----

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

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

| Delaware                                                      | 20-0996152                          |
|---------------------------------------------------------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.) |

| 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Large accelerated filer    ̈       | 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 |
|------------------------|-----------------------|

----

----

|                               |                                                                                                                               | Page   |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART I—FINANCIAL INFORMATION |                                                                                                                               |
|                               |                                                                                                                               |   |
| ITEM 1.                            | FINANCIAL STATEMENTS                                                                                                               | 1      |
|                               |                                                                                                                               |   |
|                               | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010                        | 1      |
|                               |                                                                                                                               |   |
|                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME  FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31, 2010 (UNAUDITED)         | 2      |
|                               |                                                                                                                               |   |
|                               | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE  THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)        | 3      |
|                               |                                                                                                                               |   |
|                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31, 2010 (UNAUDITED) | 4      |
|                               |                                                                                                                               |   |
|                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                                   | 5      |
|                               |                                                                                                                               |   |
| ITEM 2.                            | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                        | 13     |
|                               |                                                                                                                               |   |
| ITEM 3.                            | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                         | 19     |
|                               |                                                                                                                               |   |
| ITEM 4.                            | CONTROLS AND PROCEDURES                                                                                                            | 19     |
|                               |                                                                                                                               |
| PART II—OTHER INFORMATION    |                                                                                                                               |
|                               |                                                                                                                               |   |
| ITEM 1.                            | LEGAL PROCEEDINGS                                                                                                                  | 19     |
|                               |                                                                                                                               |   |
| ITEM 1A.                           | RISK FACTORS                                                                                                                       | 19     |
|                               |                                                                                                                               |   |
| ITEM 2.                            | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                        | 19     |
|                               |                                                                                                                               |   |
| ITEM 3.                            | DEFAULTS UPON SENIOR SECURITIES                                                                                                    | 19     |
|                               |                                                                                                                               |   |
| ITEM 4.                            | [REMOVED AND RESERVED]                                                                                                             | 19     |
|                               |                                                                                                                               |   |
| ITEM 5.                            | OTHER INFORMATION                                                                                                                  | 19     |
|                               |                                                                                                                               |   |
| ITEM 6.                            | EXHIBITS                                                                                                                           | 20     |
|                               |                                                                                                                               |   |
|                               | SIGNATURES                                                                                                                         | 22     |

----

|                                                                                                                                                                       |   | March 31, 2011 |        |   | December 31, 2010 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|-------------|--------|-------------------|--------|
|                                                                                                                                                                       |   | (Unaudited)    |        |   |              |   |
|                                                                                                                                                                       |   |           |        |   |              |   |
| Assets                                                                                                                                                                     |   |           |        |   |              |   |
|                                                                                                                                                                       |   |           |        |   |              |   |
| Current Assets                                                                                                                                                             |   |           |        |   |              |   |
| Cash and cash equivalents                                                                                                                                                  |   | $              | 2,230,000   |   |              | $      | 2,610,000 |   |
| Accounts receivable - net of allowance for doubtful accounts of $20,000 and $30,000 at March 31, 2011 and December 31, 2010, respectively                                  |   |           | 3,267,000   |   |              |   | 3,669,000 |   |
| Inventories - net                                                                                                                                                          |   |           | 444,000     |   |              |   | 698,000 |   |
| Prepaid expenses and other current assets                                                                                                                                  |   |           | 476,000     |   |              |   | 932,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total current assets                                                                                                                                                       |   |           | 6,417,000   |   |              |   | 7,909,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Fixed Assets - Net                                                                                                                                                         |   |           | 823,000     |   |              |   | 492,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Goodwill                                                                                                                                                                   |   |           | 8,279,000   |   |              |   | 8,279,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Other Intangible Assets - Net                                                                                                                                              |   |           | 555,000     |   |              |   | 587,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Other Assets                                                                                                                                                               |   |           | 449,000     |   |              |   | 393,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total Assets                                                                                                                                                               |   | $              | 16,523,000  |   |              | $      | 17,660,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Liabilities and Stockholders’ Deficit                                                                                                                                |   |           |        |   |              |   |   |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Current Liabilities                                                                                                                                                        |   |           |        |   |              |   |   |   |
| Line of credit                                                                                                                                                             |   | $              | 1,200,000   |   |              | $      | - |   |
| Term loan, current portion                                                                                                                                                 |   |           | 400,000     |   |              |   | 400,000 |   |
| Accounts payable                                                                                                                                                           |   |           | 788,000     |   |              |   | 1,133,000 |   |
| Accrued compensation                                                                                                                                                       |   |           | 1,397,000   |   |              |   | 1,526,000 |   |
| Accrued expenses and other current liabilities                                                                                                                             |   |           | 754,000     |   |              |   | 752,000 |   |
| Warranty liability                                                                                                                                                         |   |           | 202,000     |   |              |   | 210,000 |   |
| Current portion on capitalized lease obligations                                                                                                                           |   |           | 35,000      |   |              |   | - |   |
| Deferred revenue                                                                                                                                                           |   |           | 10,845,000  |   |              |   | 11,038,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total current liabilities                                                                                                                                                  |   |           | 15,621,000  |   |              |   | 15,059,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Convertible Notes Payable                                                                                                                                                  |   |           | 3,238,000   |   |              |   | 3,214,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Term Loan, Net of Current Portion                                                                                                                                          |   |           | 33,000      |   |              |   | 58,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Capitalized Lease Obligations, Less Current Portion                                                                                                                        |   |           | 174,000     |   |              |   | - |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Deferred Revenue                                                                                                                                                           |   |           | 10,328,000  |   |              |   | 10,617,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total liabilities                                                                                                                                                          |   |           | 29,394,000  |   |              |   | 28,948,000 |   |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Stockholders’ Deficit                                                                                                                                                |   |           |        |   |              |   |   |   |
| Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding                                                                            |   |           | -           |   |              |   | - |   |
| Common stock, $0.01 par value; 50,000,000 shares authorized; 16,390,811 and 16,093,135 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively |   |           | 160,000     |   |              |   | 158,000 |   |
| Additional paid-in capital                                                                                                                                                 |   |           | 41,935,000  |   |              |   | 41,818,000 |   |
| Accumulated deficit                                                                                                                                                        |   |           | (54,966,000 | )      |              |   | (53,264,000 | ) |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total stockholders’ deficit                                                                                                                                          |   |           | (12,871,000 | )      |              |   | (11,288,000 | ) |
|                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total Liabilities and Stockholders’ Deficit                                                                                                                          |   | $              | 16,523,000  |   |              | $      | 17,660,000 |   |

----

|                                                           |   | Three months ended March 31, |       |
|----------------------------------------------------------------|--------|------------------------------|------------|
|                                                           |   | 2011                         |       |   | 2010 |   |
|                                                           |   |                         |       |   |   |   |
| Revenues                                                       |   |                         |       |   |   |   |
| Subscription                                                   |   | $                            | 3,670,000  |   |   | $ | 3,496,000 |   |
| Appliance                                                      |   |                         | 708,000    |   |   |   | 883,000 |   |
| License                                                        |   |                         | 2,000      |   |   |   | 9,000 |   |
| Total Revenues                                                 |   |                         | 4,380,000  |   |   |   | 4,388,000 |   |
|                                                           |   |                         |       |   |   |   |   |   |
| Cost of Revenues                                               |   |                         |       |   |   |   |   |   |
| Subscription                                                   |   |                         | 790,000    |   |   |   | 393,000 |   |
| Appliance                                                      |   |                         | 453,000    |   |   |   | 600,000 |   |
| License                                                        |   |                         | 2,000      |   |   |   | 2,000 |   |
| Total Cost of Revenues                                         |   |                         | 1,245,000  |   |   |   | 995,000 |   |
|                                                           |   |                         |       |   |   |   |   |   |
| Gross Profit                                                   |   |                         | 3,135,000  |   |   |   | 3,393,000 |   |
|                                                           |   |                         |       |   |   |   |   |   |
| Operating Expenses                                             |   |                         |       |   |   |   |   |   |
| Sales and marketing                                            |   |                         | 2,443,000  |   |   |   | 1,730,000 |   |
| Research and development                                       |   |                         | 1,464,000  |   |   |   | 788,000 |   |
| General and administrative                                     |   |                         | 906,000    |   |   |   | 985,000 |   |
| Total Operating Expenses                                       |   |                         | 4,813,000  |   |   |   | 3,503,000 |   |
|                                                           |   |                         |       |   |   |   |   |   |
| Loss from Operations                                           |   |                         | (1,678,000 | ) |   |   | (110,000 | ) |
|                                                           |   |                         |       |   |   |   |   |   |
| Other Expense (Income)                                         |   |                         |       |   |   |   |   |   |
| Interest expense - net                                         |   |                         | 44,000     |   |   |   | 41,000 |   |
| Other income                                                   |   |                         | (20,000    | ) |   |   | (2,000 | ) |
| Total Other Expense                                            |   |                         | 24,000     |   |   |   | 39,000 |   |
| Loss Before Income Taxes                                       |   |                         | (1,702,000 | ) |   |   | (149,000 | ) |
|                                                           |   |                         |       |   |   |   |   |   |
| Income tax expense                                             |   |                         | -          |   |   |   | - |   |
| Net Loss                                                       |   | $                            | (1,702,000 | ) |   | $ | (149,000 | ) |
| Loss Per Common Share - Basic and Diluted                      |   | $                            | (0.11      | ) |   | $ | (0.01 | ) |
| Weighted Average Common Shares Outstanding - Basic and Diluted |   |                         | 16,191,701 |   |   |   | 13,388,264 |   |

----

|                                                           |   | Common Stock |       |   | AdditionalPaid-in |   |    | Accumulated |   |   |       |   |
|----------------------------------------------------------------|--------|--------------|------------|--------|-------------------|--------|---------|-------------|--------|--------|------------|--------|
|                                                           |   | Shares       |       |   | Amount            |   |    | Capital     |   |   | Deficit    |   |   | Total |   |
|                                                           |   |         |       |   |              |   |    |        |   |   |       |   |   |   |   |
| Balance at December 31, 2010                                   |   |         | 16,093,135 |   |              | $      | 158,000 |        |   | $      | 41,818,000 |   |   | $ | (53,264,000 | ) |   | $ | (11,288,000 | ) |
| Common stock issued under the employee stock purchase plan     |   |         | 159,254    |   |              |   | 1,000   |        |   |   | 43,000     |   |   |   | - |   |   |   | 44,000 |   |
| Common stock issued for the exercise of employee stock options |   |         | 138,422    |   |              |   | 1,000   |        |   |   | 34,000     |   |   |   | - |   |   |   | 35,000 |   |
| Stock-based compensation expense                               |   |         | -          |   |              |   | -       |        |   |   | 40,000     |   |   |   | - |   |   |   | 40,000 |   |
| Net loss                                                       |   |         | -          |   |              |   | -       |        |   |   | -          |   |   |   | (1,702,000 | ) |   |   | (1,702,000 | ) |
| Balance at March 31, 2011                                      |   |         | 16,390,811 |   |              | $      | 160,000 |        |   | $      | 41,935,000 |   |   | $ | (54,966,000 | ) |   | $ | (12,871,000 | ) |

----

|                                                                                      |   | Three months ended March 31, |       |
|-------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                      |   | 2011                         |       |   | 2010 |   |
|                                                                                      |   |                         |       |   |   |   |
| Cash Flows From Operating Activities                                                      |   |                         |       |   |   |   |
| Net loss                                                                                  |   | $                            | (1,702,000 | ) |   | $ | (149,000 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |   |                         |       |   |   |   |   |   |
| Depreciation and amortization                                                             |   |                         | 177,000    |   |   |   | 85,000 |   |
| Allowance for doubtful accounts                                                           |   |                         | (10,000    | ) |   |   | (1,000 | ) |
| Gain on change in fair value of warrant derivative liability                    |   |                         | (20,000    | ) |   |   | (2,000 | ) |
| Stock-based compensation expense                                                          |   |                         | 40,000     |   |   |   | 37,000 |   |
| Noncash interest expense                                                                  |   |                         | 24,000     |   |   |   | 15,000 |   |
| Change in operating assets and liablilities, net of effect of acquisition:                |   |                         |       |   |   |   |   |   |
| Accounts receivable                                                                       |   |                         | 412,000    |   |   |   | (245,000 | ) |
| Inventories                                                                               |   |                         | 254,000    |   |   |   | 26,000 |   |
| Prepaid expenses and other assets                                                         |   |                         | 400,000    |   |   |   | (252,000 | ) |
| Accounts payable                                                                          |   |                         | (345,000   | ) |   |   | 98,000 |   |
| Accrued expenses and other current liabilities                                            |   |                         | 22,000     |   |   |   | 153,000 |   |
| Accrued compensation                                                                      |   |                         | (129,000   | ) |   |   | 114,000 |   |
| Warranty liability                                                                        |   |                         | (8,000     | ) |   |   | 1,000 |   |
| Deferred revenue                                                                          |   |                         | (482,000   | ) |   |   | 393,000 |   |
| Net cash (used in) provided by operating activities                                       |   |                         | (1,367,000 | ) |   |   | 273,000 |   |
|                                                                                      |   |                         |       |   |   |   |   |   |
| Cash Flows From Investing Activities                                                      |   |                         |       |   |   |   |   |   |
| Purchases of fixed assets                                                                 |   |                         | (259,000   | ) |   |   | (31,000 | ) |
| Net cash used by investing activities                                                     |   |                         | (259,000   | ) |   |   | (31,000 | ) |
|                                                                                      |   |                         |       |   |   |   |   |   |
| Cash Flows From Financing Activities                                                      |   |                         |       |   |   |   |   |   |
| Proceeds from stock option exercises                                                      |   |                         | 35,000     |   |   |   | - |   |
| Proceeds from the sales of stock under the employee stock purchase plan                   |   |                         | 44,000     |   |   |   | 12,000 |   |
| Payments on capitalized lease obligations                                                 |   |                         | (8,000     | ) |   |   | (22,000 | ) |
| Principal payments on term loans                                                          |   |                         | (25,000    | ) |   |   | - |   |
| Net increase on short-term borrowings                                                     |   |                         | 1,200,000  |   |   |   | 100,000 |   |
| Net cash provided by financing activities                                                 |   |                         | 1,246,000  |   |   |   | 90,000 |   |
| Net (Decrease) Increase in Cash and Cash Equivalents                                      |   |                         | (380,000   | ) |   |   | 332,000 |   |
| Cash and Cash Equivalents at Beginning of Period                                          |   |                         | 2,610,000  |   |   |   | 2,454,000 |   |
| Cash and Cash Equivalents at End of Period                                                |   | $                            | 2,230,000  |   |   | $ | 2,786,000 |   |
|                                                                                      |   |                         |       |   |   |   |   |   |
| Supplemental Disclosures of Cash Flow Information:                                        |   |                         |       |   |   |   |   |   |
|                                                                                      |   |                         |       |   |   |   |   |   |
| Cash paid during the period for:                                                          |   |                         |       |   |   |   |   |   |
| Interest                                                                                  |   | $                            | 10,000     |   |   | $ | 17,000 |   |
| Income taxes                                                                              |   | $                            | -          |   |   | $ | - |   |
|                                                                                      |   |                         |       |   |   |   |   |   |
| Non Cash Investing and Financing Activities:                                              |   |                         |       |   |   |   |   |   |
| Furniture acquired pursuant to capital lease                                              |   | $                            | 217,000    |   |   | $ | - |   |

----

----

----

----

|                            |   | Three Months EndedMarch 31, 2011 |   |   | Three Months EndedMarch 31, 2010 |   |
|---------------------------------|--------|---------------------------------------|--------|--------|---------------------------------------|--------|
| Average expected life (years)   |   |                                  | 6.5    |   |                                  |   | 6.5 |   |
| Average expected volatility     |   |                                  | 55.5   | %      |                                  |   | 49.9 | % |
| Average risk-free interest rate |   |                                  | 3.5    | %      |                                  |   | 3.8 | % |
| Average expected dividend yield |   |                                  | 0      |   |                                  |   | 0 |   |

|                                                  |   | Number ofSharesOutstanding |      |    | WeightedAverageExercisePrice |    | Weighted Average Remaining Contractual Term |   | Aggregate Intrinsic Value |   | Weighted Average Grant Date Fair Value |
|-------------------------------------------------------|--------|----------------------------|-----------|---------|------------------------------|---------|---------------------------------------------|--------|---------------------------|--------|----------------------------------------|
|                                                  |   |                       |      |    |                         |    |                                        |   |                      |   |                                   |   |   |
| Options outstanding at December 31, 2010              |   |                       | 3,776,024 |    |                         | $       | 0.28                                        |   | 8.25                      |   | $                                      | 1,142,000 |   |   | — |
| Granted                                               |   |                       | 127,000   |    |                         | $       | 0.49                                        |   | —                   |   |                                   | — |   | $ | 0.28 |
| Exercised                                             |   |                       | (138,422  | )  |                         | $       | 0.24                                        |   | —                   |   |                                   | — |   |   | — |
| Forfeited/Expired                                     |   |                       | (134,874  | )       |                         | $       | 0.33                                        |   | —                   |   |                                   | — |   |   | — |
| Options outstanding at March 31, 2011                 |   |                       | 3,629,728 |    |                         | $       | 0.29                                        |   | 8.34                      |   | $                                      | 801,000 |   |   | — |
| Options vested and expected to vest at March 31, 2011 |   |                       | 3,101,354 |    |                         | $  | 0.27                                        |   | 8.18                      |   | $                                      | 725,000 |   |   | — |
| Options exercisable at March 31, 2011            |   |                       | 1,442,265 |    |                         | $       | 0.23                                        |   | 7.24                      |   | $                                      | 394,000 |   |   | — |

|                                                                                      |   | Number ofSharesOutstanding* |    |   | WeightedAverageFair Value |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|---------|--------|---------------------------|--------|
|                                                                                      |   |                        |    |   |                      |   |
| Restricted stock outstanding at December 31, 2010                                         |   |                        | 430,250 |   |                      | $      | 0.63 |   |
| Awarded                                                                                   |   |                        | — |   |                      | $      | — |   |
| Released                                                                                  |   |                        | — |   |                      | $      | — |   |
| Cancelled                                                                                 |   |                        | (24,000 | )      |                      | $      | 0.63 |   |
| Restricted stock outstanding at March 31, 2011                                            |   |                        | 406,250 |   |                      | $      | 0.63 |   |
|                                                                                      |   |                        |    |   |                      |   |   |
| * Represents the total amount of unvested restricted stock outstanding at March 31, 2011. |   |

----

|     Range of ExercisePrices |   |   | Number ofSharesOutstanding |   |   | WeightedAverageRemainingContractualLife in Years |   |   | WeightedAverageExercisePrice |   |   | NumberExercisable |   |   | WeightedAverageExercisePrice |   |
|--------------------------------------------|--------|--------|----------------------------|--------|--------|------------------------------------------------------------|--------|--------|------------------------------|--------|--------|-------------------|--------|--------|------------------------------|--------|
| $                                          | 0.14   |   |                       | $      | 0.16   |                                                       |   |   | 449,093                      |   |   |              | 8.46   |   |                         | $      | 0.16 |   |   |   | 222,297 |   |   | $ | 0.16 |   |
| $                                          | 0.18   |   |                       | $      | 0.19   |                                                       |   |   | 23,000                       |   |   |              | 8.84   |   |                         | $      | 0.18 |   |   |   | 8,621 |   |   | $ | 0.18 |   |
| $                                          | 0.20   |   |                       | $      | 0.20   |                                                       |   |   | 383,467                      |   |   |              | 8.36   |   |                         | $      | 0.20 |   |   |   | 194,939 |   |   | $ | 0.20 |   |
| $                                          | 0.22   |   |                       | $      | 0.24   |                                                       |   |   | 338,000                      |   |   |              | 8.66   |   |                         | $      | 0.23 |   |   |   | 160,921 |   |   | $ | 0.24 |   |
| $                                          | 0.25   |   |                       | $      | 0.25   |                                                       |   |   | 891,668                      |   |   |              | 6.47   |   |                         | $      | 0.25 |   |   |   | 851,837 |   |   | $ | 0.25 |   |
| $                                          | 0.26   |   |                       | $      | 0.26   |                                                       |   |   | 6,000                        |   |   |              | 8.48   |   |                         | $      | 0.26 |   |   |   | 2,984 |   |   | $ | 0.26 |   |
| $                                          | 0.29   |   |                       | $      | 0.29   |                                                       |   |   | 500,000                      |   |   |              | 9.08   |   |                         | $      | 0.29 |   |   |   | — |   |   | $ | — |   |
| $                                          | 0.31   |   |                       | $      | 0.34   |                                                       |   |   | 75,000                       |   |   |              | 9.30   |   |                         | $      | 0.33 |   |   |   | — |   |   | $ | — |   |
| $                                          | 0.35   |   |                       | $      | 0.35   |                                                       |   |   | 610,500                      |   |   |              | 9.28   |   |                         | $      | 0.35 |   |   |   | — |   |   | $ | — |   |
| $                                          | 0.45   |   |                       | $      | 0.82   |                                                       |   |   | 353,000                      |   |   |              | 9.65   |   |                         | $      | 0.62 |   |   |   | 666 |   |   | $ | 0.45 |   |
| $                                          | 0.14   |   |                       | $      | 0.82   |                                                       |   |   | 3,629,728                    |   |   |              | 8.34   |   |                         | $      | 0.29 |   |   |   | 1,442,265 |   |   | $ | 0.23 |   |

----

----

|                            |   | March 31,2011 |   |   | December 31, 2010 |   |
|---------------------------------|--------|---------------|--------|--------|-------------------|--------|
| Average expected life (years)   |   |          | 3.8    |   |              |   | 4.0 |   |
| Average expected volatility     |   |          | 58.1   | %      |              |   | 52.2 | % |
| Average risk-free interest rate |   |          | 3.5    | %      |              |   | 3.3 | % |
| Expected dividend yield         |   |          | 0      |   |              |   | 0 |   |
| Stock price                     |   | $        | 0.50   |   |              | $      | 0.58 |   |

| Balance at December 31, 2010                           |   | $      | 120,000 |   |
|--------------------------------------------------------|--------|--------|---------|--------|
| Gain on change in fair value included in other expense |   |   | 20,000  |   |
| Balance at March 31, 2011                              |   | $      | 100,000 |   |

----

----

----

|   | ● | revenue recognition; |
|--------|---------|----------------------|

|   | ● | allowance for doubtful accounts; |
|--------|---------|----------------------------------|

|   | ● | impairment of goodwill and long-lived assets; |
|--------|---------|-----------------------------------------------|

|   | ● | accounting for income taxes; |
|--------|---------|------------------------------|

|   | ● | warranty obligation; |
|--------|---------|----------------------|

|   | ● | accounting for share-based compensation; and |
|--------|---------|----------------------------------------------|

|   | ● | accounting for warrant derivative. |
|--------|---------|------------------------------------|

| Revenues       |   | For the Three Months EndedMarch 31, |   |   |   |   |
|----------------|--------|-------------------------------------|--------|--------|--------|--------|
|           |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total revenues |   | $                                   | 4,380  |   |   | $      | 4,388 |   |   |   | (0.2 | )% |

| Subscription Revenues  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|-----------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                        |   | 2011                                |   |   | 2010   |   |   | $ Change |   |
| Subscription revenues       |   | $                                   | 3,670  |   |   | $      | 3,496 |   |   |   | 5.0 | % |
| As a percentage of revenues |   |                                | 83.8   | %      |   |   | 79.7 | % |   |   |   |   |

----

| Appliance Revenues     |   | For the Three Months EndedMarch 31, |   |   |   |   |
|-----------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                        |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Appliance revenues          |   | $                                   | 708    |   |   | $      | 883 |   |   |   | (19.8 | )% |
| As a percentage of revenues |   |                                | 16.2   | %      |   |   | 20.1 | % |   |   |   |   |

| Cost of Revenues  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                   |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total cost of revenues |   | $                                   | 1,245  |   |   | $      | 995 |   |   |   | 25.1 | % |
| Gross margin percent   |   |                                | 71.6   | %      |   |   | 77.3 | % |   |   |   |   |

| Cost of Subscription Revenues  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|-------------------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                                |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total cost of subscription revenues |   | $                                   | 790    |   |   | $      | 393 |   |   |   | 101.0 | % |
| Gross margin percent                |   |                                | 78.5   | %      |   |   | 88.8 | % |   |   |   |   |

| Cost of Appliance Revenues  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|----------------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                             |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total cost of appliance revenues |   | $                                   | 453    |   |   | $      | 600 |   |   |   | (24.5 | )% |
| Gross margin percent             |   |                                | 36.0   | %      |   |   | 32.0 | % |   |   |   |   |

| Sales and Marketing    |   | For the Three Months EndedMarch 31, |   |   |   |   |
|-----------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                        |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total sales and marketing   |   | $                                   | 2,443  |   |   | $      | 1,730 |   |   |   | 41.2 | % |
| As a percentage of revenues |   |                                | 55.8   | %      |   |   | 39.4 | % |   |   |   |   |

----

| Research and Development  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|--------------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                           |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total research and development |   | $                                   | 1,464  |   |   | $      | 788 |   |   |   | 85.8 | % |
| As a percentage of revenues    |   |                                | 33.4   | %      |   |   | 18.0 | % |   |   |   |   |

| General and Administrative  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|----------------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                             |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total general and administrative |   | $                                   | 906    |   |   | $      | 985 |   |   |   | (8.0 | )% |
| As a percentage of revenues      |   |                                | 20.7   | %      |   |   | 22.4 | % |   |   |   |   |

| Interest and Other Income, Net  |   | For the Three Months EndedMarch 31, |   |   |   |   |
|--------------------------------------|--------|-------------------------------------|--------|--------|--------|--------|
|                                 |   | 2011                                |   |   | 2010   |   |   | % Change |   |
| Total interest and other income, net |   | $                                   | 24     |   |   | $      | 39 |   |   |   | (38.5 | )% |
| As a percentage of revenues          |   |                                | 0.5    | %      |   |   | 0.9 | % |   |   |   |   |

----

----

----

----

| 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    |         | 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).                                                                                                    |
|   |         |                                                                                                                                                                                                                                                                                                                                                          |
| 4.5    |         | 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).                                                                                           |
|   |         |                                                                                                                                                                                                                                                                                                                                                          |
| 4.6    |         | 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).                                                                                            |
|   |         |
| 4.7    |         | 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).                                                                                         |
|   |         |                                                                                                                                                                                                                                                                                                                                                          |
| 4.8    |         | 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).                                                                    |
|   |         |                                                                                                                                                                                                                                                                                                                                                          |
| 4.9    |    | 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.)                      |
|   |         |                                                                                                                                                                                                                                                                                                                                                          |
| 4.10   |    | Warrant Purchase Agreement between St. Bernard Software, Inc. and RWI Ventures II, L.P. dated July 28, 2010 (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 August 3, 2010).                                                                         |
|   |         |                                                                                                                                                                                                                                                                                                                                                          |
| 4.11   |    | Convertible Note Agreement between St. Bernard Software, Inc. and certain Noteholders dated July 28, 2010 (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 August 3, 2010).                                                                           |

| 10.1   |    | 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). |
|--------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |                                                                                                                                                                                                                                              |
| 10.2   |    | 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).    |

----

| 10.3   |    | St. Bernard Software, Inc. 2006 Recruitment Equity Incentive 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 December 22, 2006).                                                                  |
|--------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.4   |         | 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).                               |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.5   |         | 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).    |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.6   |         | 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).          |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.7*  |         | 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).                               |
|   |         |
| 10.8   |         | 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).      |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.9*  |         | Employment agreement between St. Bernard Software, Inc. and Thalia Gietzen executed June 15, 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 July 13, 2009).                                      |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.10* |         | Amended Employment Agreement between St. Bernard Software, Inc. and Louis E. Ryan executed January 19, 2010 (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 25, 2010).                         |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.11  |         | Sixth Amendment to Loan and Security Agreement between St. Bernard Software, Inc. and Silicon Valley Bank dated March 23, 2010 (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 25, 2010).        |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.12* |         | Employment agreement between St. Bernard Software, Inc. and Brian Nugent executed April 28, 2010 (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 4, 2010).                                         |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.13  |         | Lease Agreement between St. Bernard Software, Inc. and Kilroy Realty, L.P., dated August 2, 2010 (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 6, 2010).                                 |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.14  |         | Seventh Amendment to Loan and Security Agreement between St. Bernard Software, Inc. and Silicon Valley Bank dated September 29, 2010 (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 October 5, 2010). |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.15  |         | Asset Purchase Agreement between St. Bernard Software, Inc. and Red Condor, Inc. dated July 28, 2010 (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 3, 2010.)                                  |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.16  |         | Amendment No. 1 to the Asset Purchase Agreement between St. Bernard Software, Inc. and Red Condor, Inc. dated July 28, 2010 (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 October 13, 2010.)         |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 10.17* |         | Amended Employment Agreement between St. Bernard Software, Inc. and Thalia Gietzen executed March 24, 2011 (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 30, 2011).                            |
|   |         |                                                                                                                                                                                                                                                                                                            |
| 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 |
|---|---------------------------------------------------------|

----

|                | ST. BERNARD SOFTWARE, INC. |
|---------------------|----------------------------|
|                |                       |   |
|                |                       |   |
| Dated: May 16, 2011 | By:                        | /s/ Louis E. Ryan |
|                |                       | Louis E. RyanChief Executive Officer andChairman of the Board of Directors |

----