses
                
                
                746,000
                
                
                
                1,789,000
                
                
                
                1,499,000
                
                
                
                3,647,000General
      and administrative expenses
                
                
                1,377,000
                
                
                
                2,441,000
                
                
                
                2,575,000
                
                
                
                4,870,000Total
      Operating Expenses
                
                
                4,188,000
                
                
                
                7,644,000
                
                
                
                7,955,000
                
                
                
                15,991,000Loss
      from Operations
                
                
                (960,000
                )
                
                
                (4,423,000
                )
                
                
                (1,800,000
                )
                
                
                (9,063,000
                )Other
      (Income) ExpenseInterest
      expense - net
                
                
                157,000
                
                
                
                59,000
                
                
                
                300,000
                
                
                
                72,000(Gain)
      loss on sale of assets
                
                
                -
                
                
                
                251,000
                
                
                
                (320,000
                )
                
                
                (3,463,000
                )Other
      income
                
                
                (180,000
                )
                
                
                -
                
                
                
                (444,000
                )
                
                
                (9,000
                )Total
      Other (Income) Expense
                
                
                (23,000
                )
                
                
                310,000
                
                
                
                (464,000
                )
                
                
                (3,400,000
                )Loss
      Before Income Taxes
                
                
                (937,000
                )
                
                
                (4,733,000
                )
                
                
                (1,336,000
                )
                
                
                (5,663,000
                )Income
      tax expense
                
                
                3,000
                
                
                
                -
                
                
                
                3,000
                
                
                
                4,000Net
      Loss
                
                $
                (940,000
                )
                
                $
                (4,733,000
                )
                
                $
                (1,339,000
                )
                
                $
                (5,667,000
                )Net
      Loss Per Common Share - Basic and Diluted
                
                $
                (0.06
                )
                
                $
                (0.32
                )
                
                $
                (0.09
                )
                
                $
                (0.38
                )Weighted
      Average Shares Outstanding - Basic and Diluted
                
                
                14,772,367
                
                
                
                14,764,512
                
                
                
                14,772,096
                
                
                
                14,779,434
  The accompanying notes are an
integral part of these consolidated financial statements.
  5
  St.
Bernard Software, Inc.
  Unaudited
Consolidated Statement of Stockholders' Deficit
 AdditionalCommon Stock
                
                
                Paid-in
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                TotalBalance
      at December 31, 2007
                
                
                14,760,052
                
                
                $
                148,000
                
                
                $
                39,079,000
                
                
                $
                (47,183,000
                )
                
                $
                (7,956,000
                )Common
      stock issued under the employee stock purchase plan
                
                
                12,315
                
                
                
                -
                
                
                
                6,000
                
                
                
                -
                
                
                
                6,000Stock-based
      compensation expense
                
                
                -
                
                
                
                -
                
                
                
                334,000
                
                
                
                -
                
                
                
                334,000Value
      of warrants issued
                
                
                -
                
                
                
                -
                
                
                
                209,000
                
                
                
                -
                
                
                
                209,000Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,339,000
                )
                
                
                (1,339,000
                )Balance
      at June 30, 2008
                
                
                14,772,367
                
                
                $
                148,000
                
                
                $
                39,628,000
                
                
                $
                (48,522,000
                )
                
                $
                (8,746,000
                )
 The
accompanying notes are an integral part of these consolidated financial
statements.
 6
  St.
Bernard Software, Inc.
  Unaudited
Consolidated Statements of Cash Flows
 Six
      months ended June 30,2008
                  
                  
                  2007Cash
      Flows From Operating ActivitiesNet
      loss
                  
                  $
                  (1,339,000
                  )
                  
                  $
                  (5,667,000
                  )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                  
                  
                  321,000
                  
                  
                  
                  740,000Allowance
      for doubtful accounts
                  
                  
                  11,000
                  
                  
                  
                  (32,000
                  )Gain
      on sale of assets
                  
                  
                  (320,000
                  )
                  
                  
                  (3,463,000
                  )Stock-based
      compensation expense
                  
                  
                  334,000
                  
                  
                  
                  581,000Noncash
      interest expense
                  
                  
                  122,000
                  
                  
                  
                  2,000Increase
      (decrease) in cash resulting from changes in:Accounts
      receivable
                  
                  
                  (525,000
                  )
                  
                  
                  (92,000
                  )Inventories
                  
                  
                  (187,000
                  )
                  
                  
                  4,000Prepaid
      expenses and other assets
                  
                  
                  38,000
                  
                  
                  
                  (24,000
                  )Accounts
      payable
                  
                  
                  (911,000
                  )
                  
                  
                  (564,000
                  )Accrued
      expenses and other current liabilities
                  
                  
                  (242,000
                  )
                  
                  
                  72,000Deferred
      rent
                  
                  
                  51,000
                  
                  
                  
                  -Deferred
      revenue
                  
                  
                  582,000
                  
                  
                  
                  1,031,000Net
      cash used in operating activities
                  
                  
                  (2,065,000
                  )
                  
                  
                  (7,412,000
                  )Cash
      Flows From Investing ActivitiesAdditional
      costs related to purchase of business
                  
                  
                  -
                  
                  
                  
                  (83,000
                  )Purchases
      of fixed assets
                  
                  
                  (4,000
                  )
                  
                  
                  (231,000
                  )Proceeds
      from the sale of assets
                  
                  
                  320,000
                  
                  
                  
                  1,200,000Net
      cash provided by investing activities
                  
                  
                  316,000
                  
                  
                  
                  886,000Cash
      Flows From Financing ActivitiesProceeds
      from stock option and warrant exercises
                  
                  
                  -
                  
                  
                  
                  30,000Proceeds
      from the sales of stock under the employee stock purchase
    plan
                  
                  
                  6,000
                  
                  
                  
                  -Principal
      payments on capitalized lease obligations
                  
                  
                  (74,000
                  )
                  
                  
                  (51,000
                  )Net
      increase in short-term borrowings
                  
                  
                  896,000
                  
                  
                  
                  2,042,000Net
      cash provided by financing activities
                  
                  
                  828,000
                  
                  
                  
                  2,021,000Net
      Decrease in Cash and Cash Equivalents
                  
                  
                  (921,000
                  )
                  
                  
                  (4,505,000
                  )Cash
      and Cash Equivalents at Beginning of Period
                  
                  
                  1,297,000
                  
                  
                  
                  4,842,000Cash
      and Cash Equivalents at End of Period
                  
                  $
                  376,000
                  
                  
                  $
                  337,000Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for:Interest
                  
                  $
                  190,000
                  
                  
                  $
                  125,000Income
      taxes
                  
                  $
                  -
                  
                  
                  $
                  2,000
 Non Cash Investing and Financing
Activities:
  In
January 2008, the Company amended its loan agreement with a bank. As a result,
the Company issued warrants which allows the bank to purchase up to 140,350
shares of the Company's common stock at an exercise price of $0.57 a share. Debt
issuance costs of $58,000 were recorded in connection with the issuance of the
warrants. See Note 3.
 
 In
January 2008, the Company entered into a  loan agreement with a
lender. As a result, the Company issued a warrant which allows the lender to
purchase up to 460,526 shares of the Company's common stock at an exercise price
of $0.57 a share. Debt discount of $151,000 was recorded in connection with the
issuance of the warrants. See Note 3.
 
 During  the
six months ended June 30, 2007, the Company entered into capitalized lease
obligations for the purchase of $219,000 in fixed assets.
 
 In April
2007, the shares issued in conjunction with the purchase of AgaveOne were
reduced by 66,667 shares or $250,000 as a result of indemnification
claims.
 
 In May
2007, the Company issued 100,000 warrants in conjunction with a loan agreement
with a bank.  See Note 3.
 The
accompanying notes are an integral part of these consolidated financial
statements.
 7
  St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 1.
Summary of Significant Accounting Policies
  St. Bernard Software, Inc., a
Delaware corporation (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 (“OEM”), and directly to network managers and
administrators worldwide.
  Basis of
presentation
  The
consolidated balance sheet as of June 30, 2008, the consolidated statements of
operations for the three and six months ended June 30, 2008 and 2007, the
consolidated statement of stockholders’ deficit for the six months ended June
30, 2008, and the consolidated statements of cash flows for the six months ended
June 30, 2008 and 2007, 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, 2007 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, 2008. These consolidated financial statements should be read in
conjunction with the Company’s December 31, 2007 consolidated financial
statements and notes thereto included in the Company’s Annual Report filed on
Form 10-KSB with the Securities and Exchange Commission on March 20,
2008.
  The
consolidated financial statements include our accounts and those of our
subsidiaries which include our operations in the UK and Australia; such entities
were dissolved in 2007. All inter-company balances and transactions have been
eliminated in consolidation.
  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 assumptions used to determine the
fair value of stock options under Statement of Financial Accounting Standards,
or SFAS, No. 123R (revised 2004), “Share-based Payment”(“SFAS
123R”).
  Liquidity
  As of
June 30, 2008, the Company had approximately $0.4 million of cash and cash
equivalents and a working capital deficit of $11.1
million.  Approximately $9.9 million of our current liability balance
at June 30, 2008 consists of deferred revenues, which represents amounts that
will be amortized into revenue as they are earned in future periods. The Company
also had a stockholders’ deficit of approximately $8.7 million at June 30,
2008.
  The
Company has a history of losses and has not been able to achieve profitability.
For the three and six months ended June 30, 2008, the Company incurred net
losses of $0.9 million and $1.3 million, respectively, and through June 30, 2008
has recorded a cumulative net loss of $48.5 million. During the fourth quarter
of 2007 and through the second quarter of 2008, the Company made substantial
changes to the cost structure of its business. These changes included the
closure of its sales and marketing offices within Europe, 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. In
addition to the changes described above, the Company  entered into a
Loan and Security Agreement (the “PFG Loan Agreement”) with Partners for Growth
II, L.P. (“PFG”) in July 2008 for the amount of $1.5 million. See Note
7.
  8
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 The
Company believes that its existing cash resources, combined with projected
billings for 2008, cost reductions implemented in the fourth quarter of 2007 and
through the second quarter of 2008, and its 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.
  Loss
per common share
  Basic
loss per common share is calculated by dividing net loss by the weighted-average
number of shares of common stock outstanding. 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. No dilutive effect was calculated for the
three and six months ended June 30, 2008 and 2007, respectively, as the Company
reported a net loss in each period and the effect would have been
anti-dilutive.
  New
accounting standards
  In
May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 162, “The Hierarchy
of Generally Accepted Accounting Principle”.  SFAS 162 will
provide framework for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. GAAP for
nongovernmental entities.  SFAS 162 will be effective 60 days
following the Securities and Exchange Commission's approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section
411.  The Company is currently evaluating the impact, if any, this
statement will have on its financial position, cash flows, or results of
operations.
  On
February 15, 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. SFAS No. 159 permits all entities
to choose, at specified election dates, to measure eligible items at fair value
(the “fair value option”). A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings (or
another performance indicator if the business entity does not report earnings)
at each subsequent reporting date. Upfront costs and fees related to items for
which the fair value option is elected shall be recognized in earnings as
incurred and not deferred. The Company adopted SFAS 159 on January 1,
2008.  The adoption of SFAS 159 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.” 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 current practice. The
Company adopted SFAS 157 on January 1, 2008.  The adoption of SFAS 157
did not have a material impact on its financial position, cash flows, or results
of operations.
  Reclassifications
  Certain
amounts in the 2007 financial statements have been reclassified to conform to
the 2008 classifications. These reclassifications have no effect on previously
reported net income.
  9
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 2.
Stock-based Compensation Expense
  Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of 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 to five years, and expiration dates not to exceed ten years from date of
grant. The determination of fair value of the Company’s stock is derived using
the value of the stock price at the grant date.
  Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected term of the stock-based compensation,
expected stock price volatility factor, and the pre-vesting option forfeiture
rate. The weighted average fair value of options granted during the six months
ended June 30, 2008 and 2007 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 of its common stock 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.
  Six
      Months Ended
              
              Six
      Months EndedJune
      30, 2008
              
              June
      30, 2007Average
      expected life (years)
              
              
              6.5
              
              
              
              6.5Average
      expected volatility factor
              
              
              73.3
              %
              
              
              74.0
              %Average
      risk-free interest rate
              
              
              3.8
              %
              
              
              4.8
              %Average
      expected dividend yield
              
              
              0
              
              
              
              0
  Total
stock-based compensation expense was approximately $277,000 and $321,000 for the
three months ended June 30, 2008 and 2007, respectively, and $334,000 and
$581,000 for the six months ended June 30, 2008 and 2007, respectively. The
stock-based compensation expenses were charged to operating expenses. The
earnings per share effect as a result of the stock based compensation expense
was approximately $0.02 for the three and six months ended June 30, 2008. The
tax effect was immaterial.
  The
following is a summary of stock option activity under the Plans as of June 30,
2008 and changes during the six months ended June 30, 2008:
  Number
      of
                Shares
                Outstanding
              
              
              Weighted
                Average
                Exercise
                PriceOptions
      outstanding at December 31, 2007
              
              2,074,861
              
              
              $
              1.77Granted
              
              472,000
              
              
              $
              0.58Exercised
              
              —
              
              
              $
              —Forfeited
              
              (509,857
              )
              
              $
              1.64Options
      outstanding at June 30, 2008
              
              2,037,004
              
              
              $
              1.60
  10
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 Additional
information regarding options outstanding as of June 30, 2008 is as
follows:
  Range of
                Exercise
                Prices
              
              
              Number
      of
                Shares
                Outstanding
              
              Weighted
                Average
                Remaining
                Contractual
                Life in Years
              
              Weighted
                Average
                Exercise
                Price
              
              Number
                Exercisable
              
              Weighted
                Average
                Exercise
                Price$
              0.36
              
              to
      $0.54
              52,500
              
              9.69
              
              $
              0.52
              
              —
              
              $
              —$
              0.57
              
              to
      $0.57
              375,000
              
              9.41
              
              $
              0.57
              
              —
              
              $
              —$
              0.58
              
              to
      $0.58
              3,000
              
              9.76
              
              $
              0.58
              
              —
              
              $
              —$
              0.59
              
              to
      $0.59
              331,977
              
              8.81
              
              $
              0.59
              
              35,977
              
              $
              0.59$
              0.60
              
              to
      $1.80
              192,728
              
              6.77
              
              $
              1.03
              
              133,856
              
              $
              1.04$
              1.90
              
              to
      $1.90
              275,000
              
              8.47
              
              $
              1.90
              
              136,812
              
              $
              1.90$
              1.95
              
              to
      $1.95
              552,347
              
              8.02
              
              $
              1.95
              
              204,912
              
              $
              1.95$
              3.71
              
              to
      $3.71
              177,666
              
              6.94
              
              $
              3.71
              
              114,852
              
              $
              3.71$
              4.75
              
              to
      $4.75
              60,000
              
              1.54
              
              $
              4.75
              
              60,000
              
              $
              4.75$
              5.20
              
              to
      $5.20
              16,786
              
              4.10
              
              $
              5.20
              
              16,786
              
              $
              5.20$
              0.36
              
              to
      $5.20
              2,037,004
              
              8.08
              
              $
              1.60
              
              703,195
              
              $
              2.30
  The
aggregate intrinsic value of options outstanding and exercisable at June 30,
2008 was $0. The aggregate intrinsic value of options outstanding and
exercisable at June 30, 2007 was $39,000. The aggregate intrinsic value
represents the total intrinsic value based upon the stock price of $0.51 at June
30, 2008.
  As of
June 30, 2008, there was approximately $1.5 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 1.93 years.
  3.
Debt
  Credit
Facility
  On
May 15, 2007, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank, a California corporation (“SVB”).  The Loan and
Security Agreement with SVB was later amended during the first quarter of 2008
as discussed below.
  On
January 25, 2008, St. Bernard entered into an Amendment to the Loan and
Security Agreement (the “SVB Loan Amendment”) with SVB, amending the Loan and
Security Agreement entered into between St. Bernard and SVB on May 15,
2007. Pursuant to the terms of the SVB Loan Amendment, among other things, SVB
(i) refinanced the existing term loan with the proceeds of an advance under
the revolving line of credit (and terminated the term loan facility),
(ii) reduced the revolving line of credit it will provide to St. Bernard to
an amount not to exceed $2,000,000, (iii) increased the interest rate on
the revolving line of credit to 3% (from 2%) over the greater of the prime rate
or 7.5%, (iv) modified the tangible net worth covenant, and (v) took a
security interest in St. Bernard’s intellectual property. At June 30, 2008, the
effective interest rate was 10.5%. At June 30, 2008 the Company was in
compliance with the above stated covenants and restrictions.
  11
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 In
connection with the execution of the SVB Loan Amendment, St. Bernard issued
warrants to SVB on January 25, 2008, 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 the issue date of the warrants.
Accordingly, the Company recorded debt issue 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 for three and six months ended June 30, 2008, which is being
recorded as interest expense, was approximately $11,000 and $19,000,
respectively. Furthermore, St. Bernard has agreed to grant SVB certain piggyback
registration rights with respect to the shares of common stock underlying the
warrants. As of June 30, 2008, the balance on the line of credit with SVB was
$1.9 million.
  Bridge
Loan
  On
January 25, 2008, St. Bernard Software, Inc. entered into a Loan Agreement (the
"Agility Loan Agreement") with Agility Capital, LLC ("Agility"). Pursuant to the
terms of the Agility Loan Agreement, Agility provided St. Bernard with a
non-revolving term loan in the amount of $750,000, at a 15% fixed interest rate
(the “Agility Loan”). Beginning March 1, 2008, and on the first day of each
month thereafter until July 1, 2008, St. Bernard is required to pay to Agility
$25,000 plus accrued but unpaid interest. Beginning July 1, 2008, and on the
first day of each month thereafter, St. Bernard is required to pay Agility
$50,000 plus accrued interest.  The obligations under the Agility Loan
Agreement are secured by substantially all of St. Bernard's assets subordinated
by the SVB Loan Amendment.
  The
Agility Loan Agreement contains customary affirmative and negative covenants and
other restrictions.  At June 30, 2008, the Company was in compliance
with the above stated covenants.
  In
connection with the execution of the Agility Loan Agreement, St. Bernard issued
warrants to Agility (the "Agility Warrants"), which allows Agility to purchase
up to 460,526 shares of St. Bernard common stock at an exercise price equal to
$0.57 per share. The Agility Warrants expire on the seventh anniversary of their
issue date. The Company estimated the fair value of the warrants to be $189,000
using the following assumptions; 75.35% volatility, risk free interest rate of
3.61%, an expected life of seven years and no dividends.  In
accordance with Accounting Principles Board Opinion No. 14, the relative fair
value of the warrants, estimated to be approximately $151,000, was recorded as
debt discount.   Amortization of the debt discount for three and
six months ended June 30, 2008, which is being recorded as interest expense, was
approximately $38,000 and $63,000, respectively. The Agility Warrants contains
anti-dilution protection in the event of a debt or equity financing, with
respect to the exercise price and number of shares. Furthermore, St. Bernard
granted Agility piggyback registration rights with respect to the shares of
common stock underlying the Agility Warrants. As of June 30, 2008, the balance
on the Agility loan was approximately $650,000.
  In July
2008, the entire outstanding balance on the Agility Loan was paid using the
proceeds from a new loan (See Note 7).
  4.
Stockholders’ Deficit
  Warrants
  As of
June 30, 2008 and December 31, 2007, a total of 9,350,980 and 8,750,104 shares
of common stock, respectively, were reserved for issuance for the exercise of
warrants at exercise prices of $0.57, $1.60, $1.85, $2.98, and $5.00 per
share.  During the six months ended June 30, 2008, warrants to purchase an
aggregate of 600,876 shares of common stock at an exercise price of $0.57 per
share were granted resulting in $209,000 in compensation costs. There were no
warrants that were exercised or expired during this period.
  12
 St.
Bernard Software, Inc.
 
 Notes
to Consolidated Financial Statements
 5.
Related Party Transactions
  During
2007, a stockholder and former member of the Board of Directors provided legal
services to the Company in the ordinary course of business. Billings for such
services totaled approximately $14,000 for the three months ended June 30, 2007
and $636,000 for the six months ended June 30, 2007. Amounts due at December 31,
2007 were approximately $400,000.  The Company settled the amounts due
with this related party for approximately $179,000 resulting in a gain of
$246,000 during the three months ended March 31, 2008. No such services were
rendered in 2008.
  The
Company previously occupied office space provided by an affiliate of certain
officers and directors of the Company. The Company paid this affiliate $7,500
per month to lease 2,000 square feet of office space in Amsterdam. The lease was
terminated on February 15, 2008.
  6.
Concentrations
  Sales
and revenue
  The
Company considers itself to operate within one business segment, Secure Content
Management (“SCM”). For the six months ended June 30, 2008 and 2007,
approximately 97% and 92%, respectively, of the Company’s revenue was in North
America, the remaining 3% and 8%, respectively, were disbursed over the rest of
the world.
  7.
Subsequent Events
  On July
21, 2008, the Company entered into a Loan Agreement with Partners for Growth II,
LP (“PFG”), which became effective on July 23, 2008. Pursuant to the terms of
the PFG Loan Agreement, PFG provided St. Bernard with a revolving line of credit
in the amount not to exceed the lesser of (a) $1,500,000 at any one time
outstanding or (b) up to 30% of the amount of St. Bernard’s aggregate Eligible
Billings (as defined in the PFG Loan Agreement) over a rolling three month
period calculated monthly.
  The
annual interest rate on the PFG Loan is set at the Prime Rate, quoted by Silicon
Valley Bank as its Prime Rate from time to time, plus 3% (the “Applicable
Rate”).  St. Bernard is required to maintain a minimum borrowing
amount of at least $750,000 (the “Minimum Borrowing Amount”) or pay PFG a
minimum interest amount (the “Minimum Interest Amount”) equal to $750,000,
multiplied by the Applicable Rate, and further multiplied by the number of days
(based on a 360-day year) from the date of such failure to maintain the Minimum
Borrowing Amount to the Maturity Date (as defined in the PFG Loan
Agreement).  Pursuant to the terms of the PFG Loan Agreement, St.
Bernard paid PFG a one-time commitment fee of $30,000 and agreed to reimburse
PFG for PFG’s reasonable attorneys’ fees in connection with the negotiation of
the PFG Loan Agreement.
  Subject
to the requirement to maintain the Minimum Borrowing Amount or pay the Minimum
Interest Amount, St. Bernard may borrow, repay and reborrow from time to time
until the Maturity Date. Proceeds of the initial loan amount were used to pay
all indebtedness owing to Agility, with the remaining amount to be used for
working capital.
  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
by 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. 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 the collateral.
  In
connection with the execution of the PFG Loan Agreement, St. Bernard 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.
  13




PART II – OTHER INFORMATION




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 Annual Report on Form 10-KSB filed with
      the Securities and Exchange Commission on March 20,
  2008).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).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).




14




10.1*
            
            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).





31.1
            
            Certification
      of Chief Executive Officer and Acting 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 and Acting 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


15




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this amended report to be signed on its behalf by the undersigned
thereunto duly authorized.






ST.
      BERNARD SOFTWARE, INC.Date:  August
      26, 2008
            By:
            /s/
      Vincent
      RossiVincent Rossi
              Chief Executive Officer
              Acting Chief Financial Officer




16