As filed with the Securities and Exchange Commission on July 26, 2011

No. 333-173661

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Trustwave Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware	7372	11-3745786
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

Trustwave Holdings, Inc.

70 W. Madison, Suite 1050

Chicago, Illinois 60602

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Robert J. McCullen

Chairman, Chief Executive Officer and President

Trustwave Holdings, Inc.

70 W. Madison, Suite 1050

Chicago, Illinois 60602

(312) 873-7500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications, including communications sent to agent for service, should be sent to:


Dennis M. Myers, P.C. Kirkland & Ellis LLP 300 North LaSalle Chicago, Illinois 60654 (312) 862-2000		John J. Sabl Sidley Austin LLP One South Dearborn Chicago, Illinois 60603 (312) 853-7000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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


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

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

PROSPECTUS (Subject to completion)

Issued July 26, 2011

6,250,000 SHARES

COMMON STOCK

This is the initial public offering of common stock by Trustwave Holdings, Inc. We are selling shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $15.00 and $17.00 per share.

We have applied to list our common stock on The NASDAQ Global Market under the proposed symbol “TWAV.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

PRICE $ PER SHARE


		*Underwriting*
	*Price to*	*Discounts and*	*Proceeds to*
	*Public*	*Commissions*	*Company*

Per Share	$	$	$
Total	$	$	$

We have granted the underwriters a 30-day option to purchase up to 937,500 additional shares of common stock on the same terms as set forth above. See the section of this prospectus entitled “Underwriting.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities nor passed upon the accuracy or adequacy of the disclosures in the prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about , 2011.


MORGAN STANLEY	J.P. MORGAN	BARCLAYS CAPITAL


WILLIAM BLAIR & COMPANY	BMO CAPITAL MARKETS

, 2011

Encryption Vulnerability Scanning TrustKeeper Compliance Security Research Web Application Firewal Network access Inciocent Resp Trustwave

6,000,000 Payment Card Acceptance Locations within Existing Partner Network (as of March 31, 2011) 900,000 TrustKeeper Subscriptions (as of March 31, 2011) Simplify the complex compliance task SaaS TrustKeeper® Portal Reduce the cost of achieving compliance proprietary, bundled data security solutions

Trustwave Partner Network Enterprise Customers Small and Medium Business Customers

TABLE OF CONTENTS


Prospectus Summary			1
Risk Factors			11
Forward-Looking Statements			34
Market And Industry Data And Forecasts			36
Use Of Proceeds			37
Dividend Policy			38
Capitalization			39
Dilution			41
Unaudited Pro Forma Consolidated Financial Data			43
Selected Historical Consolidated Financial Data			48
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations			50
Business			85
Management			107
Executive Compensation			114
Security Ownership Of Certain Beneficial Owners			136
Certain Relationships And Related Party Transactions			139
Description Of Certain Indebtedness			143
Description Of Capital Stock			144
Shares Eligible For Future Sale			148
Material U.S. Federal Income And Estate Tax Considerations To Non-U.S. Holders			150
Underwriting			153
Legal Matters			159
Experts			159
Where You Can Find More Information			159
Index to financial statements			F-1
EX-3.1
EX-4.1
EX-10.12
EX-10.29
EX-10.30
EX-10.31
EX-10.32
EX-10.33
EX-10.44
EX-10.45
EX-23.1
EX-23.2
EX-23.3
EX-23.4
EX-23.5

We have not authorized anyone to provide any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until , 2011 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

TRADEMARKS AND TRADENAMES

This prospectus includes our trademarks and service marks such as Trustwave^®, TrustKeeper^®, SpiderLabs^®, ModSecurity^®, TrustedApp^®, TrustedSentry^®, Smart Tag^®, Trusted Commerce^®, Trustwave Security Data Warehouse^tm and WebDefend^® which are protected under applicable intellectual property laws and are the property of Trustwave Holdings, Inc. or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ^® or ^tm symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should read this entire prospectus, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus before deciding to invest in our common stock. Some of the statements in this summary constitute forward-looking statements, with respect to which you should review the section of this prospectus entitled “Forward-Looking Statements.” Except where the context otherwise requires or where otherwise indicated, the terms “Trustwave,” “we,” “us,” “our,” “our Company” and “our business” refer to Trustwave Holdings, Inc., together with its consolidated subsidiaries as a combined entity. Our fiscal year ends on December 31 of each calendar year.

TRUSTWAVE HOLDINGS, INC.

Trustwave is a leading provider of on-demand data security compliance solutions that enable businesses and other organizations of all sizes to efficiently achieve and maintain compliance with regulatory requirements and industry standards. Our compliance management solutions, including our easy-to-use software-as-a-service TrustKeeper^® offering, have helped hundreds of thousands of organizations simplify the complex process of validating compliance. Additionally, our broad suite of compliance enablement solutions remediates data security deficiencies, allowing our customers to achieve and maintain compliance in a cost effective manner. These solutions assist our subscribers in comprehensively securing their network infrastructure, data communications and sensitive information assets, protecting them against the increasing threats of unauthorized access, fraudulent activity and other intrusions or breaches. We have been successful in rapidly expanding our customer base across a broad range of industries as a result of our differentiated partner network, which is comprised of many of the world’s largest financial institutions and other organizations influential to the compliance and data security mandates of their customers.

Our data security compliance solutions can be applied to address many regulations and standards, including the Payment Card Industry data security standards, or “PCI,” the Health Insurance Portability and Accountability Act, or “HIPAA,” the Federal Information Security Management Act, or “FISMA,” and a number of other federal, state and international regulations and standards. To date, we have primarily focused on PCI compliance, as it is among the best defined and broadest reaching data security standards. Through this effort, we have become a leader in facilitating PCI compliance, helping organizations address the risks and challenges associated with payment card fraud and compromise. Financial institutions are generally responsible for the risk of payment card fraud or compromise and security breaches involving their payment card accepting customers to the extent they are unable to recover losses from them or other parties. In turn, many of these institutions rely on our knowledge and proprietary technology to help their customers validate, achieve and maintain compliance.

We believe data security compliance represents a large and growing addressable market, driven in part by PCI compliance. For example, MasterCard estimates that its payment cards were accepted at approximately 30 million locations worldwide as of December 31, 2010. We expect financial institutions to increasingly enforce PCI compliance among their payment card accepting customers. In addition, we believe that the number of locations where data is stored or transmitted, and consequently require protection, will continue to increase for financial transactions, as well as health care, government and other services.

Our solutions include our industry leading software-as-a-service, or “SaaS,” TrustKeeper compliance management offering along with a comprehensive suite of proprietary compliance enablement solutions. TrustKeeper and the TrustKeeper Agent assist organizations in validating compliance by analyzing, aggregating and reporting on prohibited data storage, systems configurations and security policy settings on subscribers’ systems in centralized or distributed information technology, or “IT,” environments. In addition, our compliance enablement offerings provide a comprehensive, integrated turnkey suite of data security solutions, including encryption, extensible threat management, security information and event management, network access control, web application firewalls and data loss prevention. These solutions help address vulnerabilities detected by TrustKeeper, allowing our customers to achieve and maintain compliance.

We serve customers of all sizes, from eight of the top ten Fortune 500 companies in 2010 to small- and medium-sized businesses and other organizations. Our customers include subscribers, which are businesses, government entities and other organizations that purchase our subscription services either directly or are provided our service through a member of our partner network, as well as purchasers of our professional services or perpetual-license products. Examples of our customers include financial services companies, franchised restaurants, hospitality chains, hospitals and physician networks, technology, media and telecommunications companies, educational organizations and retail operations.

We have reached many of our customers through our partner network, which is comprised of approximately 75 organizations influential to the compliance and data security mandates of their customers. Our PCI partner network includes many of the world’s leading financial institutions, major payment card companies, and other members of the payment and IT ecosystem, which we believe expands our global reach and reputation. Set forth below in alphabetical order and by the geography in which we primarily serve them is a sample of organizations that we believe are important participants within the payment and IT ecosystem with which we do business as a direct customer. The majority of these customers are also members of our partner network.


North America	American Express*	JPMorgan Chase*
	Banc of America Merchant Services*	MICROS Systems*
	Discover*	Moneris*
	EVO*	Sage Payment Solutions*
	Fifth Third Processing Solutions*	TSYS Merchant Solutions*
	First American Payment Systems*	U.S. Bank*
	First Data Corporation*	Visa
	Global Payments*	Wells Fargo*

Rest of World	Atos Worldline*	Nordea Bank*
	Barclays Capital Services	Redecard
	China UnionPay Data	Swedbank*
	Cielo	Transbank
	Commonwealth Bank of Australia*	WorldPay (UK) Limited*

* Indicates a member of our partner network

We selected the customers listed above on the basis that they are financial institutions or payment service providers supporting more than 50,000 payment card outlets or, with respect to American Express, Discover and Visa, on the basis that they are each a founding member of the organization that developed the PCI data security standards.

In addition to PCI, we plan to expand our partner network in health care, government services and other sectors, facilitating the distribution of our solutions that address relevant regulations and standards, such as HIPAA and FISMA.

As of March 31, 2011, we had over 900,000 TrustKeeper subscriptions, primarily consisting of payment card acceptance locations, the majority of which were identified by our partner network as requiring PCI compliance services. Each payment card acceptance location of a subscriber is generally counted as a separate TrustKeeper subscription when either one of our partners or the subscriber has initiated payment for our service. As of the same date, we estimate that there were approximately 6 million payment card acceptance locations within our existing PCI partner network. A number of our partners are in the midst of a multi-year effort to monitor and enforce PCI compliance among their payment card accepting customers, and in turn we expect the number of subscriptions to increase, although we do not expect this effort will result in all of them becoming subscribers and some may already be covered by our enterprise arrangements.

Our revenue increased from $58.3 million in 2008 to $73.1 million in 2009 and $111.5 million in 2010, and our net loss for each of those years was $2.0 million, $1.5 million and $4.6 million, respectively. In the same periods, our Adjusted EBITDA increased from $0.4 million in 2008 to $3.1 million in 2009 and $4.9 million in 2010. We believe Adjusted EBITDA is useful to investors in evaluating our operating performance. Adjusted EBITDA should not be considered as an alternative to net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP, or any other measure of financial performance calculated in accordance with GAAP. For a discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, see note 3 to the tables included in “Summary Historical and Pro Forma Consolidated Financial Data.”

Industry Background

We believe businesses, government entities and other organizations face a number of challenges in achieving and maintaining compliance with regulatory requirements and industry standards, including:


	•	increasing data security threats, which have led to a heightened regulatory and compliance environment;

	•	regulatory and compliance requirements that are becoming increasingly complex and challenging to achieve and maintain; and

	•	many existing compliance and data security solutions that are highly complex and expensive.

As a result, we believe there is an increasing need for on-demand, scalable, automated and cost-effective data security compliance solutions that can help these organizations address these challenges in real time and simplify the process for validating, achieving and maintaining compliance. According to International Data Corporation, or “IDC,” the total governance, risk and compliance infrastructure software market is expected to grow from $17.3 billion in 2009 to $34.5 billion in 2014, representing a compound annual growth rate of 14.8%. According to IDC, the software-as-a-service, or on-demand, software market is expected to grow from $13.1 billion in 2009 to $40.5 billion in 2014, representing a compound annual growth rate of 25.3%.

Our Solutions

Key differentiators of our solutions include:

Simplifying complex compliance processes. Our on-demand solutions simplify and automate complex compliance processes by facilitating completion of compliance assessments, automating the diagnosis of an organization’s security posture and providing easy-to-understand actionable information. Many of our other solutions are delivered as a service, also simplifying implementation and facilitating use, which is particularly important to organizations with limited IT resources and personnel.

Scalable and flexible. Our solutions are designed to satisfy our customers’ needs as their businesses grow and to address the needs of organizations with complex, geographically dispersed and heterogeneous IT infrastructures, regardless of size.

Cost-effective to achieve and maintain compliance. We provide our customers with many cost-effective solutions delivered as a service, eliminating much of the need for up-front infrastructure costs to achieve and maintain compliance. Our integrated solutions also reduce the need for in-house personnel resources and out-of-pocket costs to monitor and demonstrate on-going compliance.

Comprehensive and integrated solutions. We offer a broad suite of compliance solutions that typically work together in an integrated fashion to identify non-compliant areas as well as to remediate data security vulnerabilities.

Trusted brand. We are a leading provider of on-demand data security compliance solutions, endorsed by and marketed through many of the world’s largest, most trusted financial institutions and other well-known organizations with whom we partner to deliver our solutions.

Differentiated proprietary knowledge and technology. Our large, global customer footprint gives us visibility into existing and potential threats, which is enhanced by our SpiderLabs team, a leader in analyzing security threats and incident response. This allows us to proactively develop our solutions to address specific customer needs and protect against the latest security threats.

Our Business Model

We have developed a differentiated business model that has the following attributes:

Differentiated go-to-market strategy. We have developed a partner network comprised of a number of the world’s largest financial institutions, payment service providers and other organizations influential to the compliance and data security mandates of their customers. These organizations serve as differentiated and cost effective distribution partners for us, and we typically co-brand and co-market with these organizations to their customers.

On-demand delivery model. Many of our solutions are delivered on-demand, including our software-as-a-service TrustKeeper solution, which is offered through a subscription over the Internet using a multi-tenant architecture. This model allows us to quickly deliver a modular service to which organizations can easily subscribe without significant upfront capital investment or the requirement for professional services to integrate software or appliances into their environment.

Initiate and build upon subscriber relationships. We typically initiate a relationship with a subscriber through one of our network partners by offering our compliance management solution. We then build upon our relationship by offering our subscribers integrated compliance enablement solutions to cost-effectively enhance their security posture and help them achieve data security compliance.

Global delivery capabilities. As of March 31, 2011, we served customers in approximately 65 countries through employees and dedicated third-party support located in approximately 20 countries. We believe our multilingual, on-demand solutions allow us to efficiently serve organizations of all sizes worldwide.

Our Growth Strategy

The following are key elements of our growth strategy:

Grow subscriber base within existing partner network. We plan to grow our subscriber base globally by converting more of our PCI partner network payment card acceptance locations into TrustKeeper subscriptions. We estimate that, as of March 31, 2011, there were approximately 6 million payment card acceptance locations within our existing PCI partner network.

Build upon relationships with existing subscriber base. We believe that our compliance management solutions will continue to generate cross-selling opportunities to our installed base of our comprehensive suite of compliance enablement solutions as subscribers seek to remediate vulnerabilities identified by the compliance management process. In addition, we anticipate further expansion into the network of branches and franchises of our distributed enterprise customers.

Expand portfolio of new technologies. We expect to continue to develop and enhance our solutions to address specific customer needs and the latest security threats. Some of our products that are designed to address compliance with PCI can also be utilized by our customers to address compliance with certain requirements of other regulations and standards. We plan to leverage our expertise in addressing PCI compliance to further expand our offerings in other data security compliance regimes such as HIPAA and FISMA, among others.

Extend our partner network. We plan to continue to seek additional partners to reach more payment card acceptance locations worldwide. Additionally, we plan to develop partner networks in health care, government services and other sectors, facilitating the distribution of our solutions that address relevant regulations and standards.

Expand internationally. Our revenue from customers outside of our North America segment has grown from $10.4 million in 2008 to $16.8 million in 2010, an increase of 62%. We plan to increase our international presence, primarily by growing our presence in the approximately 65 countries in which we have customers.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including those highlighted in the section entitled “Risk Factors,” before investing in our common stock. Risks relating to our business include, among others, the following:


	•	our business and results of operations could be materially adversely affected if PCI is changed, cancelled, replaced or not enforced, new or different technologies that minimize the need for PCI are widely adopted, or we lose any of our PCI certifications;

	•	the loss of a significant member or group of members of our partner network, the failure to engage new partners or the decision by one of our partners to use our products less or compete against us could materially adversely affect our operations and sales;


	•	if we are unable to develop and maintain relationships with businesses, government entities and other organizations within our existing partner network that have not enrolled their customers into TrustKeeper, or whose customers have enrolled but have not become subscribers, our operating results may decline;

	•	we face intense competition in our market, both from larger, better-known companies and from more targeted competitors, and we may lack sufficient financial or other resources to maintain or improve our competitive position;

	•	we may not be able to compete effectively with companies that integrate or bundle products similar to ours with their other product offerings;

	•	if we are not successful in executing our strategy to increase our sales to larger enterprises, our results of operations may suffer; or

	•	our efforts to expand our product and service offerings beyond the PCI market may not succeed.

Recapitalization

We effected a one-for-four reverse stock split with respect to our outstanding Class A common stock and Class B common stock on July 22, 2011, and prior to the completion of this offering we will complete an internal recapitalization pursuant to which our outstanding shares of Class A common stock, Class B common stock, Series A-1 preferred stock, Series A-2 preferred stock and Series B preferred stock will be converted into a single class of common stock. In order to obtain the consent of the holders of our Series A preferred stock to convert their shares into common stock, we have agreed to make a one-time cash payment to such holders in an aggregate amount of approximately $7.8 million, which will be paid upon, and is subject to, the closing of this offering. For ease of reference, we collectively refer to our Series A-1 preferred stock, Series A-2 preferred stock and Series B preferred stock as our “preferred stock,” and to the conversion of all of our outstanding Class A common stock, Class B common stock and preferred stock into a single class of common stock and the associated payment to the holders of our Series A preferred stock as the “Recapitalization.” Because the one-for-four reverse stock split has been effected, we have presented all common share and common per-share data included in this prospectus after giving effect to such reverse stock split.

Upon completion of the Recapitalization, our authorized capital stock will consist of 150,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.10 per share. In connection with the reverse stock split, each outstanding option to purchase Class A common stock or Class B common stock and each outstanding warrant exercisable for shares of Class A common stock was adjusted appropriately to give effect to the reverse stock split, and in connection with the Recapitalization, each such option and warrant will relate to shares of our common stock. The number of common shares into which our preferred stock will be converted in connection with the Recapitalization will also be automatically adjusted to give effect to the reverse stock split.

Recent Developments

Financial results for periods after March 31, 2011 are not currently available. However, we expect to record between $32.5 million and $33.5 million in revenue for the three months ended June 30, 2011, compared to revenue of $26.7 million for the prior year period. Our actual revenue result for the three months ended June 30, 2011 may differ from our expectation set forth above, and such result is not necessarily indicative of the results that might be expected for any other interim period or for an entire fiscal year. Prior to the effectiveness of the registration statement of which this prospectus is a part, we will add disclosure to the prospectus to reflect our complete financial results for the six months ended June 30, 2011.

The preliminary financial data have been prepared by and are the responsibility of management. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has not audited, reviewed, compiled or performed any procedures and does not express an opinion or any other form of assurance with respect thereto.

Additional Information

The issuer of the common stock in this offering was originally incorporated as a Delaware corporation in 2005. Our corporate headquarters are located at 70 W. Madison Street, Suite 1050, Chicago, Illinois 60602. Our telephone number is (312) 873-7500. Our website address is www.trustwave.com. The information on our website is not deemed, and you should not consider such information, to be part of this prospectus.

THE OFFERING


Common stock offered		6,250,000 shares.


Common stock to be outstanding immediately after this offering		38,733,217 shares.


Option to purchase additional shares		937,500 shares.


Use of proceeds		We estimate that the net proceeds from this offering will be approximately $90.3 million, or approximately $104.2 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $16.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use substantially all of the net proceeds from this offering for general corporate purposes. We have not allocated the net proceeds from this offering for any specific purpose at this time. See “Use of Proceeds.”


Risk factors		Investing in shares of our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11 of this prospectus for a discussion of factors you should carefully consider before investing in shares of our common stock.

NASDAQ Global Market symbol		“TWAV.”

Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock outstanding immediately after this offering:


	•	gives effect to the one-for-four reverse stock split and subsequent Recapitalization, including the conversion of our outstanding Class A common stock, Class B common stock and preferred stock into a single class of common stock;


	•	assumes the effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws;


	•	excludes: (i) 3,512,862 shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $5.06 per share as of March 31, 2011; (ii) 410,021 shares of our common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $6.57 per share as of March 31, 2011; (iii) 101,125 shares of our common stock issuable upon the exercise of outstanding stock options granted subsequent to March 31, 2011 at a weighted average exercise price of $12.12 per share; (iv) 922,847 shares of our common stock reserved for grants under our 2001 Stock Incentive Plan (although no further grants will be made under such plan following this offering); (v) 2,770,000 shares of our common stock reserved for future grants under our 2011 Cash and Equity Incentive Plan, or the “2011 Incentive Plan,” that we adopted in connection with this offering, which includes an aggregate of 317,500 shares of common stock issuable upon the exercise of stock options that will be granted to certain members of our management in connection with this offering and to certain of our directors in connection with their appointment to our board; and (vi) 300,000 shares of our common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, or the “ESPP,” that we adopted in connection with this offering;


	•	includes an aggregate of 230,000 shares of restricted stock that will be granted upon the completion of this offering to certain of our directors in connection with their appointment to our board; and


	•	assumes: (i) no exercise by the underwriters of their option to purchase up to 937,500 additional shares from us; and (ii) an initial public offering price of $16.00 per share, which is the midpoint of the initial public offering price range indicated on the cover of this prospectus.

SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following tables summarize our financial data as of the dates and for the periods indicated. We have derived the summary consolidated financial data for the years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements for such years and for the three months ended March 31, 2010 and 2011 from our unaudited consolidated financial statements for such periods. Our audited consolidated financial statements as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 have been included in this prospectus. Our unaudited consolidated financial statements as of March 31, 2011 and for the three months ended March 31, 2010 and 2011 have been included in this prospectus.

The unaudited pro forma as adjusted consolidated statement of operations data set forth below for the year ended December 31, 2010 gives effect to (i) the acquisitions of Intellitactics, Inc. or “Intellitactics,” and Breach Security, Inc., or “Breach Security,” (ii) the Recapitalization, (iii) our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expense payable by us and (iv) additional stock compensation costs related to grants of awards made in connection with this offering, as if all such transactions had occurred on January 1, 2010. The operating results for Intellitactics and Breach Security are included in our statement of operations data for the year ended December 31, 2010 from their acquisition dates of March 1, 2010 and June 18, 2010, respectively. The unaudited pro forma as adjusted consolidated statement of operations data set forth below for the three months ended March 31, 2011 gives effect to (i) the Recapitalization, (ii) our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expense payable by us and (iii) additional stock compensation costs related to grants of awards made in connection with this offering, as if all such transactions had occurred on January 1, 2011.

The selected unaudited pro forma balance sheet data set forth below as of March 31, 2011 gives effect to the Recapitalization, and the selected unaudited pro forma as adjusted balance sheet data set forth below as of March 31, 2011 also gives effect to our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, in each case as if such transactions had occurred on such date.

The unaudited pro forma consolidated financial data is provided for informational purposes only, does not necessarily present our financial position or results of operations as they would have been if the companies involved had constituted one entity for the period presented and is not necessarily indicative of our future results of operations or the results that might have occurred if the forgoing transactions had been consummated on the indicated date.

The summary historical and pro forma consolidated data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Unaudited Pro Forma Consolidated Financial Data,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto and other financial data included elsewhere in this prospectus.


	For the Year Ended December 31,												For the Three Months Ended March 31,
	2008			2009			2010						2010			2011
										Pro Forma									Pro Forma
							Actual			as Adjusted			Actual			Actual			as Adjusted
	(in thousands, except share and per share data)

Revenue
Subscription revenue	$	44,356		$	56,708		$	81,677		$	84,846		$	16,829		$	23,448		$	23,448
Professional services		13,219			15,056			19,639			20,112			3,342			5,721			5,721
Product sales		753			1,343			10,187			11,057			1,518			2,229			2,229

Total revenue		58,328			73,107			111,503			116,015			21,689			31,398			31,398

Cost of sales
Service delivery, excluding depreciation and amortization		22,525			26,431			33,415			34,499			7,406			9,363			9,367
Product sales, excluding depreciation and amortization		440			481			1,715			1,794			273			508			508
Depreciation and amortization		591			718			1,403			1,468			266			450			450

Total cost of sales		23,556			27,630			36,533			37,761			7,945			10,321			10,325

Gross profit		34,772			45,477			74,970			78,254			13,744			21,077			21,073

Operating expenses
Product development		6,749			9,146			20,112			22,096			3,744			6,194			6,207
Sales and marketing		14,059			17,388			29,264			32,185			5,753			7,122			7,139
General and administrative		16,030			20,511			29,602			34,791			6,491			7,002			7,319

Total operating expenses		36,838			47,045			78,978			89,072			15,988			20,318			20,665

Income (loss) from operations		(2,066	)		(1,568	)		(4,008	)		(10,818	)		(2,244	)		759			408
Interest expense, net		(151	)		(112	)		(87	)		(84	)		(36	)		(8	)		(8	)
Other income (loss), net		193			(304	)		(155	)		80			(106	)		18			18
Gain on acquisition		—			552			—			—			—			—			—

Income (loss) before income taxes		(2,024	)		(1,432	)		(4,250	)		(10,822	)		(2,386	)		769			418
Income tax expense		(22	)		(114	)		(372	)		(395	)		(78	)		(110	)		(110	)

Net (loss) income	$	(2,046	)	$	(1,546	)	$	(4,622	)	$	(11,217	)	$	(2,464	)	$	659		$	308

Cumulative annual preferred dividends⁽¹⁾	$	(1,441	)	$	(1,800	)	$	(1,800	)		—			(450	)		(450	)		—

Net (loss) income attributable to common shareholders	$	(3,487	)	$	(3,346	)	$	(6,422	)	$	(11,217	)	$	(2,914	)	$	209		$	308

Net (loss) income per common shares:
Basic⁽²⁾	$	(0.20	)	$	(0.19	)	$	(0.30	)	$	(0.31	)	$	(0.15	)	$	0.01		$	0.01
Diluted⁽²⁾	$	(0.20	)	$	(0.19	)	$	(0.30	)	$	(0.31	)	$	(0.15	)	$	0.01		$	0.01
Weighted average shares outstanding:
Basic⁽²⁾		17,275			17,835			21,681			35,844			19,829			22,946			37,199
Diluted⁽²⁾		17,275			17,835			21,681			35,844			19,829			25,273			40,113
Other Data:
Adjusted EBITDA⁽³⁾	$	407		$	3,079		$	4,856		$	113			(610	)		2,537		$	2,537
Net cash provided by (used in):
Operating activities		671			20,943			(10,212	)					(5,495	)		4,646
Investing activities		(2,226	)		(2,292	)		8,581						2,410			(882	)
Financing activities		6,668			(1,165	)		(7,495	)					(6,375	)		190
Depreciation and amortization		2,136			3,012			4,970			5,376			1,021			1,517			1,517
Capital expenditures		1,786			2,743			4,273						333			882


	As of March 31, 2011
							Pro Forma
	Actual			Pro Forma			as Adjusted
	(in thousands)

Balance Sheet Data:
Cash and cash equivalents	$	18,492		$	18,492		$	100,671
Working capital⁽⁴⁾		(676	)		(8,498	)		81,503
Total assets		120,175			120,175			202,354
Total debt		—			—			—
Total convertible redeemable preferred stock⁽⁵⁾		21,684			—			—
Total stockholders’ equity		37,979			51,841			141,842


(1)		Represents the cumulative annual dividends payable on our outstanding preferred stock. Such dividends are payable only upon liquidation, dissolution or winding up of the Company or when and if declared by our board of directors. Our board of directors has not declared any dividends on our preferred stock and all accumulated dividends on such preferred stock will be extinguished in connection with the Recapitalization. For additional information regarding the terms of our existing preferred stock, see notes 13 and 14 to our audited consolidated financial statements for the years ended December 31, 2008, 2009 and 2010 and notes 11 and 12 to our unaudited consolidated financial statements for the three months ended March 31, 2010 and 2011 included elsewhere in this prospectus.


(2)		Net (loss) income per common share (basic and diluted) and the weighted average number of shares used to compute net (loss) income per common share (basic and diluted) for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2010 and 2011 on an actual basis have been calculated giving effect to the one-for-four reverse stock split. Pro forma as adjusted net (loss) income per common share (basic and diluted) and the weighted average number of shares gives effect to the Recapitalization and issuance and sale of shares in this offering.


(3)		We present Adjusted EBITDA, a non-GAAP measure, in this prospectus to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures can provide alone. Our board of directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expectations and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives.

		We believe Adjusted EBITDA may be useful to investors in comparing our operating performance consistently over time as it removes from our operating results the impact of our capital structure, asset base (primarily depreciation and amortization), items outside the control of the management team (such as taxes or changes in foreign currency exchange rates) and other non-cash (purchase accounting adjustments) or non-recurring items, including the impact of non-cash stock-based compensation expense.


		We define Adjusted EBITDA, a non-GAAP financial measure, as net income (loss) before income tax expense (benefit), depreciation and amortization, net interest expense, stock-based compensation, gain (loss) on foreign currency exchange, severance and transition costs, and acquisition, transaction and integration expenses.


		The use of Adjusted EBITDA has limitations as an analytical tool and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income (loss). Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

		To properly and prudently evaluate our business, we encourage you to review our audited consolidated financial statements included elsewhere in this prospectus and the reconciliation to Adjusted EBITDA from net loss, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to

(footnotes continued on following page)


		assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.


	For the Year Ended December 31,												For the Three Months Ended March 31,
	2008			2009			2010						2010			2011
										Pro Forma									Pro Forma
							Actual			as Adjusted			Actual			Actual			as Adjusted
	(unaudited)
	(in thousands)

Net (loss) income	$	(2,046	)	$	(1,546	)	$	(4,622	)	$	(11,217	)	$	(2,464	)	$	659		$	308
Income tax expense		22			114			372			372			78			110			110
Depreciation and amortization		2,136			3,012			4,970			5,376			1,021			1,517			1,517
Interest expense, net		151			112			87			87			36			8			8
Stock-based compensation expense^(a)		285			278			1,026			2,472			137			293			644
(Gain) loss on foreign currency exchange		(178	)		259			232			232			84			(50	)		(50	)
Severance and transition costs^(b)		—			948			1,268			1,268			350			—			—
Acquisition, transaction and integration expenses^(c)		37			(98	)		1,523			1,523			148			—			—

Total adjustments		2,453			4,625			9,478			11,330			1,854			1,878			2,229

Adjusted EBITDA	$	407		$	3,079		$	4,856		$	113		$	(610	)	$	2,537		$	2,537


	(a)	Represents non-cash compensation expense.

	(b)	Represents severance and transition payments made to employees that were terminated as a result of acquisitions and to certain members of our senior management team whose positions were restructured in contemplation of this offering.

	(c)	Represents costs and expenses associated with acquisitions, transactions and integration activities during the period, including the following:


	For the Year Ended December 31,									For the Three Months Ended March 31,
	2008		2009			2010				2010		2011
								Pro Forma						Pro Forma
						Actual		as Adjusted		Actual		Actual		as Adjusted
	(unaudited)
	(in thousands)

Acquisition costs⁽ⁱ⁾	$	3	$	271		$	261	$	261	$	140		—		—
Transaction costs for potential acquisitions⁽ⁱⁱ⁾		34		5			494		494		—		—		—
Financial reporting costs for acquired companies⁽ⁱⁱⁱ⁾		—		113			195		195		8		—		—
Lease abandonment^(iv)		—		—			342		342		—		—		—
Post acquisition purchase accounting adjustments^(v)		—		65			231		231		—		—		—
Gain on acquisition^(vi)		—		(552	)		—		—		—		—		—

Total acquisition, transaction and integration expenses	$	37	$	(98	)	$	1,523	$	1,523	$	148		—		—


	(i)	Represents legal fees incurred in connection with acquisitions during the period.

	(ii)	Represents legal, accounting and other consulting fees incurred in connection with transactions that were not completed.

	(iii)	Represents valuation services and audits of acquired companies.

	(iv)	Represents the lease abandonment accrual for our facility in Carlsbad, California.

	(v)	Represents certain adjustments relating to the purchased assets and assumed liabilities of Mirage Networks, Inc., BitArmor Systems, Inc. and Breach Security, Inc. which we identified subsequent to finalizing the purchase accounting for such acquisitions.

	(vi)	Represents the gain on acquisition of Mirage Networks, Inc.


(4)		Working capital is the amount by which current assets exceed current liabilities.

(5)		Our Series A-1 preferred stock and Series A-2 preferred stock can be redeemed upon the written request of the holders of two-thirds of our Series A-1 preferred stock or Series A-2 preferred stock, respectively, at an amount equal to their respective liquidation preferences. Since this redemption feature is not in our control, and does not have a date certain or event certain redemption requirement, we have classified our Series A-1 preferred stock and Series A-2 preferred stock as temporary equity on our consolidated balance sheet. For additional information regarding the terms of our preferred stock, see note 14 to the notes to our consolidated financial statements included elsewhere in this prospectus.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. Before deciding whether to invest in our common stock, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes.

Risks Relating to Our Business

A substantial portion of our revenue is derived from our solutions that help organizations validate, achieve and maintain PCI compliance and, as a result, our business and results of operations could be materially adversely affected if PCI is changed, cancelled, replaced or not enforced, new or different technologies that minimize the need for PCI are widely adopted, or we lose any of our PCI certifications.

We generate a majority of our revenues from our solutions that help organizations achieve and maintain compliance with PCI, and we expect that will continue for the foreseeable future. Our PCI compliance solutions, including our TrustKeeper solution, are based on the PCI security standards developed and maintained by the PCI Security Standards Council, or the “PCI Council.” The PCI Council may adopt significant changes to PCI with little or no notice, including changes that could make PCI more or less onerous for businesses. Governments may also adopt laws or regulations that conflict with PCI. If we are unable to timely adapt our compliance solutions to such changes, our subscribers and members of our partner network may lose confidence in our products and could switch to products offered by our competitors. If security standards are changed in a manner that makes them less onerous, our subscribers and members of our partner network may view PCI compliance as less critical to their businesses, and our partner network members may be less aggressive in requiring validation with PCI and in recommending our products to their customers.

Our growth strategy depends to a significant extent on our ability to cross-sell our compliance enablement solutions to subscribers who utilize our compliance management solutions. If the PCI Council were to prohibit or limit us from cross-selling our enablement solutions to subscribers who utilize our compliance management solutions, we would be unable to pursue a significant aspect of our growth strategy, which could have a material adverse effect on our growth prospects and our results of operations.

The introduction of products and services embodying new technologies could render our existing products and services obsolete and unmarketable. Other payment security technologies exist or could be developed in the future, and our business could be materially negatively affected if such technologies are widely adopted. For example, businesses in the United Kingdom utilize the “chip and pin” smartcard payment system in which payment cards are embedded with a microchip and are authenticated automatically using a personal identification number. This technology has been adopted in other countries, particularly in Europe, and we expect that this trend will continue. Although we believe the “chip and pin” technology does not replace or eliminate the need for our compliance solutions, customers and potential customers may nevertheless view our solutions as less critical to their businesses. Other security technologies not based on PCI could also be developed and adopted by businesses, which could result in our customers switching to those alternative technologies. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business and financial condition could be materially adversely affected.

In addition, domestic or international jurisdictions could adopt new laws or regulations that conflict with or minimize the importance of PCI. If we are unable to timely and effectively respond to any changes in the laws or regulations governing data security compliance, our business could be negatively affected.

Another important aspect of our growth strategy is the expansion of our international operations. Although PCI applies globally, compliance may be enforced less aggressively in international jurisdictions as compared to the U.S. or businesses in international jurisdictions may be less sensitive to data security compliance. As a result, we

could expend considerable time and resources on our international growth strategy without any assurances of success, or our international sales may grow more slowly than we expect. In addition, international jurisdictions may have laws or regulations that conflict with PCI, and we may be unable to adapt our solutions to such laws or regulations, which could limit our opportunities for international expansion.

We also hold certain certifications under the requirements of the PCI Council, including “Qualified Security Assessor,” “Approved Scanning Vendor” and “Qualified PCI Forensic Investigator.” If we were to lose any or all of these certifications, whether due to changes in PCI, the failure of our products to comply with PCI or for any other reason, our ability to operate our business could be materially adversely affected.

The loss of a significant member or group of members of our partner network, the failure to engage new partners or the decision by one of our partners to use our products less or compete against us, could materially adversely affect our operations and sales.

We derive a substantial portion of our revenue from our relationships with our partner network, which includes financial institutions, payment service providers and other organizations influential to the compliance and data security mandates of their customers. While our partner network is comprised of approximately 75 organizations, our five largest partner network members accounted for 15.7% our of revenue during 2010, and one member of our partner network, U.S. Bank, accounted for 10.0% of our revenue during 2010. Historically, members of our partner network have also introduced or referred us to other customer opportunities, the revenue from which we do not attribute to such members. The amount of our revenue that we derive from our partner network may be higher if these referrals or indirect relationships are considered, but we are currently unable to reliably attribute such revenue to particular members of our partner network. For the foreseeable future, we expect to continue to depend on a relatively small number of organizations in our partner network for a significant percentage of our revenue.

Our agreements with the members of our partner network are non-exclusive, and if they choose to use our products less or place greater emphasis on compliance solutions offered by our competitors, or if they otherwise fail to enroll their customers in our compliance solutions, our ability to grow our sales and customer base may be adversely affected. The unforeseen loss of one or more of our major partners, or the decision of one or more of our major partners to emphasize our competitors’ products or develop their own products, could seriously harm our business.

In addition, our continued revenue growth will depend in part on our ability to expand our partner network. Engaging new partners requires the expenditure of a considerable amount of time and resources by our management, sales force and other key employees, and we cannot assure you that our efforts will prove successful. To the extent we are unable to enter into arrangements with new partners, our ability to sell our solutions to new customers will be harmed, and our results of operations and financial condition could be negatively affected.

If we are unable to develop and maintain relationships with businesses, government entities and other organizations within our existing partner network that have not enrolled their customers into TrustKeeper, or whose customers have enrolled but have not become subscribers, our operating results may decline.

Our growth strategy depends to a significant extent on our ability to enroll our existing partner network’s customers into our TrustKeeper solution. We depend on our partners to help us identify these potential enrollees, enroll them in TrustKeeper and encourage them to become subscribers. We and our partners may be unsuccessful in obtaining new enrollees or converting enrollees to subscribers, which could negatively affect our results of operations.

We face intense competition in our market, both from larger, better-known companies and from more targeted competitors; we may lack sufficient financial or other resources to maintain or improve our competitive position.

We compete with a large and broad array of established and emerging compliance and data security vendors in a highly fragmented and competitive environment. Our principal competitors vary across our suite of data security solutions and between our enterprise and small- and medium-sized business customers. We principally compete with hundreds of smaller, private companies and, to a lesser extent, a more limited number of larger, more

established companies. A few of our larger competitors have a broad array of compliance enablement solutions and other security software products and may be able to offer products or functionality similar to ours at a more attractive price by integrating or bundling them more effectively than we can. Our competitors may attempt to further expand their presence in the data security compliance market and compete more directly against one or more of our products, services or solutions.

Some of these existing and potential competitors may enjoy competitive advantages such as:


	•	greater name recognition and longer operating histories;

	•	larger sales and marketing budgets and resources;

	•	broader distribution and established relationships with network partners and customers;

	•	access to larger customer bases;

	•	greater customer support resources;

	•	greater resources to make acquisitions;

	•	lower labor and development costs or increased economies of scale; and

	•	substantially greater financial, technical and other resources.

Some of our competitors have substantially larger installed customer bases beyond the data security compliance market and leverage their relationships based on other products, services or solutions or incorporate data security functionality into their existing products or services in a manner that may discourage users from purchasing our products or solutions. These larger competitors may also have more diversified businesses that allow them to better withstand significant reduction in capital spending by customers in a number of markets.

Conditions in our markets could change rapidly and significantly as a result of technological advancements or market consolidation. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources and product and services offerings in the markets we address. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, and more readily develop and expand their product and service offerings. These competitive pressures in our market or our failure to compete effectively may adversely affect our operating results and market share.

We may not be able to compete effectively with companies that integrate or bundle products similar to ours with their other product offerings, and consolidation within our industry may heighten this risk.

Many large, integrated software companies offer suites of products that include software applications for security and compliance management. In addition, hardware vendors, including diversified, global concerns, offer products that address the security and compliance needs of certain enterprises that comprise our target market. Further, several companies currently sell software products that our customers and potential customers have broadly adopted, providing them a substantial advantage when they sell products that perform functions substantially similar to some of our products. Competitors that offer a large array of security or software products may be able to offer products or functionality similar to ours at a more attractive price than we can by integrating or bundling them with their other product offerings. Consolidation in our industry increases the likelihood of competition based on integration or bundling. Customers may also increasingly seek to consolidate their enterprise-level software purchases with a small number of larger companies that can purport to satisfy a broad range of their requirements. If we are unable to sufficiently differentiate our products from the integrated or bundled products of our competitors, such as by offering enhanced functionality, performance or value, we may see a decrease in demand for our products, which would adversely affect our business, operating results and financial condition. Similarly, if customers seek to concentrate their software purchases with a few large providers, we may be at a competitive disadvantage.

Mergers, acquisitions or consolidations by and among actual and potential competitors present heightened competitive challenges to our business. The consolidation in our industry increases the likelihood of competition based on integration or bundling, particularly where competitors’ products and offerings are effectively integrated, and we believe that consolidation in our industry may increase the competitive pressures we face on all our products. If we are unable to sufficiently differentiate our products from the integrated or bundled products of our competitors, such as by offering enhanced functionality, performance or value, we may see a decrease in demand for those products, which would adversely affect our business, operating results and financial condition. Further, it is possible that continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized firms and consequently customers’ willingness to purchase from such firms. Similarly, if customers seek to concentrate their software purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage notwithstanding the superior performance that we believe our products can deliver.

If we are not successful in executing our strategy to increase our sales to larger enterprises, our results of operations may suffer.

Part of our growth strategy is to increase sales of our compliance solutions to enterprise customers. Sales to enterprise customers involve risks that may not be present, or that are present to a lesser extent, with sales to small- and medium-sized organizations. These risks include:


	•	increased competition from larger competitors that traditionally target enterprises, service providers and government entities and that may already have purchase commitments from those customers;

	•	increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

	•	more stringent requirements in our support service contracts, including stricter support response times, and increased penalties for any failure to meet support requirements; and

	•	longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer who elects not to purchase our products and services.

Large enterprises often undertake a significant evaluation process that results in a lengthy sales cycle. We may spend substantial time, effort and money in our sales efforts without being successful in producing any sales. In addition, product and service purchases by enterprises are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Finally, enterprises typically have longer implementation cycles, require greater product functionality and scalability and a broader range of services (including design services), demand that vendors such as us take on a larger share of risks, sometimes require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility. All of these factors can add further risk to business conducted with these customers. If sales expected from a large customer for a particular quarter are not realized in that quarter or at all, our business, operating results and financial condition could be materially adversely affected.

Our efforts to expand our product and service offerings beyond the PCI market may not succeed.

One aspect of our growth strategy is the expansion of our partner network in health care and government services in order to facilitate the distribution of solutions that address regulations and standards other than PCI, such as HIPAA and FISMA. Although some of our products that are designed to address compliance with PCI can also be utilized by our customers to address certain requirements of other regulations and standards such as HIPAA and FISMA, to date we have not developed any products solely designed for such use. Our experience with compliance solutions for such regulations and standards is limited. This strategy will likely require us to invest a significant amount of time and resources with no assurances of success. We believe that our cash and cash equivalents together with cash flows from operations will be sufficient to meet our contemplated capital expenditures in this regard. Our product and service offerings for non-PCI markets may not be adopted by potential customers or may otherwise fail to achieve commercial success. In addition, we may be unable to develop a partner network for these solutions similar to the network we have developed for our PCI compliance solutions. If we are not successful in executing on

this aspect of our growth strategy, our business, operating results and financial condition could be materially adversely affected.

Defects or vulnerabilities in our products or services or the failure of our products to adequately prevent a data security breach or protect data assets could harm our reputation and sales of our products and services and expose us to liability for losses.

Because our products are complex, undetected errors, failures or bugs may occur, especially when products are first introduced or when new versions are released despite our efforts to test those products and enhancements prior to release. Defects, errors or vulnerabilities may make our products susceptible to hacking or electronic break-ins or otherwise cause them to fail to help secure data. Any such failures may temporarily or permanently expose our customers’ data, leaving their data unprotected against the latest security threats. We may not be able to correct defects, errors, vulnerabilities or failures promptly, or at all.

In addition, our products or services could be perceived to be ineffective for a variety of reasons outside of our control. Hackers could circumvent our customers’ security measures, and customers may misuse our products resulting in a security breach or perceived product failure. We provide an enterprise-grade security compliance solution that integrates with a variety of other elements in a customer’s IT and security infrastructure, and we may receive blame for a security breach that was the result of the failure of one of the other elements. The occurrence of a breach, whether or not caused by our products, could delay or reduce market acceptance of our products, and have an adverse effect on our business and financial performance, and any necessary revisions to our products may cause us to incur significant expenses.

Any defects, errors, vulnerabilities or failures in our products or services could result in:


	•	expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work-around errors or defects or to address and eliminate vulnerabilities;

	•	loss of existing or potential partners or customers;

	•	loss or disclosure of confidential information or our proprietary technology;

	•	delayed or lost revenue;

	•	delay or failure to attain market acceptance;

	•	lost market share;

	•	negative publicity, which will harm our reputation; and

	•	litigation, regulatory inquiries or investigations that may be costly and harm our reputation.

In addition, an actual or perceived security breach of the data of one of our customers or our own systems, regardless of whether the breach is attributable to the failure of our products to prevent the security breach, could adversely affect the market’s and our customers’ perception of us as a leading data security compliance company or of our security products and services. Such an occurrence could result in negative press coverage and negatively affect our reputation. Any reputational harm to our company or our brand, or to any of our security products and services, may result in the loss of existing customers or make it more difficult for us to engage new customers.

With respect to enterprise customers, our qualified security assessors could also unintentionally provide erroneous compliance validations. If that were to occur, we could be exposed to liability, suffer reputational damage or, if we do not timely rectify the issue, be placed on a remediation list by PCI or lose or Qualified Security Assessor certification.

Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. In addition, some of our customer agreements may require us to indemnify our customers for any claims or losses resulting from defects, errors or vulnerabilities in, or infringement by, our products. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance

coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.

If we fail to timely update our products in response to new security threats or to detect security attacks, our customers’ systems and data could be compromised.

The threats facing our customers are constantly evolving and the techniques used by attackers to access or sabotage data change frequently. Our signature operations team develops signatures for new and emerging malicious code and malware. When incorporated into certain of our products, the signatures identify malicious code or malware and prevent the threat from affecting our customer’s systems and data. If we fail to timely update signatures, such that new or modified malicious code or malware are not detected by our products, our customers who utilize those products may suffer a data security breach, which could cause damage to their network and systems and loss of their data.

In addition, our teams that support our compliance enablement solutions provide real-time threat monitoring and detection for our customers. If we fail to discover a security attack against a customer, whether due to defects or vulnerabilities in our systems or our failure to timely update our threat protection systems in response to new threats, or fail to notify a customer of an attack, such customer’s network could be compromised, potentially resulting in damage to their network and systems and loss of their data.

Any such security incidents could result in the loss of customers or partners and harm our brand and reputation, which could have a material adverse effect on our business and results of operations.

If our internal network system is compromised by computer hackers, public perception of our security products and services will be harmed.

We will not succeed unless the marketplace is confident that we provide effective security protection. Because we provide security products, we may be a more attractive target for attacks by computer hackers. If an actual or perceived breach of network security occurs in our internal systems, it could adversely affect the market perception of our products and services, and may expose us to the loss of information, litigation and possible liability. In addition, such a security breach could impair our ability to operate our business, including our ability to provide support services to our customers. If this happens, our revenue could decline and our business could suffer.

Damage or disruptions to our facilities, including our corporate headquarters and third-party data center hosting facility, could impair the delivery of our products and services and materially adversely affect our business, operating results and financial condition.

Most of our sales, finance and administrative operations, and a portion of our development operations, are conducted at our corporate headquarters in Chicago, Illinois. Although we take precautions to safeguard our Chicago facility, including through physical security measures, insurance, security procedures, health and safety protocols and off-site back up of computer data, any loss of or damage or disruption to this facility could harm our ability to timely and effectively meet our customers’ data security compliance requirements, which in turn could materially adversely affect our business, operating results and financial condition.

In addition, we currently serve a substantial portion of our customers from a third-party data center hosting facility. As part of our current disaster recovery arrangements, our production environment and all of our business critical data is replicated in near real-time to our secondary data center in our corporate headquarters. Any damage to, or failure of, our data center hosting facility or recovery facility could result in interruptions in our products and services. As we add data centers and add capacity in our existing primary data center, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Interruptions in our service may reduce our revenue and harm our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable. Despite precautions taken at our third-party data center hosting facility, the occurrence of a natural disaster or an act of terrorism, a decision to close the facility without adequate notice or other unanticipated problems at that facility could result in lengthy interruptions in our service.

We cannot be certain that our development activities will be successful or will not incur delays or cost overruns.

While our management team is committed to enhancing our current product and services offerings and introducing innovative new products and services, we cannot be certain that our development activities will be successful or that we will not incur delays or cost overruns. Furthermore, we may not have sufficient financial resources to identify and develop new technologies and bring product enhancements or new products and services to market in a timely and cost effective manner. New technologies and product enhancements could be delayed or cost more than we expect, and we cannot ensure that any such products or services will be commercially successful if and when they are introduced.

The data security compliance industry is rapidly evolving and the complex technology integrated in our products makes them difficult to develop. If we do not accurately predict, prepare for and respond promptly to technological and market developments and changing customer needs and develop corresponding products, our competitive position and prospects will be harmed.

Our future success depends on our ability to respond to the rapidly changing needs of our customers by developing or introducing new products, product upgrades, services and solutions in a timely manner. We have in the past incurred, and will continue to incur, development expenses as we strive to remain competitive. New product development and introduction involves a significant commitment of time and resources and is subject to a number of risks and challenges including:


	•	managing the length of the development cycle for new products and product enhancements;

	•	adapting to emerging and evolving industry standards and to technological developments by our competitors and customers;

	•	entering into new or unproven markets with which we have limited experience;

	•	managing new product and service strategies;

	•	integrating acquired products and technologies;

	•	trade compliance issues affecting our ability to ship new or acquired products;

	•	protecting our intellectual property and other proprietary rights;

	•	developing or expanding efficient sales channels and partners; and

	•	obtaining sufficient licenses to technology and technical access from operating system software vendors on reasonable terms to enable the development and deployment of interoperable products, including source code licenses for certain products with deep technical integration into operating systems.

In addition, the data security compliance industry is expected to continue to evolve rapidly. Many of our customers operate in dynamic and rapidly changing markets that require them to continuously evolve their IT infrastructure, including adding numerous network access points and adapting increasingly complex enterprise networks, integrating a variety of hardware, software applications, operating systems and networking protocols. In addition to the rapidly changing network environments, computer hackers and others who try to attack networks are employing increasingly sophisticated techniques to gain access to and attack systems and networks. In order to remain competitive, we need to accurately anticipate changes in IT infrastructure that our customers will deploy, the security vulnerabilities of such infrastructure as well as likely attack techniques, and to continue to develop and introduce solutions that successfully address the evolving threats while minimizing the impact on IT infrastructure performance.

Although the market expects rapid development and commercial introduction of new products or product enhancements to respond to changing infrastructure and evolving threats, the development of these products is difficult and the timeline for their release and availability can be uncertain. We have in the past and may in the future experience unanticipated delays in the availability of new products and services and fail to meet previously announced timetables for such availability. If we do not quickly respond to the rapidly changing and rigorous needs

of our customers by timely developing and releasing new products and services or enhancements that can respond adequately to new security threats, our competitive position and business prospects could be materially harmed.

If our new products and product enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.

We spend substantial amounts of time and money to develop new products or enhanced versions of our existing products to integrate additional features, improved functionality or other enhancements in order to meet our customers’ rapidly evolving demands for data security compliance in our highly competitive industry. When we develop a new product or an enhanced version of an existing product, we typically incur expenses and expend resources upfront to market, promote and sell the new offering. Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market.

Our new products or product enhancements could fail to attain sufficient market acceptance for many reasons, including:


	•	delays in releasing our new products or enhancements to the market;

	•	failure to accurately predict changes in the laws, regulations and industry standards applicable to digital data, particularly payment card processing data;

	•	failure to adapt the functionality of our products in a timely fashion in response to changes in laws, regulations and industry standards;

	•	inability to interoperate effectively with the networks or applications of our prospective customers;

	•	inability to protect against new types of attacks or techniques used by hackers;

	•	defects, errors or failures;

	•	negative publicity about their performance or effectiveness;

	•	introduction or anticipated introduction of competing products by our competitors;

	•	easing of regulatory requirements around security; and

	•	reluctance of customers to purchase products incorporating open source software.

If our new products or enhancements do not achieve adequate acceptance in the market, our competitive position will be impaired, our revenue will be diminished and the effect on our operating results may be particularly acute because of the significant research, development, marketing, sales and other expenses we incurred in connection with the new product or enhancement.

If we fail to effectively manage our growth, our business and operating results could be harmed.

We have experienced, and we expect to continue to experience, rapid growth in our operations, which will continue to place significant demands on our management, employees and operational and financial infrastructure. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, and we must maintain the beneficial aspects of our corporate culture. In particular, we intend to continue to make substantial investments to expand our product development, sales and general and administrative organizations, and our international operations. To attract top talent, we have had to offer, and believe we will need to continue to offer, highly competitive compensation packages. The risks of over-hiring or over-compensating and the challenges of integrating a rapidly growing employee base into our corporate culture may be exacerbated by our international expansion. Additionally, we may not be able to hire new employees, particularly product development specialists and sales personnel, quickly enough to meet our needs. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and operating results could be adversely affected.

Additionally, if we do not effectively manage the growth of our business and operations, the quality and effectiveness of our solutions could suffer, which could negatively affect our brand, operating results and overall business. To effectively manage this growth, we will need to continue to improve our operational, financial and management controls, and our reporting systems and procedures by, among other things:


	•	improving our IT infrastructure to maintain the effectiveness of our solutions;

	•	enhancing our internal controls to ensure timely and accurate reporting of all of our operations; and

	•	appropriately documenting our IT systems and our business processes.

These systems enhancements and improvements will require significant capital expenditures and allocation of management and employee resources, and there are no assurances that any enhancements or improvements will be sufficient to keep up with our growth. If we fail to implement these enhancements and improvements effectively, our ability to manage our expected growth and comply with the rules and regulations that are applicable to public companies will be impaired.

We do not expect that our revenue growth will continue at historical rates.

Over the last five years, our net revenue has grown at a compound annual growth rate of 43% and, for the year ended December 31, 2010, we reported total revenue of $111.5 million, representing an increase of 53% and 91% as compared to the years ended December 31, 2009 and December 31, 2008, respectively. Although we believe our revenue will continue to increase in the near term as we implement our growth strategy and benefit from the increasing demand for data security compliance solutions and the key differentiators of our solutions, we do not expect that our revenue growth will continue at these historical rates due, in part, to the increasing size of our revenue base that will be used for comparison purposes. In addition, our expectation that our revenue will continue to increase in the near term is based on a number of important assumptions and subject to a number of risks and uncertainties, many of which are outside of our control. As a result, we cannot provide any assurances that such assumptions will ultimately turn out to be correct and that our revenue will continue to increase in the near term, either on a year-over-year or a sequential quarterly basis.

We have a history of losses, and we are unable to predict the extent of any future losses or when, if ever, we will achieve profitability in the future.

We have incurred net losses in recent years, including net losses of $1.5 million in 2009 and $4.6 million in 2010. As a result, we had an accumulated deficit of $24.1 million at December 31, 2010. Although we have been profitable in certain periods in the past and in the first quarter of 2011, we may not be able to achieve or sustain profitability in future periods. Achieving profitability will require us to increase revenue, manage our cost structure, including the borrowing costs on our debt, and not experience unanticipated liabilities. Revenue growth may slow or revenue may decline for a number of possible reasons, including slowing demand for our products or services, increasing competition, a decrease in the growth of our overall market, or if we fail for any reason to continue to capitalize on growth opportunities. Any failure by us to obtain and sustain profitability, or to continue our revenue growth, could cause the price of our common stock to decline significantly.

The market for on-demand applications may develop more slowly than we expect.

The market for on-demand application products is not as mature as the market for packaged software, and it is uncertain whether these products will achieve and sustain high levels of demand and market acceptance. Our success will depend, to a large extent, on the willingness of businesses, large and small, to accept and increase their use of on-demand data security compliance solutions. Many larger enterprises may have invested substantial effort and financial resources to integrate traditional enterprise software into their businesses and may be reluctant or unwilling to switch to a different solution or to migrate these applications to on-demand services. Furthermore, some enterprises may be reluctant or unwilling to use enterprise on-demand application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these products. If enterprises do not perceive the benefits of enterprise on-demand application products, then the market for these products may not develop at all, or it may develop more slowly

than we expect, either of which would significantly adversely affect our operating results. In addition, we may make errors in predicting and reacting to relevant business trends, which could harm our business. The market for our solutions may not develop further, or may develop more slowly than we expect, either of which would harm our business.

If we are unable to hire, retain and motivate qualified personnel, our business will suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in product development and sales, may seriously harm our business, financial condition and results of operations. None of our key employees has an employment agreement for a specific term, and any of our employees may terminate their employment at any time. Our ability to continue to attract and retain highly skilled personnel will be critical to our future success. Competition for highly skilled personnel is frequently intense and we may not be successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs.

Our ability to operate our business effectively could be impaired if we fail to retain our senior management.

Our future performance depends on the continued services and continuing contributions of our senior management to execute on our business plan, and to identify and pursue new opportunities and product innovations. Our management team has significant industry experience and would be difficult to replace. These individuals possess sales, marketing, product development, technical, financial and administrative skills and relationships that are critical to the operation of our business. The loss of any of our senior managers could significantly delay or prevent the achievement of our development and strategic objectives. In addition, members of our senior management may be distracted by activities unrelated to our business. The loss of the services, or distraction, of our senior management for any reason could adversely affect our business, financial condition and results of operations.

We may be forced to take certain remedial actions to address inconsistencies in the administration of our 401(k) defined-contribution benefit plan.

We sponsor a 401(k) defined-contribution benefit plan covering substantially all of our eligible employees. We recently discovered that we have been inadvertently administering our 401(k) plan in a manner inconsistent with the underlying terms of the plan as approved by the Internal Revenue Service (the “IRS”) with respect to the determination of auto-enrollment status, eligible compensation for plan contribution purposes and matching contributions for departing employees. In addition, we discovered that a plan amendment had not been adopted by the applicable regulatory deadline. To address these issues, we intend to amend the 401(k) plan on a prospective basis to conform the plan to our historical practice and, with respect to prior periods, we intend to seek concurrence from the IRS that we can amend the plan on a retroactive basis to conform it to our historical practice and to adopt any required plan amendments for which the deadlines have passed. If the IRS does not permit us to take this corrective action in whole or in part on a retroactive basis, we may be forced to take other remedial actions, including making contributions to the plan, in an effort to restore participants to the same position they would have been in under the plan had these inconsistencies not occurred. Although we do not believe any such remedial action would have a material adverse effect on our financial condition, such remedial action could have a material adverse affect on our results of operations.

We face numerous risks relating to the protection and enforceability of our intellectual property rights and our use of third-party intellectual property, many of which could result in the loss of our intellectual property rights as well as other material adverse impacts on our business and financial results and condition.

We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect our intellectual property rights in our technology and products. However, despite these measures, our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. Competitors may independently develop technologies or products that are substantially equivalent or superior to our products or that inappropriately incorporate our proprietary technology into their products. Competitors may hire our former

employees who may misappropriate our proprietary technology. Certain jurisdictions may not provide adequate legal infrastructure for effective protection of our intellectual property rights. Changing legal interpretations of liability for unauthorized use of our technologies or products or lessened sensitivity by corporate, government or institutional users to refraining from intellectual property piracy or other infringements of intellectual property could also harm our business. We also rely on key technologies developed or licensed by third parties, and we may not be able to obtain or renew such licenses from these third parties at all or on reasonable terms.

With respect to some of our proprietary technologies, we have filed patent applications and obtained patents to protect our intellectual property rights in these technologies as well as the interests of our licensees. There can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property rights, or that such patents will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable.

We rely on several registered and unregistered trademarks to protect our brand. Third parties may use trademarks similar to our trademarks in different fields of use and any potential confusion as to the source of goods or services could have a material adverse effect on our business, financial condition and results of operation.

Litigation may be necessary to enforce and protect our trade secrets, patents and other intellectual property rights. Similarly, we may be required to defend against claimed infringement.

In order to enforce and protect our intellectual property rights, it may be necessary for us to initiate litigation against third parties, such as patent infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may adversely affect our financial condition and results of operations.

Some of our products have been, and in the future could be, alleged to infringe existing intellectual property rights of third parties. Even if we believe that such claims are without merit, we cannot be certain that we will prevail in any intellectual property dispute.

The costs of defending litigation, and engaging in intellectual property litigation generally, may be substantial regardless of the merit of the claim or the outcome. Defending such intellectual property litigation can also distract management’s attention and resources. Successfully prosecuted claims of intellectual property infringement against us might also cause us to lose our proprietary rights, prevent us from developing or selling our products, redesign affected products, require us to enter into costly settlement agreements or to obtain licenses to patents or other intellectual property rights that our products are alleged to infringe. Such licenses may not be available on reasonable commercial terms, or at all.

The data security industry has increasingly been subject to patent and other intellectual property rights litigation, particularly from special purpose or so-called “non-practicing” entities that seek to monetize their intellectual property rights by asserting claims against others. We expect this trend to continue and, as we become a larger and more visible company, we expect this trend may accelerate with respect to us specifically. The litigation process is costly and subject to inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position.

In addition, because we incorporate technology from third parties in our products, our exposure to infringement actions may increase because we must rely upon these third parties to verify the origin and ownership of such technology. Even if we have an agreement for such a third party to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology at all or on reasonable terms, or substitute similar technology from another source, our business and results of operations could be adversely impacted.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our products could be adversely affected.

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees, consultants and third parties. However, these agreements may be inadequate to protect our proprietary information and intellectual property rights. Moreover, those agreements may be breached and we may not have adequate remedies for any such breach. In addition, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If we are unable to maintain the proprietary nature of our technologies, our business could be materially adversely affected.

Some of our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could adversely affect our business.

Certain of our products are distributed with software licensed by its authors or other third parties under “open source” licenses. Some of these licenses contain requirements that we make available our proprietary source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source, but we cannot be sure that all open source is submitted for approval prior to use in our products. In addition, many of the risks associated with usage of open source cannot be eliminated, as use of open source in our products could inadvertently occur, in part because open source license terms are often ambiguous. Companies that incorporate open source software into their products have, in the past, faced claims seeking enforcement of open source license provisions and claims asserting ownership of open source software incorporated into their products. Defending such claims or being required to disclose or make available our proprietary source code pursuant to an open source license could materially adversely affect our business.

We may be subject to claims that our employees or we have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers of our employees.

We employ individuals who were previously employed at other technology companies, including our competitors or potential competitors. Therefore, we face exposure to infringement actions if those employees inadvertently or deliberately incorporate proprietary technology of our competitors into our products despite efforts by our competitors and us to prevent such misuse. Litigation may be necessary to defend against such claims, which could be costly and divert management’s attention. If any such claims are successfully asserted against us, we could be required to pay substantial damages or could be prevented from selling some or all of our products. If we are prevented from selling some or all of our products, our business and results of operations would be materially adversely affected.

We may be exposed to certain claims and liabilities if a consumer suffers a loss resulting from a data security breach involving a subscriber who displays our “Trustwave Trusted Commerce Seal” or if a consumer misinterprets our seal.

Our subscribers who maintain a website which accepts payment cards are permitted to display our Trustwave Trusted Commerce seal on their website. Displaying the seal is not meant to convey that the subscriber is PCI compliant; rather, the Trustwave Trusted Commerce seal directs the website user to click on the seal in order to obtain more information about steps that the subscriber has taken, if any, to validate compliance with PCI. Although the Trustwave Trusted Commerce seal contains a limitation of liability disclaimer, that disclaimer may not fully or

effectively protect us from claims if a consumer relies on the seal in connection with a transaction and subsequently suffers a loss that results from a data security breach involving the subscriber. Furthermore, we could be subject to claims if a consumer misinterprets the display of the seal on a subscriber’s website to mean that the subscriber is PCI compliant. Any such claims could divert our management’s attention, require us to expend considerable resources in defending against such claims or otherwise materially harm our reputation, business, results of operations or financial condition.

We face a number of risks associated with our international revenue and operations, any or all of which could result in a disruption in our business and a decrease in our revenue.

During each of 2009 and 2010, 15% of our revenue was generated outside of North America. In that regard, we generated a significant amount of this revenue from sales into the United Kingdom, Sweden, Brazil, South Africa and Australia. We plan to expand our international operations, but such expansion is contingent upon the financial performance of our existing international operations as well as our identification of growth opportunities. Our revenue from international sales may fluctuate significantly or grow at a slower pace than we expect due to less enforcement of PCI in international markets or the use of other payment security technologies, for example, the “chip and pin” smartcard payment system in the United Kingdom.

As of March 31, 2011, we served customers in approximately 65 countries. Our international operations and expansion plans are subject to risks not typically associated with our domestic operations, including:


	•	potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights than U.S. laws or may not be adequately enforced;

	•	multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

	•	regulations or restrictions on the use, import, or export of encryption technologies that could delay or prevent the acceptance and use of encryption products and public networks for secure communications;

	•	fluctuations in currency exchange rates and economic instability such as higher interest rates in the U.S. and inflation;

	•	difficulties and costs of staffing and managing international operations;

	•	potentially adverse tax consequences;

	•	wage and price controls;

	•	differing technology standards;

	•	reduced sales due to the failure to obtain any required export approval of our technologies, particularly our encryption technologies;

	•	costs and delays associated with developing software and providing support in multiple languages; and

	•	political and social unrest, war or terrorism.

In addition, if we become unable to obtain foreign regulatory approvals on a timely basis, our business in the affected countries would no longer exist and our revenue could decrease significantly. Certain of our products are subject to export controls under U.S. law. The list of products and countries for which export approval is required, and the regulatory policies with respect thereto, may be revised from time to time and our inability to obtain required approvals under these regulations could materially and adversely affect our ability to make international sales.

We are subject to foreign exchange risks because the majority of our costs are denominated in U.S. dollars, whereas a significant portion of the sales and expenses of our international operations are denominated in various foreign currencies. A decrease in the value of any of these foreign currencies relative to the U.S. dollar could affect the profitability in U.S. dollars of our products sold in these markets. We do not currently hold forward exchange contracts to exchange foreign currencies for U.S. dollars to offset currency rate fluctuations.

We have a large amount of goodwill and other intangible assets and our earnings will be harmed if we suffer an impairment of our goodwill or other intangible assets.

We have a large amount of goodwill and other intangible assets and are required to perform an annual assessment for possible impairment for accounting purposes. At March 31, 2011, we had goodwill of $42.6 million and intangible assets of $16.8 million. If we do not achieve our planned operating results or other factors impair these assets, we may be required to incur a non-cash impairment charge. Any impairment charges in the future will adversely affect our results of operations or financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates-Goodwill, Intangible Assets and Business Combinations.”

Our ability to sell our products is dependent in part on the quality of our technical support services, and our failure to offer high quality technical support services would have a material adverse effect on our sales and results of operations.

Our customers depend on our technical support services to resolve any issues relating to our products. If we do not effectively assist our customers with resolving questions or issues relating to our products and provide effective ongoing support, our ability to sell additional products and services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Many enterprise customers require higher levels of support than small-or medium-sized businesses. If we fail to meet the requirements of enterprise customers, it may be more difficult to execute on our strategy to increase our penetration with such customers.

We rely significantly on revenue from subscriptions which may decline, and, because we generally recognize revenue from subscriptions over the term of the relevant service period, downturns or upturns in sales are not immediately reflected in full in our operating results.

Subscription revenue accounts for a significant portion of our revenue, comprising 76%, 78% and 73% of our total revenue in the years ended December 31, 2008, 2009 and 2010, respectively. Sales of new or renewal subscription contracts may decline and fluctuate as a result of a number of factors, including subscribers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors or reductions in our subscribers’ spending levels. If our sales of new or renewal subscription contracts decline, our revenue and revenue growth may decline and our business will suffer. In addition we recognize subscription revenue monthly over the term of the relevant subscription period, which is typically one year but has been as long as five years. As a result, a certain amount of the revenue we report each quarter is the recognition of deferred revenue from subscription contracts entered into during previous quarters. Consequently, a decline in new or renewed subscription contracts in any one quarter will not be fully reflected in revenue in that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our subscriptions is not reflected in full in our results of operations until future periods. Our subscription revenue also makes it difficult for us to rapidly increase our revenue through additional subscription sales in any period, as revenue from new and renewal subscription contracts must be recognized over the applicable subscription period. Furthermore, increases in the average term of subscription contracts would result in revenue for subscription contracts being recognized over longer periods of time.

The average sales prices of our products may decrease, which may reduce our gross profits and adversely impact our financial results.

While we expect that our average sales prices will decline as we continue to execute on our strategy to target the small- and medium-sized business, or “SMB,” market, the average sales prices for our products may also decline for a variety of other reasons, including competitive pricing pressures, discounts we offer, a change in our mix of products, anticipation of the introduction of new products or promotional programs. Competition continues to increase in the market segments in which we participate and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products. Additionally, although we typically price our products and services worldwide in U.S. dollars, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and

subscribers are willing to pay in those countries and regions. Furthermore, we anticipate that the average sales prices and gross profits for our products will decrease over product life cycles. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our product offerings, if introduced, will enable us to maintain our prices and gross profits at levels that will allow us to maintain profitability.

We cannot accurately predict subscription renewal rates or the rate at which subscribers will purchase additional or enhanced products or services from us, or the impact these rates may have on our future revenue and operating results.

Our subscribers have no obligation to renew their subscriptions for our products and services after the expiration of their initial subscription period, which is typically one year but has been as long as five years, or to purchase additional products or services from us. In addition, our subscribers may renew for fewer subscriptions, renew for shorter contract lengths, or renew for lower cost editions of our products. We cannot accurately predict renewal rates and our renewal rates may decline or fluctuate as a result of a number of factors, including subscriber dissatisfaction with our products, subscribers’ ability to continue their operations and spending levels and deteriorating general economic conditions. If our subscribers do not renew their subscriptions for our products, our revenue may decline and our business may suffer.

Our future success also depends in part on our ability to sell additional features, products and services or enhanced versions of our products and services to our current subscribers. This may also require increasingly sophisticated and costly sales efforts. Similarly, the rate at which our subscribers purchase new or enhanced products depends on a number of factors, including general economic conditions. If our efforts to sell new or enhanced products and services to our subscribers are not successful, our business may suffer.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency customers have accounted for a portion of our revenue in past periods, and we may in the future increase sales to government entities. Sales to government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will win a sale. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our products and services, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities. Any such penalties could materially adversely impact our results of operations. Finally, for purchases by the U.S. government, the government may require certain products to be manufactured in the United States and other high cost manufacturing locations, and we may not manufacture all products in locations that meet the requirements of the U.S. government.

Failure to comply with laws or regulations applicable to our business could cause us to lose U.S. government customers or our ability to contract with the U.S. government.

We must comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts, which affect how we do business with U.S. government agencies. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to penalties, termination of contracts and suspension or debarment from government contracting for a period of time with U.S. government agencies. Any such damages, penalties, disruption or limitation in our ability to do business with the U.S. government could have a material adverse effect on our business, operating results and financial condition.

We have grown, and may continue to grow, through acquisitions that give rise to risks and challenges that could adversely affect our future financial results.

We have grown, and may continue to grow, through acquisitions of other businesses, business units and technologies. Most recently, we acquired BitArmor Systems, Inc., Intellitactics and Breach Security in 2010. Any future acquisitions will depend on our ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance those acquisitions. There are no assurances that we will be successful in finding suitable acquisition candidates. When and if we are able to identify candidates, we will likely face competition from other potential acquirers that may increase our costs. Acquisitions can involve a number of special risks and challenges, including:


	•	complexity, time, and costs associated with these acquisitions, including the integration of acquired business operations, workforce, products and technologies into our existing business, sales force, employee base, product lines and technology;

	•	diversion of management time and attention from our existing business and other business opportunities;

	•	difficulties in retaining key personnel of the acquired business and additional costs that may be incurred as a result;

	•	loss or termination of employees, including costs associated with the termination or replacement of those employees;

	•	inability to maintain key pre-acquisition customer, supplier and employee relationships;

	•	assumption of debt or other liabilities of the acquired business, including litigation related to the acquired business or intellectual property assets acquired in connection with such acquisitions;

	•	increased expenses and working capital requirements;

	•	the addition of acquisition-related debt; and

	•	dilution of stock ownership of existing stockholders.

Integrating acquired businesses has been and will continue to be a complex, time consuming, and expensive process, and can also impact the effectiveness of our internal control over financial reporting. To integrate acquired businesses, we must implement our technology systems in the acquired operations and integrate and manage the personnel of the acquired operations. We also must effectively integrate the different cultures of acquired business organizations into our own in a way that aligns various interests, and may need to enter new markets in which we have no or limited experience and where competitors in such markets have stronger market positions.

Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of such acquisitions. In addition, because acquisitions of technology companies are inherently risky, no assurance can be given that our previous or future acquisitions will be successful and will not adversely affect our business, operating results or financial condition.

We may also seek to restructure our business in the future by disposing of certain of our assets. There can be no assurance that any restructuring of our business will not adversely affect our business, operating results or financial condition. In addition, any significant restructuring of our business will require significant managerial attention which may be diverted from our operations and may require us to accept non-cash consideration for any sales of our assets, the market value of which may fluctuate.

Adverse conditions in the national and global economies and financial markets may adversely affect our business and financial results.

National and global economies and financial markets have experienced a downturn stemming from a multitude of factors, including adverse credit conditions impacted by the sub-prime mortgage crisis, slower or receding economic activity, concerns about inflation and deflation, fluctuating energy costs, high unemployment, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns and other factors. The severity or length of time these economic and financial market conditions may

persist is unknown. During challenging economic times, periods of high unemployment and in tight credit markets, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies and increased price competition. These results may persist even if a number of economic conditions improve. Specific economic trends, such as declines or softness in government or corporate IT spending, would have a more direct impact on our business. Any of these events would likely harm our business, operating results, cash flows and financial condition.

We may need additional capital in the future if our business plans, growth strategies or other factors change, and our failure to obtain capital could interfere with our business.

We believe that our cash and cash equivalents following the completion of this offering together with cash flow from operations will be sufficient to fund our operations and meet our near-term expected capital expenditure needs. However, we may need additional capital in the future if our business plans, growth strategies or other factors change. Our ability to obtain financing will depend on a number of factors, some of which are outside our control, including market conditions, our operating performance and investor interest. These factors may make the timing, amount, terms and conditions of any financing unattractive. They may also result in our incurring additional indebtedness or accepting stockholder dilution. As of March 31, 2011, we had no outstanding borrowings and $2.0 million of outstanding letters of credit under our $20.0 million loan agreement. If adequate funds are not available when needed or are not available on acceptable terms, we may have to forego strategic acquisitions or investments, defer our product development activities, or delay the introduction of new or enhanced products.

Our estimates or judgments relating to our critical accounting policies are based on assumptions that may change or prove to be incorrect, and this may have an adverse effect on our results of operations or financial condition.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates 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. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors.

We may not be able to utilize a significant portion of our net operating loss carry-forwards, which could adversely affect our results of operations.

Due to losses recognized for federal and state income tax purposes in prior periods, we have generated significant federal and state net operating loss carry-forwards that may expire before we are able to utilize them. In addition, under U.S. federal and state income tax laws, if over a rolling three-year period, the cumulative change in our ownership exceeds 50%, our ability to utilize our net operating loss carry-forwards to offset future taxable income may be limited. Changes in ownership can occur due to transactions in our stock or the issuance of additional shares of our common stock or, in certain circumstances, securities convertible into our common stock. We have exceeded this 50% cumulative change threshold in prior periods, which has limited our ability to use a portion of our net operating loss carry-forwards. The effect of these transactions or future transactions on our cumulative change in ownership may further limit our ability to utilize our net operating loss carry-forwards to offset future taxable income. Furthermore, it is possible that transactions in our stock that may not be within our control may cause us to exceed the 50% cumulative change threshold and may impose a limitation on the utilization of our net operating loss carry-forwards in the future. Also, the existing net operating loss carry-forwards of corporations we have acquired may be subject to substantial limitations arising from ownership changes prior to or in connection with their acquisition by us or may expire prior to our ability to utilize them. In the event the usage of our net operating loss carry-forwards is subject to limitation and we are profitable, our results of operations could be materially adversely affected.

Risks Relating to this Offering and Ownership of Our Common Stock

An active, liquid trading market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all. The market price for shares of our common stock may decline below the initial public offering price, and you may not be able to resell your shares of common stock at or above the initial public offering price.

Market volatility may affect our stock price and the value of your investment.

Following the completion of this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been previously traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:


	•	announcements of new product launches, commercial relationships, acquisitions or other events by us or our competitors;

	•	failure of any of our products to achieve commercial success;

	•	fluctuations in stock market prices and trading volumes of securities of similar companies;

	•	general market conditions and overall fluctuations in U.S. equity markets;

	•	variations in our operating results, or the operating results of our competitors;

	•	changes in our financial guidance to investors and analysts or our failure to achieve such expectations;

	•	delays in or our failure to provide financial guidance;

	•	changes in securities analysts’ estimates of our financial performance or our failure to achieve such estimates;

	•	sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

	•	additions or departures of any of our key personnel;

	•	announcements related to litigation;

	•	changes in accounting principles or methodologies;

	•	changing legal or regulatory developments in the U.S. and other countries; and

	•	discussion of us or our stock price by the financial press and in online investor communities.

In addition, the stock market in general has experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $13.84 per share, because the assumed initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, is substantially higher than the pro forma net

tangible book value per share of our outstanding common stock. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, executive officers, consultants and directors under our stock option and equity incentive plans. For additional information, see “Dilution.”

We do not expect to pay any cash dividends for the foreseeable future.

We do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, we are currently prohibited from paying cash dividends by the loan agreement governing our $20.0 million revolving credit facility, and we expect these restrictions to continue in the future. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

Following this offering, investment funds managed by affiliates of FTV Capital, MBK Ventures, LLC and Richard Kiphart will own a substantial percentage of our common stock, which may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, (i) investment funds managed by Financial Technology Management II, L.L.C. and FTVentures Management III, L.L.C., or collectively “FTV Capital,” will beneficially own approximately 4,794,203 shares, or 12.4%, of our outstanding common stock, (ii) MBK Ventures, LLC, or “MBK Ventures,” which is beneficially owned by Robert McCullen and Andrew Bokor, each of whom is an executive officer and director, will beneficially own approximately 5,639,946 shares, or 14.6%, of our outstanding common stock, and (iii) Richard Kiphart, one of our directors, will beneficially own approximately 2,555,841 shares, or 6.6%, of our outstanding common stock. In the event that the underwriters exercise their over-allotment option in full, FTV Capital, MBK Ventures and Mr. Kiphart will own approximately 12.1%, 14.2% and 6.4% of our outstanding common stock, respectively. As a result, FTV Capital, MBK Ventures and Mr. Kiphart will, for the foreseeable future, have significant influence over all matters requiring stockholder approval, including the election of directors, adoption of or amendments to equity-based incentive plans, amendments to our amended and restated certificate of incorporation and certain mergers, acquisitions and other change-of-control transactions. The ownership of a large amount of our voting power by FTV Capital, MBK Ventures and Mr. Kiphart may have an adverse effect on the price of our common stock. FTV Capital, MBK Ventures and Mr. Kiphart may have divergent interests among themselves, and their interests may not be consistent with your interests as a stockholder.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Upon completion of this offering, there will be 38,733,217 shares of our common stock outstanding. Of these, 6,250,000 shares being sold in this offering (or 7,187,500 shares if the underwriters exercise their over-allotment option in full) will be freely tradable immediately after this offering (except for any shares purchased by affiliates, if any) and 31,288,760 shares will be subject to lock-up agreements for 180 days after the date of this prospectus. In addition, upon completion of this offering, we will have outstanding options and warrants to purchase an aggregate of 3,730,263 shares of common stock, 3,447,248 shares of which will be subject to lock-up agreements for 180 days after the date of this prospectus. A large portion of our shares, options and warrants are held by a small number of persons and investment funds. Sales by these stockholders, option holders or warrant holders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, certain holders of shares of common stock have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all common stock that we may issue under our 2001 Stock Incentive Plan and the 2011 Incentive Plan. Effective upon the completion of this offering, an aggregate of 3,000,000 shares of our common stock will be reserved for future issuance under the 2011 Incentive Plan, plus 6,913,989 shares reserved

under our 2001 Stock Incentive Plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

Our future operating results may fluctuate significantly and our current operating results may not be a good indication of our future performance. Fluctuations in our quarterly financial results could affect our stock price in the future.

Our revenues and operating results have historically varied from period-to-period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected. Any volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of our future performance.

Factors associated with our industry, the operation of our business and the markets for our products may cause our quarterly financial results to fluctuate, including:


	•	slower than expected conversion of enrollees to subscribers;

	•	failure to expand our partner network;

	•	loss of a significant member or group of members from our partner network;

	•	entry of new competition into our markets;

	•	the level of demand for our products and services;

	•	competitive pricing pressure for one or more of our products, services or solutions;

	•	our ability to timely complete the release of new or enhanced versions of our products;

	•	failure to successfully execute our cross-sell strategy;

	•	changes in laws or industry standards relating to privacy or data security compliance, or enforcement thereof;

	•	fluctuations in foreign currency exchange rates;

	•	the number, severity and timing of threat outbreaks, which may fluctuate from period-to-period;

	•	changes in interest rates;

	•	changes in the competitive landscape of our industry, including consolidation among our competitors and customers;

	•	our ability to control costs, including operating expenses;

	•	our ability to hire, train and retain key personnel;

	•	political and military instability, which could slow spending within our target markets, delay sales cycles, and otherwise adversely affect our ability to generate revenues and operate effectively;

	•	deferral of orders from customers in anticipation of new products or product enhancements announced by us or our competitors;

	•	budgetary cycles and constraints of customers, which are influenced by corporate earnings and government budget cycles and spending objectives;

	•	insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our products and services;

	•	seasonal buying patterns;


	•	changes in subscriber renewal rates for our services;

	•	acts of war or terrorism; and

	•	intentional disruptions by third parties.

Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results, including fluctuations in our key metrics. This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions include:


	•	a classified board of directors so that not all members of our board of directors are elected at one time;

	•	authorization of the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

	•	prohibition on stockholder action by written consent unless such action is recommended by all directors then in office, which requires that all stockholder actions not so approved be taken at a meeting of our stockholders;

	•	requirement that two-thirds of our stockholders approve certain amendments to our amended and restated certificate of incorporation or amended and restated bylaws;

	•	special meetings of our stockholders may only be called by a resolution adopted by a majority of our directors then in office;

	•	express authorization for our board of directors to make, alter, or repeal our amended and restated bylaws; and

	•	advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, we will be governed by the provisions of Section 203 of the Delaware General Corporation Law, or the “DGCL,” which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

If we fail to maintain an effective system of internal controls, we may not be able to report our financial results on time, and current and potential investors could lose confidence in our financial reporting.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be negatively impacted. The need for improvements in our system of internal controls has been identified in the past and may be identified in the future. During our 2010 audit, a material weakness in our system of internal controls over financial reporting was identified which may impact our ability to produce financial statements consistent with the requirements of a public company. This weakness related to the sufficiency of technical accounting expertise as well as sufficiency of our processes and procedures in place to ensure an accurate and timely financial reporting close process, primarily processes and procedures related to timely and accurate reporting from some of our smaller foreign subsidiaries. In addition, we have identified a significant deficiency regarding the need to improve interim period reporting procedures and controls. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Any failure to implement and maintain the improvements in our system of internal controls over financial reporting, or difficulties encountered in the implementation of these improvements in our system of internal controls, could cause us to fail to meet our reporting obligations. Any failure to improve our system of internal controls to address the identified material weaknesses could also cause investors to lose confidence in our reported financial information, which could have a negative impact on our company.

We have begun implementing measures and plan to take additional steps to remediate the underlying causes of the material weakness. In particular, we intend to improve our internal control over financial reporting and have hired personnel with technical accounting and internal control experience. In addition, implementing controls over the monitoring and reporting of our foreign subsidiaries and implementing controls commensurate with our quarterly reporting requirements. However, there can be no assurance that we will be able to effectively remediate the identified material weakness or that additional material weaknesses will not be identified in the future relative to our system of internal controls over financial reporting.

We are not currently required to comply with the rules of the Securities and Exchange Commission, or the “SEC,” implementing Section 404 of the Sarbanes-Oxley Act of 2002, or the “SO Act,” and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 and 404 of the SO Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until the year following our first annual report required to be filed with the SEC. At such time, our independent registered public accounting firm may issue a report that is adverse, in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to divert attention from operational and other business matters to devote substantial time to public company requirements.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be required to comply with the requirements of the SO Act, as well as rules

and regulations subsequently implemented by the SEC and The NASDAQ Global Market, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the SO Act. In that regard, we currently do not have an internal audit function, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

We will have broad discretion in how we use the proceeds of this offering and we may not use these proceeds effectively. This could affect our profitability and cause our share price to decline.

Our management and board of directors will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. We currently intend to use the net proceeds for general corporate purposes, which could include a variety of uses such as funding working capital, operating expenses, the continued development of our new or enhanced versions of our products and technology and the selective pursuit of business development opportunities. From time to time, for example, we will consider acquisitions or investments if a suitable opportunity arises, in which case a portion of the proceeds may be used to fund such an acquisition or investment. We have no commitments or understandings to make any such acquisition or investment. We may use the net proceeds for corporate purposes that do not improve our profitability or increase our market value, which could cause our share price to decline. See “Use of Proceeds.”

Our business and stock price may suffer as a result of our lack of public company operating experience. In addition, if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

We have never operated as a public company. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy and grow our business, either as a result of our inability to manage our current size, effectively manage the business in a public company environment or manage our future growth or for any other reason, our business, prospects, financial condition and results of operations may be harmed.

In addition, as a new public company we do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “continue,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:


	•	PCI may be changed, cancelled, replaced or not enforced, new or different technologies that minimize the need for PCI may be widely adopted, or we may lose certain of our PCI certifications;

	•	we may lose a significant member or group of members of our partner network, fail to engage new partners or one of our partners may decide to use our products less or compete against us;

	•	we may be unable to develop and maintain relationships with businesses, government entities and other organizations within our existing partner network that have not enrolled their customers into TrustKeeper, or whose customers have enrolled but have not become subscribers;

	•	we may lack sufficient financial or other resources to maintain or improve our competitive position;

	•	we may not be able to compete effectively with companies that integrate or bundle products similar to ours with their other product offerings;

	•	we may not be successful in executing our strategy to increase our sales to larger enterprises;

	•	our efforts to expand our product and service offerings beyond the PCI market may not succeed;

	•	defects or vulnerabilities in our products or services or the failure of our products to adequately prevent a security breach or protect data assets;

	•	we may fail to timely update our products in response to new security threats or to detect security attacks;

	•	our internal network system could be compromised by computer hackers, which would harm public perception of our security products and services;

	•	damage or disruptions to our facilities, including our corporate headquarters and third-party data center hosting facility, which could impair the delivery of our products and services;

	•	delays or cost overruns related to our development activities;

	•	we may fail to accurately predict, prepare for and respond promptly to technological and market developments and changing customer needs and develop corresponding products;

	•	our new products and product enhancements may not achieve sufficient market acceptance;

	•	we may fail to effectively manage our growth; and

	•	the other risks set forth in the section entitled “Risk Factors” in this prospectus.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking

statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors described in the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not be all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

MARKET AND INDUSTRY DATA AND FORECASTS

Market data and certain industry data and forecasts that we have included in this prospectus were obtained from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications and surveys. We have relied upon publications of IDC as our primary source for third-party industry data and forecasts. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. While we believe that each of these surveys, forecasts and publications is reliable based upon our management’s knowledge of the industry, we have not independently verified any of the data from third-party sources. Statements as to our market position are based on recently available data. In a number of places in this prospectus, we have included MasterCard’s estimate of the number of locations at which its payment cards are accepted in order to convey the size of the PCI market. We obtained this information from MasterCard’s annual report filed with the SEC. We believe that MasterCard’s estimate of the number of locations at which its payment cards are accepted is reliable and representative of the total number of payment card acceptance locations because MasterCard is one of the largest and most pervasive payment card brands in the world. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” appearing elsewhere in this prospectus. While we believe our internal business research is reliable and market definitions are appropriate, neither such research nor definitions have been verified by any independent source.

USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 6,250,000 shares of common stock in this offering will be approximately $90.3 million, assuming an initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) our net proceeds from this offering by approximately $5.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $104.2 million, assuming an initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility to pursue internal and external opportunities, to increase our visibility in the market place, to create a public market for our common stock and to facilitate our future access to the public equity markets. We expect to use substantially all of the net proceeds for general corporate purposes, which we expect to include funding working capital, operating expenses, the continued development of our products and services, the strengthening of our existing commercial organization and the selective pursuit of business development opportunities, which could include acquisitions of other companies. At this time, we have not specifically identified a large single use for which we intend to use the net proceeds, and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. Such factors include how quickly we are able to begin to generate operating profits, whether our revenues continue to increase and, if so, the rate of any such increase, and business development opportunities that may arise in the future. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Pending use of the proceeds from this offering, we intend to invest the proceeds in short-term, investment-grade and interest-bearing instruments or money market funds.

DIVIDEND POLICY

We have never paid any dividends on our Class A common stock, Class B common stock or preferred stock. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and therefore we do not anticipate paying any cash dividends in the foreseeable future. We are currently prohibited from paying cash dividends on or making any distributions with respect to our capital stock under the terms of our loan agreement, and we expect these restrictions to continue in the foreseeable future. For additional information, see “Description of Certain Indebtedness.” Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of March 31, 2011 on:


	•	an actual basis after giving effect to the one-for-four reverse stock split;


	•	a pro forma basis to give effect to the Recapitalization (without giving effect to the one time cash payment associated with the Recapitalization); and


	•	a pro forma as adjusted basis also gives effect to the one time cash payment associated with the Recapitalization and our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Data,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.


	As of March 31, 2011
							Pro Forma as
	Actual			Pro Forma			Adjusted
				(unaudited)			(unaudited)
	(in thousands)

Cash and cash equivalents	$	18,492		$	18,492		$	100,671

Revolving credit facility⁽¹⁾	$	—		$	—		$	—
Convertible redeemable preferred stock⁽²⁾⁽³⁾:
Series A-1, $0.0001 par value, 10,953 shares authorized; 10,953 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted		13,666			—			—
Series A-2, $0.0001 par value, 11,505 shares authorized; 11,505 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted		8,018			—			—
Stockholders’ equity⁽³⁾:
Series B preferred stock, $0.0001 par value, 5,882 shares authorized; 5,882 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted		10,000			—			—
Class B convertible common stock, $0.0001 par value, 1,406 shares authorized; 1,236 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted		—			—			—
Class A common stock, $0.0001 par value, 37,556 shares authorized; 23,377 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted		2			—			—
Preferred stock, $0.10 par value per share; no shares authorized, no shares issued and outstanding, actual; 5,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted		—			—			—
Common stock, $0.01 par value per share; no share authorized, no shares issued and outstanding, actual; 150,000 shares authorized, pro forma and pro forma as adjusted; 31,699 shares issued and outstanding, pro forma; and 38,179 shares issued and outstanding pro forma as adjusted		—			317			382
Additional paid-in capital⁽⁴⁾⁽⁵⁾		51,122			74,669			165,885
Accumulated deficit		(23,488	)		(23,488	)		(24,768	)
Accumulated other comprehensive income		343			343			343

Total stockholders’ equity		37,979			51,841			141,842

Total capitalization	$	59,663		$	51,841		$	141,842


(1)		The revolving credit facility under our loan agreement provides for aggregate borrowings of up to $20.0 million. See “Description of Certain Indebtedness-Amended and Restated Loan and Security Agreement.”
(2)		Our Series A-1 preferred stock and Series A-2 preferred stock can be redeemed upon the written request of holders of two-thirds of the Series A-1 preferred stock or Series A-2 preferred stock, respectively, at an amount equal to their respective liquidation preference. Since


		this redemption feature is not in our control, we have classified our Series A-1 preferred stock and Series A-2 preferred stock as temporary equity on our consolidated balance sheets. For additional information regarding the terms of our preferred stock, see note 14 to the notes to our consolidated financial statements included elsewhere in this prospectus.
(3)		The number of our authorized and outstanding preferred stock, Class A common stock and Class B common stock as of March 31, 2011 on an actual basis have not been adjusted to give effect to the Recapitalization.


(4)		On a pro forma basis, Additional paid-in capital includes adjustments for (i) the conversion of our Class B common stock, Series A-1 preferred stock, Series A-2 preferred stock and Series B preferred stock into common stock, including adjustments in the amount of $2, $13,666, $8,018 and $10,000, respectively, (ii) the establishment of the par value of common stock in the amount of $317 and (iii) the payment of $7,822 to holders of our Series A preferred stock.


(5)		On a pro forma as adjusted basis, Additional paid-in capital includes adjustments for (i) our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the issuance of an aggregate of 230,000 shares of restricted stock that will be granted upon the completion of this offering to certain of our directors in connection with their appointment to our board, 25% of which will vest upon grant and the remainder of which will vest in equal annual installments beginning on the first anniversary of the date of grant, (iii) the issuance of an aggregate of 37,500 stock options with an exercise price of $16.00 per share, the midpoint of the price range listed on the cover page of this prospectus, that will be granted upon the completion of this offering to certain of our directors, 25% of which will vest upon grant and the remainder of which will vest in equal annual installments beginning on the first anniversary of the date of grant, (iv) the acceleration of stock options held by Mark Iserloth, our Chief Financial Officer, in the amount of $48 upon completion of this offering pursuant to the terms of his employment agreement and (v) a $250 payment to Kevin Bradford, our former Chairman and Chief Executive Officer and currently one of our directors, in connection with the completion of this offering pursuant to the employment arrangement he previously had with us.

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount for each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $5.8 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of March 31, 2011. This number excludes:


	•	3,512,862 shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $5.06 per share as of March 31, 2011;

	•	410,021 shares of our common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $6.57 per share as of March 31, 2011;

	•	101,125 shares of our common stock issuable upon the exercise of outstanding stock options granted subsequent to March 31, 2011 at a weighted average exercise price of $12.12 per share;


	•	922,847 shares of our common stock reserved for grants under our 2001 Stock Incentive Plan (although no further grants will be made under such plan following this offering);


	•	2,770,000 shares of our common stock reserved for future grants under the 2011 Incentive Plan we adopted in connection with this offering, which includes an aggregate of 317,500 shares of common stock issuable upon the exercise of stock options that will be granted to certain members of our management in connection with this offering and to certain of our directors in connection with their appointment to our board; and

	•	300,000 shares of our common stock reserved for future issuance under the ESPP we adopted in connection with this offering;

and includes:


	•	an aggregate of 230,000 shares of restricted stock that will be granted upon the completion of this offering to certain of our directors in connection with their appointment to our board.

DILUTION

After giving effect to the Recapitalization, our pro forma net tangible book value as of March 31, 2011 was approximately $(7.6) million, or approximately $(0.24) per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding at March 31, 2011, prior to the sale of 6,250,000 shares of common stock offered in this offering, but assuming the completion of our Recapitalization. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the net tangible book value per share of our common stock outstanding immediately after this offering.

After giving effect to the completion of the Recapitalization and the sale of 6,250,000 shares of common stock in this offering, based upon an assumed initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been approximately $82.5 million, or $2.16 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $2.40 per share to existing stockholders and immediate dilution of $13.84 per share to new investors purchasing shares of common stock in this offering at the initial public offering price.

The following table illustrates this per share dilution:


Assumed initial public offering price per share				$	16.00
Pro forma net tangible book value (deficit) per share as of March 31, 2011 (which gives effect to the Recapitalization)	$	(0.24	)
Increase in net tangible book value per share attributable to new investors		2.40

Pro forma as adjusted net tangible book value (deficit) per share as of March 31, 2011 (which gives effect to the Recapitalization and this offering)					2.16

Dilution per share to new investors				$	13.84

The following table summarizes, as of March 31, 2011, on a pro forma as adjusted basis giving effect to the Recapitalization and the sale of 6,250,000 shares of common stock in this offering, the number of shares of our common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock from us in this offering. The table assumes an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.


											Average
											Price
	Shares Purchased					Total Consideration					Per
	Number		Percentage			Amount		Percentage			Share

Existing stockholders		31,928,737		84	%	$	72,182,976		42	%	$	2.26
New investors		6,250,000		16			100,000,000		58			16.00

Total		38,178,737		100	%	$	172,182,976		100	%

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by $6.3 million, or increase (decrease) the percent of total consideration paid by investors participating in this offering by 2.0%, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares and no exercise of any outstanding options. If the underwriters’ option to purchase

additional shares is exercised in full, our existing stockholders would own approximately 82% and our new investors would own approximately 18% of the total number of shares of our common stock outstanding after this offering.

The tables and calculations above are based on shares of common stock outstanding as of March 31, 2011 (after giving effect to the Recapitalization) and exclude:


	•	3,512,862 shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $5.06 per share as of March 31, 2011;

	•	410,021 shares of our common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $6.57 per share as of March 31, 2011;

	•	101,125 shares of our common stock issuable upon the exercise of outstanding stock options granted subsequent to March 31, 2011 at a weighted average exercise price of $12.12 per share;


	•	922,847 shares of common stock reserved for grants under our 2001 Stock Incentive Plan (although no further grants will be made under such plan following this offering);


	•	2,770,000 shares of our common stock reserved for future grants under the 2011 Incentive Plan we adopted in connection with this offering, which includes an aggregate of 317,500 shares of common stock issuable upon the exercise of stock options that will be granted to certain members of our management in connection with this offering and to certain of our directors in connection with their appointment to our board; and

	•	300,000 shares of our common stock reserved for future issuance under the ESPP we adopted in connection with this offering;

and include:


	•	an aggregate of 230,000 shares of restricted stock that will be granted upon the completion of this offering to certain of our directors in connection with their appointment to our board.

To the extent that any outstanding options are exercised or if new options or other equity incentive grants are issued in the future with an exercise price or purchase price below the initial public offering price, new investors will experience further dilution.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following tables set forth our unaudited consolidated statement of operations for the year ended December 31, 2010 on a pro forma basis to give effect to (i) the acquisition of Breach Security, which was completed on June 18, 2010, and Intellitactics, which was completed on March 1, 2010, as if each of these acquisitions had occurred on January 1, 2010, (ii) the Recapitalization, and on a pro forma as adjusted basis to also give effect to our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expense payable by us and (iii) additional stock compensation expense related to grants of new awards made in connection with this offering, as if all such transactions had occurred on January 1, 2010. In connection with the acquisitions, all of our assets and liabilities were revised to reflect the fair values on the date of acquisition, based upon our allocation of the overall purchase price to the underlying net assets acquired. The following tables also set forth our unaudited consolidated statement of operations for the three months ended March 31, 2011 on a pro forma basis to give effect to the Recapitalization and on a pro forma as adjusted basis to also give effect to our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expense payable by us and additional stock compensation expense related to grants of new awards made in connection with this offering, as if all such transactions had occurred on January 1, 2011.

The unaudited pro forma financial information is based on our historical financial statements and the historical financial statements of Breach Security and Intellitactics, and certain adjustments which we believe to be reasonable, to give effect to these transactions, which are described in the notes to our consolidated financial statements referenced below.

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2010 does not give effect to the acquisition of BitArmor, which was completed on January 6, 2010, as its pre-acquisition results are not significant. The unaudited pro forma consolidated statement of operations is presented for informational purposes only and does not purport to represent the financial position and results of operations that would have been achieved had the acquisitions been completed as of the date indicated or our future financial position or results of operations.

The following unaudited pro forma consolidated statements of operations should be read in conjunction with:


	•	the accompanying notes to the unaudited pro forma consolidated statements of operations;

	•	our unaudited consolidated financial statements for the three months ended March 31, 2011, and the notes relating thereto, included elsewhere in this prospectus;

	•	our audited consolidated financial statements for the year ended December 31, 2010, and the notes relating thereto, included elsewhere in this prospectus;

	•	the consolidated financial statements of Breach Security for the period from January 1, 2010 through March 31, 2010, and the notes relating thereto, included elsewhere in this prospectus;

	•	the consolidated financial statements of Intellitactics for the period January 1, 2010 through February 28, 2010, and the notes relating thereto, included elsewhere in this prospectus; and

	•	the sections entitled “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

The impacts of the acquisitions of Breach Security and Intellitactics are already reflected in our consolidated balance sheet as of March 31, 2011. See “Capitalization” for additional information regarding the effects of the Recapitalization and the issuance and sale of 6,250,000 shares of common stock in this offering on our cash and cash equivalents, convertible redeemable preferred stock and stockholders’ equity.

TRUSTWAVE HOLDINGS, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2010


				Breach
				Security and
	Trustwave			Intellitactics			Recapitalization					Offering			Pro Forma As
	Historical			Adjustments^(A)			Adjustments^(B)		Pro Forma			Adjustments^(C)			Adjusted
	(in thousands, except per share data)

Statements of Operations Data:
Revenue:
Subscription revenue	$	81,677		$	3,169		$	—	$	84,846		$	—		$	84,846
Professional services		19,639			473			—		20,112			—			20,112
Product sales		10,187			870			—		11,057			—			11,057

Total revenue		111,503			4,512			—		116,015			—			116,015

Cost of sales:
Service delivery, excluding depreciation and amortization		33,415			1,069			—		34,484			15			34,499
Product sales, excluding depreciation and amortization		1,715			79			—		1,794			—			1,794
Depreciation and amortization⁽¹⁾		1,403			65			—		1,468			—			1,468

Total cost of sales		36,533			1,213			—		37,746			15			37,761

Gross profit		74,970			3,299			—		78,269			(15	)		78,254

Operating expenses:
Product development		20,112			1,931			—		22,043			53			22,096
Sales and marketing		29,264			2,853			—		32,117			68			32,185
General and administrative⁽¹⁾⁽²⁾		29,602			3,920			—		33,522			1,269			34,791

Total operating expenses		78,978			8,704			—		87,682			1,390			89,072

Loss from operations		(4,008	)		(5,405	)		—		(9,413	)		(1,405	)		(10,818	)
Interest income (expense), net⁽³⁾		(87	)		3			—		(84	)		—			(84	)
Other income (loss), net		(155	)		235			—		80			—			80

Loss before income taxes		(4,250	)		(5,167	)		—		(9,417	)		(1,405	)		(10,822	)
Income tax expense		(372	)		(23	)		—		(395	)		—			(395	)

Net loss	$	(4,622	)	$	(5,190	)		—	$	(9,812	)	$	(1,405	)	$	(11,217	)

Cumulative annual preferred dividends		(1,800	)		—			1,800		—			—			—

Net loss attributable to common shareholders	$	(6,422	)	$	(5,190	)	$	1,800	$	(9,812	)	$	(1,405	)	$	(11,217	)

Net loss per common share (basic and diluted)	$	(0.30	)												$	(0.31	)
Weighted-average number of shares used to compute net loss per common share (basic and diluted)		21,681														35,844

See accompanying notes to unaudited pro forma consolidated statement of operations.

TRUSTWAVE HOLDINGS, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2011


	Trustwave			Recapitalization					Offering			Pro Forma As
	Historical			Adjustments^(B)		Pro Forma			Adjustments^(C)			Adjusted
	(In thousands, except per share data)

Statements of Operations Data:
Revenue:
Subscription revenue	$	23,448		$	—	$	23,448		$	—		$	23,448
Professional services		5,721			—		5,721			—			5,721
Product sales		2,229					2,229			—			2,229

Total revenue		31,398			—		31,398			—			31,398

Cost of sales:
Service delivery, excluding depreciation and amortization		9,363			—		9,363			4			9,367
Product sales, excluding depreciation and amortization		508			—		508			—			508
Depreciation and amortization		450			—		450			—			450

Total cost of sales		10,321			—		10,321			4			10,325

Gross profit		21,077			—		21,077			(4	)		21,073

Operating expenses:
Product development		6,194			—		6,194			13			6,207
Sales and marketing		7,122			—		7,122			17			7,139
General and administrative		7,002			—		7,002			317			7,319

Total operating expenses		20,318			—		20,318			347			20,665

Income from operations		759			—		759			(351	)		408
Interest income (expense), net		(8	)		—		(8	)		—			(8	)
Other income (loss), net		18			—		18			—			18

Income before income taxes		769			—		769			(351	)		418
Income tax expense		(110	)		—		(110	)		—			(110	)

Net income	$	659			—	$	659		$	(351	)	$	308

Cumulative annual preferred dividends		(450	)		450		—			—			—

Net income attributable to common shareholders	$	209		$	450	$	659		$	(351	)	$	308

Net income per common share
Basic	$	0.01										$	0.01
Diluted	$	0.01										$	0.01
Weighted-average number of shares
Basic		22,946											37,199
Diluted		25,273											40,113

See accompanying notes to unaudited pro forma consolidated statement of operations.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(A)

The table set forth below includes the historical operating results of Breach Security from January 1, 2010 to June 17, 2010 and Intellitactics from January 1, 2010 to February 28, 2010. The results of Breach Security and Intellitactics operations subsequent to the acquisition dates of June 18, 2010 and March 1, 2010, respectively, have been included in our audited consolidated historical financial statements included elsewhere in this prospectus.


	Breach			Breach			Breach															Total
	Security			Security			Security						Intellitactics			Intellitactics						Breach
	Historical			Historical			Purchase			Total			Historical			Purchase						Security
	January 1, 2010			April 1, 2010			Accounting and			Breach			January 1, 2010			Accounting and			Total			and
	to			to			Other			Security			to			Other			Intellitactics			Intellitactics
	March 31, 2010			June 17, 2010			Adjustments			Adjustments			February 28, 2010			Adjustments			Adjustments			Adjustments
	(in thousands)

Statement of Operations Data:
Revenue:
Subscription revenue	$	1,264		$	864		$	—		$	2,128		$	1,041		$	—		$	1,041		$	3,169
Professional services		34			84			—			118			355			—			355			473
Product sales		4			2			—			6			864			—			864			870

Total revenue		1,302			950			—			2,252			2,260			—			2,260			4,512

Cost of sales:
Service delivery, excluding depreciation and amortization		421			328			—			749			320			—			320			1,069
Product sales, excluding depreciation and amortization		—			—			—			—			79			—			79			79
Depreciation and amortization⁽¹⁾		—			—			(13	)		(13	)		—			78			78			65

Total cost of sales		421			328			(13	)		736			399			78			477			1,213

Gross profit		881			622			13			1,516			1,861			(78	)		1,783			3,299

Operating expenses:
Product development		735			698			—			1,433			498			—			498			1,931
Sales and marketing		1,182			1,042			—			2,224			629			—			629			2,853
General and								57									97
administrative⁽¹⁾⁽²⁾		620			1,634			(118	)		2,193			1,759			(129	)		1,727			3,920

Total operating expenses		2,537			3,374			(61	)		5,850			2,886			(32	)		2,854			8,704

Loss from operations		(1,656	)		(2,752	)		74			(4,334	)		(1,025	)		(46	)		(1,071	)		(5,405	)
Interest income (expense), net⁽³⁾		(222	)		(235	)		460			3			(123	)		123			—			3
Other income (loss), net		(3	)		46			—			43			192			—			192			235

Loss before income taxes		(1,881	)		(2,941	)		534			(4,288	)		(956	)		77			(879	)		(5,167	)
Income tax expense		(8	)		(15	)		—			(23	)		—			—			—			(23	)

Net loss	$	(1,889	)	$	(2,956	)	$	534		$	(4,311	)	$	(956	)	$	77		$	(879	)	$	(5,190	)


(1)		Reflects the pro forma impact of the recognized intangible assets of the Breach Security and Intellitactics acquisitions. Amortization expense is related to capitalized customer relationships amortized over five to ten years, capitalized trade names amortized over one to nine years and capitalized acquired proprietary technology amortized over four to eight years. The incremental amortization expense from the pro forma presentation results in an additional $219 in amortization expense for the year ended December 31, 2010. This increase in amortization was attributable to $142 for customer relationships, $65 for proprietary technology and $12 for trademarks.

(2)		We incurred transaction-related costs of $118 and $129 for the Breach Security and Intellitactics acquisitions, respectively. A pro forma adjustment has been made to eliminate these costs.

(3)		The Breach Security and Intellitactics acquisitions included the settlement of acquiree debt. A pro forma adjustment has been made to eliminate the historical interest expense of $460 and $123 for Breach Security and Intellitactics, respectively.

(B)

Gives effect to the Recapitalization, including the conversion of all of the outstanding shares of our Class A common stock, Class B common stock and preferred stock into a single class of common stock and the payment to the holders of our Series A preferred stock. Our outstanding preferred stock accrues cumulative annual dividends, which are payable only upon liquidation, dissolution or winding up of the Company or when and if declared by our board of directors. Except for the payment to holders of our Series A preferred stock, our board of directors has not declared any dividends on our preferred stock and all accumulated dividends or distributions on such preferred stock will be extinguished in connection with the Recapitalization.

(C)

Gives further effect to our issuance and sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, in each case as if such transactions had occurred on such date and the application of the net proceeds therefrom as set forth under “Use of Proceeds.” The offering will increase the weighted-average number of shares used to compute net loss per common share. In addition, this includes stock compensation expense for grants of awards directly attributable to this offering, including the recurring impact of the following approved by the board of directors (i) the issuance of an aggregate of 230,000 shares of restricted stock that will be granted upon the completion of this offering to certain of our directors in connection with their appointment to our board, 25% of which will vest upon grant and the remainder of which will vest in equal annual installments beginning on the first anniversary of the date of grant, (ii) the issuance of an aggregate of 280,000 stock options with an exercise price of $16.00 per share, the midpoint of the price range listed on the cover page of this prospectus, that will be granted upon the completion of this offering to certain members of our management, 25% of which will vest on the one year anniversary of the date of grant and the remainder of which will vest quarterly in equal installments over the subsequent three years and (iii) the issuance of an aggregate of 37,500 stock options with an exercise price of $16.00 per share, the midpoint of the price range listed on the cover of this prospectus, that will be granted upon the completion of this offering to certain of our directors, 25% of which will vest upon grant and the remainder of which will vest in equal annual installments beginning on the first anniversary of the date of grant.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data as of and for the periods indicated. We have derived the selected historical consolidated financial data as of and for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 from our audited consolidated financial statements for such period or years, as applicable. For comparison purposes, certain balances with respect to the financial data for the years ended December 31, 2006 and 2007 have been reclassified in order to conform with the presentation for the years ended December 31, 2008, 2009 and 2010. We have derived the selected historical consolidated financial data as of March 31, 2011 and for the three months ended March 31, 2010 and 2011 from our unaudited consolidated financial statements for such periods. Our audited consolidated financial statements as of December 31, 2009 and 2010 and for each of the three years in the period ended December 31, 2010 and our unaudited consolidated financial statements as of March 31, 2011 and for the three months ended March 31, 2010 and 2011 have been included in this prospectus. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

The selected historical consolidated data presented below should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.


																Three Months
	For the Year Ended December 31,															Ended March 31,
	2006			2007			2008			2009			2010			2010			2011
	(in thousands, except share and per share data)

Revenue:
Subscription revenue	$	18,220		$	33,996		$	44,356		$	56,708		$	81,677		$	16,829		$	23,448
Professional services		4,603			9,096			13,219			15,056			19,639			3,342			5,721
Product sales		4,103			2,423			753			1,343			10,187			1,518			2,229

Total revenue		26,926			45,515			58,328			73,107			111,503			21,689			31,398

Cost of sales:
Service delivery, excluding depreciation and amortization		8,578			16,443			22,525			26,431			33,415			7,406			9,363
Product sales, excluding depreciation and amortization		3,206			1,615			440			481			1,715			273			508
Depreciation and amortization		120			396			591			718			1,403			266			450

Total cost of sales		11,904			18,454			23,556			27,630			36,533			7,945			10,321

Gross profit		15,022			27,061			34,772			45,477			74,970			13,744			21,077

Operating expenses:
Product development		1,517			4,184			6,749			9,146			20,112			3,744			6,194
Sales and marketing		7,079			11,689			14,059			17,388			29,264			5,753			7,122
General and administrative		9,527			12,989			16,030			20,511			29,602			6,491			7,002

Total operating expenses		18,123			28,862			36,838			47,045			78,978			15,988			20,318

Income (loss) from operations		(3,101	)		(1,801	)		(2,066	)		(1,568	)		(4,008	)		(2,244	)		759
Interest expense, net		51			(84	)		(151	)		(112	)		(87	)		(36	)		(8	)
Other income (loss), net		(269	)		(23	)		193			(304	)		(155	)		(106	)		18
Gain on acquisition		—			—			—			552			—			—			—

Income (loss) before income taxes		(3,319	)		(1,908	)		(2,024	)		(1,432	)		(4,250	)		(2,386	)		769
Income tax expense		—			—			(22	)		(114	)		(372	)		(78	)		(110	)

Net (loss) income	$	(3,319	)	$	(1,908	)	$	(2,046	)	$	(1,546	)	$	(4,622	)	$	(2,464	)	$	659

Cumulative annual preferred dividends	$	(1,000	)	$	(1,000	)	$	(1,441	)	$	(1,800	)	$	(1,800	)		(450	)		(450	)

Net (loss) income attributable to common shareholders	$	(4,319	)	$	(2,908	)	$	(3,487	)	$	(3,346	)	$	(6,422	)	$	(2,914	)	$	209

Net (loss) income per common share:
Basic⁽²⁾		(0.40	)		(0.17	)		(0.20	)		(0.19	)		(0.30	)		(0.15	)		0.01
Diluted⁽²⁾		(0.40	)		(0.17	)		(0.20	)		(0.19	)		(0.30	)		(0.15	)		0.01
Weighted average shares outstanding:
Basic⁽²⁾		10,802			16,774			17,275			17,835			21,681			19,829			22,946
Diluted⁽²⁾		10,802			16,774			17,275			17,835			21,681			19,829			25,273
Other Data:
Net cash provided by (used in):
Operating activities	$	1,243		$	(462	)	$	671		$	20,943		$	(10,212	)	$	(5,495	)	$	4,646
Investing activities		159			(4,796	)		(2,226	)		(2,292	)		8,581			2,410			(882	)
Financing activities		(652	)		1,483			6,668			(1,165	)		(7,495	)		(6,375	)		190
Depreciation and amortization		1,233			1,747			2,136			3,012			4,970			1,021			1,517
Capital expenditures		507			1,771			1,786			2,743			4,273			333			882


	As of December 31,											As of March 31,
	2006		2007			2008		2009		2010		2011
	(in thousands)

Balance Sheet:
Cash and cash equivalents	$	5,235	$	1,441		$	6,594	$	23,916	$	14,558	$	18,492
Working capital⁽³⁾		2,948		(5,199	)		2,391		9,659		256		(676	)
Total assets		35,208		45,272			55,021		86,675		122,068		120,175
Total debt⁽⁴⁾		1,283		5,533			2,083		1,000		—		—
Total convertible redeemable preferred stock⁽⁵⁾		17,434		18,434			19,434		20,434		21,434		21,684
Total stockholders’ equity		6,550		5,914			12,845		14,382		36,203		37,979


(1)		Represents the cumulative annual dividends payable on our outstanding preferred stock. Such dividends are payable only upon liquidation, dissolution or winding up of the Company or when and if declared by our board of directors. Our board of directors has not declared any dividends on our preferred stock and all accumulated dividends on such preferred stock will be extinguished in connection with the Recapitalization. For additional information regarding the terms of our existing preferred stock, see notes 13 and 14 to our audited consolidated financial statements for the years ended December 31, 2008, 2009 and 2010 and notes 11 and 12 to our unaudited consolidated financial statements for the three months ended March 31, 2010 and 2011 included elsewhere in this prospectus.


(2)		Net (loss) income per common share (basic and diluted) and the weighted average number of shares used to compute net (loss) income per common share (basic and diluted) for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 and for the three months ended March 31, 2010 and 2011 on an actual basis have been calculated giving effect to the one-for-four reverse stock split.


(3)		Working capital is the amount by which current assets exceed current liabilities.

(4)		Total debt includes notes payable, both current and non-current.

(5)		Our Series A-1 preferred stock and Series A-2 preferred stock can be redeemed upon the written request of the holders of two-thirds of our Series A-1 preferred stock or Series A-2 preferred stock, respectively, at an amount equal to their respective liquidation preferences. Since this redemption feature is not in our control, and does not have a date certain or event certain redemption requirement, we have classified our Series A-1 preferred stock and Series A-2 preferred stock as temporary equity on our consolidated balance sheet. For additional information regarding the terms of our preferred stock, see note 14 to the notes to our consolidated financial statements included elsewhere in this prospectus.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this prospectus, including those set forth under “Risk Factors.”

Overview

Trustwave is a leading provider of on-demand data security compliance solutions that enable businesses and other organizations of all sizes to efficiently achieve and maintain compliance with regulatory requirements and industry standards. Our compliance management solutions, including our easy-to-use software-as-a-service TrustKeeper offering, have helped hundreds of thousands of organizations simplify the complex process of validating compliance. Additionally, our broad suite of compliance enablement solutions remediates data security deficiencies, allowing our customers to achieve and maintain compliance in a cost effective manner. These solutions assist our subscribers in comprehensively securing their network infrastructure, data communications and sensitive information assets, protecting them against the increasing threats of unauthorized access, fraudulent activity and other intrusions or breaches. We have been successful in rapidly expanding our customer base across a broad range of industries as a result of our differentiated partner network, which is comprised of many of the world’s largest financial institutions and other organizations influential to the compliance and data security mandates of their customers.

Our solutions include our industry leading software-as-a-service TrustKeeper compliance management offering along with a comprehensive suite of proprietary compliance enablement solutions. TrustKeeper and the TrustKeeper Agent assist organizations in validating compliance by analyzing, aggregating and reporting on prohibited data storage, systems configurations and security policy settings on subscribers’ systems or in centralized or distributed IT environments. In addition, our compliance enablement offerings provide a comprehensive, integrated turnkey suite of data security solutions, including encryption, extensible threat management, security information and event management, network access control, web application firewalls and data loss prevention. These solutions help address vulnerabilities detected by TrustKeeper, allowing our customers to achieve and maintain compliance.

We have reached many of our customers through our partner network, which is comprised of approximately 75 organizations influential to the compliance and data security mandates of their customers. Our PCI partner network includes many of the world’s leading financial institutions, major payment card companies, and other members of the payment and IT ecosystem, which we believe expands our global reach and reputation. In addition to PCI, we plan to expand our partner network in health care, government services and other sectors, facilitating the distribution of our solutions that address relevant regulations and standards, such as HIPAA and FISMA.

We conduct our operations through four geographic operating segments, which are North America (U.S. and Canada), Europe Middle East and Africa, or “EMEA,” Latin America and the Caribbean, or “LAC,” and Asia Pacific, or “APAC.” Each of our operating segments offers both compliance management and compliance enablement solutions.

Important Factors Affecting Our Operating Results and Financial Condition

We believe our operating results and financial condition will continue to be affected by the following factors:

Increasing Demand For Data Security Compliance Solutions. We believe that the need for on-demand, scalable, automated and cost-effective data security compliance solutions will continue to increase as organizations

address a number of challenges of achieving and maintaining compliance with regulatory requirements and industry standards, including:


	•	increasing data security threats, which have led to a heightened regulatory and compliance environment;

	•	regulatory and compliance requirements that are becoming increasingly complex and difficult to achieve and maintain; and

	•	many existing compliance and data security solutions that are highly complex and expensive.

In addition, we believe that the number of locations where data is stored or transmitted, and consequently require protection, will continue to increase for financial transactions, as well as health care, government and other services. We believe we are well-positioned to benefit from this increasing demand for data security compliance solutions due to a number of key differentiators of our solutions, including that they simplify complex compliance processes, are cost-effective, scalable and flexible, comprehensive and integrated, well-known and trusted and utilize our proprietary knowledge and technology.

Continued Development of Our Partner Network. We have developed a partner network comprised of organizations influential to the compliance and data security mandates of their customers. These organizations, including many of the world’s leading financial institutions and other payment service providers, serve as differentiated and cost effective distribution partners for us, and we typically co-brand and co-market with these organizations to their customers. Many of our partners are in the midst of a multi-year effort to monitor and enforce PCI compliance among their payment card accepting customers. Historically, our partners started this process with their enterprise customers and in recent years they have expanded their focus to include small- and medium-sized business payment card accepting customers. As a result, we initially targeted the sale of our compliance management solutions to enterprise customers. Revenues from these enterprise customers accounted for a majority of our growth in 2008. Since then, our partner network has enabled us to expand into the SMB market, which contributed to a substantial increase in our 2009 and 2010 revenue. During 2010, our five largest partner network members accounted for 15.7% of our revenue. We expect this concentration of revenue in our five largest network partners to remain generally consistent during the remainder of 2011. Going forward, we intend to focus on increasing our subscriber base globally by converting more of our PCI partner network payment card acceptance locations into TrustKeeper subscriptions.

Sales to New Customers and Additional Sales to Our Existing Customers. In addition to adding subscribers through our partner network, we have been successful at expanding our subscriber base through our direct sales efforts that have been principally focused on adding enterprise customers. We intend to continue to focus our direct sales efforts on such enterprises and, in that regard, intend to add new sales representatives, both domestically and internationally, as well as to expand into new compliance regimes and standards. Additionally, we believe that our compliance management solutions will continue to generate cross-selling opportunities to our installed base of our comprehensive suite of compliance enablement solutions as subscribers seek to remediate vulnerabilities identified by the compliance management process.

Introduction of New Products and Further Expansion into Specific Sectors. We believe it is important that we continue to develop new and enhanced solutions to enable us to capitalize on increasing demand for data security compliance solutions. For example, we recently introduced our end-to-end encryption and tokenization solutions, which were specifically designed to protect cardholder and other sensitive data. Additionally, we intend to continue to expand our offerings tailored to specific sectors, such as health care and government, which we believe will allow us to better address their specific compliance needs and further increase our presence in these sectors.

Improvement in our Operating Performance. Our recent operating results reflect our success in expanding our subscriber base through our partner network and direct sales efforts as well as increasing sales of our compliance enablement solutions to existing subscribers through our added capabilities from recent acquisitions. Our revenue increased from $58.3 million in 2008 to $73.1 million in 2009 and $111.5 million in 2010. During the same periods, our gross margin has expanded from 60% in 2008 to 62% in 2009 and 67% in 2010. Our net loss was $2.0 million in 2008, $1.5 million in 2009 and $4.6 million in 2010, while our Adjusted EBITDA increased from $0.4 million in 2008 to $3.1 million in 2009 and $4.9 million in 2010. Although we believe our revenue will continue to increase in the near term as we implement our growth strategy and benefit from the increasing demand for data security compliance solutions and the key differentiators of our solutions, we do not expect that our revenue growth will

continue at these historical rates due, in part, to the increasing size of our revenue base that will be used for comparison purposes. To support our recent and expected revenue growth and geographic expansion, we have recently hired a number of employees in our finance, human resource and IT departments, which has contributed to an increase in our general and administrative expenses.

Selective Pursuit of Acquisitions. An important part of our strategy to date has been the selective acquisition of compliance enablement technologies to enhance our ability to offer a cost-effective, comprehensive suite of data security compliance solutions to our customers. In the last three years, we acquired six companies with complementary technologies and we are utilizing these acquired technologies to enhance the capabilities of our overall product suite. For example, we introduced our DataControl solution, which combines our data loss prevention and persistent file encryption technologies, we incorporated new value-added features into our extensible threat management solution, and we developed our 360 Application Security Program, which combines our SpiderLabs services with web application firewalls. For additional information regarding these recent acquisitions, see “-Recent Acquisitions” set forth below. Going forward, we plan to continue to selectively pursue acquisitions of technologies that bolster and complement our data security solutions.

Revenue Composition. Our revenue composition across subscription revenue, professional services, and product sales has and will continue to vary from period-to-period. Our subscription revenue in any particular period is influenced by a number of factors, including the number of new subscribers added through our direct sales efforts, our network partners’ rollout for our compliance management solutions and subscriber turnover. For example, we believe that certain of our network partners have recently delayed the rollout of our TrustKeeper solution as they focus on compliance with certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 relating to payment cards. Our professional services revenue in any given period is typically impacted by the level of demand for our security consulting services, as well as our ability to hire, train and retain security professionals. Our product sales are generally dependent on recent bookings trends, which can be affected by a number of factors, such as customer budget cycles, seasonality, buying preferences of customers and the introduction of new solution offerings by us. Our revenue composition has also been affected by our recent acquisitions and may be impacted by any future acquisitions we may complete. For example, our product sales in 2010 significantly increased as compared to prior periods primarily as a result of our acquisition of Intellitactics on March 1, 2010, which accounted for $6.7 million of our product sales in 2010. As a result of this significant increase, our subscription revenue as a percentage of total revenue decreased by 4% during 2010 as compared to 2009, despite a 44% increase in subscription revenue during that period. During 2009, subscription revenue as a percentage of total revenue increased by 2% as compared to 2008, even as product sales experienced strong growth of 78% during that period. The table below sets forth the amount of our subscription revenue, professional services and product sales as a percentage of revenue for each of our last three years:


										For the
										Three Months
	For the Year Ended									Ended
	December 31,									March 31,
	2008			2009			2010			2010			2011

Revenue:
Subscription revenue		76.0	%		77.6	%		73.3	%		77.6	%		74.7	%
Professional services		22.7			20.6			17.6			15.4			18.2
Product sales		1.3			1.8			9.1			7.0			7.1

Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

As compared to 2010, we expect that our subscription revenue will represent a greater percentage of our total revenue over the longer term as a result of our focus in expanding our subscriber base and cross-selling our subscription compliance enablement solutions to our subscribers. We believe our subscription revenue provides us with a significant level of visibility with respect to our overall revenue for the next 12 months. The gross margins associated with these revenue categories vary and, as a result, our gross margin will be impacted by period-to-period changes in our revenue composition.

Foreign Currency Exchange Rates. As a result of our international operations, we generate a portion of our revenue and incur a portion of our expenses in currencies other than the U.S. dollar, including the euro, the British pound sterling, the Swedish krona, the Brazilian real, the South African rand and the Australian dollar. Our results of operations are impacted by currency exchange rate fluctuations to the extent that we are unable to match net revenues received in foreign currencies with expenses incurred in the same currency. For example, where we have significantly more expenses than net revenues generated in a foreign currency, our profit from operations in that location would be adversely affected in the event that the U.S. dollar depreciates against that foreign currency. Although we are not currently engaged in any financial hedging transactions, we may seek to mitigate the cash effect of exchange rate fluctuations through the use of derivative financial instruments. We record the effects from changes in foreign currency exchange rates in our consolidated statement of operations in other income (loss), net.

We present our consolidated financial statements in U.S. dollars. As a result, we must translate the assets, liabilities, net revenues and expenses of all of our operations into U.S. dollars at applicable exchange rates. Consequently, increases or decreases in the value of the U.S. dollar may affect the value of these items with respect to our non-U.S. dollar businesses in our consolidated financial statements, even if their value has not changed in their local currency. For example, a stronger U.S. dollar will reduce the relative value of reported results of non-U.S. dollar operations and, conversely, a weaker U.S. dollar will increase the relative value of the non-U.S. dollar operations. These translations could significantly affect the comparability of our results between financial periods or result in significant changes to the carrying value of our assets, liabilities and stockholders’ equity.

Recent Acquisitions

We believe that our ability to offer cost effective, comprehensive compliance enablement solutions to help our customers remediate vulnerabilities identified by our compliance management solutions is a critical step toward achieving our longer term growth strategy. In order to accelerate the time to market of our compliance enablement offerings and take advantage of the growth in our compliance management subscriber base, we decided to acquire a number of the technologies required to address certain data security requirements, specific customer needs and evolving security threats. Our acquisitions have enabled us to acquire a broad suite of core, enterprise-grade security technologies and capabilities that we have been able to successfully integrate into our overall solutions.

During the last three fiscal years, we have completed the following acquisitions:

Breach Security, Inc. On June 18, 2010, we acquired Breach Security, a provider of web application firewall technology, or “WAF,” which provides protection for web applications, such as e-commerce sites, against attacks. WAF helps organizations using active web applications to safely maintain the flow of critical network traffic into and out of their organizations and enables compliance with multiple requirements of PCI as well as requirements of other regulatory standards. We have utilized this technology as part of our 360 Application Security Program.

Intellitactics, Inc. On March 1, 2010, we acquired Intellitactics, a provider of security information and event management, or “SIEM,” technology. This solution provides comprehensive reporting of events logged in networks, systems, applications and databases, and is a critical component of robust security architectures, as well as a requirement of many information security regulations and industry standards. SIEM technology can be integrated with our other solutions at customer sites to enable real-time analysis and reaction to security threats through policy-based event monitoring. Also, the SIEM solution is used internally by our secure operations centers and plays a key role in the delivery of our managed security services.

BitArmor Systems, Inc. On January 6, 2010, we acquired BitArmor Systems, Inc., or “BitArmor,” a provider of data encryption solutions, including full disk encryption and persistent file encryption. Encrypting sensitive information is a key component to complying with many data security standards, including PCI. The acquired technology has also served as a foundation for both our DataControl solution and our end-to-end encryption product.

Vericept Corporation. On August 26, 2009, we acquired Vericept Corporation, or “Vericept,” to provide our customers access to advanced data loss prevention solutions. These solutions detect and analyze sensitive data that may be traveling over corporate networks or that may be stored on various enterprise devices. As part of a

comprehensive data protection technology suite, this acquired technology can assist companies in meeting their security and compliance objectives. This technology has also served as a foundation for our DataControl solution.

Mirage Networks, Inc. On February 1, 2009, we acquired Mirage Networks, Inc., or “Mirage Networks,” a provider of network access control solutions. These solutions provide a means for customers to govern who connects to their network, which devices they use and which IT resources they are permitted to access. The acquired technology meets one of the PCI requirements and can be used to aid compliance with three other requirements by enforcing policies with respect to server roles, host-based anti-virus and operating system patch application. A lightweight network access control solution, known as NAC Express, is integrated into our extensible threat management solution.

ControlPath Inc. On August 18, 2008, we acquired ControlPath Inc., a provider of solutions to manage and automate enterprise governance, risk management and compliance of multiple regulatory regimes. Since the data security requirements across compliance initiatives are relatively uniform, it is significantly more efficient to address them through a single, unified compliance solution. We plan to integrate components of this acquired technology to further expand our offerings in other data security regimes such as HIPAA and FISMA, among others.

Acquisition Accounting and Related Matters

We accounted for each of the acquisitions described above using the purchase method of accounting. As a result, the purchase prices for each of these acquisitions were allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values as of the date of each acquisition. The excess of the purchase price over the fair value of assets and liabilities was assigned to goodwill, which is not amortized for accounting purposes, but is subject to testing for impairment at least annually. At March 31, 2011, we had goodwill of $42.6 million and intangible assets of $16.8 million. The application of purchase accounting resulted in an increase in amortization and depreciation expense in the periods subsequent to such acquisitions relating to our acquired intangible assets. For more information regarding our accounting for such acquisitions, see note 2 to the notes to our consolidated financial statements included elsewhere in this prospectus.

In connection with such acquisitions, we incurred acquisition, transaction and integration expenses as well as severance and transition costs. We have added these costs and expenses back to our net loss in calculating Adjusted EBITDA. For more information regarding our integration charges, see note 11 to the notes to our consolidated financial statements included elsewhere in this prospectus. In certain instances, we have experienced increases in our sales and marketing and product development expenses in periods following certain acquisitions as a result of adding additional sales and marketing and product development personnel from those acquired businesses.

Important Components of Our Statement of Operations

Revenues

Subscription Revenue. Subscription revenue includes compliance management and compliance enablement solutions sold under subscription arrangements. Our subscription revenue is driven primarily by the number and type of services to which our subscribers subscribe and is not concentrated within one subscriber or group of subscribers. A majority of our subscription revenue has been related to PCI compliance, including through our TrustKeeper and Compliance Validation solutions, which is expected to remain the main driver of subscription revenue in the foreseeable future. We offer a variety of billing options from monthly to annually depending on the size of the contract and we initially record a subscription fee as deferred revenue and then recognize it ratably over the subscription period. The amount of deferred revenue recorded depends on the invoicing terms as more frequent invoicing cycles will not materially affect our deferred revenue balance while less frequent invoicing cycles will affect such balance.

Professional Services. Services revenue includes consulting, implementation, training and other services. We recognize professional services revenue as the services are performed. We offer a variety of billing options including up front, milestone or percent completion. Depending on the billing option, we may or may not record any deferred revenue.

Product Sales. Product sales includes the sale of perpetual software licenses and related hardware, such as our security information and event management, web application firewall and network access control solutions. We recognize product revenue upon delivery or acceptance (deemed or explicit) depending on the specific contract language.

Cost of Sales

Service Delivery, Excluding Depreciation and Amortization. Cost of service delivery includes the cost of generating subscription revenue and professional services revenue. Cost of service delivery, excluding depreciation and amortization, primarily consists of expenses related to delivery to and support of our compliance management and compliance enablement customers. These expenses include salaries, benefits, bonuses and stock-based compensation, commissions, travel costs, outside service providers and data center costs. In general, we do not allocate overhead such as rent, IT costs and certain benefit program costs to cost of services but instead we recognize these costs as general and administrative expenses.

Product Sales, Excluding Depreciation and Amortization. Cost of product sales consists primarily of the expense associated with third party license fees and related hardware.

Depreciation and Amortization. Depreciation and amortization consists primarily of depreciation expense related to customer premise equipment for our compliance enablement offerings where any managed device resides at a customer location and amortization expense for certain acquired intangible assets.

We expect that these costs will continue to increase in absolute dollars in the event our revenue continues to increase. As a percentage of revenue, however, we expect these costs are likely to continue to decrease as we improve our overall gross margin through favorable changes in our revenue composition. Cost of sales as a percentage of revenue could vary from period-to-period depending on a number of factors, including the timing and pace of additional employee hiring and fluctuations in outside vendor costs.

Operating Expenses

Product Development. Our product development expense consists primarily of personnel and related expense for our product development and product management teams, including salaries, benefits, bonuses and stock-based compensation, commissions, travel costs, outside service providers and recruiting costs. We have focused our development efforts primarily to enhancing the functionality and expanding the capabilities of our compliance management and compliance enablement solutions. As a percentage of revenue, our product development expense was 12%, 13% and 18% of revenue in 2008, 2009 and 2010, respectively, and 17% and 20% in the three months ended March 31, 2010 and 2011, respectively. We expect to continue to invest in product development to expand the functionality and enhance the ease of use of our compliance management and compliance enablement solutions. In the near term, we expect that our product development expense is likely to continue to increase in absolute dollars but that it will remain relatively consistent with prior periods as a percentage of revenue.

Sales and Marketing. Our sales and marketing expense consists primarily of personnel and related expense for our direct sales team, our sales engineers, our team that recruits, enables and supports our partner network and our marketing team. This expense includes salaries, benefits, bonuses, stock-based compensation, commissions, travel costs, outside service providers and recruiting costs. As a percentage of revenue, our sales and marketing expenses were 24%, 24% and 26% in 2008, 2009 and 2010, respectively, and 27% and 23% in the three months ended March 31, 2010 and 2011, respectively, primarily due to our ongoing efforts to expand our subscriber base. We intend to continue to invest in sales and marketing to add new subscribers, increase penetration in our existing subscriber base, build brand awareness and sponsor additional marketing events and programs. In the near term, we expect that our sales and marketing expenses will continue to increase in absolute dollars but that it will remain relatively consistent with prior periods as a percentage of revenue.

General and Administrative. Our general and administrative expense consists primarily of personnel and related expense for our executive, finance, legal, human resources, IT and administrative personnel, including salaries, benefits, bonuses and stock-based compensation, commissions, travel costs, outside service providers and recruiting costs. We also group support expense such as facilities, legal, accounting, other professional service fees, corporate expense and depreciation and amortization in general and administrative. As a percentage of revenue,

general and administrative expense was 27%, 28% and 27% in 2008, 2009 and 2010, respectively, and 30% and 22% in the three months ended March 31, 2010 and 2011, respectively.

Going forward, we expect to continue to incur higher costs associated with being a public company, including higher legal, corporate insurance and accounting expenses and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations. We currently anticipate that we will be required to begin to comply with Section 404 of the Sarbanes-Oxley Act in 2012. We expect that general and administrative expenses will increase in the near term in absolute dollars because of these public company costs and our efforts to expand our international operations. However, over time we believe our general and administrative costs will decline as a percentage of revenues as we expect to derive greater efficiencies from our corporate infrastructure.

Gain on Acquisition

Gain on acquisition was the result of our acquisition of Mirage Networks on February 1, 2009. The total purchase price consisted of the assumption of short-term liabilities and resulted in a $0.6 million bargain purchase gain, which was recorded as a gain on acquisition in our consolidated statement of operations in 2009.

Income Tax Expense

We estimate actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carry forwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. For deferred tax assets generated in the U.S., the United Kingdom, Brazil, Canada, Hong Kong, India and Singapore, we recorded a full valuation allowance as of December 31, 2008, 2009 and 2010. Based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize all of our deferred tax assets in the future. We intend to maintain the valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance, either as a result of establishing a pattern of profitability or the possible result of a to be developed tax strategy assessing the need for the valuation allowance. In that event, we would make an adjustment to the allowance for the deferred tax asset, which would increase income in the period that determination was made. At December 31, 2010, we had federal net operating loss carry-forwards of $45.3 million available to reduce future taxable income in the United States.

We underwent a change in ownership for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, or the “Code,” as a result of our merger with Ambiron in 2005. As a result, the amount of our pre-change net operating losses, or “NOLs,” and other tax attributes that are available to offset future taxable income of $5.8 million are subject to an annual limitation of $0.7 million per year. Section 382 of the Code also limited the annual deduction related to $10.5 million of accumulated net operating losses acquired through the acquisition of Secure Pipe, Inc in December, 2006 to approximately $0.5 million per year. The annual limitation is based on the value of the corporation as of the effective date of the transaction. The ownership change and the resulting annual limitation on use of NOLs are not expected to result in the expiration of our NOL carry forwards if we are able to generate sufficient future taxable income within the carry forward periods. However, the limitation on the amount of NOLs available to offset taxable income in a specific year may result in the payment of income taxes before all NOLs have been utilized. Additionally, a subsequent ownership change may result in further limitation on the ability to utilize existing NOLs and other tax attributes. Our NOLs are subject to expiration from 2022 through 2029. For more information regarding income taxes, see note 8 to the notes to our consolidated financial statements included elsewhere in this prospectus.

Adjusted EBITDA

We present Adjusted EBITDA, a non-GAAP financial measure, in this prospectus to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures can provide alone. Our board of directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expectations and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives.

We believe Adjusted EBITDA may be useful to investors in comparing our operating performance consistently over time as it removes from our operating results the impact of our capital structure, asset base (primarily depreciation and amortization), items outside the control of the management team (such as taxes or changes in foreign currency exchange rates) and other non-cash (such as purchase accounting adjustments) or non-recurring items, including the impact of non-cash stock-based compensation expense.

We define Adjusted EBITDA, a non-GAAP financial measure, as net income (loss) before income tax expense (benefit), depreciation and amortization, net interest expense, stock-based compensation, gain (loss) on foreign currency exchange, severance and transition costs, and acquisition, transaction and integration expenses.

The use of Adjusted EBITDA has limitations as an analytical tool and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income/(loss) or loss from operations. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

To properly and prudently evaluate our business, we encourage you to review our audited consolidated financial statements included elsewhere in this prospectus and the reconciliation to Adjusted EBITDA from net loss, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from net loss to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of items not considered in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect ongoing operating performance.

Results of Operations

The following table sets forth a summary of our consolidated statements of operations in thousands of dollars and as a percentage of total revenue. We have derived the data for the years ended December 31, 2008, 2009 and 2010 from the audited consolidated financial statements included elsewhere in this prospectus and for the three months ended March 31, 2010 and 2011 from the unaudited consolidated financial statements included elsewhere in this prospectus. The table below also presents a reconciliation of Adjusted EBITDA to net loss. See “—Adjusted EBITDA.” Amounts and percentages in the table below have been calculated based on unrounded numbers. Accordingly, certain amounts may not add to the totals due to the effect of rounding.


	For the Year Ended December 31,																		For the Three Months Ended March 31,
	2008						2009						2010						2010						2011
				Percent of						Percent of						Percent of						Percent of						Percent of
	Amount			Revenue			Amount			Revenue			Amount			Revenue			Amount			Revenue			Amount			Revenue
	(dollars in thousands)

Statement of Operations Data:
Revenue:
Subscription revenue	$	44,356			76.0	%	$	56,708			77.6	%	$	81,677			73.3	%	$	16,829			77.6	%	$	23,448			74.7	%
Professional services		13,219			22.7			15,056			20.6			19,639			17.6			3,342			15.4			5,721			18.2
Product sales		753			1.3			1,343			1.8			10,187			9.1			1,518			7.0			2,229			7.1

Total revenue		58,328			100.0			73,107			100.0			111,503			100.0			21,689			100			31,398			100


Cost of sales:
Service delivery, excluding depreciation and amortization⁽¹⁾		22,525			38.6			26,431			36.1			33,415			30.0			7,406			34.1			9,363			29.9
Product sales, excluding depreciation and amortization		440			0.8			481			0.7			1,715			1.5			273			1.3			508			1.6
Depreciation and amortization		591			1.0			718			1.0			1,403			1.3			266			1.2			450			1.4

Total cost of sales		23,556			40.4			27,630			37.8			36,533			32.8			7,945			36.6			10,321			32.9

Gross profit		34,772			59.6			45,477			62.2			74,970			67.2			13,744			63.4			21,077			67.1

Operating expenses:
Product development		6,749			11.5			9,146			12.5			20,112			18.0			3,744			17.3			6,194			19.7
Sales and marketing		14,059			24.1			17,388			23.8			29,264			26.2			5,753			26.5			7,122			22.7
General and administrative		16,030			27.5			20,511			28.0			29,602			26.6			6,491			29.9			7,002			22.3

Total operating expenses		36,838			63.1			47,045			64.3			78,978			70.8			15,988			73.7			20,318			64.7

Loss from operations		(2,066	)		(3.5	)		(1,568	)		(2.1	)		(4,008	)		(3.6	)		(2,244	)		(10.3	)		759			2.4
Interest expense, net		(151	)		(0.3	)		(112	)		(0.1	)		(87	)		(0.1	)		(36	)		(0.2	)		(8	)		0.0
Other income (loss), net		193			0.3			(304	)		(0.5	)		(155	)		(0.1	)		(106	)		(0.5	)		18			0.0
Gain on acquisition		—			—			552			0.7			—			—			—			0.0			—			0.0

Loss before income taxes		(2,024	)		(3.5	)		(1,432	)		(2.0	)		(4,250	)		(3.8	)		(2,386	)		(11.0	)		769			2.4
Income tax expense		(22	)		0.0			(114	)		(0.1	)		(372	)		(0.3	)		(78	)		(0.4	)		(110	)		0.3

Net (loss) income	$	(2,046	)		(3.5	)%	$	(1,546	)		(2.1	)%	$	(4,622	)		(4.1	)%	$	(2,464	)		(11.4	)%	$	659			2.1	%

Reconciliation of non-GAAP measure:
Income tax expense	$	22			N/M		$	114			0.1	%	$	372			0.3	%	$	78			0.4	%	$	110			0.3	%
(Gain) loss on foreign currency exchange		(178	)		(0.3	)		259			0.4			232			0.2			84			0.4			(50	)		(0.2	)
Interest expense, net		151			0.3			112			0.2			87			0.1			36			0.2			8			—

Depreciation and amortization included in:
Total cost of sales		591			1.0			718			1.0			1,403			1.3			266			1.2			450			1.4
General and administrative		1,545			2.6			2,294			3.1			3,567			3.2			755			3.5			1,067			3.4

Total depreciation and amortization		2,136			3.7			3,012			4.1			4,970			4.5			1,021			4.7			1,517			4.8

Stock-based compensation expense included in:
Service delivery, excluding depreciation and amortization		44			0.2			46			0.1			77			0.1			18			0.1			34			0.1
Product development		64			0.3			64			0.1			243			0.2			58			0.3			100			0.3
Sales and marketing		55			0.3			87			0.1			145			0.1			37			0.2			87			0.3
General and administrative		122			0.6			81			0.1			561			0.5			24			0.1			72			0.2

Total stock-based compensation expense⁽²⁾		285			0.5			278			0.4			1,026			0.9			137			0.6			293			0.9

Severance and transition costs included in:
Product development		—			—			—			—			46			—			—			—			—			—
Sales and marketing		—			—			4			—			154			0.1			57			0.3			—			—
General and administrative		—			—			944			1.3			1,068			1.0			293			1.4			—			—

Total severance and transition costs⁽³⁾		—			—			948			1.3			1,268			1.1			350			1.6			—			—

Acquisition, transaction and integration expenses included in:
Service delivery, excluding depreciation and amortization		—			—			—			—			109			0.1			—			—			—			—
General and administrative		37			0.2			389			0.5			1,292			1.2			148			0.7			—			—
Other expense (income), net		—			—			65			0.1			122			0.1			—			—			—			—
Gain on acquisition		—			—			(552	)		(0.8	)		—			—			—			—			—			—

Total acquisition, transaction and integration expenses⁽⁴⁾		37			0.1			(98	)		(0.1	)		1,523			1.4			148			0.7			—			0.0

Adjusted EBITDA⁽⁵⁾	$	407			0.7	%	$	3,079			4.2	%	$	4,856			4.4	%	$	(610	)		(2.8	)%	$	2,537			8.1	%

“N/M” indicates the percentage is not meaningful.


(1)		Calculated based upon a percentage of total subscription and professional services, as the costs to deliver these product lines originate from the same Company resources.
(2)		Represents non-cash compensation expense.
(3)		Represents severance and transition payments made to employees that were terminated as a result of acquisitions and to certain members of our senior management team whose positions were restructured in contemplation of this offering.
(4)		Represents costs and expenses associated with acquisitions, transactions and integration activities during the period, including the following:


	For the Year Ended December 31,							For the Three Months Ended March 31,
	2008		2009			2010		2010		2011
	(in thousands)

Acquisition costs⁽ⁱ⁾	$	3	$	271		$	261	$	140		—
Transaction costs for potential acquisitions⁽ⁱⁱ⁾		34		5			494		—		—
Financial reporting costs for acquired companies⁽ⁱⁱⁱ⁾		—		113			195		8		—
Lease abandonment^(iv)		—		—			342		—		—
Post acquisition purchase accounting adjustments^(v)		—		65			231		—		—
Gain on acquisition^(vi)		—		(552	)		—		—		—

Total acquisition, transaction and integration expenses	$	37	$	(98	)	$	1,523	$	148		—


	(i)	Represents legal fees incurred in connection with acquisitions during the period.

	(ii)	Represents legal, accounting and other consulting fees incurred in connection with transactions that were not completed.

	(iii)	Represents valuation services and audits of acquired companies.

	(iv)	Represents the lease abandonment accrual for our facility in Carlsbad, California.

	(v)	Represents certain adjustments relating to the purchased assets and assumed liabilities of Mirage Networks, BitArmor and Breach Security which we identified subsequent to finalizing the purchase accounting for such acquisitions.

	(vi)	Represents the gain on acquisition of Mirage Networks.


(5)		For more information regarding Adjusted EBITDA, a non-GAAP measure, see “— Adjusted EBITDA.”

Comparison of the Three Months Ended March 31, 2010 and 2011

Revenue


	For the Three Months Ended March 31,
	2010					2011
			Percent of					Percent of			Period-to-Period Change
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Revenue:
Subscription revenue	$	16,829		77.6	%	$	23,448		74.7	%	$	6,619		39.3	%
Professional services		3,342		15.4			5,721		18.2			2,379		71.2
Product sales		1,518		7.0			2,229		7.1			711		46.8

Total revenue	$	21,689		100.0	%	$	31,398		100.0	%	$	9,709		44.8	%

North America	$	18,334		84.5	%	$	25,016		79.7	%	$	6,682		36.4	%
EMEA		2,723		12.6			5,371		17.1			2,648		97.2
LAC		363		1.7			551		1.8			188		51.8
APAC		269		1.2			460		1.4			191		71.0

Total revenue	$	21,689		100.0	%	$	31,398		100.0	%	$	9,709		44.8	%

Revenue was $31.4 million in the three months ended March 31, 2011 compared to $21.7 million in the three months ended March 31, 2010, an increase of $9.7 million, or 45%. Subscription revenue increased by $6.6 million, or 39%, due to a significant increase in the number of subscribers from our partner network, which accounted for 53% of the increase, and the acquisition of additional customer relationships and technologies through our acquisitions of Intellitactics and Breach Security, which accounted for 23% of the increase. Substantially all of the remainder of the increase in revenue during the 2011 period was attributable to our direct sales efforts, which increased our customer and device counts. Professional services revenue increased by $2.4 million, or 71%, because of increased demand for our SpiderLabs services, which accounted for 50% of the increase in revenue, as well as additional installation work associated with our product sales. Product sales increased by $0.7 million, or 47%, due to our acquisitions of Intellitactics and Breach Security. In the three months ended March 31, 2011, revenue

generated by recently acquired businesses through the first anniversary of their respective acquisition dates was $3.8 million. Excluding this revenue, our revenue increased in the three months ended March 31, 2011 by 27% as compared to our comparable revenue in 2010.

We increased revenue in the three months ended March 31, 2011 by $6.7 million, or 36%, in our largest geographic market, North America, due to a significant increase in our subscriber base through our partner network and direct sales efforts and our acquisition of Intellitactics. Our EMEA revenue increase of $2.6 million, or 97%, was related to our acquisition of Intellitactics and a significant increase in subscribers for our partner network.

Cost of Sales and Gross Profit


	For the Three Months Ended March 31,
	2010					2011
			Percent of					Percent of			Period-to-Period Change
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Cost of sales:
Service delivery, excluding depreciation and amortization	$	7,406		34.1	%	$	9,363		29.9	%	$	1,957		26.4	%
Product sales, excluding depreciation and amortization		273		1.3			508		1.6			235		86.1
Depreciation and amortization		266		1.2			450		1.4			184		69.2

Total cost of sales		7,945		36.6	%		10,321		32.9	%		2,376		29.9	%

Gross profit	$	13,744		63.4	%	$	21,077		67.1	%	$	7,333		53.4	%

Cost of sales was $10.3 million in the three months ended March 31, 2011 compared to $7.9 million in the three months ended March 31, 2010, an increase of $2.4 million, or 30%. Cost of sales as a percent of revenue declined from 37% in the three months ended March 31, 2010 to 33% in the three months ended March 31, 2011. The decrease in cost of sales as a percent of revenue resulted from higher revenue and, to a lesser extent, a change of revenue mix towards higher margin products. Service delivery cost increased $2.0 million, or 26%, primarily as a result of a $1.7 million, or 26%, increase in salary and associated employee expense for tax, benefits, bonus, travel and entertainment. There was also an increase of $0.1 million due to increased use of outsourced call center capabilities. The increase in employees and associated expense is due to ramping up our delivery and support capabilities to support our customer and product revenue growth.

Product sales cost increased $0.2 million, or 86%, as a result of our increased product sales related to security information & event management and web application firewall solution, and their associated hardware and other costs.

Depreciation and amortization expense increased $0.2 million as a result of a $0.1 million increase in depreciation expense for customer premise equipment and a $0.1 million increase in amortization expense due to our 2010 acquisitions.

Gross profit increased to $21.1 million in the three months ended March 31, 2011 compared to $13.7 million in the three months ended March 31, 2010, an increase of $7.3 million, or 53%, as a result of the benefits of economies of being a larger organization and, to a lesser extent, a change of revenue mix towards higher margin products.

Operating Expenses


	For the Three Months Ended March 31,
	2010					2011
			Percent of					Percent of			Period-to-Period Change
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Operating expenses:
Product development	$	3,744		17.3	%	$	6,194		19.7	%	$	2,450		65.4	%
Sales and marketing		5,753		26.5			7,122		22.7			1,369		23.8
General and administrative		6,491		29.9			7,002		22.3			511		7.9

Total operating expenses	$	15,988		73.7	%	$	20,318		64.7	%	$	4,330		27.1	%

Product Development. Product development expenses increased by $2.5 million, or 65%, in the three months ended March 31, 2011, related to headcount expansion both from integrating the development teams from the three companies we acquired in 2010, as well as other hiring. Salary and associated employee expense increased $2.1 million, or 59%. There was also an increase of $0.2 million in the use of temporary employees on a project basis and an increase of $0.1 million in other costs.

Sales and Marketing. Sales and marketing expenses increased by $1.4 million, or 24%, in the three months ended March 31, 2011, as a result of our retaining sales resources from our 2010 acquisitions and ongoing hiring. Employee related expense, excluding commissions and referral fees, increased by $0.7 million, or 20%. Commissions and referral fees increased by $0.4 million, or 24%, the result of increased sales period to period that included a higher percentage of product sales. Third party marketing expense increased by $0.3 million as a result of increased presence at industry trade shows and similar events.

General and Administrative. General and administrative expenses increased by $0.5 million, or 8%, in the three months ended March 31, 2011. This increase was due to an increase in employee related expense of $0.1 million, or 5%, from hiring in 2010 to support our infrastructure build out. Real estate costs increased by $0.3 as we increased our rental space, and utilities and telecommunications costs increased by $0.1 million to $0.4 million in the three months ended March 31, 2011 due to expanding our offices and upgrading our systems. These increases were offset by a decrease in bad debt expense of $0.4 million as we experienced fewer collections difficulties. Depreciation and amortization expense increased $0.3 million as a result of increased capital expenditures.

Other Income (Loss), Net

Other income (loss), net was income of $0.02 million in the three months ended March 31, 2011 compared to an expense of $0.1 million in the three months ended March 31, 2010. The change was the result of an improvement in our foreign currency exchange rates and other income of $0.1 million.

Income Tax Expense

We recorded an income tax expense of $0.08 million in the three months ended March 31, 2010 as compared to $0.1 million in the three months ended March 31, 2011. We had an effective tax expense rate of 14.3% for the three months ended March 31, 2011 and (3.3)% in the three months ended March 31, 2010.

Adjusted EBITDA


	For the Three Months Ended March 31,
	2010						2011
				Percent of						Percent of			Period-to-Period Change
	Amount			Revenue			Amount			Revenue			Amount			Percent
	(dollars in thousands)

Segment Reported Adjusted EBITDA:
North America	$	(162	)		(0.7	)%	$	2,931			9.3	%	$	3,093			N/M
EMEA		189			0.9			265			0.8			76			40.2
LAC		(256	)		(1.2	)		(556	)		(1.8	)		(300	)		117.2
APAC		(381	)		(1.8	)		(103	)		(0.3	)		278			(73.0	)

Total adjusted EBITDA⁽¹⁾	$	(610	)		(2.8	)%	$	2,537			8.1	%	$	3,147			N/M

Income tax expense	$	(78	)		(0.4	)%	$	(110	)		(0.4	)%	$	(32	)		(41.0	)%
Depreciation and amortization		(1,021	)		(4.7	)		(1,517	)		(4.8	)		(496	)		(48.6	)
Interest expense, net		(36	)		(0.2	)		(8	)		0.0			28			77.8
Stock-based compensation expense⁽²⁾		(137	)		(0.6	)		(293	)		(0.9	)		(156	)		(113.9	)
Gain (loss) on foreign currency exchange		(84	)		(0.4	)		50			0.2			134			159.5
Severance and transition costs		(350	)		(1.6	)		—			0.0			350			N/M
Acquisition transaction and integration expenses⁽³⁾		(148	)		(0.7	)		—			0.0			148			N/M

Net income (loss)	$	(2,464	)		(11.4	)%	$	659			2.1	%	$	3,123			126.7	%

“N/M” indicates the percentage is not meaningful.


(1)		For more information regarding Adjusted EBITDA, a non-GAAP measure, see “—Results of Operations” and “—Adjusted EBITDA.”

(2)		Represents non-cash compensation expense.

(3)		Represents costs and expenses associated with acquisitions, integration activities and restructuring during the period, including legal, diligence and audit expenses, severance expenses and restructuring charges. For more information, see “—Recent Acquisitions.”

Adjusted EBITDA increased by $3.1 million in the three months ended March 31, 2011 to $2.5 million as a result of our gross profit excluding depreciation and amortization increasing by $7.5 million, or 54%, largely due to our increase in subscribers in North America and the effects of our 2010 acquisitions. This was partially offset by a net increase of $4.4 million in operating expenses excluding depreciation and amortization, stock-based compensation and acquisition, transaction, integration and severance costs, that resulted from increased hiring, additional sales and marketing activities to support our revenue growth and other factors.

Comparison of the Years Ended December 31, 2009 and 2010

Revenue


	For the Year Ended December 31,
	2009					2010					Period-to-Period Change
			Percent of					Percent of
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Revenue:
Subscription revenue	$	56,708		77.6	%	$	81,677		73.3	%	$	24,969		44.0	%
Professional services		15,056		20.6			19,639		17.6			4,583		30.4
Product sales		1,343		1.8			10,187		9.1			8,844		N/M

Total revenue	$	73,107		100.0	%	$	111,503		100.0	%	$	38,396		52.5	%

North America	$	61,936		84.7	%	$	94,706		84.9	%	$	32,770		52.9	%
EMEA		9,957		13.6			13,509		12.1			3,552		35.7
LAC		579		0.8			1,980		1.8			1,401		N/M
APAC		635		0.9			1,308		1.2			673		106.0

Total revenue	$	73,107		100.0	%	$	111,503		100.0	%	$	38,396		52.5	%

“N/M” indicates the percentage is not meaningful.

Revenue was $111.5 million in 2010 compared to $73.1 million in 2009, an increase of $38.4 million, or 53%. Subscription revenue increased by $25.0 million, or 44%, due to a significant increase in the number of subscribers from our partner network, which accounted for 41% of the increase, as well as the acquisition of additional customer relationships and technologies through our acquisitions of Intellitactics and Breach Security, which accounted for 25% of the increase. Substantially all of the remainder of the increase in revenue during 2010 was attributable to our direct sales efforts, which increased our customer and device counts. We increased our subscription revenue from the sale of our compliance management solutions as a result of a significant increase in our subscribers from our partner network as well as our ongoing direct sales efforts. We also increased our revenue from the sale of compliance enablement solutions as a result of acquiring additional customer relationships and technologies through our acquisition of Intellitactics in 2010, as well as increasing our customers and device counts through our own direct sales efforts. Professional services revenue increased by $4.6 million, or 30%, because of increased demand for our SpiderLabs and Payment Application services, which accounted for 36% of the growth, as well as additional installation work associated with our product sales, which accounted for 32% of the growth. Product sales increased by $8.8 million, $6.7 million of which was due to our acquisition of Intellitactics. In 2010, revenue generated by recently acquired businesses through the first anniversary of their respective acquisition dates was $19.2 million. Excluding this revenue, our revenue increased in 2010 by 26% as compared to our comparable revenue in 2009.

We increased revenue in 2010 by $32.8 million, or 53%, in our largest geographic market, North America, due to a significant increase in our subscriber base through our partner network and direct sales efforts and our acquisition of Intellitactics. Our EMEA revenue increase was related to an increase in subscribers for our partner network.

Cost of Sales and Gross Profit


	For the Year Ended December 31,
	2009					2010					Period-to-Period Change
			Percent of					Percent of
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Cost of sales:
Service delivery, excluding depreciation and amortization	$	26,431		36.1	%	$	33,415		30.0	%	$	6,984		26.4	%
Product sales, excluding depreciation and amortization		481		0.7			1,715		1.5			1,234		N/M
Depreciation and amortization		718		1.0			1,403		1.3			685		95.4

Total cost of sales		27,630		37.8	%		36,533		32.8	%		8,903		32.2	%

Gross profit	$	45,477		62.2	%	$	74,970		67.2	%	$	29,493		64.9	%

“N/M” indicates that the percentage is not meaningful.

Cost of sales was $36.5 million in 2010 compared to $27.6 million in 2009, an increase of $8.9 million, or 32%. Cost of sales as a percent of revenue declined from 38% in 2009 to 33% in 2010. Service delivery cost increased $7.0 million, or 26%, primarily as a result of $5.8 million, or 25%, increase in salary and associated employee expense for tax, benefits, bonus, travel and entertainment expense. There was also an increase of $0.5 million due to increased use of outsourced call center capabilities. The increase in employees and associated expense is due to ramping up our delivery and support capabilities to support our customer and product growth.

Product sales cost increased $1.2 million as a result of our increased product sales related to our security information & event management, web application firewall and network access control solutions, and their associated hardware and other costs.

Depreciation and amortization expense increased $0.7 million as a result of a $0.2 million increase in depreciation expense for customer premise equipment and a $0.5 million increase in amortization expense primarily due to our 2010 acquisitions.

Gross profit increased to $75.0 million in 2010 compared to $45.5 million in 2009, an increase of $29.5 million, or 65%, as our revenue mix moved towards higher margin products and other offerings and the benefits of economies of being a larger organization.

Operating Expenses


	For the Year Ended December 31,
	2009					2010					Period-to-Period Change
			Percent of					Percent of
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Operating expenses:
Product development	$	9,146		12.5	%	$	20,112		18.0	%	$	10,966		119.9	%
Sales and marketing		17,388		23.8			29,264		26.2			11,876		68.3
General and administrative		20,511		28.0			29,602		26.6			9,091		44.3

Total operating expenses	$	47,045		64.3	%	$	78,978		70.8	%	$	31,933		67.9	%

Product Development. Product development expenses increased by $11.0 million, or 120% as a result of headcount expansion both from integrating the development teams from the three companies we acquired in 2010, as well as other hiring. Salary and associated employee expense increased $10.2 million, or 114%. There was also

an increase of $0.3 million in the use of temporary employees on a project basis and an increase of $0.5 million in other costs.

Sales and Marketing. Sales and marketing expenses increased by $11.9 million, or 68%, as a result of our retaining sales resources from our 2010 acquisitions. Employee related expense, excluding commissions and referral fees, increased by $6.0 million, or 60%. Commissions and referral fees increased by $4.3 million, or 76%, primarily the result of legacy commission plans from the acquired entities and increased product sales of $8.8 million compared to the prior year. Third party marketing expense increased by $1.1 million as a result of increased advertising and presence at industry trade shows and similar events.

General and Administrative. General and administrative expenses increased by $9.1 million, or 44%. This increase was due to an increase in employee related expense of $2.5 million, or 33%, as a result of hiring employees in our finance, human resource and IT departments. There was also an increase of $1.2 million in legal, accounting and third party support fees related to our three acquisitions in 2010. Real estate costs increased by $1.1 million, which includes a write-off of $0.3 million related to an office we closed after an acquisition. Bad debt expense increased by $0.8 million to $1.5 million in 2010 as a result of the associated increase in our revenue and the broader geographic scope of our subscriber base. Telecommunications costs increased by $0.9 million to $1.7 million in 2010 primarily due to hiring employees, office expansion and upgrading our systems. Certain gross receipt tax expenses increased by $0.5 million to $0.6 million in 2010 as a result of filing in more tax jurisdictions. Depreciation and amortization expense increased $1.3 million primarily as a result of capital expenditures and the acquisitions completed in 2010.

Other Income (Loss), Net

Other income (loss), net was a loss of $0.2 million in 2010 compared to an expense of $0.3 million in 2009. The change was the result of an improvement in our foreign currency exchange rates and other income of $0.1 million.

Income Tax Expense

We recorded an income tax expense of $0.1 million in 2009 as compared to $0.4 million in 2010. We had an effective tax expense rate of (8.0)% for 2009 and (8.8)% in 2010. For 2010, we applied a valuation allowance against certain of our deferred tax assets, including net operating loss carry forwards, which reduced the effective tax benefit rate from the expected statutory rate. In accordance with authoritative accounting guidance, a valuation allowance is required unless it is more likely than not that future taxable income or the reversal of deferred tax liabilities will be sufficient to recover deferred tax assets. In addition, certain state taxes are calculated on bases different than pre-tax loss. This resulted in us recording income tax expense for these states, which also lowered our effective tax benefit rate in 2009 and 2010 compared to the statutory rate.

Adjusted EBITDA


	For the Year Ended December 31,												Period-to-Period
	2009						2010						Change
				Percent of						Percent of
	Amount			Revenue			Amount			Revenue			Amount			Percent
	(dollars in thousands)

Segment Reported Adjusted EBITDA:
North America	$	4,175			5.7	%	$	7,111			6.4	%	$	2,936			70.3	%
EMEA		329			0.5			492			0.4			163			49.5
LAC		(624	)		(0.9	)		(1,817	)		(1.6	)		(1,193	)		191.2
APAC		(801	)		(1.1	)		(930	)		(0.8	)		(129	)		16.1

Total adjusted EBITDA⁽¹⁾	$	3,079			4.2	%	$	4,856			4.4	%	$	1,777			57.7	%

Income tax expense	$	(114	)		(0.1	)%	$	(372	)		(0.3	)%	$	(258	)		N/M
Depreciation and amortization		(3,012	)		(4.1	)		(4,970	)		(4.5	)		(1,958	)		65.0
Interest expense, net		(112	)		(0.1	)		(87	)		(0.1	)		25			(22.3	)
Stock-based compensation expense⁽²⁾		(278	)		(0.4	)		(1,026	)		(0.9	)		(748	)		N/M
Gain (loss) on foreign currency exchange		(259	)		(0.4	)		(232	)		(0.2	)		27			(10.4	)
Severance and transition costs		(948	)		(1.3	)		(1,268	)		(1.1	)		(320	)		33.8
Acquisition transaction and integration expenses⁽³⁾		98			0.1			(1,523	)		(1.4	)		(1,621	)		N/M

Net loss	$	(1,546	)		(2.1	)%	$	(4,622	)		(4.1	)%	$	(3,076	)		199.0	%

“N/M” indicates the percentage is not meaningful.


(1)		For more information regarding Adjusted EBITDA, a non-GAAP measure, see “—Results of Operations” and “—Adjusted EBITDA.”
(2)		Represents non-cash compensation expense.
(3)		Represents costs and expenses associated with acquisitions, integration activities and restructuring during the period, including legal, diligence and audit expenses, severance expenses and restructuring charges. For more information, see “—Recent Acquisitions.”

Adjusted EBITDA increased by $1.8 million, or 58%, to $4.9 million as a result of our gross profit excluding depreciation and amortization increasing by $30.2 million, or 65%, largely due to our increase in subscribers in North America and our acquisitions during the period. This was offset by a net increase of $27.9 million in operating expenses excluding depreciation and amortization, stock-based compensation and acquisition, transaction, integration and severance costs, that resulted from increased hiring, additional sales and marketing activities to support our revenue growth and other factors.

Comparison of the Years Ended December 31, 2008 and 2009

Revenue


	For the Year Ended December 31,
	2008					2009					Period-to-Period Change
			Percent of					Percent of
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Revenue:
Subscription revenue	$	44,356		76.0	%	$	56,708		77.6	%	$	12,352		27.8	%
Professional services		13,219		22.7			15,056		20.6			1,837		13.9
Product sales		753		1.3			1,343		1.8			590		78.4

Total revenue	$	58,328		100.0	%	$	73,107		100.0	%	$	14,779		25.3	%

North America	$	47,932		82.2	%	$	61,936		84.7	%	$	14,004		29.2	%
EMEA		9,640		16.5			9,957		13.6			317		3.3
LAC		268		0.5			579		0.8			311		116.0
APAC		488		0.8			635		0.9			147		30.1

Total revenue	$	58,328		100.0	%	$	73,107		100.0	%	$	14,779		25.3	%

Revenue was $73.1 million in 2009 compared to $58.3 million in 2008, an increase of $14.8 million, or 25%. Subscription revenue increased by $12.4 million, or 28%, primarily as a result of a substantial increase in our revenue from sales of our solutions through our successful expansion into the SMB market through our partner network in 2009, which accounted for 68% of the increase. Professional services revenue increased by $1.8 million, or 14%, because of increased demand for our SpiderLabs and Payment Application services, which accounted for 65% of the increase, as well as additional installation work associated with our product sales. Product sales increased by $0.6 million as a result of the acquisition of Mirage Networks. In 2009, revenue generated by recently acquired businesses through the first anniversary of their respective acquisition dates was $3.4 million. Excluding this revenue, our revenue increased in 2009 by 20% as compared to our comparable revenue in 2008.

Revenue increased $14.0 million, or 29%, in our largest geographic market, North America, due to our successful expansion into the SMB market through our partner network and acquisitions we completed in 2009.

Cost of Sales and Gross Profit


	For the Year Ended December 31,
	2008					2009					Period-to-Period Change
			Percent of					Percent of
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Cost of sales:
Service delivery, excluding depreciation and amortization	$	22,525		38.6	%	$	26,431		36.1	%	$	3,906		17.3	%
Product sales, excluding depreciation and amortization		440		0.8			481		0.7			41		9.3
Depreciation and amortization		591		1.0			718		1.0			127		21.5

Total cost of sales	$	23,556		40.4	%	$	27,630		37.8	%	$	4,074		17.3	%

Gross profit	$	34,772		59.6	%	$	45,477		62.2	%	$	10,705		30.8	%

Cost of sales was $27.6 million in 2009 compared to $23.6 million in 2008, an increase of $4.1 million, or 17%. Cost of sales as a percent of revenue declined from 40% in 2008 to 38% in 2009. Service delivery cost increased $3.9 million, or 17%, as a result of $3.7 million, or 19%, increase in salary and associated employee expense for tax,

benefits, bonus, travel and entertainment expense and a $0.1 million increase in data licenses and other costs to support our compliance enablement solutions. The increase in employees and associated expense is due to ramping up our delivery and support capabilities to support our customer and product growth.

Product sales cost increased $0.04 million, or 9%, as a result of increased hardware costs related to increased sales.

Depreciation and amortization expense increased $0.1 million as a result of an increase in depreciation expense for customer premise equipment and an increase in amortization expense due to our 2009 acquisitions.

Gross profit increased to $45.5 million in 2009 compared to $34.8 million in 2008, an increase of $10.7 million, or 31%, as our revenue mix moved towards higher margin solutions and we experienced economies of scale from our revenue growth. Our gross margin increased from 60% in 2008 to 62% 2009.

Operating Expenses


	For the Year Ended December 31,
	2008					2009					Period-to-Period Change
			Percent of					Percent of
	Amount		Revenue			Amount		Revenue			Amount		Percent
	(dollars in thousands)

Operating expenses:
Product development	$	6,749		11.5	%	$	9,146		12.5	%	$	2,397		35.5	%
Sales and marketing		14,059		24.1			17,388		23.8			3,329		23.7
General and administrative		16,030		27.5			20,511		28.0			4,481		28.0

Total operating expenses	$	36,838		63.1	%	$	47,045		64.3	%	$	10,207		27.7	%

Product Development. Product development expenses increased $2.4 million, or 36%, related to hiring additional employees as well as adding the development teams from two companies we acquired in 2009. Salary and associated employee expense increased $2.6 million, or 41%, which was offset by a $0.2 million reduction in outside consultants costs.

Sales and Marketing. Sales and marketing expenses increased by $3.3 million, or 24% as a result of retaining sales personnel from our 2009 acquisitions and hiring. Employee related expenses, excluding commission expense and referral fees, increased by $2.0 million, or 24%. Commission expense and referral fees increased by $1.3 million, or 28%, as a result of increased sales activity. Third party marketing expense increased by $0.1 million as a result of increased advertising and presence at industry trade shows and similar events, which was partially offset by a $0.1 million reduction in expense associated with third party consultants and miscellaneous other expense.

General and Administrative. General and administrative expenses increased by $4.5 million, or 28%, in 2009. This increase was due to an increase in employee-related expense of $1.0 million, or 16%, primarily as a result of hiring employees in finance and other support groups. There was also an increase of $1.0 million in legal, accounting and third party fees directly related to the two acquisitions. Real estate and other facilities related costs increased by $1.5 million as we expanded our headquarters in Chicago. Bad debt expense increased by $0.2 million as our business and our associated accounts receivable increased. Depreciation and amortization expense increased $0.9 million primarily due to increased equipment and leasehold improvement depreciation.

Other Income (Loss), Net

Other income (loss), net was a loss of $0.3 million in 2009 compared to income of $0.2 million in 2008. The change was the result of a change in foreign currency exchange rates.

Income Tax Expense

We recorded an income tax expense of $0.1 million and $0.02 million in 2009 and 2008, respectively. We had an effective tax expense rate was (8.0)% for 2009 and (1.0)% in 2008. Our effective tax rate differs substantially from the federal statutory rate primarily due to the application of a valuation allowance that reduced the recognized benefit of our deferred tax assets. In addition, certain state income taxes are calculated on bases different than pre-tax income (loss). This resulted in recording income tax expense in certain states that experience a pre-tax loss.

Adjusted EBITDA


	For the Year Ended December 31,
	2008						2009						Period-to-Period Change
				Percent of						Percent of
	Amount			Revenue			Amount			Revenue			Amount			Percent
	(dollars in thousands)

Segment Reported Adjusted EBITDA:
North America	$	959			1.6	%	$	4,175			5.7	%	$	3,216			N/M
EMEA		8			N/M			329			0.5			321			N/M
LAC		(254	)		(0.4	)		(624	)		(0.9	)		(370	)		145.7
APAC		(306	)		(0.5	)		(801	)		(1.1	)		(495	)		161.8

Total adjusted EBITDA⁽¹⁾	$	407			0.7	%	$	3,079			4.2	%	$	2,672			N/M

Income tax expense	$	(22	)		N/M		$	(114	)		(0.1	)%	$	(92	)		N/M
Depreciation and amortization		(2,136	)		(3.7	)		(3,012	)		(4.1	)		(876	)		41.0
Interest expense, net		(151	)		(0.2	)		(112	)		(0.1	)		39			(25.8	)
Stock-based compensation expense⁽²⁾		(285	)		(0.5	)		(278	)		(0.4	)		7			(2.5	)
Gain (loss) on foreign currency exchange		178			0.3			(259	)		(0.4	)		(437	)		N/M
Severance and transition costs		—			—			(948	)		(1.3	)		(948	)		N/M
Acquisition transaction and integration expenses⁽³⁾		(37	)		(0.1	)		98			0.1			135			N/M

Net loss	$	(2,046	)		(3.5	)%	$	(1,546	)		(2.1	)%	$	500			(24.4	)%

“N/M” indicates the percentage is not meaningful.


(1)		For more information regarding Adjusted EBITDA, a non-GAAP measure, see “— Results of Operations” and “— Adjusted EBITDA.”
(2)		Represents non-cash compensation expense.
(3)		Represents costs and expenses associated with acquisitions, integration activities and restructuring during the period, including legal, diligence and audit expenses, severance expenses and restructuring charges. For more information, see “— Recent Acquisitions.”

Adjusted EBITDA increased by $2.7 million to $3.1 million as a result of gross profit excluding depreciation and amortization increasing by $10.8 million, or 31%, due to increased traction with our enterprise customers and subscribers in North America. This was offset by a net increase of $8.6 million in operating expenses excluding depreciation and amortization, stock-based compensation and acquisition, transaction, integration and severance costs that resulted from increased hiring, sales and marketing activities and infrastructure expansion.

Quarterly Results of Operations

The following table sets forth unaudited selected quarterly operating results for 2009 and 2010. In the opinion of our management, the following selected quarterly information includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.


	For the Three Months Ended
	March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,		December 31,
	2009		2009		2009		2009		2010		2010		2010		2010

Consolidated Statement of Operations Data:
Revenue
Subscription revenue	$	12,660	$	13,581	$	14,651	$	15,816	$	16,829	$	19,559	$	21,683	$	23,606
Professional services		3,454		3,684		3,221		4,697		3,342		4,708		5,341		6,248
Product sales		140		468		247		488		1,518		2,424		3,720		2,525

Total revenue

Trustwave Holdings, Inc. S-1/A