##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended March 31, 2010

or



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

For the transition period from              to

Commission File Number: 001-34358





SOLARWINDS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 73-1559348                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

3711 S. MoPac Expressway

Building Two

Austin, Texas 78746

(512) 682.9300

(Address and telephone number of principal executive offices)





Indicate by check mark whether 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.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  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.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

Indicate the number of shares outstanding of each of the issuers classes of stock, as of the latest practicable date.

On May 3, 2010, 67,978,795 shares of common stock, par value $0.001 per share, were outstanding.









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##### Table of Contents

SOLARWINDS, INC.

Table of Contents



|                              |  |                                                                                                               |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                               |  | Page No.
|                             
|PART I: FINANCIAL INFORMATION
|                              |  |                                                                                                              
|Item 1.                       |  | Financial Statements (unaudited)                                                                              |  |         
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009                              |  | 1       
|                              |  | Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 andMarch 31,
2009       |  | 2       
|                              |  | Condensed Consolidated Statement of Changes in Stockholders Equity for the Three Months EndedMarch 31,
 2010 |  | 3       
|                              |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 andMarch 31, 2009   |  | 4       
|                              |  | Notes to Condensed Consolidated Financial Statements                                                          |  | 5       
|                              |  |                                                                                                              
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                         |  | 14      
|                              |  |                                                                                                              
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 25      
|                              |  |                                                                                                              
|Item 4T.                      |  | Controls and Procedures                                                                                       |  | 26      
|                             
|PART II: OTHER INFORMATION   
|                              |  |                                                                                                              
|Item 1.                       |  | Legal Proceedings                                                                                             |  | 26      
|                              |  |                                                                                                              
|Item 1A.                      |  | Risk Factors                                                                                                  |  | 26      
|                              |  |                                                                                                              
|Item 6.                       |  | Exhibits                                                                                                      |  | 27      
|                              | 
|Signature                     |  | 28                                                                                                           
|                              | 
|Exhibit Index                 |  | 29                                                                                                           
|                              | 
|Certifications                |  |                                                                                                              



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##### Table of Contents

PART I: FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

SolarWinds, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(unaudited)



|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                   |  | March 31,2010 |         |   | December 31,2009 |  
|Assets                                                                                                                                                             |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                          |  | $             | 104,088 |   |                  | $ | 129,788 |  
|Accounts receivable, net of allowances of $116 and $149 as of March 31, 2010 and December 31, 2009,
respectively                                                   |  |               | 18,937  |   |                  |   | 15,786  |  
|Income tax receivable                                                                                                                                              |  |               | 5       |   |                  |   | 109     |  
|Deferred taxes                                                                                                                                                     |  |               | 314     |   |                  |   | 252     |  
|Prepaid income taxes                                                                                                                                               |  |               | 807     |   |                  |   | 4,675   |  
|Other current assets                                                                                                                                               |  |               | 2,563   |   |                  |   | 2,116   |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                               |  |               | 126,714 |   |                  |   | 152,726 |  
|Property and equipment, net                                                                                                                                        |  |               | 6,614   |   |                  |   | 6,406   |  
|Debt issuance costs, net                                                                                                                                           |  |               | 144     |   |                  |   | 399     |  
|Deferred taxes                                                                                                                                                     |  |               | 2,539   |   |                  |   | 2,078   |  
|Goodwill                                                                                                                                                           |  |               | 40,636  |   |                  |   | 15,444  |  
|Intangible assets and other, net                                                                                                                                   |  |               | 22,054  |   |                  |   | 4,417   |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                       |  | $             | 198,701 |   |                  | $ | 181,470 |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Liabilities and stockholders equity                                                                                                                               |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                               |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                   |  | $             | 2,524   |   |                  | $ | 3,293   |  
|Accrued liabilities                                                                                                                                                |  |               | 5,283   |   |                  |   | 4,937   |  
|Accrued interest payable                                                                                                                                           |  |               | 525     |   |                  |   | 539     |  
|Accrued acquisition earnout                                                                                                                                        |  |               | 3,743   |   |                  |   |        |  
|Income taxes payable                                                                                                                                               |  |               | 746     |   |                  |   | 284     |  
|Current portion of deferred revenue                                                                                                                                |  |               | 41,893  |   |                  |   | 37,103  |  
|Current portion of long-term debt                                                                                                                                  |  |               |        |   |                  |   | 16,871  |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                          |  |               | 54,714  |   |                  |   | 63,027  |  
|Long-term liabilities:                                                                                                                                             |  |               |         |   |                  |   |         |  
|Deferred revenue, net of current portion                                                                                                                           |  |               | 2,362   |   |                  |   | 1,544   |  
|Other long-term liabilities                                                                                                                                        |  |               | 539     |   |                  |   | 607     |  
|Long-term debt, net of current portion                                                                                                                             |  |               | 25,000  |   |                  |   | 27,226  |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total long-term liabilities                                                                                                                                        |  |               | 27,901  |   |                  |   | 29,377  |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                  |  |               | 82,615  |   |                  |   | 92,404  |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Commitments and contingencies (Note 8)                                                                                                                             |  |               |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                              |  |               |         |   |                  |   |         |  
|Common stock, $0.001 par value: 123,000,000 shares authorized and 67,813,000 and 66,502,098 shares issued as of March 31,
2010 and December 31, 2009, respectively |  |               | 68      |   |                  |   | 67      |  
|Additional paid-in capital                                                                                                                                         |  |               | 141,776 |   |                  |   | 123,083 |  
|Accumulated other comprehensive loss                                                                                                                               |  |               | (770    | ) |                  |   | (159    | )
|Accumulated deficit                                                                                                                                                |  |               | (24,988 | ) |                  |   | (33,925 | )
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                         |  |               | 116,086 |   |                  |   | 89,066  |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                         |  | $             | 198,701 |   |                  | $ | 181,470 |  
|                                                                                                                                                                   |  |               |         |   |                  |   |         |  

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



1



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##### Table of Contents

SolarWinds, Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share information)

(Unaudited)



|                                                                                               |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                               |  | Three Months EndedMarch
31, |       
|                                                                                               |  | 2010                        |        |   | 2009 |  
|                                                                                               |  |                             |        |   |      |  
|Revenue:                                                                                       |  |                             |        |   |      |   |        |  
|License                                                                                        |  | $                           | 17,621 |   |      | $ | 12,541 |  
|Maintenance and other                                                                          |  |                             | 16,704 |   |      |   | 11,534 |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Total revenue                                                                                  |  |                             | 34,325 |   |      |   | 24,075 |  
|Cost of license revenue                                                                        |  |                             | 355    |   |      |   | 151    |  
|Cost of maintenance and other revenue (1)                                                      |  |                             | 1,344  |   |      |   | 978    |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Gross profit                                                                                   |  |                             | 32,626 |   |      |   | 22,946 |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Operating expenses:                                                                            |  |                             |        |   |      |   |        |  
|Sales and marketing (1)                                                                        |  |                             | 10,249 |   |      |   | 6,700  |  
|Research and development (1)                                                                   |  |                             | 3,627  |   |      |   | 2,426  |  
|General and administrative (1)                                                                 |  |                             | 5,321  |   |      |   | 3,865  |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Total operating expenses                                                                       |  |                             | 19,197 |   |      |   | 12,991 |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Operating income                                                                               |  |                             | 13,429 |   |      |   | 9,955  |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Other income (expense):                                                                        |  |                             |        |   |      |   |        |  
|Interest income                                                                                |  |                             | 33     |   |      |   | 79     |  
|Interest expense                                                                               |  |                             | (783   | ) |      |   | (1,451 | )
|Other income                                                                                   |  |                             | 48     |   |      |   | 3      |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Total other expense                                                                            |  |                             | (702   | ) |      |   | (1,369 | )
|                                                                                               |  |                             |        |   |      |   |        |  
|Income before income taxes                                                                     |  |                             | 12,727 |   |      |   | 8,586  |  
|Income tax expense                                                                             |  |                             | 3,790  |   |      |   | 2,598  |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Net income                                                                                     |  |                             | 8,937  |   |      |   | 5,988  |  
|Amount allocated to participating preferred stockholders                                       |  |                             |       |   |      |   | (2,930 | )
|                                                                                               |  |                             |        |   |      |   |        |  
|Net income available to common stockholders                                                    |  | $                           | 8,937  |   |      | $ | 3,058  |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Net income available to common stockholders per share:                                         |  |                             |        |   |      |   |        |  
|Basic earnings per share available to common stockholders                                      |  | $                           | 0.13   |   |      | $ | 0.11   |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Diluted earnings per share available to common stockholders                                    |  | $                           | 0.12   |   |      | $ | 0.09   |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Weighted-average shares used to compute net income available to common stockholders per share: |  |                             |        |   |      |   |        |  
|Shares used in computation of basic earnings per share available to common stockholders        |  |                             | 67,268 |   |      |   | 28,180 |  
|                                                                                               |  |                             |        |   |      |   |        |  
|Shares used in computation of diluted earnings per share available to common stockholders      |  |                             | 72,851 |   |      |   | 33,518 |  
|                                                                                               |  |                             |        |   |      |   |        |  



|(1) | Includes stock-based compensation expense as follows:
|--- | -----------------------------------------------------



Three
Months EndedMarch 31,2010

2009(In thousands)Cost of maintenance revenue

$
37

$
17Sales and marketing


578


428Research and development


359


224General and administrative


1,347


999


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



2



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##### Table of Contents

SolarWinds, Inc.

Condensed Consolidated Statements of Changes in Stockholders Equity

(In thousands)

(Unaudited)



|                                                      |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------ |  | ----------------- | -- | ----------------------------- | - | ------- | ----------- | - | ------- | ------------------ |  | ------ | ------- | - |  | - | ------- | -
|                                                      |  | Common Stock |  | AdditionalPaid-in |    | AccumulatedOtherComprehensive |   |         | Accumulated |   |         | TotalStockholders | 
|                                                      |  | Shares       |  | Amount            |    | Capital                       |   | Loss    |             |   | Deficit |                    |  | Equity |        
|Balances at December 31, 2009                         |  | 66,502       |  | $                 | 67 |                               | $ | 123,083 |             | $ | (159    | )                  |  | $      | (33,925 | ) |  | $ | 89,066  |  
|Comprehensive income:                                 |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   |         |  
|Foreign currency translation adjustment               |  |             |  |                   |   |                               |   |        |             |   | (611    | )                  |  |        |        |   |  |   | (611    | )
|Net income                                            |  |             |  |                   |   |                               |   |        |             |   |        |                    |  |        | 8,937   |   |  |   | 8,937   |  
|                                                      |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   |         |  
|Comprehensive income                                  |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   | 8,326   |  
|                                                      |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   |         |  
|Shares issued in connection with business acquisition |  | 453          |  |                   |   |                               |   | 9,221   |             |   |        |                    |  |        |        |   |  |   | 9,221   |  
|Exercise of stock options                             |  | 858          |  |                   | 1  |                               |   | 3,268   |             |   |        |                    |  |        |        |   |  |   | 3,269   |  
|Stock-based compensation                              |  |             |  |                   |   |                               |   | 2,321   |             |   |        |                    |  |        |        |   |  |   | 2,321   |  
|Excess tax benefit from stock-based compensation      |  |             |  |                   |   |                               |   | 3,883   |             |   |        |                    |  |        |        |   |  |   | 3,883   |  
|                                                      |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   |         |  
|Balances at March 31, 2010                            |  | 67,813       |  | $                 | 68 |                               | $ | 141,776 |             | $ | (770    | )                  |  | $      | (24,988 | ) |  | $ | 116,086 |  
|                                                      |  |              |  |                   |    |                               |   |         |             |   |         |                    |  |        |         |   |  |   |         |  

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



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##### Table of Contents

SolarWinds, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                                      |  |                             |         |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                      |  | Three MonthsEnded March 31, |        
|                                                                                                                      |  | 2010                        |         |   | 2009 |  
|                                                                                                                      |  |                             |         |   |      |  
|Cash flows from operating activities                                                                                  |  |                             |         |   |      |   |        |  
|Net income                                                                                                            |  | $                           | 8,937   |   |      | $ | 5,988  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |  |                             |         |   |      |   |        |  
|Depreciation and amortization                                                                                         |  |                             | 1,104   |   |      |   | 493    |  
|Provision for doubtful accounts                                                                                       |  |                             | 24      |   |      |   | 123    |  
|Stock-based compensation expense                                                                                      |  |                             | 2,321   |   |      |   | 1,668  |  
|Deferred taxes                                                                                                        |  |                             | (680    | ) |      |   | (433   | )
|Excess tax benefit from stock-based compensation                                                                      |  |                             | (3,883  | ) |      |   |       |  
|Other non-cash expenses                                                                                               |  |                             | 304     |   |      |   | 373    |  
|Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business
combinations: |  |                             |         |   |      |   |        |  
|Accounts receivable                                                                                                   |  |                             | (3,460  | ) |      |   | 2,356  |  
|Income taxes receivable                                                                                               |  |                             | 100     |   |      |   | 245    |  
|Prepaid income taxes                                                                                                  |  |                             | 3,868   |   |      |   |       |  
|Prepaid and other current assets                                                                                      |  |                             | (523    | ) |      |   | (319   | )
|Accounts payable                                                                                                      |  |                             | (760    | ) |      |   | 68     |  
|Accrued liabilities                                                                                                   |  |                             | 391     |   |      |   | 76     |  
|Accrued interest payable                                                                                              |  |                             | (14     | ) |      |   | (653   | )
|Income taxes payable                                                                                                  |  |                             | 4,449   |   |      |   | 2,783  |  
|Deferred revenue and other liabilities                                                                                |  |                             | 3,745   |   |      |   | 2,163  |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Net cash provided by operating activities                                                                             |  |                             | 15,923  |   |      |   | 14,931 |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Cash flows from investing activities                                                                                  |  |                             |         |   |      |   |        |  
|Purchases of property and equipment                                                                                   |  |                             | (582    | ) |      |   | (414   | )
|Purchases of intangible assets                                                                                        |  |                             | (101    | ) |      |   | (150   | )
|Acquisition of businesses, net of cash acquired                                                                       |  |                             | (28,039 | ) |      |   | (20    | )
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Net cash used in investing activities                                                                                 |  |                             | (28,722 | ) |      |   | (584   | )
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Cash flows from financing activities                                                                                  |  |                             |         |   |      |   |        |  
|Repayment of long-term debt                                                                                           |  |                             | (19,097 | ) |      |   | (7,161 | )
|Exercise of stock options                                                                                             |  |                             | 3,269   |   |      |   | 80     |  
|Excess tax benefit from stock-based compensation                                                                      |  |                             | 3,883   |   |      |   |       |  
|Repayments of capital lease obligations                                                                               |  |                             | (7      | ) |      |   | (6     | )
|Payments for initial public offering costs                                                                            |  |                             |        |   |      |   | (22    | )
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Net cash used in financing activities                                                                                 |  |                             | (11,952 | ) |      |   | (7,109 | )
|Effect of exchange rate changes on cash and cash equivalents                                                          |  |                             | (949    | ) |      |   | (598   | )
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents                                                                  |  |                             | (25,700 | ) |      |   | 6,640  |  
|Cash and cash equivalents                                                                                             |  |                             |         |   |      |   |        |  
|Beginning of period                                                                                                   |  |                             | 129,788 |   |      |   | 40,566 |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|End of period                                                                                                         |  | $                           | 104,088 |   |      | $ | 47,206 |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Supplemental disclosure of cash flow information                                                                      |  |                             |         |   |      |   |        |  
|Cash paid for interest                                                                                                |  | $                           | 538     |   |      | $ | 2,011  |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Cash received for income taxes                                                                                        |  | $                           | (3,947  | ) |      | $ |       |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Noncash investing and financing transactions                                                                          |  |                             |         |   |      |   |        |  
|Accrued acquisition earnout (Note 8)                                                                                  |  | $                           | 3,743   |   |      | $ |       |  
|                                                                                                                      |  |                             |         |   |      |   |        |  
|Stock issued for acquisition (Note 3)                                                                                 |  | $                           | 9,221   |   |      | $ |       |  
|                                                                                                                      |  |                             |         |   |      |   |        |  

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



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##### Table of Contents

SolarWinds, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Nature of Operations

SolarWinds, Inc., a Delaware corporation, and its subsidiaries, or we or us, design, develop, market, sell and support enterprise
information technology, or IT, management software for IT professionals in organizations of all sizes. Our product offerings range from individual software tools to more comprehensive software products that solve problems encountered every day by IT
professionals. Our products are designed to help enable efficient and effective management of networks and IT environments.

2. Summary of
Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP, for interim financial reporting and applicable quarterly reporting regulations of the Securities and Exchange Commission, or the SEC. In the opinion of our management, the
accompanying interim unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and those items discussed in these Notes, necessary for a fair presentation of our financial position, as
of March 31, 2010, the results of operations for the three months ended March 31, 2010 and 2009, the cash flows for the three months ended March 31, 2010 and 2009 and stockholders equity for the three months ended March 31, 2010. Certain
information and disclosures normally included in the notes to the annual financial statements prepared in accordance with GAAP have been omitted from these interim condensed consolidated financial statements pursuant to the rules and
regulations of the SEC. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying Notes for the fiscal year ended December 31,
2009, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2010.

Basis of Consolidation

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. We
have eliminated all intercompany balances and transactions.

Recently Adopted Accounting Principles

In May 2009, the FASB issued a standard that sets forth the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date
in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This standard is effective for interim and annual periods ending after June 15, 2009. We
adopted this standard in the quarter ended June 30, 2009. This standard did not impact the consolidated financial results. In February 2010, the FASB amended the guidance for SEC filers removing the requirement to disclose the date through
which an entity has disclosed subsequent events. The reissuance disclosure requirements for subsequent events have been refined to apply only to revised financial statements.

In January 2010, the FASB issued a standard that requires new disclosures about significant transfers in and out of Levels 1 and 2
fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. This standard also clarifies existing disclosure requirements regarding inputs and valuation techniques,
as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. We adopted this standard at the quarter ended March 31, 2010, except for the separate disclosures
about purchases, sales, issuances and settlements relating to Level 3 measurements, which is effective for us at the beginning of fiscal 2011. The adoption of this standard did not have a material impact, and the deferred provisions of this standard
are not expected to have a material impact, on our financial statements.

Recent Accounting Pronouncements

In September 2009, the FASB ratified two consensuses that will significantly affect the revenue recognition accounting
policies for transactions that involve multiple deliverables and sales of software-enabled devices. The first consensus requires companies to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of
each deliverable, even though those deliverables are not sold separately either by the company itself or other vendors. This consensus eliminates the requirement that



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##### Table of Contents

all undelivered elements have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already
have been delivered. In the absence of vendor-specific objective evidence and third-party evidence for one or more elements in a multiple-element arrangement, companies will estimate the selling prices of those elements. The overall arrangement fee
will be allocated to each element, whether delivered or undelivered, based on their relative selling prices, regardless of whether those estimated selling prices are evidenced by vendor-specific object evidence, third-party evidence of fair value,
or are based on the companys judgment.

Under the second consensus, sales of tangible products that contain
essential software will no longer be subject to the stringent revenue recognition requirements that used to apply to software licensing arrangements. The second consensus excludes tangible products from the scope of software revenue
accounting requirements if they contain both software and non-software components that function together to deliver their essential functionality. For those tangible products, the new guidance from the first consensus will be applied, and a greater
proportion of the revenue from multiple-element arrangements involving tangible products that contain software will be recognized immediately in many circumstances.

Both consensuses will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning
on or after June 15, 2010. However, early adoption is permitted. If a company elects early adoption and the period of adoption is not the beginning of its fiscal year, the requirements must be applied retrospectively to the beginning of the fiscal
year. Retrospective application to prior years is permitted, but not required. In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impact of the changes. In many circumstances, the
new guidance under these consensuses will require significant changes to a companys revenue recognition policies and procedures, including system modifications. These consensuses will not have a material impact on our condensed consolidated
financial statements.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate their respective fair values, due to the short-term nature of these instruments.

We apply the
authoritative guidance on fair value measurements for financial assets and liabilities and non-financial assets and liabilities, such as goodwill, indefinite-lived intangible assets, and property, plant and equipment. The guidance defines fair
value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations.

The guidance establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value
calculations. The three levels of inputs are defined as follows:

Level 1: Unadjusted quoted prices for identical assets or
liabilities in active markets accessible by us.

Level 2: Inputs that are observable in the marketplace other than those inputs
classified as Level 1.

Level 3: Inputs that are unobservable in the marketplace and significant to the valuation.

The following section describes the valuation methodologies we use to measure different financial assets and financial
liabilities at fair value.

Money Market Funds

In order to determine fair value of our money market funds, we use quoted prices in active markets for identical assets. Therefore, our
money market funds are considered a Level 1 item. We currently have no financial instruments that qualify as Level 2 or 3 items.

The following table summarizes the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in
our condensed consolidated balance sheet at March 31, 2010:



|                                      |  |                                  |        |                                                          |   |                                           |  |                                        |   |  |   |  
|------------------------------------- |  | -------------------------------- | ------ | -------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | -
|                                      | 
|                                      |  | Basis of Fair Value Measurements
|                                      |  | Balance atMarch 31,2010          |        | Quoted PricesIn
ActiveMarkets
forIdenticalItems(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|                                      |  | (In thousands)                  
|Cash equivalents  money market funds |  | $                                | 77,000 |                                                          | $ | 77,000                                    |  | $                                      |  |  | $ | 



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Long-Term Debt

On December 13, 2005, we entered into credit agreements with an investment management firm pursuant to which we borrowed $85.0 million on
a first lien note, or First Lien Note, and $25.0 million on a second lien note, or Second Lien Note, and collectively the Notes. The First Lien Note had an outstanding principal balance of $0 and $19.1 million at March 31, 2010 and December 31,
2009, respectively. The Second Lien Note had an outstanding principal balance of $25.0 million as of March 31, 2010 and December 31, 2009. In March and May 2009, respectively, we repaid $7.2 million of principal based on our excess cash
flow and $49.8 million with proceeds from our initial public offering, or IPO, of our common stock, reducing the total outstanding principal balance on the Notes to $44.1 million as of December 31, 2009. In March 2010, we prepaid
$16.9 million of principal based on our excess cash flow in 2009 which was reflected as current portion of long-term debt in our December 31, 2009 condensed consolidated balance sheet. In addition to our excess cash flow payment, we made a
payment of $2.2 million in March 2010 to repay all of the outstanding principal balance subject to the First Lien Note.

The
estimated fair value of our total amounts outstanding under the credit agreements at March 31, 2010 and December 31, 2009 was $24.2 million and $43.0 million, respectively, and was determined in accordance with fair value disclosure
requirements. We estimated the fair value of the credit agreements by discounting future cash flows using interest rate spreads currently available for a credit agreement with similar terms and maturity to our existing outstanding borrowings. The
total outstanding borrowings at March 31, 2010 and December 31, 2009 were recorded in our condensed consolidated financial statements at their carrying values of $25.0 million and $44.1 million, respectively.

Debt Issuance Costs

We amortize debt issuance costs over the term of the associated debt. The gross carrying amount of debt issuance costs was $0.5 million
and $1.2 million at March 31, 2010 and December 31, 2009, respectively, and accumulated amortization was $0.4 million and $0.8 million at March 31, 2010 and December 31, 2009, respectively. In March 2010, we paid off the $19.1 million outstanding
principal balance on our First Lien Note and wrote-off $0.2 million of debt issuance costs associated with this note. Interest expense includes the amortization and write-off of debt issuance costs, which was $0.3 million and $0.1 million for the
three months ended March 31, 2010 and 2009, respectively.

Income Taxes

We use the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes.
Under this method, we recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the respective carrying amounts and tax basis of our assets and liabilities.

In July 2006, the FASB issued guidance on accounting for uncertainty in income taxes, which clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We adopted this
guidance on January 1, 2007. At the adoption, there was no liability for uncertain tax positions due to the fact that there were no material identified tax benefits that were considered uncertain tax positions.

We accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of the adoption date of
this guidance, there were no accrued interest and penalties.

Stock-Based Compensation

We have granted our employees and directors stock-based incentive awards. These awards are in the form of stock options, restricted stock
and restricted stock units. We measure stock-based compensation expense for all share-based awards granted based on the estimated fair value of those awards on the date of grant. The fair values of stock option awards are estimated using a
Black-Scholes valuation model. The fair value of restricted stock and restricted stock unit awards is determined using the fair market value of our common stock on the date of grant.

Stock-based compensation decreased income before income taxes by $2.3 million and $1.7 million for the three months ended March 31, 2010
and 2009, respectively. The income tax benefit related to stock-based compensation was $0.5 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively.



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An excess tax benefit arises when the tax deduction related to a stock option award is
greater than the awards original grant date fair value pursuant to the authoritative guidance. For financial reporting purposes, this excess tax benefit is not recorded as a tax benefit in our condensed consolidated statements of income and is
instead treated as additional paid-in capital in our condensed consolidated balance sheets. For the three months ended March 31, 2010, we recognized $4.4 million of tax benefits from the exercise of stock option awards, of which
$3.9 million resulted in excess tax benefits. For the three months ended March 31, 2009, we did not recognize any tax benefits from the exercise of stock option awards. These excess tax benefits are a reduction to our cash payments related
to income taxes and must be reported in net cash used in financing activities in our condensed consolidated statements of cash flows.

Reclassifications

Certain reclassifications have been made to the condensed consolidated balance sheet at December 31, 2009 to conform with the
March 31, 2010 presentation. These reclassifications had no effect on total assets, total liabilities, total stockholders equity or cash flows.

3. Business Combinations

On January 26, 2010, we acquired certain of the assets of Tek-Tools, Inc., or Tek-Tools, for the following: (i) $26.0 million of
cash; (ii) 362,138 shares of our common stock with a value of approximately $7.4 million based on the closing price of our common stock as reported on the New York Stock Exchange on January 26, 2010; (iii) $2.0 million of cash and
90,535 shares of our common stock with a value of approximately $1.8 million based on the closing price of our common stock on the date of the acquisition, each being held in escrow as security for breaches of representations and warranties,
covenants and certain other expressly enumerated matters by Tek-Tools and its stockholders; (iv) $2.0 million of cash being withheld to be paid upon the achievement of sales milestones of the acquired business during calendar year 2010; and
(v) $2.0 million of cash being withheld to be paid upon the receipt of certain third party consents. See Note 8 for a further discussion of outstanding obligations related to the Tek-Tools acquisition. Tek-Tools provided us an immediate product
offering of storage and virtualized server infrastructures that was missing from our product offerings and eliminated the normal time to market required to develop a new software product. We accounted for the Tek-Tools acquisition using the purchase
method of accounting. We allocated the purchase price to the assets acquired, including intangible assets, and liabilities assumed based on estimated fair values at the date of the acquisition. We estimated the value of assets and liabilities based
on purchase price and future intended use. We derived the value of intangible assets from the present value of estimated future benefits from the various intangible assets acquired. Goodwill represents the excess of the purchase price over the
aggregate fair value of the net identifiable assets acquired and is deductible for tax purposes. We also incurred direct acquisition costs of approximately $0.3 million, which are included in general and administrative expense in our condensed
consolidated statements of income. We included the operating results of Tek-Tools in our condensed consolidated financial statements from the effective date of the acquisition.

We allocated the purchase price for Tek-Tools as follows:



|                                  |  |            |        |   |                        |  
|--------------------------------- |  | ---------- | ------ | - | ---------------------- | -
|                                  |  | Fair Value |        |   | Useful Life (in years)
|Intangible assets (In thousands): |  |            |        |   |                        |  
|Developed product technologies    |  | $          | 9,571  |   |                        | 7
|Customer relationships            |  |            | 5,330  |   |                        | 6
|Trademarks                        |  |            | 2,922  |   |                        | 7
|Non-competition covenant          |  |            | 295    |   |                        | 5
|Goodwill                          |  |            | 25,190 |   |                        | 
|Deferred revenue                  |  |            | (2,380 | ) |                        | 
|Net other assets                  |  |            | 36     |   |                        | 
|                                  |  |            |        |   |                        |  
|Total purchase price              |  | $          | 40,964 |   |                        |  
|                                  |  |            |        |   |                        |  

Goodwill for Tek-Tools resulted primarily from our expectations that we will now be able to offer
to customers of our network and application management products additional products that provide visibility into storage performance and usage, virtualization and server performance and backup monitoring and analysis. Additionally, the Tek-Tools
products will be used to attract new customers to SolarWinds for storage and virtualization management. We have integrated the Tek-Tools business into our broader IT management business and intend to integrate the storage and virtualization
management products into our Orion suite of products.



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##### Table of Contents

The following table presents our unaudited pro forma results of operations for the three
months ended March 31, 2010 and 2009 as if the acquisition had occurred at the beginning of the respective periods. The pro forma financial data for all periods presented include adjustments for the following: (i) elimination of
stock-based compensation and interest expense from historical Tek-Tools financial statements; (ii) recording the additional amortization expense from the identifiable intangible assets; (iii) adjusting the estimated tax provision of the pro
forma combined results; and (iv) the issuance of our common stock to Tek-Tools stockholders. The pro forma revenue for the three months ended March 31, 2010 is based on Tek-Tools deferred revenue balance of $4.5 million as of
December 31, 2009. The purchase price allocation amount assigned to deferred revenue is $2.4 million, which represents the fair value of the maintenance agreements we assumed and our future obligation to provide support to these customers. We
prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisition had taken place at the beginning the respective periods, or of
future results.



|                                                     |  |                                          |        |  |                                          |   |       
|---------------------------------------------------- |  | ---------------------------------------- | ------ |  | ---------------------------------------- | - | ------
|                                                     |  | For the Three Months EndedMarch 31, 2010 |        |  | For the Three Months EndedMarch 31, 2009
|                                                     |  | Pro Forma                                |        |  | Pro Forma                               
|(in thousands, except per share data)                |  |                                          |        |  |                                         
|Revenue                                              |  | $                                        | 34,927 |  |                                          | $ | 25,372
|Net income                                           |  |                                          | 8,824  |  |                                          |   | 5,037 
|Net income available to common stockholders          |  |                                          |       |  |                                          |   | 2,107 
|Earnings per share available to common stockholders: |  |                                          |        |  |                                          |   |       
|Basic                                                |  |                                          | 0.13   |  |                                          |   | 0.07  
|Diluted                                              |  |                                          | 0.12   |  |                                          |   | 0.06  

4. Goodwill and Other Intangible
Assets

At March 31, 2010 and December 31, 2009, we had goodwill in the amounts of $40.6 million and $15.4 million,
respectively. The increase in goodwill in the first quarter of 2010 consisted of $25.2 million of goodwill associated with the Tek-Tools acquisition. We assess the impairment of goodwill annually in the fourth quarter, or more frequently if other
indicators of potential impairment arise. No impairment was noted at March 31, 2010 or December 31, 2009.

We record
intangible assets in accordance with the authoritative guidance for business combinations. The developed product technologies that we acquired in the Tek-Tools acquisition were Tek-Tools Storage Profiler, Virtual and Server Profiler and Backup
Profiler, which provide web based storage monitoring, virtualization and server monitoring and backup reporting and analysis solutions. These product technologies were feasible at the date of acquisition as they were being actively marketed and sold
by the acquired company at the acquisition date. We recognize the developed product technologies as intangible assets separate from goodwill as they were capable of being separated or divided from the acquired entity and sold or licensed. We based
the estimated useful lives of these assets primarily on future cash flows of the existing technologies considering future development cycles. In addition to the developed product technologies, we also recorded intangible assets for the acquired
companys customer relationships, trademarks and a non-competition covenant.

Intangible assets consisted of the
following at March 31, 2010 and December 31, 2009:



|                               |  |                      |        |                         |   |        |     |  |                      |        |                         |   |       |     |   |        |   |  |   |      
|------------------------------ |  | -------------------- | ------ | ----------------------- | - | ------ | --- |  | -------------------- | ------ | ----------------------- | - | ----- | --- | - | ------ | - |  | - | -----
|                               |  | March 31, 2010       |        | December 31, 2009      
|                               |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | Net |  | Gross CarryingAmount |        | AccumulatedAmortization |   |       | Net
|(in thousands)                 |  |                      |        |                         |   |        |     |  |                      |        |                         |   |       |    
|Developed product technologies |  | $                    | 12,529 |                         | $ | (1,209 | )   |  | $                    | 11,320 |                         | $ | 2,958 |     | $ | (861   | ) |  | $ | 2,097
|Customer relationships         |  |                      | 5,922  |                         |   | (372   | )   |  |                      | 5,550  |                         |   | 592   |     |   | (196   | ) |  |   | 396  
|Intellectual property          |  |                      | 695    |                         |   | (150   | )   |  |                      | 545    |                         |   | 657   |     |   | (133   | ) |  |   | 524  
|Trademarks                     |  |                      | 4,197  |                         |   | (113   | )   |  |                      | 4,084  |                         |   | 1,212 |     |   | (36    | ) |  |   | 1,176
|Non-competition covenant       |  |                      | 295    |                         |   | (10    | )   |  |                      | 285    |                         |   |      |     |   |       |   |  |   |     
|                               |  |                      |        |                         |   |        |     |  |                      |        |                         |   |       |     |   |        |   |  |   |      
|                               |  |                      |        |                         |   |       
|Total intangible assets        |  | $                    | 23,638 |                         | $ | (1,854 | )   |  | $                    | 21,784 |                         | $ | 5,419 |     | $ | (1,226 | ) |  | $ | 4,193
|                               |  |                      |        |                         |   |        |     |  |                      |        |                         |   |       |     |   |        |   |  |   |      

Intangible asset amortization expense was
$0.6 million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively. We estimate aggregate intangible asset amortization expense to be $3.2 million for the full year 2010, $3.4 million in 2011, $3.2 million
in 2012, $3.2 million in 2013 and $3.2 million in 2014. We use a useful life for assets with finite lives of three to seven years for trademarks, customer relationships, non-competition covenants and acquired developed product technologies and ten
years for intellectual property.

Deposits, which are included in other assets, were $0.3 million and $0.2 million at
March 31, 2010 and December 31, 2009, respectively.



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5. Stockholders Equity and Stock-Based Compensation

Stock Options

All equity awards granted following our IPO are granted under our 2008 Equity Incentive Plan, or 2008 Stock Plan. Our Amended and Restated
Stock Plan, or the 2005 Stock Plan, was terminated at the time of our IPO for purposes of granting any future equity awards under the plan. The 2005 Stock Plan will continue to govern the terms and conditions of all outstanding equity awards
previously granted under the 2005 Stock Plan. At March 31, 2010, 6,933,880 shares of common stock were available for future grants under the 2008 Stock Plan.

Option grant activity under the 2005 and 2008 Stock Plan was as follows:



|                                                      |  |                            |   |  |                               |       |                                       |   |                                                    |  |     
|----------------------------------------------------- |  | -------------------------- | - |  | ----------------------------- | ----- | ------------------------------------- | - | -------------------------------------------------- |  | ----
|                                                      |  | Number ofSharesOutstanding |   |  | Weighted-AverageExercisePrice |       | AggregateIntrinsicValue (inthousands) |   | Weighted-AverageRemainingContractualTerm (inYears)
|Outstanding balances at December 31, 2009             |  | 10,732,409                 |   |  | $                             | 4.67  |                                       |   |                                                    |  |     
|Options granted                                       |  | 1,015,712                  |   |  |                               | 19.26 |                                       |   |                                                    |  |     
|Options exercised                                     |  | (858,211                   | ) |  |                               | 3.87  |                                       |   |                                                    |  |     
|Options forfeited                                     |  | (45,237                    | ) |  |                               | 11.18 |                                       |   |                                                    |  |     
|                                                      |  |                            |   |  |                               |       |                                       |   |                                                    |  |     
|Outstanding balances at March 31, 2010                |  | 10,844,673                 |   |  | $                             | 6.07  |                                       |   |                                                    |  |     
|                                                      |  |                            |   |  |                               |       |                                       |   |                                                    |  |     
|Options exercisable at March 31, 2010                 |  | 6,799,329                  |   |  | $                             | 3.22  |                                       | $ | 125,290                                            |  | 6.51
|                                                      |  |                            |   |  |                               |       |                                       |   |                                                    |  |     
|Options vested and expected to vest at March 31, 2010 |  | 10,542,038                 |   |  | $                             | 5.97  |                                       | $ | 165,354                                            |  | 7.31
|                                                      |  |                            |   |  |                               |       |                                       |   |                                                    |  |     

Additional information regarding options follows (in
thousands except per share amounts):



|                                                                                      |  |                                  |        |  | 
|------------------------------------------------------------------------------------- |  | -------------------------------- | ------ |  | 
|                                                                                      |  | Three Months EndedMarch 31, 2010
|                                                                                      | 
|Weighted-average grant date fair value per share of options granted during the period |  | $                                | 11.02 
|Aggregate intrinsic value of options exercised during the period                      |  |                                  | 13,977
|Aggregate weighted-average fair value of options vested during the period             |  |                                  | 1,600 

The total
unrecognized stock-based compensation expense related to unvested stock options and subject to recognition in future periods was $25.9 million as of March 31, 2010 and we expect to recognize this expense over a weighted-average period of 3.14 years.

We estimated fair value for these options at the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:



|                         |  |                                  |  | 
|------------------------ |  | -------------------------------- |  | 
|                         |  | Three Months EndedMarch 31, 2010
|                         | 
|Expected dividend yield  |  | 0.0%                            
|Volatility               |  | 59.4%                           
|Risk-free rate of return |  | 2.7 - 2.8%                      
|Expected life            |  | 6.03 years                      

We have not
paid and do not anticipate paying cash dividends on our common stock; therefore, we assumed the expected dividend yield to be zero. Since we were a private entity prior to our IPO in May 2009 with no historical data regarding the volatility of our
own common stock price, we based the expected volatility on the historical and implied volatility of comparable companies from a representative industry peer group. We determined expected volatility of options granted using an average of the
historical volatility measures of this peer group of companies. We based the risk-free rate of return on the average U.S. treasury yield curve for five and seven-year terms for the three months ended March 31, 2010. As allowed under current
guidance, we have elected to apply the simplified method in developing our estimate of expected life for plain vanilla stock options by using the midpoint between the vesting date and contractual termination date since we do
not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our common stock has been publicly traded.



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Restricted Stock Awards

The following table summarizes restricted stock award activity under the 2008 Stock Plan:



|                                       |  |                             |   |  |                                                 |       |  |                                                    |     
|-------------------------------------- |  | --------------------------- | - |  | ----------------------------------------------- | ----- |  | -------------------------------------------------- | ----
|                                       |  | Number 
ofAwardsOutstanding |   |  | Weighted-AverageGrant DateFair Value(Per Share) |       |  | Weighted-AverageRemainingContractualTerm(in Years)
|Unvested balances at December 31, 2009 |  | 3,753                       |   |  | $                                               | 19.99 |  |                                                    |     
|Restricted stock awards granted        |  |                            |   |  |                                                 |      |  |                                                    |     
|Restricted stock awards vested         |  |                            |   |  |                                                 |      |  |                                                    |     
|Restricted stock awards forfeited      |  | (1,251                      | ) |  |                                                 | 19.99 |  |                                                    |     
|                                       |  |                             |   |  |                                                 |       |  |                                                    |     
|Unvested balances at March 31, 2010    |  | 2,502                       |   |  | $                                               | 19.99 |  |                                                    | 9.33
|                                       |  |                             |   |  |                                                 |       |  |                                                    |     

To date, no restricted stock awards have vested. As of
March 31, 2010, restricted stock awards for 2,502 shares of our common stock were outstanding, with an aggregate intrinsic value of approximately $54,000 based on the share price as of March 31, 2010. These awards are expected to vest as of the 2010
annual meeting of our stockholders currently scheduled to be held on May 21, 2010.

Restricted Stock
Units

The following table summarizes restricted stock unit activity under the 2008 Stock Plan:



|                                       |  |                           |  |                                                 |       |                                       |   |                                                    |  |     
|-------------------------------------- |  | ------------------------- |  | ----------------------------------------------- | ----- | ------------------------------------- | - | -------------------------------------------------- |  | ----
|                                       |  | Number ofUnitsOutstanding |  | Weighted-AverageGrant DateFair Value(per Share) |       | AggregateIntrinsicValue (Inthousands) |   | Weighted-AverageRemainingContractualTerm(in Years)
|Unvested balances at December 31, 2009 |  |                          |  | $                                               |      |                                       |   |                                                    |  |     
|Restricted stock units granted         |  | 221,240                   |  |                                                 | 18.88 |                                       |   |                                                    |  |     
|Restricted stock units vested          |  |                          |  |                                                 |      |                                       |   |                                                    |  |     
|Restricted stock units forfeited       |  |                          |  |                                                 |      |                                       |   |                                                    |  |     
|                                       |  |                           |  |                                                 |       |                                       |   |                                                    |  |     
|Unvested balances at March 31, 2010    |  | 221,240                   |  | $                                               | 18.88 |                                       | $ | 4,733                                              |  | 9.91
|                                       |  |                           |  |                                                 |       |                                       |   |                                                    |  |     

6. Earnings Per Share

We computed basic earnings per share available to common stockholders using the weighted-average number of our common shares outstanding
during the reporting period. We adjusted diluted earnings per share for the after-tax impact of incremental shares that would be available for issuance upon the assumed exercise of stock options and for the shares that would be issued upon the
conversion of the convertible preferred stock.



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##### Table of Contents

A reconciliation of the number of the numerator and denominator used in the calculation of
basic and diluted earnings per share follows:



|                                                                                      |  |                             |        |      |   |       
|------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                                                      |  | Three Months EndedMarch 31,
|                                                                                      |  | 2010                        |        | 2009
|(In thousands)                                                                        |  |                             |        |      |   |       
|Basic earnings per share                                                              |  |                             |        |      |   |       
|Numerator:                                                                            |  |                             |        |      |   |       
|Net income available to common stockholders                                           |  | $                           | 8,937  |      | $ | 3,058 
|                                                                                      |  |                             |        |      |   |       
|                                                                                      |  |                            
|Denominator:                                                                          |  |                             |        |      |   |       
|Weighted-average common shares outstanding used in computing basic earnings per share |  |                             | 67,268 |      |   | 28,180
|                                                                                      |  |                             |        |      |   |       
|                                                                                      |  |                            
|Diluted earnings per share                                                            |  |                             |        |      |   |       
|Numerator:                                                                            |  |                             |        |      |   |       
|                                                                                      |  |                            
|Net income available to common stockholders                                           |  | $                           | 8,937  |      | $ | 3,058 
|                                                                                      |  |                             |        |      |   |       
|                                                                                      |  |                            
|Denominator:                                                                          |  |                             |        |      |   |       
|Weighted-average shares used in computing basic earnings per share                    |  |                             | 67,268 |      |   | 28,180
|Add options to purchase common stock                                                  |  |                             | 5,583  |      |   | 5,338 
|                                                                                      |  |                             |        |      |   |       
|Weighted-average shares used in computing diluted earnings per share                  |  |                             | 72,851 |      |   | 33,518
|                                                                                      |  |                             |        |      |   |       

Net income has been allocated to the common and
preferred stock based on their respective rights to share in dividends. The conversion of the convertible preferred stock outstanding into 27,000,003 shares of common stock was not included in diluted earnings per share for the three months ended
March 31, 2009 under the if-converted method because the results would have been antidilutive.

Dilution from assumed
exercises of stock options is dependent upon several factors, including the market price of our common stock. During the three months ended March 31, 2010 and 2009, options to purchase approximately 1,125,000 and 1,529,000 shares of common stock,
respectively, were outstanding but were not included in the computation of diluted earnings per share because the average market price of the underlying stock did not exceed the sum of the option exercise price, unrecognized compensation expense and
the excess tax benefit. The calculation of diluted earnings per share requires us to make certain assumptions related to the use of proceeds that would be received upon the assumed exercise of stock options. These assumed proceeds include the excess
tax benefit that we receive upon assumed exercises.

7. Income Taxes

For the three months ended March 31, 2010, we recorded $3.8 million of income tax expense, resulting in an effective tax rate of 29.8%.
For the three months ended March 31, 2009, we recorded $2.6 million of income tax expense, resulting in an effective tax rate of 30.3%. The decrease in the effective tax rate from the three months ended March 31, 2009 to the three months ended March
31, 2010 was primarily attributable to our international revenue, which is taxed at a lower rate, becoming a larger percentage of our total revenue.

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three months ended
March 31, 2010 and 2009, interest and penalties recorded were not significant. As of March 31, 2010, we had accrued an insignificant amount for the payment of interest related to unrecognized tax benefits.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2006 through 2008 tax years
generally remain open and subject to examination by federal and state tax authorities. In significant foreign jurisdictions, the 2007 and 2008 tax years generally remain open and subject to examination by their respective tax authorities. We are not
currently under audit in any major taxing jurisdiction.



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8. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we may be subject to litigation related to matters arising out of our business operations. We do not
believe that any of these outstanding matters will have a material adverse effect on our consolidated financial position, result of operations or liquidity.

Other

We entered into an agreement to purchase certain assets of Tek-Tools in January 2010. The purchase agreement included two earnout payments
as follows: (i) up to $2.0 million of cash to be paid upon the achievement of sales milestones for 2010 and (ii) up to $2.0 million of cash to be paid upon the receipt of certain third-party consents. The $1.7 million present value of
the sales milestone earnout is based on the weighted average cost of capital discount rate reduced by the risk of achieving a revenue-based milestone. The payments are recorded at fair value on our condensed consolidated balance sheet at
March 31, 2010 as an accrued acquisition earnout of $3.7 million.

Registration Rights

We entered into an agreement in 2005 providing our stockholders with rights to have their shares of our common stock registered under the
Securities Act of 1933.



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|Item 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Safe Harbor Cautionary Statement

This quarterly report on Form 10-Q contains forward-looking statements that are based on our managements beliefs and assumptions
and on information currently available to our management. The statements contained in this quarterly report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may be signified by terms such as anticipates, believes, could, seeks, estimates,
expects, intends, may, plans, potential, predicts, projects, should, will, would or similar expressions and the negatives of
those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in other documents we file with the Securities and
Exchange Commission. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our managements beliefs and assumptions only as of the date of this
quarterly report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future.

Overview

We design, develop, market, sell and support powerful yet easy-to-use enterprise IT management software to IT professionals in
organizations of all sizes. Our offerings range from individual software tools to more comprehensive software products, solve problems faced every day by IT professionals and help to enable efficient and effective management of networks and IT
environments.

Since our founding we have provided tools for network engineers and software for managing enterprise networks,
and we are a leading provider of network management software. In 2008, with the launch of Orion Application Performance Manager, we began to offer solutions for managing servers and applications. In January 2010, in response to changes in the
technology environment and to meet the needs of our customers, we acquired certain assets of Tek-Tools, Inc., or Tek-Tools, expanding the range of elements of IT infrastructure that our products monitor and manage to include storage and virtualized
servers. We now offer a suite of powerful software that allows IT professionals to manage key elements of their infrastructure, including networks, applications, storage, and physical and virtual servers. All of our products are ready-to-use,
featuring intuitive and easily customized user interfaces and built-in workflows. Our products can be downloaded directly from our websites and installed and configured by our end-users in a matter of hours. We design our software to meet the
requirements of networks and IT environments of varying sizes and levels of complexity, ranging from a single device to over 100,000 installed devices.

We have increased the number of our customers from over 28,000 as of June 30, 2006, to over 93,000 as of March 31, 2010. Our
customers include small and mid-size businesses, enterprises, and local, state and federal government entities that have purchased one or more of our products. We have an active, loyal end-user community that is built from our customers and
end-users who have downloaded our free tools. We seek to expand, and generate loyalty from, our customer base and our end-user community by providing a variety of free tools for IT professionals, by hosting our online community website, thwack, and
through other marketing programs.

As a core part of our strategy, we have developed a differentiated business model for
marketing and selling high volumes of affordably priced, downloadable, enterprise-class software directly to IT professionals. We design our products to be easy-to-install and easy-to-evaluate, allowing potential buyers of our software to see the
value that the product provides after downloading a free copy of the software from our website for evaluation. We offer our products at compelling prices, and our average license transaction in each of 2007, 2008, 2009 and the three months ended
March 31, 2010, was less than $7,500 compared to hundreds of thousands of dollars for many competing products. We design our Internet-based marketing programs to drive visitors to our websites in order to generate large volumes of highly
qualified leads. Our inside sales force uses a disciplined, transaction-oriented process to convert these leads into paying customers at a level of productivity per sales representative that is much higher than is typically achieved with a
traditional direct sales force. Our business model allows us to offer our products at prices that are typically lower than competing frameworks and to support rapid growth in our business while maintaining high operating margins.



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In addition, we employ a highly efficient product development process, a scalable marketing
model and a high-volume, transaction-oriented inside sales model that have allowed us to drive and support rapid growth in our business at high operating margins while offering our products at prices that are typically significantly lower than
competing frameworks. Our revenue grew from $61.7 million in 2007 to $93.1 million in 2008 and $116.4 million in 2009 and our operating income grew from $30.9 million in 2007 to $42.0 million in 2008 and $43.8 million in 2009. We
manage our business with a culture and systems that are focused on metrics and helping us to achieve a high level of consistency in our execution.

We have also sought to expand our product offerings through acquisitions. In April 2007, we acquired ipMonitor, our entry-level network
monitoring product, by purchasing substantially all of the assets and liabilities of IPMonitor Corporation, or IPMonitor. In May 2007, we acquired our LANsurveyor product and various underlying technologies by purchasing all of the outstanding stock
of Neon Software, Inc., or Neon. In December 2008, we acquired our Kiwi Syslog Server and Kiwi CatTools products by purchasing substantially all of the assets and liabilities of Trilenium Investments Limited, or Trilenium, and assets and liabilities
of its sole member. In January 2010, we acquired our Storage Profiler, Virtual and Server Profiler and Backup Profiler products in our Tek-Tools acquisition. We anticipate continuing to make selective additional acquisitions of companies with
products that complement our business model.

To increase our international sales, we have expanded international operations
by building a direct inside sales force and building a network of resellers in selected international markets. We established operations in Cork, Ireland in 2007 to serve as our Europe, Middle East and African, or EMEA, sales and support center as
well as our international headquarters and then opened a sales and support operation in Singapore in 2008. We have also expanded our research and development operations internationally by establishing a research and development facility in the Czech
Republic in 2008 and acquiring research and development personnel in New Zealand and India.

In May 2009, we completed our
initial public offering, or IPO, in which we issued and sold 9,000,000 shares of our common stock at a price of $12.50 per share. We raised a total of $112.5 million in gross proceeds from the offering, or approximately $100.5 million in net
proceeds after deducting underwriting discounts and commissions of $7.9 million and other offering costs of $4.1 million. In addition, we facilitated a secondary offering in November 2009, for 13,800,000 shares of common stock held by our pre-IPO
major investors. The selling stockholders received all proceeds from the secondary offering.

Key Business Metrics

We designed our business model to sell high volumes of low-priced, downloadable, enterprise-class software to our
customers and to be low cost, scalable and efficient. We review a number of key business metrics to help us monitor the performance of our business model and to identify trends affecting our business. The measures that we believe are the primary
indicators of our quarterly and annual performance are as follows:

Average Transaction Size for New License Sales. We
focus our sales, marketing and research and development efforts on IT professionals in organizations of all sizes, with the goal of driving purchases of our software by these IT professionals in very short sales cycles with minimal levels of
approval. In addition, many of our customers make small initial purchases of our software to manage specific components of their networks and then make additional purchases over time to expand the use of the product that they purchased or to buy
additional software products from us. We measure the average transaction size for new license sales on a frequent basis as an indicator of the success of these efforts and to ensure the effectiveness of our marketing and sales model. We exclude our
Kiwi Syslog Server and Kiwi CatTools products from our calculation of average transaction size for new license sales because these products sell at a much lower price point than our Orion family of products and, despite representing a small portion
of our revenue, would therefore have a significant impact to the average transaction size for new license sales in those periods in which we sold the products. By excluding the products, we believe that management can better evaluate our core
business without the variations imposed by the Kiwi products.



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Non-GAAP Operating Income. Our management uses non-GAAP operating income to measure
our performance. Because non-GAAP operating income excludes certain non-cash expenses such as depreciation, amortization and stock-based compensation and certain expenses that may not be indicative of our core business, we believe that this measure
provides us with additional useful information to measure and understand our performance on a consistent basis, particularly with respect to changes in performance from period to period. We use non-GAAP operating income in the preparation of our
budgets and to measure and monitor our performance. Non-GAAP operating income is not determined in accordance with GAAP and is not a substitute for or superior to financial measures determined in accordance with GAAP. For further discussion
regarding non-GAAP operating income and a reconciliation of non-GAAP operating income to net income, see Reconciliation of Non-GAAP Financial Measures included later in this Item 2 entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Revenue Growth. We have employed a differentiated business model
for marketing and selling high volumes of enterprise- class software, which is focused on rapid revenue growth at high operating margins. We regularly review our revenue growth to measure our success.

Opportunities and Trends

Businesses, governments and other organizations are increasingly relying on data networks and IT infrastructures to execute their
operations, facilitate their internal and external communications and transact business with their customers and partners. The size of these networks, the number of applications and servers, and the complexity of physical and virtual server
environments are increasing as organizations place more reliance on them. We believe that the increasing challenges of IT management and the limitations of existing offerings present a market opportunity for our products. In addition to the network
management products that we have offered since 2001, we also offer products that we have developed or acquired that manage servers and applications and monitor and manage storage and virtualized servers. We believe that these products allow us to
compete effectively in these additional markets of application management, storage resource management and virtual server management. We expect our revenue to continue to grow as we capitalize on these market opportunities.

We believe that the recent economic conditions have caused some customers, particularly small businesses, to be more cautious about their
purchases of technology and other related items. However, we believe that small businesses have become more confident in making purchases of new software and will continue to be so in the future and we intend to capitalize on this opportunity. We
also believe that the recent economic conditions offer us an opportunity to market and sell our products to mid-size businesses and enterprise customers at compelling prices compared to the prices of many competing products. We expect to increase
the number of sales transactions to larger customers and customers in the U.S. federal government, which tend to have larger transaction sizes.

We expect to continue to invest for the foreseeable future in expanding our business as we increase our direct inside sales presence in
the United States, Europe and Asia, enhance and expand our product offerings and pursue strategic acquisitions. We expect to continue to experience significant annual growth in our business while striving to maintain non-GAAP operating income as a
percentage of revenue; however, there is a risk that the returns that we achieve on future investments in the growth of our business will not be as rapid or as high as what we have achieved in the past. In January 2010, we acquired certain assets of
Tek-Tools to expand the range of elements of IT infrastructure that we monitor and manage to include storage and virtualized servers.



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We expect our revenue to increase from this acquisition, but expect the acquired business to have a negative impact on our overall non-GAAP operating income as a percentage of revenue. We expect
that this negative impact on non-GAAP operating income as a percentage of revenue to continue through the end of 2010.

Key Components of Our Results of Operations

Sources of Revenue

Our revenue is primarily comprised of license and maintenance revenue. We license our software under perpetual licenses, which includes
maintenance, typically for one year, as part of the initial purchase price of the product. License revenue reflects the revenue recognized from sales of new licenses and upgrades to our software. We have experienced annual and quarterly growth in
license revenue. Customers can renew and generally have renewed their maintenance agreements for annual periods at our standard list maintenance renewal pricing for their software products. Current customers with maintenance agreements are entitled
to receive unspecified upgrades or enhancements when and if they become available. Maintenance revenue is an important source of our future revenue. We have experienced strong and consistent annual and quarterly growth in maintenance and other
revenue. Because our maintenance base grew during 2007, 2008 and 2009 due to new license sales and high customer retention, we expect maintenance revenue to continue to increase in future periods.

Cost of Revenue

Cost of revenue primarily consists of personnel costs related to providing technical support services and amortization of acquired
developed product technologies. Personnel costs include salaries, bonuses and stock-based compensation for technical support personnel, as well as an allocation of our facilities, information technology and other overhead costs and our employee
benefit costs. We allocate stock-based compensation expense to personnel costs based on the expense category in which the option holder works. We allocate overhead, such as rent, computer and other technology costs, and employee benefit costs to
personnel costs in each expense category based on worldwide headcount in that category. We expect our cost of revenue to increase in absolute dollars but to remain relatively stable as a percentage of revenue in future periods.

Operating Expenses

We classify our operating expenses into three categories: sales and marketing, research and development and general and administrative.

Our operating expenses primarily consist of personnel costs, contract research and development costs, marketing program costs
and legal, accounting, consulting and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses and stock-based compensation for personnel in that category, as well as an allocation of our
facilities, information technology and other overhead costs and our employee benefit costs. We allocate stock-based compensation expense resulting from the amortization of the fair value of options granted based on how we categorize the department
in which the optionholder works. We allocate overhead, such as rent, computer and other technology costs and employee benefit costs, to each expense category based on worldwide headcount in that category.

Our operating expenses increased in absolute dollars and as a percentage of revenue in each of 2007, 2008 and 2009 as we have built
infrastructure and added employees across all categories in order to accelerate and support our growth and to expand into international markets. We expect our operating expenses in future periods to continue to increase in absolute dollars and, as a
result of the Tek-Tools acquisition, to be higher as a percentage of revenue in 2010 as we integrate the business.

Sales
and Marketing. Sales and marketing expenses primarily consist of personnel costs for our sales, marketing and business development employees and executives, commissions earned by our sales personnel, the cost of marketing programs such as
on-line lead generation, promotional events and webinars and the cost of business development programs. We expect to continue to hire sales personnel in the United States and in both of our international offices.

Research and Development. Research and development expenses primarily consist of personnel costs for our product development
employees and executives and fees to our contract development vendors in Eastern



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Europe. We have devoted our development efforts primarily to expanding our product line and increasing the functionality and enhancing the ease-of-use of our software offerings. In 2008, we
opened a development center in the Czech Republic to take advantage of low labor rates and strong technical talent. We also acquired research and development personnel in New Zealand and India as part of our acquisition of Trilenium and Tek-Tools,
respectively. Since establishing our research and development center in the Czech Republic and as a result of our acquisitions, we have significantly increased our research and development employee headcount and relied less on our Eastern European
contract development vendors for research and development personnel.

General and Administrative. General and
administrative expenses primarily consist of personnel costs for our executive, finance, legal, human resources and administrative personnel, as well as legal, accounting and other professional service fees and other corporate expenses. We incurred
additional costs in 2009 and expect to continue to incur higher costs associated with being a public company, including higher legal, corporate insurance and financial reporting expenses and the additional costs of achieving and maintaining
compliance with Section 404 of the Sarbanes-Oxley Act.

Other Income (Expense)

Other income (expense) primarily consists of interest income, interest expense, foreign exchange gains (losses) and government grant
income. Interest income represents interest received on our cash and cash equivalents. Interest expense is associated with our outstanding long-term debt, which was $25.0 million and $44.1 million as of March 31, 2010 and December 31,
2009, respectively. Interest expense also includes the amortization and write-off of debt issuance costs, which in the aggregate was $0.3 million and $0.1 million for the three months ended March 31, 2010 and 2009, respectively. Foreign
exchange gains (losses) relate to expenses and transactions denominated in currencies other than the functional currency of the associated company. Government grant income relates to grants to be received by our Irish and Czech Republic entities for
the creation of job positions and related training costs.

Income Tax Expense

Income tax expense primarily consists of corporate income taxes related to profits resulting from the sale of our software offerings by
our United States and Irish entities. We expect our income tax expense to increase in absolute dollars as our profits continue to increase; however, we expect our effective tax rate to continue to decline slowly, due to the lower corporate tax rate
in Ireland, as our international revenue increases as a percentage of total revenue.

We benefit from the tax credit
incentives under the U.S. research and experimentation tax credit extended to taxpayers engaged in qualified research and experimental activities while carrying on a trade or business. The tax credit expired on December 31, 2009, and if not
renewed under similar terms as in prior years, the result could have a material impact on our financial results.

Critical
Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP. The
preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are
reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future
financial statement presentation, financial condition, results of operations and cash flows will be affected.

In many cases,
the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require managements judgment in its application, while in other cases, managements judgment is required in selecting among available
alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving managements judgments and estimates. These critical accounting policies are:



| |  |  | Impairment of long-lived assets;
| | - |  | --------------------------------



| |  |  | Goodwill and other intangible assets with indefinite lives;
| | - |  | -----------------------------------------------------------



| |  |  | Revenue recognition;
| | - |  | --------------------



| |  |  | Stock-based compensation; and
| | - |  | -----------------------------



| |  |  | Income taxes
| | - |  | ------------



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A description of our critical accounting policies that involve significant management
judgments appears in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission Managements Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting Policies and Estimates.

Results of Operations

The following table sets forth our condensed consolidated statements of income data for the periods indicated (in thousands):



|                               |  |                              |        |   |      |   |        |  
|------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                               |  | Three Months EndedMarch 
31, |       
|                               |  | 2010                         |        |   | 2009 |  
|Revenue:                       |  |                              |        |   |      |   |        |  
|License                        |  | $                            | 17,621 |   |      | $ | 12,541 |  
|Maintenance and other          |  |                              | 16,704 |   |      |   | 11,534 |  
|                               |  |                              |        |   |      |   |        |  
|Total revenue                  |  |                              | 34,325 |   |      |   | 24,075 |  
|Cost of revenue (1)            |  |                              | 1,699  |   |      |   | 1,129  |  
|                               |  |                              |        |   |      |   |        |  
|Gross profit                   |  |                              | 32,626 |   |      |   | 22,946 |  
|                               |  |                              |        |   |      |   |        |  
|                               |  |                             
|Operating expenses:            |  |                              |        |   |      |   |        |  
|Sales and marketing (1)        |  |                              | 10,249 |   |      |   | 6,700  |  
|Research and development (1)   |  |                              | 3,627  |   |      |   | 2,426  |  
|General and administrative (1) |  |                              | 5,321  |   |      |   | 3,865  |  
|                               |  |                              |        |   |      |   |        |  
|Total operating expenses       |  |                              | 19,197 |   |      |   | 12,991 |  
|                               |  |                              |        |   |      |   |        |  
|                               |  |                             
|Operating income               |  |                              | 13,429 |   |      |   | 9,955  |  
|                               |  |                              |        |   |      |   |        |  
|                               |  |                             
|Other income (expense):        |  |                              |        |   |      |   |        |  
|Interest income                |  |                              | 33     |   |      |   | 79     |  
|Interest expense               |  |                              | (783   | ) |      |   | (1,451 | )
|Other income                   |  |                              | 48     |   |      |   | 3      |  
|                               |  |                              |        |   |      |   |        |  
|Total other expense            |  |                              | (702   | ) |      |   | (1,369 | )
|                               |  |                              |        |   |      |   |        |  
|Income before income taxes     |  |                              | 12,727 |   |      |   | 8,586  |  
|Income tax expense             |  |                              | 3,790  |   |      |   | 2,598  |  
|                               |  |                              |        |   |      |   |        |  
|Net income                     |  | $                            | 8,937  |   |      | $ | 5,988  |  
|                               |  |                              |        |   |      |   |        |  

Comparison of the Three Months Ended March 31, 2010 and 2009

Revenue



|                       |  |                              |        |                      |       |   |        |   |                      |  |       |        |  |   |       
|---------------------- |  | ---------------------------- | ------ | -------------------- | ----- | - | ------ | - | -------------------- |  | ----- | ------ |  | - | ------
|                       |  | Three Months Ended March 31,
|                       |  | 2010                         |        |                      | 2009  |   |        |  
|Revenue                |  | Amount                       |        | Percentageof Revenue |       |   | Amount |   | Percentageof Revenue |  |       | Change
|(dollars in thousands) |  |                              |        |                      |       |   |        |   |                      |  |       |       
|License                |  | $                            | 17,621 |                      | 51.3  | % |        | $ | 12,541               |  | 52.1  | %      |  | $ | 5,080 
|Maintenance and other  |  |                              | 16,704 |                      | 48.7  |   |        |   | 11,534               |  | 47.9  |        |  |   | 5,170 
|                       |  |                              |        |                      |       |   |        |   |                      |  |       |        |  |   |       
|Total                  |  | $                            | 34,325 |                      | 100.0 | % |        | $ | 24,075               |  | 100.0 | %      |  | $ | 10,250
|                       |  |                              |        |                      |       |   |        |   |                      |  |       |        |  |   |       

Revenue was $34.3 million in the three months ended
March 31, 2010 compared to $24.1 million in the three months ended March 31, 2009, an increase of $10.2 million, or 42.6%. This increase was comprised of a



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$5.2 million increase in maintenance and other revenue, which resulted from a growing maintenance base due to new license sales, new customers through acquisitions and high customer
retention, and a $5.1 million increase in license revenue due to an increase in sales transaction volumes and a 28.1% increase in our average transaction size for new license sales. Our average transaction size for new license sales was
approximately $7,300 and $5,700 for the three months ended March 31, 2010 and 2009, respectively. Through the first quarter 2010, the trailing twelve month average transaction size was approximately $7,300 as compared to approximately $5,900
for the twelve month period ending in the first quarter 2009. We expect our trailing twelve month average transaction sizes to gradually increase. We believe that the increase in new license sales and our average transaction size for new license
sales resulted from better awareness of our products, an increase in the number of products that we sell primarily as a result of our product development and, to a significantly lesser extent, our acquisitions.

Cost of Revenue and Gross Margin



|                                 |  |                              |        |   |      |   |        |        |  |   |       
|-------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | ------
|                                 |  | Three Months Ended March 31,
|Cost of Revenue and Gross Margin |  | 2010                         |        |   | 2009 |   |        | Change
|(dollars in thousands)           |  |                              |        |   |      |   |        |       
|Total revenue                    |  | $                            | 34,325 |   |      | $ | 24,075 |        |  | $ | 10,250
|Total cost of revenue            |  |                              | 1,699  |   |      |   | 1,129  |        |  |   | 570   
|                                 |  |                              |        |   |      |   |        |        |  |   |       
|Gross profit                     |  | $                            | 32,626 |   |      | $ | 22,946 |        |  | $ | 9,680 
|                                 |  |                              |        |   |      |   |        |        |  |   |       
|                                 |  |                              |       
|Gross margin                     |  |                              | 95.1   | % |      |   | 95.3   | %      |  |   |       

Cost of revenue was $1.7 million in the three months ended March 31, 2010 compared to
$1.1 million in the three months ended March 31, 2009, an increase of $0.6 million, or 50.5%. This increase was primarily due to a $0.4 million increase in cost of maintenance revenue related to increased headcount of our North
American and European support organizations to support the new customers we added during 2009 and the first quarter of 2010. Cost of license revenue also increased by $0.2 million in the three months ended March 31, 2010 compared to the same period
in 2009 due to the amortization of acquired product technologies associated with the Tek-Tools acquisition in January 2010.

Operating Expenses



|                           |  |                              |        |                      |      |   |        |   |                      |  |      |        |  |   |      
|-------------------------- |  | ---------------------------- | ------ | -------------------- | ---- | - | ------ | - | -------------------- |  | ---- | ------ |  | - | -----
|                           |  | Three Months Ended March 31,
|                           |  | 2010                         |        |                      | 2009 |   |        |  
|Operating Expenses         |  | Amount                       |        | Percentageof Revenue |      |   | Amount |   | Percentageof Revenue |  |      | Change
|(dollars in thousands)     |  |                              |        |                      |      |   |        |   |                      |  |      |       
|Sales and marketing        |  | $                            | 10,249 |                      | 29.9 | % |        | $ | 6,700                |  | 27.8 | %      |  | $ | 3,549
|Research and development   |  |                              | 3,627  |                      | 10.6 |   |        |   | 2,426                |  | 10.1 |        |  |   | 1,201
|General and administrative |  |                              | 5,321  |                      | 15.5 |   |        |   | 3,865                |  | 16.1 |        |  |   | 1,456
|                           |  |                              |        |                      |      |   |        |   |                      |  |      |        |  |   |      
|Total                      |  | $                            | 19,197 |                      | 55.9 | % |        | $ | 12,991               |  | 54.0 | %      |  | $ | 6,206
|                           |  |                              |        |                      |      |   |        |   |                      |  |      |        |  |   |      

Sales and Marketing.Sales and marketing
expenses were $10.2 million in the three months ended March 31, 2010 compared to $6.7 million in the three months ended March 31, 2009, an increase of $3.5 million, or 53.0%. Sales and marketing expenses increased in the three
months ended March 31, 2010 due to the expansion of our direct inside sales force in the United States, EMEA and the Asia Pacific region, an increase in marketing operations and program costs in the United States and EMEA and an increase in
business development costs as we began to expand our partner relationships. As a result of these efforts, our sales and marketing personnel costs, which includes stock-based compensation expense, increased by $2.6 million. Marketing program
costs such as paid search, search engine optimization, search engine management, web operating costs and trade shows increased by $0.8 million.

Research and Development. Research and development expenses were $3.6 million in the three months ended March 31, 2010
compared to $2.4 million in the three months ended March 31, 2009, an increase of $1.2 million, or 49.5%. In order to support our product development strategy, we increased the size of our



20



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research and development organization in 2009, including a significant increase to our personnel in our Czech Republic development center as well as the addition of research and development
personnel in Dallas, Texas and Chennai, India as a result of the acquisition of Tek-Tools. Due to this growth, our personnel costs, which includes stock-based compensation expense, increased by $1.2 million in the first quarter of 2010 compared to
the first quarter of 2009.

General and Administrative. General and administrative expenses were $5.3 million in
the three months ended March 31, 2010 compared to $3.9 million in the three months ended March 31, 2009, an increase of $1.5 million, or 37.7%. This increase was due primarily to a $1.2 million increase in personnel
costs, which includes stock-based compensation expense, $0.3 in accounting and legal expenses associated with the acquisition of Tek-Tools and a $0.2 million increase in amortization related to the certain intangible assets from Tek-Tools
offset by a $0.3 million decrease in management fees.

Other Income (Expense)



|                       |  |                              |      |   |      |   |        |        |  |   |     |  
|---------------------- |  | ---------------------------- | ---- | - | ---- | - | ------ | ------ |  | - | --- | -
|                       |  | Three Months Ended March 31, |     
|Other Income (Expense) |  | 2010                         |      |   | 2009 |   |        | Change | 
|(dollars in thousands) |  |                              |      |   |      |   |        |        | 
|Interest income        |  | $                            | 33   |   |      | $ | 79     |        |  | $ | (46 | )
|Interest expense       |  |                              | (783 | ) |      |   | (1,451 | )      |  |   | 668 |  
|Other income           |  |                              | 48   |   |      |   | 3      |        |  |   | 45  |  
|                       |  |                              |      |   |      |   |        |        |  |   |     |  
|Total                  |  | $                            | (702 | ) |      | $ | (1,369 | )      |  | $ | 667 |  
|                       |  |                              |      |   |      |   |        |        |  |   |     |  

Interest expense in the three months ended March 31, 2010 decreased by $0.7 million from the three
months ended March 31, 2009 due to a lower amount of outstanding indebtedness because of principal prepayments we made in 2009 and a lower effective interest rate on our outstanding debt.

Income Tax Expense

Our income tax expense in the three months ended March 31, 2010 increased by $1.2 million from the three months ended March 31,
2009. This increase resulted from an increase in our income before income taxes of $4.1 million during the same periods. This increase was partially offset by a decrease in our effective tax rate from 30.3% in the three months ended March 31, 2009
to 29.8% in the three months ended March 31, 2010 as a result of an increase in the percentage of our revenue that is comprised of international revenue, which is taxed at a lower corporate tax rate.

Reconciliation of Non-GAAP Financial Measures

Our investor and analyst presentations include non-GAAP operating income, which we define as operating income plus stock-based
compensation expense, amortization of intangible assets, expenses related to the secondary offering of common stock by certain of our stockholders in the fourth quarter of 2009, lawsuit settlement and related legal fees and certain acquisition
costs. The table below provides a reconciliation of this non-GAAP financial measure to the most recent directly comparable financial measure calculated and presented in accordance with GAAP. Non-GAAP operating income should not be considered as an
alternative to operating income and any other measure of financial performance calculated and presented in accordance with GAAP. Our non-GAAP operating income may not be comparable to similarly titled measures of other organizations because other
organizations may not calculate non-GAAP operating income in the same manner as we do. We prepare non-GAAP operating income to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to
evaluate these adjustments and the reason we consider them appropriate.

We believe non-GAAP operating income is useful to
investors in evaluating our operating performance for the following reasons:



| |  |  | Non-GAAP operating income is widely used by investors to measure a companys operating performance without regard to items, such as interest
expense, income tax expense, depreciation and amortization and stock-based compensation, that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital
structures and the method by which their assets were acquired and certain expenses and expenditures, such as lawsuit settlement and related legal fees, that may not be indicative of a companys core business operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securities analysts use non-GAAP operating income as a supplemental measure to evaluate the overall operating performance of companies; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | By comparing our non-GAAP operating income in different historical periods, our investors can evaluate our operating results without the additional
variations of stock-based compensation expense, which is a non-cash expense that is not a key measure of our operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management uses non-GAAP operating income:



| |  |  | As a measure of operating performance, because it does not include the impact of items not directly resulting from our core operations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For planning purposes, including the preparation of our annual operating budget;
| | - |  | --------------------------------------------------------------------------------



| |  |  | To allocate resources to enhance the financial performance of our business;
| | - |  | ---------------------------------------------------------------------------



| |  |  | To evaluate the effectiveness of our business strategies; and
| | - |  | -------------------------------------------------------------



| |  |  | In communications with our board of directors concerning our financial performance.
| | - |  | -----------------------------------------------------------------------------------

We understand that, although non-GAAP operating income is frequently used by investors and securities analysts in their evaluation of
companies, non-GAAP operating income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Items excluded from the calculation of
non-GAAP operating income, such as stock-based compensation expense, the amortization of intangible assets, costs related to equity offerings and acquisition costs, can have a material impact on our business.

The following table presents a reconciliation of non-GAAP operating income to operating income, the most comparable GAAP measure, for
each of the three-month periods indicated (in thousands):



|                                                                |  |                    |        |   |               |   |       
|--------------------------------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------
|                                                                |  | Three Months Ended
|Reconciliation of Non-GAAP Operating Income to Operating Income |  | March 31,2010      |        |   | March 31,2009
|Operating income                                                |  | $                  | 13,429 |   |               | $ | 9,955 
|Amortization of intangible assets                               |  |                    | 631    |   |               |   | 189   
|Lawsuit settlement and related legal fees                       |  |                    | (148   | ) |               |   | 65    
|Secondary offering expenses                                     |  |                    | 19     |   |               |   |      
|Acquisition costs                                               |  |                    | 266    |   |               |   |      
|Stock-based compensation expense                                |  |                    | 2,321  |   |               |   | 1,668 
|                                                                |  |                    |        |   |               |   |       
|Non-GAAP operating income                                       |  | $                  | 16,518 |   |               | $ | 11,877
|                                                                |  |                    |        |   |               |   |       



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Acquisitions

On January 26, 2010, we acquired certain of the assets of Tek-Tools for the following: (i) $26.0 million of cash; (ii) 362,138 shares of
our common stock with a value of approximately $7.4 million based on the closing price of our common stock as reported on the New York Stock Exchange on January 26, 2010; (iii) $2.0 million of cash and 90,535 shares of our common stock with a value
of approximately $1.8 million based on the closing price of our common stock on the date of the acquisition, each being held in escrow as security for breaches of representations and warranties, covenants and certain other expressly enumerated
matters by Tek-Tools and its stockholders; (iv) $2.0 million of cash being withheld to be paid upon the achievement of sales milestones of the acquired business during calendar year 2010; and (v) $2.0 million of cash being withheld to be paid upon
the receipt of certain third-party consents. Tek-Tools provided us an immediate product offering of storage and virtualized server infrastructures that was missing from our product offerings and eliminated the normal time to market required to
develop a new software product. We accounted for the Tek-Tools acquisition using the purchase method of accounting. We allocated the purchase price to the assets acquired, including intangible assets, and liabilities assumed based on estimated fair
values at the date of the acquisition. We estimated the value of assets and liabilities based on purchase price and future intended use. We derived the value of intangible assets of $18.1 million and recorded goodwill of $25.2 million for the
Tek-Tools acquisition. We derived the value of intangible assets from the present value of estimated future benefits from the various intangible assets acquired. Goodwill represents the excess of the purchase price over the aggregate fair value of
the net identifiable assets acquired. We have included the operating results of this acquisition in our consolidated results from the effective date of the acquisition.

Liquidity and Capital Resources

At March 31, 2010, we had $104.1 million in cash and cash equivalents and $72.0 million of working capital. Our available cash and
cash equivalents are held in bank deposits and money market funds. Our money market mutual funds invest in high-quality, short-term securities, many of which are issued or guaranteed by the U.S. government or by U.S. government agencies. We also
hold a portion of our cash and cash equivalents in bank deposits located in Ireland that are fully guaranteed by the Irish government. We actively monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis
is primarily on safety of principal while secondarily maximizing yield on those funds. The balances held in the United States may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits or are not insured by the FDIC. While we
monitor the balances in our accounts and adjust the balances as appropriate, these balances could be impacted if the underlying depository institutions or the guarantors fail or could be subject to adverse conditions in the financial markets. We
strive to maintain our cash deposits and invest our money market funds with financial institutions of reputable credit and therefore bear minimal credit risk. To date, we have experienced no loss or lack of access to our invested cash and cash
equivalents; however, we can provide no assurances that access to our funds will not be impacted by adverse conditions in the financial markets.

As of December 31, 2009, we had approximately $44.1 million of outstanding indebtedness under our first lien and second lien credit
agreements. In March 2010, we made a required prepayment of $16.9 million and an additional prepayment of $2.2 million of principal, which paid off all of the outstanding principal under our first lien credit agreement and reduced our total
outstanding indebtedness to $25.0 million under our second lien credit agreement. The outstanding balance under the second lien credit agreement matures in December 2011.

The second lien credit agreement contains financial covenants placing a limit on our annual capital expenditures and requiring us to
maintain a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio as of the last day of each fiscal quarter and the borrowings are secured by substantially all of our North American assets. The interest coverage ratio
is calculated as a ratio of Adjusted EBITDA for the trailing four quarters to cash interest expense for the trailing four quarters. Adjusted EBITDA is defined in our second lien credit agreement as net income plus net interest expense, income tax
expense (benefit), depreciation and amortization and stock-based compensation expense. To be in compliance, our interest coverage ratio had to be at least 3.5 to 1.0 as of March 31, 2010 and must be at least 3.5 to 1.0 as of the last day of each
fiscal quarter thereafter. The leverage ratio is calculated as a ratio of consolidated total debt to Adjusted EBITDA for the trailing four quarters. Our leverage ratio as of March 31, 2010 could not be more than 2.6 to 1.0, and this maximum ratio
decreases over time to 2.1 to 1.0 as of December 31, 2011. We were in compliance with each of these key operational and financial covenants as of March 31, 2010. We estimate our capital expenditures for 2010 to be approximately $3.5 million,
comprised primarily of additional leasehold improvements, furniture and fixtures and computer equipment.



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Net Cash Provided by Operating Activities

Net cash provided by operating activities was $16.0 million and $14.9 million for the three months ended March 31, 2010 and 2009,
respectively. Net income was $8.9 million and $6.0 million for the three months ended March 31, 2010 and 2009, respectively. We incurred a net non-cash benefit of $0.8 million for the three months ended March 31, 2010. We
incurred non-cash expenses totaling $2.2 million for the three months ended March 31, 2009. Non-cash expenses or benefits primarily consisted of stock-based compensation expense, deferred taxes and depreciation and amortization expense.

The change in certain assets and liabilities resulted in a net source of cash of $7.8 million and $6.7 million for
the three months ended March 31, 2010 and 2009, respectively. Cash provided by operating activities is driven by sales of our software offerings. Collection of accounts receivable from the sales of our software offerings is a significant
component of our cash flows from operating activities, as is the change in deferred revenue related to these sales. Net cash provided by operating activities was reduced by interest payments of $0.5 million and $2.0 million for the three months
ended March 31, 2010 and 2009, respectively. Net cash provided by operating activities was increased by $3.9 million from an income tax refund in the three months ended March 31, 2010 that decreased prepaid income taxes.

Net Cash Used in Investing Activities

Net cash used in investing activities was $28.7 million and $0.6 million for the three months ended March 31, 2010 and
2009, respectively. Net cash used in investing activities for the three months ended March 31, 2010 was primarily due to the $28.0 million of cash used in our purchase of certain assets of Tek-Tools.

Net Cash Used in Financing Activities

Net cash used in financing activities was $12.0 million and $7.1 million for the three months ended March 31, 2010 and 2009,
respectively. Net cash used in financing activities in the three months ended March 31, 2010 was due to a $19.1 million repayment of long-term debt partially offset by $3.3 million of proceeds from the exercise of employee stock
options and the excess tax benefit related to stock option exercises of $3.9 million, which is a reduction in cash payments related to income taxes.

We believe that our existing cash and cash equivalents and our cash flow from operations will be sufficient to fund our operations and
our capital expenditures and pay our debt service for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and
extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new software products and enhancements to existing software products, and the continuing market acceptance of our software
offerings. Although we are not currently a party to any agreement or letter of intent regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements,
which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Contractual Obligations and Commitments

In March 2010, we made a required prepayment of $16.9 million and an additional prepayment of $2.2 million of principal, which paid off
all of the outstanding principal under our first lien credit agreement and reduced our total outstanding indebtedness to $25.0 million under our second lien credit agreement. Unlike our first lien credit agreement, our second lien credit agreement
does not require us to make repayments based on the annual calculations of our excess cash flow. As a result of these prepayments under our first lien credit agreement, our future estimated interest expense was reduced by approximately $0.5 million
in 2010 and $0.7 million in 2011.



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##### Table of Contents

We entered into an agreement to purchase certain assets of Tek-Tools in January 2010. The
purchase agreement included two earnout payments as follows: (i) up to $2.0 million of cash to be paid upon the achievement of sales milestones for 2010 and (ii) up to $2.0 million of cash to be paid upon the receipt of certain third-party
consents. The payments are recorded at fair value on our condensed consolidated balance sheet at March 31, 2010 as an accrued acquisition earnout of $3.7 million.

Off-Balance Sheet Arrangements

During the three months ended March 31, 2010, we did not have any relationships with unconsolidated organizations or financial
partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.



|Item 3: | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are exposed to certain financial market risks, the most predominant being fluctuations in interest rates for borrowings under our
credit facilities and foreign exchange rate risk.

Interest Rate Risk

We had cash and cash equivalents of $104.1 million at March 31, 2010. We held these amounts primarily in cash or money market funds.
We hold cash and cash equivalents for working capital purposes. We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with original maturities of
three months or less. We do not use derivative financial instruments for speculative or trading purposes; however, we may adopt specific hedging strategies in the future. Any declines in interest rates, however, will reduce future interest income.

We had total outstanding debt of $25.0 million at March 31, 2010. The interest rate on this debt is variable and adjusts
periodically based on the three-month LIBOR rate. If the LIBOR rate changes by 1%, our annual interest expense would change by approximately $0.3 million.

Foreign Currency Risk

Our results of operations and cash flows will be subject to fluctuations because of changes in foreign currency exchange rates,
particularly changes in exchange rates between the U.S. dollar and the Euro and British Pound Sterling. Our historical revenue has generally been denominated in U.S. dollars, and a significant majority of our current revenue continues to be
denominated in U.S. dollars; however, we expect an increasing portion of our future revenue to be denominated in currencies other than the U.S. dollar, primarily the Euro and the British Pound Sterling. Our expenses are generally denominated in the
currencies of the countries in which our operations are located, primarily the United States, Ireland, India, the Czech Republic and Singapore. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign
currencies or any derivative financial instruments for trading or speculative purposes, although we may do so in the future. Thus, fluctuations in currency exchange rates could harm our business in the future.



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##### Table of Contents

|Item 4T: | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of March 31, 2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of March 31, 2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.

Changes in Internal Control over Financial Reporting

The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring every company that files reports with the SEC
to include a management report on such companys internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm must attest to our internal control over financial reporting. Our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 did not include a report of managements assessment regarding internal control over financial reporting or an attestation report of our independent registered public
accounting firm due to a transition period established by SEC rules applicable to newly public companies. Management will be required to provide an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2010. We believe we will have adequate resources and expertise, both internal and external, in place to meet this requirement. However, there is no guarantee that our efforts will result in managements ability to conclude, or
our independent registered public accounting firm to attest, that our internal control over financial reporting is effective as of December 31, 2010.

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2010, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From
time to time, we have been and may be involved in various legal proceedings arising from our ordinary course of business. We currently have no material legal proceedings pending.



|Item 1A. | Risk Factors
|-------- | ------------

There have
been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.



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|Item 6. | Exhibits
|------- | --------



|               |  |                                                                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  |                                                                                                                                                                                                 
|               | 
|2.1(1)         |  | Asset Purchase Agreement dated as of January 26, 2010 by and among the Registrant, SolarWinds Worldwide, LLC, SolarWinds Software Europe (Holdings) Limited, Tek-Tools, Inc. and U.S.
Bank, N.A.
|               | 
|3.1(2)         |  | Amended and Restated Certificate of Incorporation, as currently in effect                                                                                                                       
|               | 
|3.2(3)         |  | Amended and Restated Bylaws, as currently in effect                                                                                                                                             
|               | 
|4.1(3)         |  | Specimen certificate for shares of common stock                                                                                                                                                 
|               | 
|10.1(4)        |  | 2008 Equity Incentive Plan and forms of agreements thereto                                                                                                                                      
|               | 
|10.2*          |  | Amended and Restated Employment Agreement between SolarWinds Worldwide, LLC and Kenny L. Van Zant dated April 26, 2010                                                                          
|               | 
|31.1*          |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                           
|               | 
|31.2*          |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                           
|               | 
|32.1**         |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                  



|(1) | Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K (SEC File No. 001- 34358) filed on January 27, 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the same numbered exhibit to the Companys Registration Statement on Form S-1 (SEC File No. 333-162661) filed on October 26, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the exhibit of the same number to the Companys Registration Statement on Form S-1 (No. 333-149851), originally filed on March 21,
2008 and subsequently amended, or the IPO Registration Statement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to exhibits 10.4, 10.5, 10.6 and 10.6A of the IPO Registration Statement.
|--- | ---------------------------------------------------------------------------------------------------

|* | Filed herewith
|- | --------------

|** | Furnished herewith.
|-- | -------------------



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SOLARWINDS, INC.

SIGNATURE

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



|                   |  |                  |  |                                                                                                                   
|------------------ |  | ---------------- |  | ------------------------------------------------------------------------------------------------------------------
|                   |  | SOLARWINDS, INC.
|                   |  |                 
|Dated: May 6, 2010 |  | By:              |  | /S/    MICHAEL J.
BERRY                                                                                           
|                   |  |                  |  | Michael J. Berry                                                                                                  
|                   |  |                  |  | Senior Vice President and Chief Financial Officer
(on behalf of the Registrant and as principal financial officer)



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  |                                                                                                                                                                                                 
|               | 
|2.1(1)         |  | Asset Purchase Agreement dated as of January 26, 2010 by and among the Registrant, SolarWinds Worldwide, LLC, SolarWinds Software Europe (Holdings) Limited, Tek-Tools, Inc. and U.S.
Bank, N.A.
|               | 
|3.1(2)         |  | Amended and Restated Certificate of Incorporation, as currently in effect                                                                                                                       
|               | 
|3.2(3)         |  | Amended and Restated Bylaws, as currently in effect                                                                                                                                             
|               | 
|4.1(3)         |  | Specimen certificate for shares of common stock                                                                                                                                                 
|               | 
|10.1(4)        |  | 2008 Equity Incentive Plan and forms of agreements thereto                                                                                                                                      
|               | 
|10.2*          |  | Amended and Restated Employment Agreement between SolarWinds Worldwide, LLC and Kenny L. Van Zant dated April 26, 2010                                                                          
|               | 
|31.1*          |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                           
|               | 
|31.2*          |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                           
|               | 
|32.1**         |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                  



|(1) | Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K (SEC File No. 001- 34358) filed on January 27, 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the same numbered exhibit to the Companys Registration Statement on Form S-1 (SEC File No. 333-162661) filed on October 26, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the exhibit of the same number to the Companys Registration Statement on Form S-1 (No. 333-149851), originally filed on March 21,
2008 and subsequently amended, or the IPO Registration Statement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to exhibits 10.4, 10.5, 10.6 and 10.6A of the IPO Registration Statement.
|--- | ---------------------------------------------------------------------------------------------------

|* | Filed herewith
|- | --------------

|** | Furnished herewith.
|-- | -------------------



29