VSCN Visual Sciences (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

o		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: 0-31613

VISUAL SCIENCES, INC.

(FORMERLY KNOWN AS WEBSIDESTORY, INC.)

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2007

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			31
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			33
Item 6. Exhibits			49
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I — FINANCIAL INFORMATION

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

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

VISUAL SCIENCES, INC.
(FORMERLY KNOWN AS WEBSIDESTORY, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Nature of Business

     Visual Sciences, Inc. (formerly known as WebSideStory, Inc.) was founded and commenced operations in September 1996 and is a leading provider of real-time analytics applications. In May 2007, the company changed its name from WebSideStory, Inc. to Visual Sciences, Inc. (together with its subsidiaries, the “Company”). The Company’s analytics solutions, based on its patent pending on-demand service and software platform, enable fast and detailed analytics on large volumes of streaming and stored data. The Company designed its platform for the analysis of terabytes of data at higher performance levels and at a lower total cost of ownership than can be achieved via traditional data warehouse and business intelligence systems. The Company provides packaged real-time analytics applications for web sites, contact centers, retail points-of-sale, messaging systems and other business systems and channels that generate high volumes of customer interaction data.

     The majority of the Company’s operations are conducted in the United States. In order to pursue the sale of its products and services in international markets, the Company established wholly owned subsidiaries in France (February 2000), the Netherlands (August 2000) and the United Kingdom (April 2003).

2. Basis of Presentation and Significant Accounting Policies

Interim Financial Statements

     The accompanying interim condensed consolidated financial statements have been prepared by the Company without audit, in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. These condensed consolidated financial statements and related notes should be read together with the consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of the Company’s management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for the fair statement of the results for the periods presented, with such adjustments consisting only of normal recurring adjustments. Operating results for interim periods are not necessarily indicative of operating results to be expected for an entire fiscal year.

Principles of Consolidation

     The condensed consolidated financial statements include the accounts of Visual Sciences, Inc. and its wholly owned subsidiaries. The results of operations for the nine months ended September 30, 2006 include the results of operations of Visual Sciences Technologies, LLC (formerly known as Visual Sciences, LLC) (“VS”) commencing on February 1, 2006, the date of the Company’s merger with VS. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

Use of Estimates

     The condensed consolidated financial statements of the Company have been prepared using accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and reported amounts of revenue and expenses. Actual results could differ from those estimates.

Revenue Recognition

     The Company derives its revenue from the sale of products and services that it classifies into the following four categories: (1) subscription, hosting and support; (2) license; (3) professional services; and (4) advertising. The Company derives the majority of its

revenue from HBX™ Analytics, which is delivered as a hosted web analytics solution on a subscription basis. Web analytics refers to the collection, analysis and reporting of information about Internet user activity. HBX Analytics collects data from web browsers, processes that data and delivers analytic reports of online behavior to its customers on demand. The Company sells its services and licenses its products primarily through its direct sales force. The Company utilizes written contracts as the means to establish the terms and conditions upon which its products and services are sold to customers.

     The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition , and related interpretations, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 — Revenue Recognition . For arrangements outside the scope of SOP 97-2, the Company evaluates if multiple elements can be accounted for separately in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables .

     During the nine months ended September 30, 2007, the Company recorded adjustments to correct for revenue recognition which resulted in a cumulative $235,000 increase in revenue. Of this amount, $203,000 related to 2006, and the remaining $32,000 related to prior periods. Management concluded that no period was materially misstated; accordingly, these adjustments have been recorded in the nine months ended September 30, 2007.

      Subscription, Hosting and Support Revenue

     Subscription, hosting and support revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer as described below; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of the fees is probable.

     The Company begins revenue recognition for services based on the following:

	•		Revenue recognition for subscription services begins when the customer has been given access to the service or after acceptance.
	•		Revenue recognition for post-contract support begins upon execution of the software license agreement or after acceptance of the related software license, and revenue recognition for hosting support services begins upon acceptance of the software. For contracts without acceptance provisions, revenue recognition for post-contract support begins upon completion of installation and for hosting support services, upon delivery of the service.

     Subscription and hosting revenues are recognized over the term of the related contract periods, which generally range from six months to two years. The Company warrants certain levels of uptime reliability under subscription arrangements and permits its customers to receive credits or terminate their agreements in the event that the Company fails to meet those levels. The Company has rarely provided any such credits or termination rights. Subscription and hosting revenues that are invoiced and paid in advance of delivery of the service are recorded as deferred revenue.

     All software license arrangements include post-contract support services for the initial term, which are recognized ratably over the term of the post-contract service period, typically one year. Post-contract support services provide customers with rights to when and if available updates, maintenance releases and patches released during the term of the support period.

      License Revenue

     The Company derives its license revenue from selling perpetual software licenses to its customers. The Company does not provide custom software development services or create tailored products to sell to specific customers. Pricing is based on a standard price list with volume and marketing related discounts. The perpetual software licenses are sold with the first year of post-contract services,

installation and training. As such, the combination of these products and services represent a “multiple-element” arrangement for revenue recognition purposes.

     For contracts with multiple elements, the Company recognizes revenue using the residual method in accordance with SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and recognized as revenue, assuming all other revenue recognition criteria have been met. If evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is recognized when evidence of fair value is determined or when all elements of the arrangement are delivered. Vendor specific objective evidence (“VSOE”) for post-contract services is based on the stated renewal rate in the contract if that rate is substantive.

     Revenue for perpetual software licenses is recognized when all of the following occur:

	1.		Persuasive evidence of an arrangement exists, which consists of a written contract signed by both the customer and the Company.
	2.		Delivery has occurred, which is after acceptance of the software, or for contracts without acceptance provisions, delivery occurs after completion of installation.
	3.		The fee is fixed or determinable, which occurs when the Company has a signed contract that states the agreed upon fee for its products and/or services and specifies the related terms and conditions that govern that arrangement.
	4.		Collection is probable as determined by the payment history of the customer and the customer’s financial position.

      Professional Services Revenue

     VSOE of fair value for professional consulting and training services is determined by reference to the Company’s established pricing and discounting practices for these services when sold separately. Revenue is derived primarily from time and material based contracts and is recognized as time is incurred.

      Advertising Revenue

     Advertising revenue is recognized based on actual delivery of advertisements.

Internal-use Software and Website Development Costs

     The Company capitalizes qualifying software and website development costs in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and EITF 00-02, Accounting for Website Development Costs . These costs are incurred during the application development stage, and amortized over their estimated useful lives ranging from two to three years. The Company capitalized $28,000 and $0 during the three months ended September 30, 2007 and 2006, respectively. The Company capitalized $142,000 and $361,000 during the nine months ended September 30, 2007 and 2006, respectively. Net capitalized software and website development costs of $0.9 million and $1.2 million as of September 30, 2007 and December 31, 2006, respectively, are included in other assets in the accompanying condensed consolidated balance sheets. Amortization expense totaled $146,000 and $152,000 during the three months ended September 30, 2007 and 2006, respectively, and $426,000 and $338,000 during the nine months ended September 30, 2007 and 2006, respectively.

Software Development Costs

     Costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed , until the product is available for general release. The Company has not capitalized any software development costs because technological feasibility has not been established for software being developed through the nine months ended September 30, 2007.

Concentration of Credit Risk and Significant Customers and Suppliers

     The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term marketable securities and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.

     The Company’s accounts receivable and revenue are derived from a large number of customers. Collateral is not required for accounts receivable. The Company maintains an allowance for potential credit losses as considered necessary. At September 30, 2007 and December 31, 2006, the allowance for doubtful accounts was $1.1 million and $0.6 million, respectively.

     Substantially all of the Company’s advertising revenue for the three and nine months ended September 30, 2007 and 2006 was derived from one customer. Advertising revenue from that one customer accounted for approximately 2% and 3% of consolidated revenue for the three months ended September 30, 2007 and 2006, respectively, and approximately 2% and 4% of consolidated revenue for the nine months ended September 30, 2007 and 2006, respectively. The Company had no amounts due from a single customer that accounted for more than 10% of accounts receivable as of September 30, 2007 and December 31, 2006. The Company had no revenue generated from a single customer that accounted for more than 10% of revenue for the three and nine months ended September 30, 2007 or 2006.

Cost of Revenues

     The Company’s cost of revenues primarily consists of internet connectivity costs, colocation facility charges, depreciation on network infrastructure and personnel associated with the Company’s professional services as well as network operations. A substantial portion of these costs are related to the subscription, hosting and support revenue line item in the condensed consolidated statements of operations.

Accounting for Stock-Based Compensation

     On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”), and amends SFAS No. 95, Statement of Cash Flows (“SFAS No. 95”). SFAS No. 123R requires companies to recognize the estimated fair value of stock-based compensation in the income statement.

     The Company previously accounted for its stock-based compensation using the intrinsic value method as defined in APB Opinion No. 25 and accordingly, prior to January 1, 2006, compensation expense for stock options was measured as the excess, if any, of the fair value of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the stock. The Company used the modified prospective transition method to adopt the provisions of SFAS No. 123R. Under this method, unvested awards at the date of adoption are amortized based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, with the exception of options granted prior to the Company’s initial public offering (“pre-IPO awards”). The pre-IPO awards will continue to be amortized based on the intrinsic value method in accordance with APB Opinion No. 25. Awards that are granted or modified after the date of adoption will be measured and accounted for in accordance with SFAS No. 123R.

     The following table presents the stock-based compensation expense included in the Company’s cost of revenues, sales and marketing, technology development, and general and administrative expenses for the three and nine months ended September 30, 2007 and 2006 (in thousands):

Restricted Stock Awards

     During the third quarter of 2007, the Company granted 18,750 shares of restricted common stock to members of the Company’s board of directors. The shares of restricted common stock were granted pursuant to the 2004 Equity Incentive Award Plan and the restrictions applicable to such shares lapse on August 1, 2008. The Company has recorded $0.5 million and $0.6 million of compensation expense related to all of its restricted stock awards for the three and nine months ended September 30, 2007, in accordance with SFAS No. 123R. As of September 30, 2007, there was approximately $2.8 million of total unrecognized compensation expense related to the restricted stock awards, which is expected to be recognized over a weighted-average period of 2.1 years.

Net Loss per Share

     Basic net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if options and warrants to purchase common stock were exercised. In periods in which the inclusion of such instruments was anti-dilutive, the effect of such securities was not given consideration.

     The Company has excluded outstanding stock options, warrants and unvested common stock subject to repurchase from the calculation of diluted net loss per share for the three and nine months ended September 30, 2007 and 2006 because such securities were anti-dilutive for those periods as the Company was in a net loss position. The total number of potential common shares excluded from the calculation of diluted net loss per share was as follows:

     In addition, restricted common stock and employee stock options to purchase 852,999 and 1,807,557 shares of common stock during the three months ended September 30, 2007 and 2006, respectively, and 2,250,660 and 1,424,797 shares of common stock during the nine months ended September 30, 2007 and 2006, respectively, were outstanding but not included in the computation of diluted net loss per share, because the option or share price was greater than the average market price of the common stock, and therefore, the effect on diluted net loss per share would have been anti-dilutive.

Income Taxes

     The Company calculates its interim tax provision in accordance with Accounting Principles Board Opinion No. 28, Interim Financial Reporting , and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (“FIN No. 18”). At the end of each interim period, the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

     Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of future income tax assets is dependent upon the generation of sufficient future taxable income during the period in which the deferred tax assets are recoverable. The realization of the

deferred tax asset relating to stock compensation expense is dependent on the Company’s stock price exceeding the exercise price of the related stock options at the time of exercise. Management assesses the likelihood that the deferred tax assets will be recovered from future taxable income and whether a valuation allowance is required to reflect any uncertainty. Management has determined that no such valuation allowance was necessary as of September 30, 2007. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Tax rate changes are reflected in the computation of the income tax provision during the period such changes are enacted. In connection with the Company’s initial public offering, the Company triggered a change in ownership under tax regulations resulting in annual limitations on the amount of the historical net operating losses that can be utilized to offset future taxable income.

     The Company’s effective income tax rate for the nine months ended September 30, 2007 was approximately 36% as compared to an effective rate of 37% during the same period in 2006. The decrease in the effective tax rate for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was primarily due to the Company’s net loss position for the year and permanent differences between book and tax amounts. The permanent differences consisted of the imputed interest associated with the senior notes, stock-based compensation expense for our foreign employees and meals and entertainment expense.

     The Company has not provided applicable U.S. income and foreign withholding taxes on undistributed earnings from foreign subsidiaries at September 30, 2007 or December 31, 2006, since they are expected to be reinvested indefinitely outside the U.S. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to various foreign countries. It is not practicable to determine the amount of unrecognized deferred U.S. income tax liability that might be payable if those earnings were eventually repatriated.

Uncertain Tax Positions

     FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes, prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires that the Company determine whether the benefits of its tax positions are more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not to be sustained upon audit, the Company recognizes the largest amount of the benefit that has more than a 50% likelihood of being realized. For tax positions that are not more likely than not to be sustained upon audit, the Company does not recognize any portion of the benefit in its consolidated financial statements. There is significant judgment used in determining the likelihood of the Company’s tax positions being sustained upon audit.

Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 . SFAS No. 159 expands the use of fair value in accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS No. 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and firm commitments. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined if it will adopt the fair value reporting for financial assets and liabilities.

     In September 2006, the FASB issued SFAS No. 157 (“SFAS No. 157”), Fair Value Measurements , which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. The accounting provisions of SFAS No. 157 will be effective for the Company beginning January 1, 2008. The Company is in the process of determining the effect, if any, the adoption of SFAS No. 157 will have on its financial statements.

3. Business Combinations

Visual Sciences Technologies

     As discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, the Company acquired all of the outstanding units of membership interest of VS on February 1, 2006. As part of the merger agreement between VS and the Company, VS’s former members had the right to receive 568,512 shares of Company common stock (the “Escrowed Common Stock”), which were held in escrow until April 1, 2007 pursuant to the terms of an escrow agreement to satisfy indemnification claims, if any, of the Company against VS’s former members and optionholders.

     During the first quarter of 2007, the Company recorded an increase to goodwill of $7.4 million due to the Company’s conclusion that there were no claims against VS beyond a reasonable doubt. The amount recorded was based on the 568,512 shares of Escrowed Common Stock valued based on the closing price of the Company’s common stock of $12.95 on March 30, 2007. The shares were released from escrow in April 2007.

     During the first quarter of 2007, the Company finalized its purchase price allocation for the VS merger and recorded an increase to goodwill and sales tax liability of $356,000.

     The total amount assigned to goodwill is deductible for tax purposes. The amortization periods for the acquired intangible assets are as follows:

	•		completed technology of $12.8 million: 5 years
	•		customer relationships of $3.9 million: 5 years
	•		maintenance contracts of $1.7 million: 10 years
	•		trade name of $0.3 million: 3 years

     The merger with VS closed on February 1, 2006. The Company’s results of operations for the nine months ended September 30, 2006 include the results of operations of VS beginning February 1, 2006. The following table summarizes unaudited pro forma operating results for the nine months ended September 30, 2006 as if the Company had completed the merger as of the beginning of the period presented (in thousands, except per share data):

     This information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the VS merger occurred as of the beginning of the period presented, nor is it indicative of future financial results.

Avivo

     On May 4, 2005, the Company completed the acquisition of Avivo Corporation (“Avivo”), a provider of on-demand website search and content solutions. The Company paid approximately $4.2 million in cash and issued 2,958,713 shares of common stock and options to purchase 164,434 shares of common stock to acquire Avivo. On the acquisition date, approximately $0.8 million of the $4.2 million total cash consideration and approximately 592,000 of the 2,958,713 shares of common stock (together, the “Escrow Amount”) were deposited in escrow to secure indemnification obligations of Avivo and possible adjustments to the purchase price. In August 2006, upon the 15-month anniversary of the closing, 325,538 shares of the Company’s common stock and cash in the amount of approximately $444,000 were released from escrow to the former shareholders of Avivo. The Company recorded an increase to goodwill of $3.9 million as a result of the value of the shares released from escrow based on the closing price of its common stock on August 4, 2006. In addition, approximately $161,000 in cash was returned from escrow to the Company and 118,261 shares of common stock were cancelled as a result of an earn-out adjustment. One-fourth of the original Escrow Amount was held back for an additional nine months to secure certain ongoing indemnification obligations of Avivo.

     On May 4, 2007, upon the two year anniversary of the closing of the acquisition of Avivo, 147,943 shares of the Company’s common stock and $202,000 in cash were released from escrow to the former shareholders of Avivo. The Company recorded an increase to goodwill of $1.8 million as a result of the cash released from escrow and the value of the shares released from escrow based on the closing price of the Company’s common stock on May 4, 2007.

4. Debt

Senior Notes

     In connection with the merger with VS, the Company issued senior notes in an aggregate principal amount of $20 million to former members of VS. The senior notes accrued interest at a rate of 4% per annum and were to mature on August 1, 2007. As described below, the senior notes were paid off in full in the first quarter of 2007.

     The Company recorded imputed interest on the senior notes based on an effective interest rate of 9.5%. The discount of $1.3 million was being amortized, using the effective interest method, over the period ending April 1, 2007, which was the date on which the senior notes became payable upon demand. Total discount amortization of $0 and $0.3 million was recorded as interest expense during the three months ended September 30, 2007 and 2006, respectively. Total discount amortization of $0.3 million and $0.7 million was recorded as interest expense during the nine months ended September 30, 2007 and 2006, respectively. Interest expense on the senior notes, inclusive of discount amortization, totaled $0 and $0.5 million during the three months ended September 30, 2007 and 2006, respectively, and $0.4 million and $1.2 million during the nine months ended September 30, 2007 and 2006, respectively.

Credit Facility

     In February 2007, the Company entered into a loan and security agreement with Silicon Valley Bank (the “Credit Agreement”), which provides for a $15 million senior secured revolving credit facility through February 2009. Amounts borrowed under the Credit Agreement bear interest at 0.25 percent less than the prime rate, or LIBOR plus 2.50 percent, as selected by the Company. All advances made under the Credit Agreement are guaranteed by the Company’s domestic subsidiaries and are secured by a first priority security interest in substantially all of the present and future personal property of the Company and certain domestic subsidiaries, other than intellectual property rights and the capital stock of foreign subsidiaries. Future advances under the revolving credit facility, if any, will be used by the Company for working capital and to fund the Company’s general business requirements.

     Under the Credit Agreement, the Company is subject to certain limitations including limitations on its ability to incur additional debt, sell assets, make certain investments or acquisitions, grant liens, pay dividends and enter into certain merger and consolidation transactions, among other restrictions. The Company is also required to maintain compliance with financial covenants which include a minimum consolidated adjusted quick ratio and a minimum level of earnings before stock-based compensation, asset impairments,

income taxes and depreciation and amortization expense, less cash paid for capital expenditures. As a result of the expense recorded in connection with the settlement of the Company’s patent litigation with NetRatings in August 2007, the Company was not in compliance with the minimum level of earnings covenant at September 30, 2007. The Company requested and obtained a waiver of such non-compliance from Silicon Valley Bank.

     During the first quarter of 2007, the Company used $5.0 million of initial borrowings under this credit facility together with cash-on-hand, to repay all of the senior notes it had issued in connection with its merger with VS. As of September 30, 2007, the Company had $4.0 million of outstanding borrowings under this credit facility. The maturity date for outstanding borrowings under the Credit Agreement is February 22, 2009. The Company is recording interest on the outstanding borrowings at approximately 8.0%, which was 0.25 percent less than the prime rate, as selected by the Company. Interest expense under the credit facility totaled $90,000 and $213,000 for the three and nine months ended September 30, 2007, respectively.

5. Composition of Certain Balance Sheet Captions

Investments

     Short-term investments, which are classified as available-for-sale, consisted of the following (in thousands):

     Total depreciation expense was $1.0 million and $0.7 million for the three months ended September 30, 2007 and 2006, respectively, and $2.8 million and $1.8 million for the nine months ended September 30, 2007 and 2006, respectively.

     The Company leases certain computer and office equipment under capital leases. As of September 30, 2007 and December 31, 2006, $121,000 of such equipment was included in property and equipment. Accumulated amortization relating to this equipment totaled $69,000 and $50,000 at September 30, 2007 and December 31, 2006, respectively.

Goodwill and Intangible Assets

     The change in the carrying amount of goodwill for the nine months ended September 30, 2007 was as follows (in thousands):

     The following table sets forth the components of intangible assets, net (in thousands):

     Patent licenses represent the estimated value of licenses obtained from NetRatings, Inc. (See Note 9). The amount recorded in intangible assets, net, represents the estimated future benefit the Company expects to obtain from licenses granted under the NetRatings settlement agreement. The Company is amortizing the patent licenses to cost of revenues through 2017 based on the pattern in which the economic benefit is consumed.

     The customer relationships, maintenance contracts, acquired complete technology and trade name have weighted average amortization periods of approximately 63 months, 120 months, 58 months and 36 months, respectively. The values assigned to the intangible assets were, in large part, based on the values determined using a discounted cash flow model. The customer relationships and maintenance contracts are amortized based on the pattern in which the economic benefit is consumed and the acquired complete technology and trade name are amortized on a straight-line basis, which approximates that pattern.

     Total amortization expense was $1.4 million and $1.5 million for the three months ended September 30, 2007 and 2006, respectively, and $4.1 million and $4.3 million for the nine months ended September 30, 2007 and 2006, respectively. Future amortization expense for the remainder of 2007, 2008, 2009, 2010, 2011 and thereafter is expected to be $1.5 million, $5.4 million, $5.0 million, $4.9 million, $1.4 million and $4.4 million, respectively, excluding any incremental expense that could result if the Company consummates future acquisitions.

Accrued Liabilities and Other Liabilities

     The following table sets forth the components of accrued liabilities (in thousands):

     The following table sets forth the components of other liabilities (in thousands):

6. Income Taxes

     In July 2006, the FASB issued FIN No. 48. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.

     The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recorded unrecognized tax benefits of $723,000 which was included in other liabilities in the condensed consolidated balance sheet. If recognized, $417,000 would effect the Company’s effective tax rate. The cumulative effect of adopting FIN No. 48 resulted in an increase to the January 1, 2007 balance of accumulated deficit of $417,000.

     During the third quarter of 2007, unrecognized tax benefits were reduced by $124,000 with no effect on the Company’s effective tax rate. Additionally, unrecognized tax benefits were increased by $25,000 due to foreign exchange rate fluctuations. Accrued interest was increased by $6,000. The Company does not anticipate any material increase or decrease in its unrecognized tax benefits will occur within the next twelve months

     The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. Upon adoption of FIN No. 48 on January 1, 2007, the Company recorded interest expense on unrecognized tax benefits of $43,000. As of September 30, 2007, the Company has accrued $28,000 of additional interest expense related to unrecognized tax benefits.

     The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company currently has no years under examination by the Internal Revenue Service or any other state or foreign jurisdiction. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2002.

7. Comprehensive (Loss) Income

     Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events, including foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments. A reclassification adjustment for net realized gains (losses) results from the recognition of the net realized gains (losses) in the statement of operations when marketable securities are sold. Total comprehensive loss consists of the following (in thousands):

     The following table sets forth the components of accumulated other comprehensive income, net of taxes (in thousands):

8. Segment Information

     Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.

     In 2006, the Company had two reportable business segments: WebSideStory and VS, as the Chief Executive Officer separately reviewed these components to make operating decisions and assess performance. During the first quarter of 2007, the Company merged those two segments and now operates its business in one reportable segment: a suite of products that builds and optimizes a company’s online presence and analyzes customer interactions and data across a company’s business. The Chief Executive Officer began evaluating the Company’s performance on a consolidated basis during the first quarter of 2007.

     As of both September 30, 2007 and December 31, 2006, 4% of the Company’s total assets were located outside the United States. Revenue from our subsidiaries located outside the United States was 14% and 12% for the three months ended September 30, 2007 and 2006, respectively, and 14% and 13% for the nine months ended September 30, 2007 and 2006, respectively. Revenues for the three and nine months ended September 30, 2007 and 2006, by geographic region were as follows (in thousands):

     No individual European subsidiary accounted for 10% or more of revenues for the three and nine months ended September 30, 2007 or 2006.

9. Commitments and Contingencies

Legal Proceedings

     In February 2006, NetRatings, Inc. (“NetRatings”), an internet media and market research company, filed a lawsuit against the Company in the United States District Court for the Southern District of New York. The suit alleged willful infringement of United States Patent Nos. 5,675,510, 6,108,637, 6,115,680, 6,138,155, and 6,763,386. Also, in February 2006, the Company filed a complaint in the United States District Court for the Southern District of California charging NetRatings with willful infringement of United States Patent No. 6,393,479 (the “‘479 Patent”).

     On August 17, 2007, the Company entered into a settlement and patent cross-license agreement (the “Settlement Agreement”) with NetRatings to resolve the lawsuits discussed above. Under the terms of the Settlement Agreement, the Company and NetRatings each granted the other party a limited, non-exclusive, non-transferable (except as otherwise permitted in the Settlement Agreement), world-wide license to certain patents, subject, in the case of the license granted by NetRatings to the Company, to certain exceptions and exclusions. Each party also granted the other party certain rights to sublicense the rights licensed therein. The consummation of the Company’s merger with Omniture, Inc., pursuant to the terms of the definitive merger agreement between the parties, would constitute a change of control under the terms of the Settlement Agreement (see Note 10 — “Subsequent Events” below).

     The Settlement Agreement requires the Company to pay a royalty fee of $9.0 million, $2.0 million of which became due upon the execution of the Settlement Agreement with the remaining $7.0 million payable in quarterly installments of $0.5 million commencing on March 31, 2008. In addition, in the event of a change of control of the Company, the Settlement Agreement provides that the Company will be required to pay an additional royalty fee of $2.25 million and $2.0 million of the $7.0 million in ongoing payments would be accelerated. In the event of a change of control of the Company, the Settlement Agreement may be assigned to the purchaser upon written notice to NetRatings, subject to certain limitations. In the event of a change of control of the Company, the patent license from NetRatings would be limited to (1) products, services and technology commercially released as of the date of the change of control, (2) the products, or elements of such products, that were under development as of the date of the change of control if those products are released as standard products within twelve months of the date of the change of control, (3) future versions of the

Company’s products, services or technology commercially released as of the date of the change of control that contain patches to, bug fixes of, enhancements to, modifications of, improvements to, updates or upgrades of the original versions (except for any new feature or functionality added to the original versions which new feature or functionality in and of itself infringes a licensed NetRatings patent that did not already cover the original versions) and (4) future versions of the Company’s products, services or technology that supersede any of the Company’s products, services or technology described under clauses (1), (2) or (3) above. The license also extends to the combination, merger, bundling or incorporation of the Company’s products, services or technology, or any portion of them, with any of the purchaser’s Web analytics products, services or technology not otherwise licensed pursuant to a separate license agreement with NetRatings, so long as the purchaser’s Web analytics products, services or technology represents less than 40% of the source code of the combined, merged or bundled Web analytics product, service or technology. In addition, the patent license from NetRatings does not limit the right of the Company or any person or entity that acquires the Company from combining, merging, bundling or incorporating any unlicensed product, service or technology into or with the products, services and technology covered by the Company’s license from NetRatings, provided that such unlicensed product, service or technology does not, by itself, infringe upon any claim of any licensed NetRatings patent.

     In addition, in the event that the Company acquires certain companies, it may elect to extend the license granted by NetRatings under the Settlement Agreement to cover the products, services and technology of such an acquired company by making additional payments to NetRatings based on a percentage of revenues of the web analytics products, services or technologies of such acquired company during the twelve month period preceding such acquisition. Further, under the terms of the Settlement Agreement, in the event that the Company acquires certain companies, the Company may elect to pay an additional royalty to NetRatings in exchange for a release of all claims by NetRatings related to such acquired company.

     In exchange for the licenses and royalties described above, under the terms of the Settlement Agreement, the Company and NetRatings each released the other from all claims, as of the date of the Settlement Agreement, related to the ongoing patent infringement lawsuits between the parties and agreed to dismiss the patent infringement lawsuits filed by the parties with prejudice.

     As discussed above, the Settlement Agreement requires the Company to make periodic payments totaling $9.0 million, as well as a contingent payment of $2.25 million upon a change in control of the Company. During the third quarter of 2007, the Company accrued $7.9 million, representing the $9.0 million of periodic payments due under the agreement discounted to its net present value, based upon the Company’s estimated incremental borrowing rate of 8.0%. The discount of $1.1 million is being amortized to interest expense using the effective interest method over the period ending June 30, 2011, which corresponds to the periodic payment stream. The Company will record the $2.25 million contingent payment due under the agreement at the time such payment is deemed probable. Based upon a valuation study, the Company assigned $7.0 million to the patent licenses received in the Settlement Agreement based upon the future economic benefit the Company expects to obtain from the licenses granted under the Settlement Agreement. The Company also recorded $0.9 million during the third quarter of 2007 as litigation settlement expense, representing the difference between the net present value of the periodic payments due under the Settlement Agreement and the value of the patent licenses obtained. At September 30, 2007, the amount remaining to be paid under the Settlement Agreement, discounted to its net present value, was $5.9 million, of which $1.4 million was included in accrued liabilities and $4.5 million was included in other long-term liabilities in the accompanying condensed consolidated balance sheet.

     From time to time, the Company is also involved in other routine litigation arising in the ordinary course of its business. While the results of such litigation cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Other Commitments and Contingencies

     During 2006, the Company entered into non-cancelable letters of credit in the aggregate amount of $442,000 to secure future payments under leases for two facilities. The letters of credit expire in 2007 and contain automatic renewal terms extending through 2013. No amounts had been drawn against either letter of credit as of September 30, 2007 or December 31, 2006. The funds that secure the letters of credit for the bank have been classified as restricted cash and included in prepaid expenses and other current assets in the condensed consolidated balance sheets as of September 30, 2007 and December 31, 2006.

     The Company leases its office facilities and office equipment under non-cancelable operating lease arrangements that expire on various dates through January 2013 and, with respect to the office leases, contain certain renewal options. Rent expense under non-

cancelable operating lease arrangements is accounted for on a straight-line basis and totaled $0.6 million for both the three months ended September 30, 2007 and 2006, and $1.9 million and $1.5 million for the nine months ended September 30, 2007 and 2006, respectively. Rent expense for the three months ended September 30, 2007 and 2006 was net of sublease income of $154,000 and $198,000, respectively. Rent expense for the nine months ended September 30, 2007 and 2006 was net of sublease income of $444,000 and $588,000, respectively.

     The following table summarizes the approximate future minimum rentals under non-cancelable operating lease arrangements, net of sublease rental income of $153,000 for the remainder of 2007, in effect at September 30, 2007 (in thousands):

Year Ending December 31:
Remainder of 2007		$	701
2008			2,619
2009			2,635
2010			2,639
2011			2,718
Thereafter			3,033
Total		$	14,345

10. Subsequent Events

Entry into Definitive Merger Agreement

     On October 25, 2007, the Company entered into a definitive agreement to be acquired by Omniture, Inc. (“Omniture”) through the merger of a wholly owned subsidiary of Omniture with the Company (the “Merger”). In connection with the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive 0.49 of a share of Omniture common stock and $2.39 in cash. The Merger, which is expected to close in early to mid 2008, is subject to customary closing conditions, including obtaining the approval of stockholders of both companies and regulatory approvals. If the definitive agreement is terminated under certain circumstances specified in the definitive agreement, the Company may be required to pay a termination fee of $11.8 million to Omniture. The Merger is intended to qualify as a tax-free reorganization for federal income tax purposes.

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

     The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II below under the caption “Item 1A. Risk Factors.” The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the financial statements and related notes for the year ended December 31, 2006 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

Caution on Forward-Looking Statements

     Any statements in this report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements, including, but not limited to, statements regarding Visual Sciences’ ability to complete the proposed merger with Omniture, Inc., or Omniture, pursuant to the definitive agreement between the parties, the ability to satisfy conditions to closing the merger, including obtaining stockholder and regulatory approvals and the benefits of the merger to stockholders. This report contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to our management. You can identify these forward-looking statements by the use of words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation, our reliance on our web analytics services for the majority of our revenue; potential impacts on our business, results of operations and common stock price resulting from the proposed merger with Omniture, including, but not limited to risks of disruption to our business development and sales efforts and disruption and distraction of our management and employees from day-to-day operations as a result of the merger; risks associated with obtaining stockholder or regulatory approvals related to the proposed merger; risks that the expected financial effect of the merger may not be realized; risks associated with contractual limitations on our ability to take certain actions as a result of the merger; risks associated with costs to be incurred in connection with the merger; risks associated with our failure to complete the merger; blocking or erasing of cookies or limitations on our ability to use cookies; our limited experience with analytics applications beyond web analytics; the risks associated with integrating the operations and products of acquired companies with those of the company; privacy concerns and laws or other domestic or foreign regulations that may subject us to litigation or limit our ability to collect and use Internet user information; our ongoing ability to protect our own intellectual property rights and to avoid violating the intellectual property rights of third parties; the highly competitive markets in which we operate that could make it difficult for us to acquire and retain customers; the risk that our customers fail to renew their agreements; the risks associated with our indebtedness, including the risk of non-compliance with the covenants in our credit facility; the risk that our services may become obsolete in a market with rapidly changing technology and industry standards; the risks associated with our renaming the company and undertaking related branding activities; and other risks described below under the heading “Item 1A. Risk Factors.” Given these 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 report.

     Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 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.

Overview

     Visual Sciences, Inc. (formerly known as WebSideStory, Inc.) was founded and commenced operations in September 1996 and is a leading provider of real-time analytics applications. In May 2007, we changed our name from WebSideStory, Inc. to Visual Sciences, Inc. Our analytics solutions, based on our patent pending on-demand service and software platform, enable fast and detailed analytics on large volumes of streaming and stored data. The answers delivered by these analytics provide organizations with actionable information to optimize their business operations. We designed our platform specifically for the analysis of terabytes of data at higher performance levels, at a lower total cost of ownership and with greater ease of use than can be achieved via traditional data warehouse and business intelligence systems. Our real-time analytics platform performs faster, deeper and more iterative analyses

on larger amounts of detailed data, giving our customers greater insight into trends and anomalies in their businesses, thereby enabling them to make better strategic decisions.

     We provide packaged real-time analytics solutions for web sites, contact centers, retail points-of-sale, messaging systems and other business systems and channels that generate high volumes of customer interaction data. The services we provide deliver comprehensive insight into the lifetime of customer interactions across on-line and off-line channels. We identify developing trends, analyze and test business hypotheses and optimize the performance of customer facing business systems without the need for significant investments in internal infrastructure.

     Our customers can take advantage of the broad range of solutions we offer with flexible pricing and deployment options, including on-demand service and licensed software. Our on-demand services are delivered over the Internet using secure, proprietary and scalable applications and system architecture. On-demand delivery allows us to concurrently serve a large number of customers securely and to efficiently distribute the workload across our network of servers with provisions for redundant, fault-tolerant operations. Customers can also purchase certain of our solutions by installation of licensed software on a customer’s hardware. The licensed software delivery model enables us to respond to a broad range of application, performance, and security requirements found in the largest and most analytically competitive organizations.

     We derive our revenue from the sale of products and services that we classify into the following four categories: (1) subscription, hosting and support; (2) license; (3) professional services; and (4) advertising. We derive the majority of our revenue from HBX™ Analytics, which is delivered as a hosted web analytics solution on a subscription basis. Web analytics refers to the collection, analysis and reporting of information about Internet user activity. HBX Analytics collects data from web browsers, processes that data and delivers analytic reports of online behavior to our customers on demand, allowing them to improve their websites and their online marketing campaigns.

     As of September 30, 2007, we served approximately 1,590 data-intensive organizations including large global enterprises, mid-market companies and government agencies. Our direct sales force sells our services to a broad range of organizations in many industries including sports and entertainment, news, retail, financial services, travel, technology, manufacturing, telecommunications and education.

     The majority of our operations are conducted in the United States. In order to pursue the sale of our products and services in international markets, we established wholly owned subsidiaries in France (February 2000), the Netherlands (August 2000) and the United Kingdom (April 2003). See Note 8 to our condensed consolidated financial statements for additional information regarding the geographic markets in which we operate.

     On October 25, 2007, we entered into a definitive agreement, which we refer to as the merger agreement, to be acquired by Omniture, Inc. through the merger of a wholly owned subsidiary of Omniture with the Company, which we refer to as the merger. In connection with the merger, each outstanding share of our common stock will be converted into the right to receive 0.49 of a share of Omniture common stock and $2.39 in cash. The merger is intended to qualify as a tax-free reorganization for federal income tax purposes.

     In connection with the merger, options to purchase our common stock outstanding at the time of the merger will be assumed by Omniture and converted into options to purchase Omniture common stock based on an option exchange ratio. Omniture has agreed to file a registration statement on Form S-8 following the closing in order to register the shares of Omniture common stock issuable upon the exercise of the assumed options to purchase our common stock that are eligible to be registered on Form S-8.

     The merger , which is expected to close in early to mid 2008, is subject to customary closing conditions, including obtaining the requisite approval of our stockholders and of Omniture’s stockholders, and the termination or expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. Each of our Board of Directors and Omniture’s Board of Directors has approved the merger and the merger agreement. Both we and Omniture have agreed, subject to certain exceptions, to cause a stockholders meeting to be held, for the purpose of considering approval of the merger and the merger agreement with respect to our stockholders, and for the purpose of considering approval of the issuance of Omniture’s common stock as provided in the merger agreement with respect to Omniture’s stockholders. If the merger agreement is terminated under certain circumstances specified in the merger agreement, we may be required to pay a termination fee of $11.8 million to Omniture.

     In connection with the merger agreement, certain of our stockholders entered into voting agreements with Omniture and us pursuant to which such stockholders agreed to vote any shares held by them at the time of our stockholders’ meeting in favor of the adoption of the merger agreement. Additionally, certain stockholders of Omniture entered into voting agreements with us and Omniture pursuant to which such stockholders agreed to vote any shares held by them at the time of the Omniture stockholders’ meeting in favor of the issuance of Omniture common stock in connection with the merger.

Critical Accounting Policies and Estimates

     This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our condensed consolidated financial statements, which have been prepared using accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expense and related disclosures. On an on-going basis, we evaluate estimates, including those related to accounts receivable allowance, stock-based compensation expense, estimated life of intangible assets, impairment of intangible assets and goodwill, income tax valuation allowance and depreciation lives. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

     Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Except for the implementation of FASB Interpretation No. 48 as described below, management believes there have been no material changes during the three and nine months ended September 30, 2007 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 13, 2007.

Uncertain Tax Positions

     FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires that we determine whether the benefits of our tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that has more than a 50% likelihood of being realized. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in our consolidated financial statements. There is significant judgment used in determining the likelihood of these tax positions being sustained upon audit.

Recent Accounting Pronouncements

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 . SFAS No. 159 expands the use of fair value in accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS No. 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and firm commitments. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have not yet determined if we will adopt the fair value reporting for financial assets and liabilities.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. The accounting provisions of SFAS No. 157 will be effective for us beginning January 1, 2008. We are in the process of determining the effect, if any, the adoption of SFAS No. 157 will have on our financial statements.

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006

Revenues

     Our total revenues were $20.4 million for the three months ended September 30, 2007 compared to $17.4 million for the three months ended September 30, 2006, representing an increase of $3.0 million, or 17%.

      Subscription, Hosting and Support Revenue. Subscription, hosting and support revenue was $16.6 million for the three months ended September 30, 2007 compared to $13.9 million for the three months ended September 30, 2006, representing an increase of $2.7 million, or 20%. An increase in the number of new customers for our services and average deal size contributed to this increase.

      License Revenue. License revenue was $1.9 million for the three months ended September 30, 2007 compared to $1.3 million for the three months ended September 30, 2006, representing an increase of $0.6 million, or 40%. The increase was due to an increase in the number of customers and the number of licensing contracts entered into during the three months ended September 30, 2007.

      Professional Services Revenue. Professional services revenue was $1.6 million for the three months ended September 30, 2007 compared to $1.7 million for the three months ended September 30, 2006, representing a decrease of $0.1 million, or 6%. The slight decrease was due to the mix of stand alone services performed as compared to services bundled with subscription.

      Advertising Revenue. Advertising revenue was $0.4 million for the three months ended September 30, 2007 compared to $0.6 million for the three months ended September 30, 2006, representing a decrease of $0.2 million, or 34%.

Cost of Revenues and Operating Expenses

      Cost of Revenues. Cost of revenues was $6.4 million for the three months ended September 30, 2007 compared to $5.0 million for the three months ended September 30, 2006, representing an increase of $1.4 million, or 28%. Our cost of revenues as a percentage of revenue was 32% for the three months ended September 30, 2007 compared to 29% for the three months ended September 30, 2006. The majority of the increase in absolute dollars resulted from an approximate $0.6 million increase in salaries, bonuses, and employee-related costs associated with the expansion of our professional services department, an increase in data center costs of $0.3 million, depreciation expense of $0.3 million associated with our larger balance of property and equipment, and travel and lodging expenses of $0.2 million. These increases were partially offset by a decrease in stock-based compensation expense of $0.3 million.

      Sales and Marketing Expenses. Sales and marketing expenses were $6.5 million for the three months ended September 30, 2007 compared to $6.9 million for the three months ended September 30, 2006, representing a decrease of $0.4 million, or 5%. Salaries, wages and related employee benefits decreased $0.4 million and stock-based compensation expense decreased by $0.4 million. These decreases were partially offset by increases in contract labor of $0.1 million and advertising and business promotions expense of $0.1 million.

      Technology Development Expenses. Technology development expenses were $2.6 million for the three months ended September 30, 2007 compared to $3.4 million for the three months ended September 30, 2006, representing a decrease of $0.8 million, or 22%. The decrease was primarily due to a decrease in salaries, wages and related employee benefits of $0.5 million due to a reduction in the number of technology development personnel and a reduction in stock-based compensation expense of $0.3 million.

      General and Administrative Expenses. General and administrative expenses were $5.6 million for the three months ended September 30, 2007 compared to $4.0 million for the three months ended September 30, 2006, representing an increase of $1.6 million, or 39%. Of the increase, $1.1 million was attributable to the legal expense related to the NetRatings litigation and the settlement thereof, $0.3 million of the increase was due to transaction fees associated with the process undertaken to reach a definitive agreement for the sale of the company and $0.2 million of the increase was attributable to salaries and wages and related employee benefits for general and administrative personnel. These increases were partially offset by a decrease in professional fees for accounting of $0.3 million.

      Amortization of Intangibles. Amortization of intangibles expense was $0.6 million for the three months ended September 30, 2007 compared to $0.8 million for the three months ended September 30, 2006, representing a decrease of $0.2 million, or 24%. The $8.3 million of intangibles related to the acquisition of Avivo have estimated lives ranging from three to six years with a weighted-average

estimated life of approximately five years. The $18.7 million of intangibles related to the merger with VS have estimated useful lives of three to ten years. Intangible asset amortization of acquired complete technology is included in cost of revenue and amortization of customer and maintenance contracts and trade name is included in operating expenses.

Other (Expense) Income

      Interest expense. Interest expense was $0.2 million for the three months ended September 30, 2007 compared to $0.5 million for the three months ended September 30, 2006, representing a decrease of $0.3 million, or 70%, compared to the prior year period. The decrease in interest expense resulted from the repayment of the $20.0 million in principal amount of senior notes during the first quarter of 2007 which were replaced by $5.0 million of initial borrowings under our secured credit facility. This resulted in a lower outstanding debt balance compared to the prior year. In addition, the effective interest rate on the senior notes was higher than the effective interest rate on the secured credit facility.

      Interest income. During the three months ended September 30, 2007, interest income of $0.1 million remained consistent as compared to the prior year period.

Benefit from Income Taxes

     The benefit from income taxes of $0.4 million for the three months ended September 30, 2007 decreased $0.8 million as compared to the benefit from income taxes of $1.2 million for the three months ended September 30, 2006. The decrease primarily related to the change in our net loss position. Our effective income tax rate for the three months ended September 30, 2007 was approximately 26% as compared to an effective rate of 39% during the same period in 2006. We did not have a valuation allowance on our deferred tax assets as of September 30, 2007. We were profitable from the fourth quarter of 2003 through the end of 2005 and began generating a net loss in 2006 primarily due to the stock-based compensation expense associated with the adoption of SFAS No. 123R and the intangible asset amortization expense related to our merger with VS. We believe that it is more likely than not that we will utilize our deferred tax assets in the near future; therefore, no valuation allowance has been recorded as of September 30, 2007. We will continue to monitor our financial results and the likelihood of utilizing our net operating loss carryforwards each quarter. In the third quarter of 2007, we recorded a benefit from income taxes based on our effective rate of approximately 26%. The statutory rate of approximately 40% was increased based on the permanent differences between book and tax amounts. The permanent differences consisted of the imputed interest associated with the senior notes, stock-based compensation expense for our foreign employees and meals and entertainment expense.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006

Revenues

     Our total revenues were $60.6 million for the nine months ended September 30, 2007 compared to $46.1 million for the nine months ended September 30, 2006, representing an increase of $14.5 million, or 31%. Our results of operations for the nine months ended September 30, 2006 included the results of operations of VS commencing on February 1, 2006, the date our merger with VS was consummated.

      Subscription, Hosting and Support Revenue. Subscription, hosting and support revenue was $49.8 million for the nine months ended September 30, 2007 compared to $38.7 million for the nine months ended September 30, 2006, representing an increase of $11.1 million, or 29%. The increase was due to an increase in the number of new customers for our services and the average deal size and the additional month of revenue from VS for the nine months ended September 30, 2007 compared to September 30, 2006.

      License Revenue. License revenue was $4.5 million for the nine months ended September 30, 2007 compared to $2.0 million for the nine months ended September 30, 2006, representing an increase of $2.5 million, or 122%. The increase was due to an increase in the number of customers and the number of licensing contracts entered into during the nine months ended September 30, 2007 as well as the additional month of VS revenue included for the nine months ended September 30, 2007 compared to September 30, 2006.

      Professional Services Revenue. Professional services revenue was $4.9 million for the nine months ended September 30, 2007 compared to $3.6 million for the nine months ended September 30, 2006, representing an increase of $1.3 million, or 38%. The increase was primarily due to increased sales of optimization work.

      Advertising Revenue. Advertising revenue was $1.4 million for the nine months ended September 30, 2007 compared to $1.8 million for the nine months ended September 30, 2006, representing a decrease of $0.4 million, or 25%.

Cost of Revenues and Operating Expenses

      Cost of Revenues. Cost of revenues was $17.9 million for the nine months ended September 30, 2007 compared to $13.4 million for the nine months ended September 30, 2006, representing an increase of $4.5 million, or 34%. Our cost of revenues as a percentage of revenue was 30% for the nine months ended September 30, 2007 compared to 29% for the nine months ended September 30, 2006. The majority of the increase in absolute dollars primarily resulted from an approximate $2.1 million increase in salaries, bonuses, and employee-related costs associated with the expansion of our professional services department. There was also an increase in data center costs of $0.9 million and depreciation expense of $0.7 million associated with our larger balance of property and equipment. The amortization of intangible assets increased $0.3 million due to the inclusion of VS for the full nine months ended September 30, 2007. In addition, travel and lodging expenses increased $0.4 million and training expenses increased $0.2 million. These increases were partially offset by a decrease in stock-based compensation expense of $0.5 million.

      Sales and Marketing Expenses. Sales and marketing expenses were $20.6 million for the nine months ended September 30, 2007 compared to $19.7 million for the nine months ended September 30, 2006, representing an increase of $0.9 million, or 4%. The increase came from the following: advertising, trade shows and promotions expense increased by $0.9 million as we rebranded our company; and contract labor increased $0.4 million and employee events increased $0.2 million as we expanded our marketing efforts. There were also increases in rent expense of $0.2 million and depreciation expense of $0.1 million. These increases were partially offset by a decrease in stock-based compensation expense of $1.0 million.

      Technology Development Expenses. Technology development expenses were $9.0 million for the nine months ended September 30, 2007 compared to $9.4 million for the nine months ended September 30, 2006, representing a decrease of $0.4 million, or 5%. The decrease was primarily due to a decrease in salaries, wages and related employee benefits of $0.1 million due to a reduction in the number of technology development personnel and a reduction in stock-based compensation expense of $0.7 million.

      General and Administrative Expenses. General and administrative expenses were $13.5 million for the nine months ended September 30, 2007 compared to $10.0 million for the nine months ended September 30, 2006, representing an increase of $3.5 million, or 35%. Approximately $2.2 million of the increase was attributable to the legal expense related to the NetRatings litigation and the settlement thereof, $0.6 million of the increase was attributable to salaries and wages and related employee benefits for general and administrative personnel, $0.5 million was due to bad debt expense, $0.3 million was due to transaction fees associated with the process undertaken to reach a definitive agreement for the sale of the company, and increases of $0.2 million each in contract labor and travel and lodging. These increases were partially offset by a decrease in professional fees for accounting of $0.5 million.

      Amortization of Intangibles. Amortization of intangibles expense was $1.9 million for the nine months ended September 30, 2007 compared to $2.4 million for the nine months ended September 30, 2006, representing a decrease of $0.5 million, or 20%.

Other (Expense) Income

      Interest expense. Interest expense was $0.8 million for the nine months ended September 30, 2007 compared to $1.3 million for the nine months ended September 30, 2006, representing a decrease of $0.5 million, or 41%, compared to the prior year period. The decrease in interest expense resulted from the repayment of the $20.0 million in principal amount of senior notes during the first quarter of 2007 which were replaced by $5.0 million of initial borrowings under our secured credit facility. This resulted in a lower outstanding debt balance compared to the prior year. In addition, the effective interest rate on the senior notes was higher than the effective interest rate on the secured credit facility.

      Interest income. During the nine months ended September 30, 2007, interest income of $0.5 million remained consistent as compared to the prior year period.

Benefit from Income Taxes

     The benefit from income taxes of $0.9 million for the nine months ended September 30, 2007 decreased $2.7 million as compared to the benefit from income taxes of $3.6 million for the nine months ended September 30, 2006. The decrease primarily related to the change in our net loss position. Our effective income tax rate for the nine months ended September 30, 2007 was approximately 36% as compared to an effective rate of 37% during the same period in 2006. We did not have a valuation allowance on our deferred tax assets as of September 30, 2007. We were profitable from the fourth quarter of 2003 through the end of 2005 and began generating a net loss in 2006 primarily due to the stock-based compensation expense associated with the adoption of SFAS No. 123R and the intangible asset amortization expense related to our merger with VS. We believe that it is more likely than not that we will utilize our deferred tax assets in the near future; therefore, no valuation allowance has been recorded as of September 30, 2007. We will continue to monitor our financial results and the likelihood of utilizing our net operating loss carryforwards each quarter. For the nine months ended September 30, 2007, we recorded a benefit from income taxes based on our effective rate of approximately 36%. The statutory rate of approximately 40% was increased based on the permanent differences between book and tax amounts. The permanent differences consisted of the imputed interest associated with the senior notes, stock-based compensation expense for our foreign employees and meals and entertainment expense.

Liquidity and Capital Resources

Overview

     As of September 30, 2007, we had $12.7 million of cash and cash equivalents, $1.8 million in short-term investments and $1.6 million in working capital, as compared to $19.7 million of cash and cash equivalents, $5.6 million in short-term investments and $5.4 million in working capital deficit as of December 31, 2006. Our cash, cash equivalents and investments, combined with our positive cash flow from operating activities and available borrowings under the revolving credit facility we entered into in February 2007, are our principal sources of liquidity. We believe that our existing cash and short-term investments, anticipated cash flows from operations, and available borrowings under our credit facility will be sufficient to meet our operating and capital requirements through at least the next 12 months.

      Visual Sciences Technologies Merger. On February 1, 2006, we acquired VS in exchange for $22.0 million in cash, 568,512 shares of our common stock, warrants to purchase 1,082,923 shares of our common stock at an exercise price of $18.47 per share, and $20.0 million in aggregate principal amount of senior notes due August 1, 2007, subject to certain mandatory prepayment provisions. The warrants generally expired on August 1, 2007, with the exception of warrants to purchase an aggregate of 326,170 shares of our common stock held by certain of our executive officers which, pursuant to the terms of the warrants, will remain exercisable until such time as these executive officers are not restricted from acquiring securities under our insider trading policy. We also granted, pursuant to our existing equity incentive plan, 189,507 shares of restricted common stock to certain employees of VS, which became fully vested at the end of January 2007, and non-qualified stock options to purchase 350,000 shares of our common stock to certain employees of VS. As discussed below, in February 2007, we entered into a $15 million, two-year, senior secured revolving credit facility. We used $5.0 million of initial borrowings under this credit facility, together with cash-on-hand, to repay all of the senior notes we issued in connection with the VS merger.

      Credit Facility. In February 2007, we entered into a loan and security agreement with Silicon Valley Bank, which we refer to as the Credit Agreement, which provides for a $15.0 million senior secured revolving credit facility through February 2009. Amounts borrowed under the Credit Agreement bear interest at 0.25 percent less than the prime rate, or LIBOR plus 2.50 percent, as selected by us. All advances made under the Credit Agreement are guaranteed by our domestic subsidiaries and are secured by a first priority security interest in substantially all of our present and future personal property and the present and future personal property of certain of our domestic subsidiaries, other than intellectual property rights and the capital stock of foreign subsidiaries. Future advances under the revolving credit facility, if any, will be used by us for working capital and to fund our general business requirements.

     Under the Credit Agreement, we are subject to certain limitations including limitations on our ability to incur additional debt, sell assets, make certain investments or acquisitions, grant liens, pay dividends and enter into certain merger and consolidation transactions, among other restrictions. We are also required to maintain compliance with financial covenants which include a

minimum consolidated adjusted quick ratio and a minimum level of earnings before stock-based compensation, asset impairments, income taxes and depreciation and amortization expense, less cash paid for capital expenditures. As a result of the expense recorded in connection with the settlement of our patent litigation with NetRatings in August 2007, we were not in compliance with the minimum level of earnings covenant at September 30, 2007. We requested and obtained a waiver of such non-compliance from Silicon Valley Bank.

     In the first quarter of 2007, we used $5.0 million of borrowings under this credit facility, together with cash-on-hand, to repay all of the senior notes we issued in connection with the VS merger. In the second quarter we repaid $1.0 million of such borrowings. We had $4.0 million of indebtedness outstanding under our senior credit facility as of September 30, 2007. The maturity date for the outstanding borrowings under the senior credit facility is February 22, 2009.

      Legal Settlement with NetRatings, Inc. On August 17, 2007, we entered into a settlement and patent cross-license agreement, which we refer to as the settlement agreement, with NetRatings. Under the terms of the settlement agreement, we and NetRatings each granted the other party a limited, non-exclusive, non-transferable (except as otherwise permitted in the settlement agreement), world-wide license to certain patents, subject, in the case of the license granted by NetRatings to us, to certain exceptions and exclusions. Each party also granted the other party certain rights to sublicense the rights licensed therein.

     The settlement agreement requires us to pay a royalty fee of $9.0 million, $2.0 million of which became due upon the execution of the settlement agreement and was paid in August 2007, with the remaining $7.0 million payable in quarterly installments of $0.5 million commencing on March 31, 2008. In addition, in the event of a change of control of the company, the settlement agreement provides that we will be required to pay an additional royalty fee of $2.25 million and $2.0 million of the $7.0 million in ongoing payments would be accelerated. The consummation of the proposed merger with Omniture would constitute a change of control under the terms of the settlement agreement. Please see Note 9 to the Condensed Consolidated Financial Statements included elsewhere in this report for further details regarding our settlement with NetRatings, Inc.

      Operating Activities

     Net cash provided by operating activities was $5.8 million and $7.9 million for the nine months ended September 30, 2007 and 2006, respectively.

     During the nine months ended September 30, 2007, net cash provided by operating activities consisted primarily of a net loss of $1.7 million offset by non-cash adjustments to reconcile net loss to net cash provided by operating activities of $7.3 million and $5.8 million for depreciation and amortization and stock-based compensation, respectively. Total changes in working capital decreased the net cash provided by operations due to increases in accounts receivable of $3.9 million and decreases in accounts payable and accrued liabilities of $1.0 million and deferred revenue of $0.8 million. These working capital changes were due primarily to the timing of billed revenue, collections and the delivery of service.

     During the nine months ended September 30, 2006, net cash provided by operating activities consisted primarily of a net loss of $6.0 million offset by non-cash adjustments to reconcile net loss to net cash provided by operating activities of $6.5 million and $8.1 million for depreciation and amortization and stock-based compensation, respectively. Total changes in working capital increased the net cash provided by operations due to increases in deferred revenue of $3.4 million and increases in accounts payable, accrued liabilities and other liabilities of $2.8 million, partially offset by an increase in accounts receivable of $4.7 million. These working capital changes were due primarily to the timing of billed revenue, collections and the delivery of service.

      Investing Activities

     Net cash used in investing activities was $1.9 million and $19.2 million for the nine months ended September 30, 2007 and 2006, respectively.

     During the nine months ended September 30, 2007, we had purchases of property and equipment of $4.4 million, the acquisition of patent licenses of $1.1 million and a cash outflow of $0.2 million for the escrow payment to the selling shareholders of Avivo which were partially offset by sales and maturities of investments totaling $3.9 million. The property and equipment purchased related mainly to servers, network infrastructure and computer equipment and leasehold improvements.

     During the nine months ended September 30, 2006, we acquired VS which resulted in a net cash outflow of $20.2 million (including transaction expenses). There were also cash outflows of $3.8 million for property and equipment purchased related mainly to servers, network infrastructure and computer equipment and construction in progress and $0.4 million for the letters of credit to secure future payments under two leases and $0.4 million for the escrow payment to the selling shareholders of Avivo. These cash outflows were partially offset by the net $5.7 million of purchases, sales and maturities of securities.

      Financing Activities

     Net cash used by financing activities was $11.0 million for the nine months ended September 30, 2007 compared to net cash provided by financing activities of $1.2 million for the nine months ended September 30, 2006.

     During the nine months ended September 30, 2007, we used $5.0 million of initial borrowings under the senior secured credit facility, together with cash-on-hand, to repay the $20 million aggregate principal amount of the senior notes we issued in connection with the VS merger. We also had a cash inflow of $4.0 million from stock option exercises.

     During the nine months ended September 30, 2006, our cash provided by financing activities primarily consisted of stock option exercises.

     We anticipate that our future capital uses and requirements will depend on a variety of factors. These factors include but are not limited to the following:

	•		the costs of serving more customers;
	•		the costs of our network infrastructure;
	•		the costs of our research and development activities to improve our service offerings; and
	•		the extent to which we acquire or invest in other technologies and businesses..

     We believe that our current cash, cash equivalents and short-term investments, combined with our positive cash flow from operating activities and available borrowings under our revolving credit facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We believe that we will have access to sufficient liquidity to fund our business, satisfy interest and principal payments under our senior secured credit facility and meet our contractual lease obligations over a period beyond the next 12 months.

Off-Balance Sheet Arrangements

     As of September 30, 2007 and for all periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

     We are exposed to foreign currency exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro. We analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to reduce the effect of these potential fluctuations. To date, we have not entered into any hedging contracts since exchange rate fluctuations have had little impact on our operating results and cash flows. The majority of our subscription agreements are denominated in U.S. dollars. To date, our foreign revenue has been primarily in Euros. Revenue from our subsidiaries located outside the United States was 14% and 12% for the three months ended September 30, 2007 and 2006, respectively, and 14% and 13% for the nine months ended September 30, 2007 and 2006, respectively.

Interest Rate Sensitivity

     We had unrestricted cash, cash equivalents and short-term marketable securities totaling $14.5 million and $25.3 million at September 30, 2007 and December 31, 2006, respectively. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. Marketable securities were invested in certificates of deposit and mortgage backed securities. These securities are classified as available-for-sale and are recorded on the balance sheet at fair market value with unrealized gains or losses reported as a separate component of stockholders’ equity. Unrealized losses are charged against income when a decline in fair market value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.

     As of September 30, 2007, our outstanding floating rate indebtedness totaled $4.0 million. Changes in interest rates would not significantly affect the fair value of our outstanding indebtedness. As of September 30, 2007, the primary interest rate that we had selected under our senior secured credit agreement was 0.25 percent less than the prime rate. Assuming the outstanding balance under our senior secured credit agreement remains constant over a year, a 100 basis point increase in the interest rate would decrease pre-tax income and cash flows by approximately $40,000.

Item 4. Controls and Procedures

      (a) Evaluation of Disclosure Controls and Procedures

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

     Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2007.

      (b) Changes in Internal Control Over Financial Reporting

     There was no change in our internal control over financial reporting during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1A. Risk Factors

      The following information sets forth factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this quarterly report and those we may make from time to time.

Risks Related to Our Business

Our web analytics services comprise a substantial majority of our revenue, and our business will be harmed if customer demand for these services declines.

     We anticipate that web analytics services and support will continue to represent a substantial majority of our total revenues. Our future success will depend, in part, on our ability to further enhance our web analytics services to meet client needs, to add functionality and to address technological advancements. Our future success will also be dependent upon our ability to attract new web analytics customers and to convince existing web analytics customers to renew their subscription agreements with us and to purchase web analytics services from us. In order to expand or to maintain our web analytics business, we may need to make significant investments in additional sales, marketing and other resources, which may not generate any additional revenues. We have experienced significant competition from other providers of web analytics services, and we cannot assure you that we will be able to continue to enhance our web analytics technology, expand our business or remain competitive in this market, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our efforts to expand our services beyond web analytics may not be successful.

     We have historically focused on the web analytics market and our efforts to expand our business beyond web analytics may not be successful. In connection with our acquisition of Avivo in May 2005, we expanded our services to include website search and web content management. We also introduced our keyword bid management service in early 2006, and our strategy includes the further expansion of our service offerings to include additional analytics applications in the future. The launch of new services can involve technological challenges, which may not be resolved on a timely basis or at all and may require significant development efforts and expenditures. We cannot assure you that our website search, web content management, keyword bid management or other new analytics services will achieve broad market acceptance or generate significant revenues. In addition, the expansion of our services beyond web analytics may result in a diversion of management’s attention and may require us to commit significant financial and other resources to an unproven business that may not generate a commensurate level of revenue or profits and could limit the resources we are able to devote to our existing business. If we are not successful in our expansion efforts, our brand image and existing business could be harmed and our stock price could decline.

Our indebtedness could adversely affect our financial health.

     In February 2007, we entered into a $15.0 million two-year, senior secured revolving credit facility. We used $5.0 million of initial borrowings under this credit facility, together with cash-on-hand, to repay all of the senior notes we issued in connection with the VS merger. As of September 30, 2007, we had $4.0 million in aggregate principal amount outstanding under our senior secured revolving credit facility.

     Our indebtedness could have important consequences. For example, it could:

	•		increase our vulnerability to general adverse economic and industry conditions;
	•		impair our ability to obtain additional financing in the future for working capital needs, capital expenditures, acquisitions and general corporate purposes;
	•		require us to dedicate our cash flows from operations to the payment of principal and interest on our indebtedness, thereby eliminating or reducing the availability of our cash flows to fund working capital needs, capital expenditures, acquisitions and other general corporate purposes;

	•		have a material adverse effect on our business and financial condition if we are unable to service our indebtedness or refinance such indebtedness;
	•		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate
	•		place us at a disadvantage compared to our competitors that have less indebtedness; and
	•		expose us to higher interest expense in the event of increases in interest rates because indebtedness under our credit facility bears interest at a variable rate.

Covenants in our senior secured revolving credit facility may limit our ability to operate our business.

     Under our senior secured credit agreement that we entered into in February 2007 with Silicon Valley Bank, we must comply with, among other things, certain specified financial ratios, including a minimum consolidated adjusted quick ratio and a minimum level of earnings before stock-based compensation, asset impairments, income taxes and depreciation and amortization expenses (but less cash paid for capital expenditures). As a result of the expense recorded in connection with the settlement of our patent litigation with NetRatings in August 2007, we were not in compliance with the minimum level of earnings covenant at September 30, 2007. We requested and obtained a waiver of such non-compliance from Silicon Valley Bank. If we default under the senior secured credit facility, because of a covenant breach or otherwise, the outstanding amounts thereunder could become immediately due and payable. In addition, the covenants contained in our senior secured credit facility limit our ability to incur additional debt, sell assets, make certain investments or acquisitions, grant liens, pay dividends and enter into certain merger and consolidation transactions, among other restrictions.

If we cannot successfully integrate our business with the businesses of the companies we have acquired, or if the benefits of these business combinations do not meet the expectations of investors or financial or industry analysts, the market price of our common stock may decline.

     We completed our acquisition of Avivo and our merger with VS on May 4, 2005 and February 1, 2006, respectively. However, we cannot assure you that we will realize the anticipated benefits of these business combinations. The market price of our common stock may decline as a result of our business combinations with Avivo or VS for a variety of reasons, including, among others, the following:

	•		we may not be able to integrate the business of Avivo or VS with our business in a timely and efficient manner, or at all;
	•		the combined company may not achieve the benefits of either business combination as rapidly as, or to the extent, anticipated by investors or financial or industry analysts;
	•		we may not be able to expand the customer base of Avivo or VS; or
	•		the former stockholders of Avivo or VS could dispose of a significant portion of our common stock that they received in connection with the business combinations.

We operate in highly competitive markets, which could make it difficult for us to acquire and retain customers.

     The market for analytics applications is rapidly evolving and highly competitive. We expect competition to increase from existing competitors as well as new market entrants, and we expect that competitive pressures may further increase during the pendency of our proposed merger with Omniture. We compete primarily with other application service providers and software vendors on the basis of product functionality, price, timeliness and level of service. Should our competitors consolidate, or if our smaller competitors are acquired by other, larger competitors, they may be able to provide services comparable to ours at a lower price due to their size. We also compete with companies that offer analytics software bundled with other products or services, which may result in such companies effectively selling these services at prices below their market price. Our current principal competitors include:

	•		web analytics providers such as Coremetrics, Omniture, Unica and WebTrends;
	•		website search providers such as Endeca, Google and Verity;
	•		web content management providers such as CrownPeak Technology, Interwoven and Vignette; and
	•		providers of keyword bid management solutions such as Gown Peak Technlogy, Did-It and Efficient Frontier.

     In addition, we face competition from companies that develop similar technologies for their own use. Many companies, including some of our largest potential customers, use internally-developed customer intelligence software rather than the commercial services or software offered by us or our competitors. These companies may seek to offer their internally-developed software commercially in the future, which would bring us into direct competition with their products. To date, no web analytics service has been adopted as the industry standard for measuring Internet user behavior and preferences. However, if one of our current or future competitors is successful in establishing its products and services as the industry standard, it will be difficult for us to retain current customers or attract additional customers for our services.

     Furthermore, some businesses may require data or reports that are available only in competitors’ products, and potential customers may, therefore, select the products of our competitors. Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger client bases, and substantially greater resources than us, including sales and marketing, financial, support and other resources. As a result, these competitors may be able to devote more resources to new customer acquisitions or may be able to respond to evolving market needs more quickly than us. If we are not able to compete successfully against our current and future competitors, it will be difficult to acquire and retain customers, and we may experience limited or no revenue growth, reduced operating margins, loss of market share and diminished value in our services.

Many of our services are sold pursuant to short-term subscription agreements, and if our customers elect not to renew these agreements, our revenue may decrease.

     The majority of our services are sold pursuant to short-term subscription agreements, which are generally one to three years in length with no obligation to renew. Many of our customers are relatively new, which makes it difficult for us to predict if they will renew their agreements. Many of our subscription agreements will be subject to renewal in the next 12 months, and we cannot assure you that such agreements will be renewed. Our renewal rates may decline due to a variety of factors, including the services and prices offered by our competitors, the level of service we provide, consolidation in our customer base or cessation of operations by some of our customers. If our renewal rates are low or decline for any reason, including due to the pendency of our proposed merger with Omniture, or if customers renew on less favorable terms, our revenue may decrease, which could materially adversely affect our business, financial condition and results of operations, and our stock price.

Because we recognize the majority of our revenue from subscriptions to our services over the term of the applicable agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.

     We recognize a large portion of our revenue from our customers over the term of their agreements with us. As a result, the majority of our quarterly revenue usually represents deferred revenue from subscription agreements entered into during previous quarters. As such, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. In addition, the effect of significant downturns in sales and market acceptance of our services may not be fully reflected in our results of operations until future periods. Similarly, revenue recognition requirements also make it difficult for us to reflect any rapid expansion in our customer base or the addition of significant new subscription agreements.

We may have difficulty maintaining our profitability.

     Although we had generated net income in 2005, we incurred net losses of $1.7 million for the nine months ended September 30, 2007 and $7.7 million for the year ended December 31, 2006, primarily due to the stock-based compensation expense associated with the adoption of SFAS No. 123R and the intangible asset amortization expense related to our merger with VS. We may not be able to regain our profitability in the future. We expect that our expenses relating to the sales of our services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our networks, will increase in the future. Because a large portion of our costs are fixed, we may not be able to reduce or maintain our expenses in response to any decrease in our revenue, which could adversely affect our operating results and profitability, and our stock price.

If we fail to respond to rapidly changing technology or evolving industry standards, our services may become obsolete or less competitive.

     The market for our services is characterized by rapid technological advances, changes in client requirements, changes in protocols and evolving industry standards. If we are unable to develop enhancements to and new features for our existing services or acceptable new services that keep pace with rapid technological developments, our services may become obsolete, less marketable and less competitive and our business would be harmed. The success of any enhancements, new features and services depends on several factors, including the timing of completion, functionality and market acceptance of the feature or enhancement. Failure to produce acceptable new features and enhancements may significantly impair our revenue growth and reputation.

We may be liable to our customers and may lose customers if we provide poor service, if our services do not comply with our agreements or if there is a loss of data.

     The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet or the failure of our network or software systems. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. Our agreements generally give our customers the right to terminate their agreements for cause if we fail to meet certain reliability standards stated in the agreements or if we otherwise materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data may give our customers the right to terminate their agreements with us and could subject us to liability. We may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. We may be liable to our customers for loss of business, loss of future revenue, breach of contract or even for the loss of goodwill to their business. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to supply information, our reputation could be harmed and we could lose customers.

     Although we have errors and omissions insurance with coverage limits of up to $5.0 million, this coverage may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, we cannot assure you that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

We may expand through acquisitions of, or investments in, other companies or through business relationships, all of which may divert our management’s attention, result in additional dilution to our stockholders or consume resources that are necessary to sustain our business.

     One of our business strategies is to acquire competing or complementary services, technologies or businesses. We also may enter into relationships with other businesses in order to expand our service offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies.

     An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the acquired businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. Moreover, we cannot assure you that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of those transactions, we may:

	•		issue additional equity securities that would dilute our stockholders;
	•		use cash that we may need in the future to operate our business;
	•		incur debt on terms unfavorable to us or that we are unable to repay;

	•		incur large charges or substantial liabilities;
	•		encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures; and
	•		become subject to adverse tax consequences, or incur substantial depreciation or deferred compensation charges.

     We periodically engage in preliminary discussions relating to acquisitions, but we are not currently a party to any acquisition agreements relating to pending or proposed acquisitions. In addition, our definitive merger agreement with Omniture restricts us from making certain acquisitions and taking other specified actions without Omniture’s approval.

Fluctuations in our operating results may make it difficult to predict our future performance and may result in volatility in the market price of our common stock.

     Due to our limited experience in offering analytics applications other than web analytics, our evolving business model and the unpredictability of our emerging industry, we may not be able to accurately forecast our rate of growth. In addition, we may experience significant fluctuations in our operating results for other reasons such as:

	•		our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers’ requirements;
	•		the timing and amount of license revenue we generate;
	•		the timing and success of new product introductions or upgrades by us or our competitors;
	•		changes in our pricing policies or payment terms or those of our competitors;
	•		concerns relating to the security of our networks and systems;
	•		the rate of success of our domestic and international expansion;
	•		our ability to hire and retain key executives as well as technical and sales and marketing personnel;
	•		our ability to expand our operations and the amount and timing of expenditures related to this expansion;
	•		limitations in the scalability of our networks and systems;
	•		costs related to the integration of Avivo and VS with our business and the development or acquisition of other technologies, products or businesses;
	•		costs related to the consummation of our proposed merger with Omniture; and
	•		general economic, industry and market conditions.

     These factors tend to make the timing and amount of revenue and operating costs unpredictable and may lead to greater period-to-period fluctuations in revenue and operating costs than we have experienced historically.

     As a result of the factors described above, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors, the price of our common stock could decline substantially.

We rely on a small number of third parties to support our network, any disruption of which could affect our ability to provide our services and could harm our reputation.

     Our networks are susceptible to outages due to fires, floods, power loss, telecommunications failures, systems failures, break-ins and similar events. We have experienced some outages due to power loss, systems failure and telecommunications failure. In addition, some of our network infrastructure is located in San Diego, California and in San Jose, California, areas susceptible to fires, earthquakes and rolling electricity black-outs. We do not have multiple operating sites for our services in the event of any such occurrence. Our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Frequent or persistent disruptions of our services could cause us to suffer losses that are impossible to quantify at this time, such as claims by customers for indirect or consequential damages, loss of market share and damage to our reputation. Our business interruption insurance may not compensate us for every kind of loss resulting from disruptions of our services, and even if the type of loss is covered, the amount incurred may exceed the loss limitations in our insurance policies.

     All of our servers and our customers’ data are located at three, third-party co-location facilities: one in San Diego, California, operated by Level 3 Communications, LLC, which we use primarily for our HBX web analytics services; one in San Jose, California, operated by Equinix Operating Co., Inc., which we use primarily for our site search and web content management services; and one in Ashburn, Virginia also operated by Equinix, which we use primarily for our Visual Site web analytics services and other analytics offerings. Our agreement with Level 3 expires in November 2007 and Level 3 has the right to terminate the agreement if (i) we fail to pay any amounts past due within ten days after written notice or (ii) we fail to observe or perform any other material term of the agreement and such failure continues for 30 days after written notice to us by Level 3. In addition, Level 3 may terminate our rights to use the co-location space and receive co-location services under certain circumstances. Our agreement with Equinix for the San Jose facility expires in April 2008 but is subject to automatic one-year renewals unless either party provides notice of non-renewal to the other party at least 45 days prior to the end of the then-applicable term. Our agreement with Equinix for the Ashburn facility expires in November 2008 but is subject to automatic one-year renewals unless either party provides notice of non-renewal to the other party at least 90 days prior to the end of the then-applicable term. In addition, Equinix has the right to terminate an agreement with us if (i) we fail to pay any amounts past due within ten days after written notice, (ii) we liquidate, become insolvent or cease doing business or (iii) we breach any other material term of the applicable agreement and such failure continues for 30 days after written notice to us by Equinix.

     We depend on access to the Internet through Internet service providers, or ISPs, to operate our business. If we lose the services of one or more of our ISPs for any reason, we could experience disruption in our service offerings. The loss of one of our ISPs as the result of consolidation in the ISP industry could delay us from retaining the services of a replacement ISP and increase the potential for disruption of our business. Any disruption in our access to the Internet could damage our reputation and result in a decrease in our revenue from the loss of current or potential customers.

A rapid expansion of our networks and systems could cause us to lose data or cause our networks or systems to fail.

     In the future, we may need to expand our networks and systems at a more rapid pace than we have in the past. We may suddenly require additional bandwidth for which we have not adequately planned. We may secure an extremely large customer or a group of customers with extraordinary volumes of information to collect and process that would require significant system resources, and our systems may be unable to process the information. Our networks or systems may not be capable of meeting the demand for increased capacity, or we may incur additional unanticipated expenses to accommodate such capacity constraints. In addition, we may lose valuable data or our networks may temporarily shut down if we fail to expand our networks to meet future requirements. Any lapse in our ability to collect or transmit data will decrease the value of our data, prevent us from providing the complete data requested by our customers and affect some of our customers’ web pages. Any disruption in our network processing or loss of Internet user data may damage our reputation and result in the loss of customers.

If our security measures are breached and unauthorized access is obtained, our services may be perceived as not being secure, and customers may hold us liable or stop using our services.

     Our services involve the storage and transmission of proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. While we have not experienced any material security breach in the past of which we are aware, if our security measures are breached as a result of third-party action, employee error or otherwise, and as a result, someone obtains unauthorized access to our data or our customers’ data, we could incur liability and our reputation would be damaged. For example, hackers or individuals who attempt to breach our network security could, if successful, misappropriate proprietary information or cause interruptions in our services. If we experience any breaches of our network security or sabotage, we

might be required to devote significant capital and resources to protect against or to alleviate problems. We may not be able to remedy any problems caused by hackers or saboteurs in a timely manner, or at all. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose current and potential customers.

Any failure to adequately expand our direct sales force will impede our growth.

     We expect to be substantially dependent on our direct sales force to obtain new customers, particularly large enterprise customers, and to manage our customer relationships. We plan to expand our direct sales force and believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient direct sales personnel. New hires require significant training and may, in some cases, take twelve months or more before they achieve full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. In addition, the pendency of our proposed merger with Omniture may make it more difficult for us to recruit additional sales personnel. If we are unable to hire and develop sufficient numbers of productive sales personnel, sales of our services will suffer.

We may encounter difficulties managing our growth, which could adversely affect our results of operations.

     We have experienced significant growth in recent periods. Our total annual revenue has grown from $14.3 million in 2000 to $64.5 million in 2006. We anticipate that we will need to continue to expand and effectively manage our organization, operations and facilities in order to manage our growth and regain our profitability. We increased the number of our full-time employees from 130 as of January 1, 2001 to 278 as of December 31, 2006, and we expect to continue to expand our team to meet our strategic objectives. If we continue to grow, it is possible that our management, systems and facilities currently in place may not be adequate. Our need to effectively manage our operations and growth requires that we continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to successfully implement these tasks on a large scale and, accordingly, may not achieve our strategic objectives.

The success of our business depends in large part on our ability to protect and enforce our intellectual property rights.

     We regard the protection of our inventions, patents, copyrights, service marks, trademarks and trade secrets as important to our future success. We rely on a combination of patent, copyright, service mark, trademark, and trade secret laws and contractual restrictions to establish and protect our proprietary rights, all of which only offer limited protection. We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business in order to limit access to and disclosure of our proprietary information. Despite our efforts, the steps we have taken to protect our intellectual property may not prevent the misappropriation of proprietary rights or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights also depends on our legal actions against such infringers being successful, but we cannot be sure such actions will be successful, even when our rights have been infringed.

     Although we do have three issued U.S. patents, numerous registered U.S. and foreign service marks and pending patent and service mark applications, we cannot assure you that any future patents or service mark registrations will be issued with respect to pending or future applications or that any issued patents or registered service marks will be enforceable or provide adequate protection of our proprietary rights.

     Because of the global nature of the Internet, our websites can be viewed worldwide, but we do not have intellectual property protection in every jurisdiction. Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available over the Internet. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

     The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We, and certain of our customers, have in the past received correspondence from third parties alleging that certain of our services or customers’ use of our services violates such third parties’ patent rights. For example, we are aware that four of our customers have received letters from third parties alleging, among other things, that such customers’ online activities, including the use of our services, infringe patent rights held by these third parties. Some of these customers have requested that we indemnify them against these allegations, and one customer recently filed a lawsuit against us alleging that we were obligated to indemnify them in connection with their settlement of such claim. Other customers may receive similar allegations of infringement and make similar requests for indemnification under our service agreements with them or these third parties may make claims directly against us. If a third party successfully asserts a claim that we or our customers are infringing their proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at all. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third parties. We expect that the number of infringement claims in our market will increase as the number of services and competitors in our industry grows. These claims, whether or not successful, could:

	•		divert management’s attention;
	•		result in costly and time-consuming litigation;
	•		require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or
	•		require us to redesign our software and services to avoid infringement.

     As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time.

If we fail to develop our brands cost-effectively, our business may suffer.

     We believe that developing and maintaining awareness of our brands in a cost-effective manner is critical to achieving widespread acceptance of our current and future services and is an important element in attracting new customers. Furthermore, we believe that brand recognition will become more important as competition in our market increases. In May 2007, we changed our name from WebSideStory, Inc. to Visual Sciences, Inc. and commenced related branding activities. We cannot assure you that we will be successful in our renaming and branding efforts, or that customers, suppliers and other industry partners will embrace the name change and branding. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in changing, promoting and building our brands. If we fail to successfully change, promote and build our brands, or incur substantial expenses in an unsuccessful attempt to change, promote and build our brands, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business and results of operations could suffer.

We rely on our management team and will need to hire additional personnel to grow our business.

     Our success and future growth depends to a significant degree on the skills and continued services of the members of our senior management team, including our chief executive officer and chief financial officer. We have employment agreements with many of our executive officers; however, under these agreements, our employment relationships with these executive officers are generally “at-will,” and they can terminate their employment relationships with us at any time. We do not maintain key person life insurance on any members of our management team. We anticipate that we will need to continue to hire key management personnel and that our ability

to recruit qualified management personnel may be adversely impacted by the pendency of our proposed merger with Omniture. We may not be able to successfully locate, hire, assimilate and retain other qualified key management personnel to grow our business.

     Jeffrey W. Lunsford, who had served as our president and chief executive officer since April 2003, resigned in November 2006 to become chief executive officer of another company. James W. MacIntyre, IV, who previously served as the chief executive officer of VS, was appointed as our president and chief executive officer effective as of November 20, 2006. Any disruptions that result from the transition of chief executive leadership from Mr. Lunsford to Mr. MacIntyre could adversely affect our business.

     Our future success also depends on our ability to attract, retain and motivate highly skilled technical, managerial, sales, marketing and customer service personnel. We plan to hire additional personnel in all areas of our business, in particular for our sales, marketing and technology development areas, both domestically and internationally, but our ability to recruit such personnel may be adversely impacted by the pendency of our proposed merger with Omniture. Competition for these types of personnel is intense, particularly in the Internet industry. As a result, we may be unable to successfully attract or retain qualified personnel. Our inability to retain and attract the necessary personnel could adversely affect our business.

Our business strategy includes expanding our international operations; therefore, our business is susceptible to risks associated with international operations.

     We currently maintain a sales office in the Netherlands and currently have sales personnel or independent sales consultants in Australia, Canada, France, Germany, Sweden and the United Kingdom. We have limited experience operating in these foreign jurisdictions and no experience operating in other foreign markets into which we may expand in the future. Conducting international operations subjects us to new risks that we have not generally faced in the United States. These risks include but are not limited to:

	•		unexpected changes in foreign regulatory requirements;
	•		localization of our service, including translation into foreign languages and associated expenses;
	•		fluctuations in currency exchange rates;
	•		political, social and economic instability abroad, including conflicts in the Middle East, terrorist attacks and security concerns in general;
	•		longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
	•		difficulties in managing and staffing international operations;
	•		potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
	•		maintaining and servicing computer hardware in distant locations;
	•		the burdens of complying with a wide variety of foreign laws and different legal standards; and
	•		reduced or varied protection for intellectual property rights in some countries.

     The occurrence of any one of these risks could negatively affect our international business and, consequently, our results of operations generally. In addition, the Internet may not be used as widely in international markets in which we expand our operations and, as a result, we may not be successful in offering our services internationally.

     Some of our international fees are currently denominated in U.S. dollars and paid in local currency. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our services more expensive for international customers, which could harm our business.

We previously identified material weaknesses in our internal control over financial reporting, and our business and stock price may be adversely affected if our internal controls are not effective.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to perform a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, we are required to document and test our internal control over financial reporting; our management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to attest to and report on management’s assessment and the effectiveness of internal control over financial reporting. In connection with their evaluations of our disclosure controls and procedures, our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, concluded that certain material weaknesses in our internal control over financial reporting existed during the periods ending December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006. These material weaknesses included insufficient staffing in our accounting and financial reporting functions and weaknesses in our recognition of leasing transactions in accordance with related generally accepted accounting principles. Our independent registered public accounting firm attested and reported that our internal control over financial reporting was not effective as of December 31, 2005. We believe that each of these material weaknesses has now been adequately remediated. Our management has concluded and our independent registered public accounting firm has attested and reported that our internal control over financial reporting was effective as of December 31, 2006. However, we cannot assure you that we will not have other material weaknesses in the future. The existence of one or more material weaknesses could result in errors in our financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.

Changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

     A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, in December 2004, the Financial Accounting Standards Board issued SFAS No. 123R. This statement is a revision of SFAS No. 123, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , or APB No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123R required that we change the way we account for share-based payments, including employee stock options. We previously accounted for stock-based awards to employees in accordance with APB No. 25. Under our previous accounting policy, we recorded stock-based compensation based on the difference between the exercise price of the stock option and the fair market value at the time of grant. To arrive at the fair value for each option grant, SFAS No. 123R requires the use of an option pricing model to evaluate our stock by factoring in additional variables such as expected life of the option, risk-free interest rate, expected volatility of the stock and expected dividend yield. We adopted SFAS No. 123R effective as of January 1, 2006.

Our net operating loss carryforwards may expire unutilized, which could prevent us from offsetting future taxable income.

     Changes in ownership have occurred that have triggered the limitations of Section 382 of the Internal Revenue Code on our net operating loss carryforwards. As a result of the Section 382 limitations, we can only utilize a portion of the net operating loss carryforwards generated prior to the ownership changes to offset future taxable income generated in U.S. federal and state jurisdictions.

     At December 31, 2006, we had federal net operating loss carryforwards of approximately $30.6 million and state net operating loss carryforwards of approximately $22.3 million, which are available to offset future taxable income. The federal net operating loss carryforwards will begin to expire in 2020. The state net operating loss carryforwards will begin to expire in 2012.

     In 2006, net deferred tax assets increased approximately $6.0 million primarily due to the recognition of approximately $4.3 million of net deferred tax assets in connection with compensation expense related to stock options. The realization of the tax benefits

of this deferred tax asset is dependent upon the stock price of the Company exceeding the exercise price of the related stock options at the time of exercise, as well as the sufficiency of taxable income in future years. The combined deferred tax assets represent the amounts expected to be realized before expiration.

     We periodically assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that it is more-likely-than-not that our net deferred tax assets will ultimately be recovered and, accordingly, no valuation allowance on such assets was recorded as of September 30, 2007 or December 31, 2006.

Risks Related to Our Industry

Widespread blocking or erasing of cookies or limitations on our ability to use cookies may impede our ability to collect information with our technology and reduce the value of that data.

     Our technology currently uses cookies, which are small files of information placed on an Internet user’s computer, to collect information about the user’s visits to the websites of our customers. Third-party software and our own technology make it easy for users to block or delete our cookies. Several software programs, sometimes marketed as ad-ware or spyware detectors, block our cookies by default or prompt users to delete or block our cookies. If a large proportion of users delete or block our cookies, this could significantly undermine the value of the data that we collect for our customers and could negatively impact our ability to deliver accurate reports to our customers, which would harm our business.

     Changes in web browsers may also encourage users to block our cookies. Microsoft, for example, frequently modifies its Internet Explorer web browser. Certain modifications by Microsoft or other providers of web browsers could substantially impair our ability to use cookies for data collection purposes. If that happens and we are unable to adapt our technology and practices adequately in response to changes in web browser technology, then the value of our services would be substantially impaired. Additionally, other technologies could be developed that impede the operation of our services. These developments could prevent us from providing our services to our customers or reduce the value of our services.

     In addition, laws regulating the use of cookies by us and our customers could also prevent us from providing our services to our customers or require us to employ alternative technology. A European Union Directive currently being implemented by member countries requires us to tell users about cookies placed on their computers, describe how we and our customers will use the information collected and offer users the right to refuse a cookie. Although no European country currently requires consent prior to delivery of a cookie, one or more European countries may do so in the future. If we were required to obtain consent before delivering a cookie or if the use or effectiveness of cookies is limited, we would be required to switch to alternative technologies to collect user profile information, which may not be done on a timely basis, at a reasonable cost, or at all.

     Currently, the only alternative to using cookies to identify a browser and its browsing session is the use of an Internet protocol address, or IP address. The IP address is an identifier that each computer or other device connected to the Internet has. However, for purposes of web analytics, IP addresses are not as reliable as cookies, because they are often re-assigned by Internet service providers.

     We do not believe that a better alternative to using cookies currently exists for tracking online customer behavior. Creating replacement technology for cookies could require us to expend significant time and resources. We may be unable to complete this alternative technology development in time to avoid negative consequences to our business, and the replacement methods we develop may not be commercially feasible. The replacement of cookies might also reduce our existing customer base by requiring current customers to take specific action to accommodate new technology.

Privacy concerns and laws or other domestic or foreign regulations may subject us to litigation or limit our ability to collect and use Internet user information, resulting in a decrease in the value of our services and an adverse impact on the sales of our services.

     We collect, use and distribute information derived from the activities of Internet users. Federal, state and foreign government bodies and agencies have adopted or are considering adopting laws regarding the collection, use and disclosure of personal

information obtained from consumers. The costs of compliance with, and the other burdens imposed by, such laws may limit the adoption of our services. In addition, some companies have been the subject of class-action lawsuits and governmental investigations based on their collection, use and distribution of Internet user information without the consent of Internet users. For example, the Federal Trade Commission, or FTC, investigates companies’ compliance with their own stated privacy policies. While we are not aware of any FTC investigation regarding any practices we currently employ, the FTC may in the future investigate the practices we employ. Governmental entities and private persons or entities may assert that our methods of collecting, using and distributing Internet user information are illegal or improper. Any such legal action, even if unsuccessful, may distract our management’s attention, divert our resources, negatively affect our public image and harm our business.

     Both existing and proposed laws regulate and restrict the collection and use of information over the Internet that personally identifies the Internet user. These laws continue to change and vary among domestic and foreign jurisdictions, but certain information such as names, addresses, telephone numbers, credit card numbers and email addresses are widely considered personally identifying. The scope of information collected over the Internet that is considered personally identifying may become more expansive, and it is possible that current and future legislation may apply to information that we currently collect without the explicit consent of Internet users. If information that we collect and use without consent is considered to be personally identifying, our ability to collect and use this information will be restricted and we would have to change our methods of operation.

     Recently, the legislatures of several states including Utah, California, Arizona, Virginia, and Arkansas enacted legislation designed to protect Internet users’ privacy by prohibiting certain kinds of downloadable software defined as “spyware.” Similar legislation has been considered, or is being considered, in nearly all state legislatures and in the U.S. House of Representatives. Such legislation, if it includes a broad definition of “spyware,” could restrict our information collection methods. Any restriction or change to our information collection methods would cause us to spend substantial money and time to make such changes and could decrease the amount and utility of the information that we collect.

     In addition, domestic and foreign governments are considering restricting the collection and use of Internet usage data. Some privacy advocates argue that even anonymous data, individually or when aggregated, may reveal too much information about Internet users. If governmental authorities were to follow privacy advocates’ recommendations and enact laws that limit our online data collection practices, we would likely have to obtain the express consent, or opt-in, of an Internet user before we could collect, share, or use any of that user’s information. It might not be possible to comply with all domestic and foreign governmental restrictions simultaneously. Any change to an opt-in system of data collection would damage our ability to aggregate and utilize the information we currently collect from Internet users and would reduce the amount and value of the information that we provide to customers. A reduction in the value of our information might cause some existing customers to discontinue their use of our services or discourage potential customers from subscribing to our services, which would reduce our revenue. We would also need to devote considerable effort and resources, both human and financial, to develop new information collection procedures to comply with an opt-in requirement. Even if we succeeded in developing new procedures, we might be unable to convince Internet users to agree to our collection and use of their information. This would negatively impact our revenue, growth and potential for expanding our business and could cause our stock price to decline.

The success of our business depends on the continued growth of the Internet as a business tool and the growth of the web analytics market.

     Expansion in the sales of our services depends on the continued reliance on the Internet as a communications and commerce platform for enterprises. The use of the Internet as a business tool could be adversely impacted by the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality-of-service. The performance of the Internet and its acceptance as a business tool has been harmed by viruses, worms, and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If, for any reason, the Internet does not remain a widespread communications medium and commercial platform and business processes do not continue to move online, the demand for our service would be significantly reduced, which would harm our business.

     In addition, the market for Internet user measurement and analysis services is new and rapidly evolving. In particular, the market for outsourced, on-demand information services is relatively new and evolving. We may not be able to sell our on-demand services or

grow our business if the market for Internet user measurement and analysis services does not grow or is not outsourced, or if on-demand services are not widely adopted.

Risks Related to the Securities Market and the Ownership of Our Common Stock

Our stock price may be volatile and you may not be able to sell your shares at an attractive price.

     Our common stock had not been publicly traded prior to our initial public offering, which was completed in October 2004, and an active trading market may be difficult to sustain. We have not paid cash dividends since our inception and do not intend to pay cash dividends in the foreseeable future. Therefore, investors will have to rely on appreciation in our stock price and a liquid trading market in order to achieve a gain on their investment. The market prices for our common stock and for securities of technology companies in general have been highly volatile and may continue to be highly volatile in the future. The trading price of our common stock may fluctuate substantially as a result of one or more of the following factors:

	•		variations in our operating results;
	•		the pendency of our proposed merger with Omniture, and the risks regarding the ability of each party to satisfy the conditions to closing such merger, including obtaining required stockholder approvals and regulatory approvals;
	•		fluctuations in the trading prices of Omniture common stock during the pendency of our proposed merger with Omniture;
	•		announcements of technological innovations, new services or service enhancements or significant agreements by us or by our competitors;
	•		recruitment or departure of key personnel;
	•		changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;
	•		sales of our common stock, including sales by officers, directors and funds affiliated with them;
	•		fluctuations in stock market prices and trading volumes of similar companies or of the securities markets generally;
	•		market conditions in our industry, the industries of our customers and the economy as a whole; or
	•		economic and political factors, including wars, terrorism and political unrest.

We might require additional capital to support business growth and this capital might not be available on acceptable terms, or at all.

     We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services or enhance our existing services, enhance our operating infrastructure and acquire competing or complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. The senior secured credit agreement we entered into with Silicon Valley Bank in February 2007 and the merger agreement we entered into with Omniture in October 2007 each include restrictive covenants which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. If we need to raise additional funds and are unable to do so, we may be required to modify our operations, which would have an adverse effect on our financial position, results of operations and cash flows.

Future sales of our common stock by our stockholders may depress our stock price.

     Our existing stockholders hold a substantial number of shares of our common stock that they generally are currently able to sell in the public market. In particular, the former Avivo shareholders who received shares of our common stock pursuant to the merger agreement with Avivo are generally able to sell in the public market. We have also registered the shares of our common stock that are subject to outstanding stock options or reserved for issuance under our stock option plans, which shares can also be freely sold in the public market upon issuance. In addition, certain stockholders have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or for other stockholders. Sales by our existing stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock.

     In addition, in connection with our merger with VS, 568,512 shares of our common stock were placed in escrow for the benefit of the former members and certain optionholders of VS. These shares were released from escrow in April 2007, and generally may be sold in the public market pursuant to Rules 144 and 145 or pursuant to a shelf registration statement that we filed with respect to such shares. Moreover, we issued to the former members and certain optionholders of VS warrants to purchase 1,082,923 shares of our common stock at an exercise price of $18.47 per share. As of September 30, 2007, warrants to purchase 326,170 shares of our common stock remain outstanding. Any shares issued upon exercise of the warrants may also be sold pursuant to such shelf registration statement. Sales by the former members and optionholders of VS of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock.

     Moreover, certain of our stockholders have established trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for the purpose of effecting sales of common stock, and other employees and affiliates, including our directors and executive officers, may choose to establish similar plans in the future. Sales of a substantial number of shares of our common stock in the public market by our affiliates could cause the market price of our common stock to decline and could impair our ability to raise additional capital through equity financings.

Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

     Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

	•		establish a classified board of directors so that not all members of our board are elected at one time;
	•		provide that directors may only be removed “for cause” and only with the approval of the holders of 66 2/3% of our outstanding voting stock;
	•		require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and amended and restated bylaws;
	•		authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
	•		prohibit stockholder action by written consent, requiring all stockholder actions to be taken at a meeting of our stockholders;
	•		provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws; and
	•		establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

     Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company.

Risks Related to the Proposed Merger with Omniture

The pendency of our proposed merger with Omniture could materially and adversely affect our business, financial condition, results of operations and common stock price.

     On October 25, 2007, we entered into a definitive merger agreement with Omniture, under which we are to merge with a wholly-owned subsidiary of Omniture. The pending merger may lead to uncertainty for our employees and some of our customers and suppliers.

     This uncertainty may mean:

	•		There may be substantial disruption to our business and a distraction of our management and employees from day-to-day operations, because matters related to the merger (including integration planning) may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to us;
	•		Our competitors also may seek to use the pending merger to disrupt our sales and business development efforts with existing and potential customers. Also, our customers or prospective customers may elect not to purchase products from us and instead may elect to purchase products from our competitors, including Omniture. Further, our customers or prospective customers may delay or cease to enter into new agreements or purchase our products as a result of the announcement of the merger, for any number of reasons, including concerns that our existing products will not be supported after the merger is completed; and
	•		We may have difficulties retaining key employees or attracting qualified replacements, and the pendency of the proposed merger may be a distraction for our employees, some of whom could lose their focus or pursue other employment opportunities.

     The occurrence of any of these events individually or in combination could materially and adversely affect our business, financial condition and results of operations and our common stock price.

The termination fee contained in the merger agreement may discourage other companies from trying to acquire us.

     We may be required to pay a termination fee of $11.8 million if the merger agreement is terminated under certain circumstances. This termination fee could discourage other companies from trying to acquire us prior to the completion of the merger, even though those other companies might be willing to offer greater value to our stockholders than we could realize through effecting the merger.

We are subject to contractual obligations while the merger is pending that could restrict the manner in which we operate our business.

     The merger agreement restricts us from taking certain specified actions without Omniture’s approval. These restrictions could prevent us from taking actions that could have been beneficial to us that may arise prior to the completion of the merger.

We expect to incur significant costs associated with the merger.

     We expect to incur significant transaction costs, which are not currently estimable, associated with completing the merger, including legal, accounting, financial advisory and other costs related to the merger.

Failure to complete the merger could materially and adversely affect our business, results of operations and stock price.

     Completion of the merger with Omniture is subject to customary conditions, including the approval of our stockholders and Omniture’s stockholders and the receipt of applicable regulatory approvals and clearances. There can be no assurance that these conditions will be satisfied or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all.

     If the merger is not completed, we will be subject to several risks, including the following:

	•		The current market price of our common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a decline in the market price of our common stock;
	•		Any operational investments that we may delay due to the pending transaction would need to be made, potentially on an accelerated timeframe, which could then prove costly and more difficult to implement;
	•		Key employees may have resigned and we may have been unable to attract qualified replacements for such key employees;
	•		Our customer base and revenues may have materially decreased during the pendency of the proposed merger; and
	•		We would continue to face the risks that we currently face as an independent company.

     The occurrence of any of these events individually or in combination could materially and adversely affect our business, financial condition and results of operations and our common stock price.

We may be unable to obtain the regulatory approvals required to complete the merger.

     We and Omniture may be unable to obtain the regulatory approvals required to complete the transaction in the time period forecasted, if at all. The merger is subject to U.S. antitrust laws and, as such, is subject to review by the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR Act. In addition, we may need to obtain clearance from competition authorities in foreign jurisdictions. Reviewing agencies or governments or private persons may challenge the merger under antitrust or similar laws at any time before or after its completion. Any resulting delay in the completion of the merger could diminish the anticipated benefits of the merger or result in additional transaction costs, loss of revenue or other adverse affects associated with uncertainty about the transaction.

     The reviewing authorities may not permit the merger at all or may impose restrictions or conditions on the merger that may seriously harm the combined company if the merger is completed. These conditions could include a complete or partial license, divestiture, or the separate holding of assets or businesses. Pursuant to the terms of the merger agreement, either we or Omniture may refuse to complete the merger if the waiting periods required under the HSR Act have not expired or terminated, or if all other material foreign antitrust approvals or requirements have not been obtained or satisfied. In addition Omniture may refuse to complete the merger if governmental authorities impose any material restrictions or limitations on us, Omniture or our respective subsidiaries and their ability to conduct their respective businesses that will have or which is reasonably likely to have a material adverse effect on the condition, business, assets, liabilities or results of operations of the parties to the merger agreement. We and Omniture also may agree to restrictions or conditions imposed by antitrust authorities in order to obtain regulatory approval, and these restrictions or conditions could harm the surviving company’s operations.

Our failure to obtain certain consents related to the merger could give third parties the right to terminate or alter existing contracts, declare a default under existing contracts, or otherwise result in liabilities of the surviving company to third parties.

     Certain agreements between us and our lenders, suppliers, customers or other business partners require the consent or approval of these other parties in connection with the merger. We have agreed to use reasonable efforts to secure any necessary consents and approvals to complete the merger. However, we may not be successful in obtaining all necessary consents or approvals, or if the necessary consents are obtained, they may not be obtained on favorable terms. If these consents and approvals are not obtained, the failure to have obtained such consents and approvals could give third parties the right to terminate or alter existing contracts, declare a default under existing contracts, demand payment on outstanding obligations or result in other liabilities of the surviving company to such third party, which in each instance could have a material adverse effect on the business and financial condition of the combined company after the merger.

Item 6. Exhibits