Riverbed Technology (RVBD)

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

Quarter Ended March 31, 2009 Compared to the Quarter Ended March 31, 2008: Sales and marketing expenses increased by $9.6 million, or 31%, primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 440 employees as of March 31, 2009 from 336 employees as of March 31, 2008. The increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 due to increased revenue and personnel. Salaries and related benefits, bonuses and commissions accounted for $5.8 million, marketing related activities accounted for $1.3 million, facilities and information technology expenses accounted for $0.3 million and bad debt expense accounted for $0.3 million of the $9.6 million increase in sales and marketing expenses. Stock-based compensation, which was $6.0 million in the

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three months ended March 31, 2009 compared to $5.4 million in the three months ended March 31, 2008, accounted for $0.6 million of the increase in sales and marketing expenses. In addition, the first quarter of 2009 includes acquisition-related expenses for the amortization of intangibles of $0.2 million and compensation expense of $0.2 million related to the acquisition-related contingent consideration to be paid to former employees of Mazu.

We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to grow and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Sales and Marketing Expenses

Sales and marketing expenses represent the largest component of our operating expenses and include personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing customers, and are expensed as incurred. We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

2008 Compared to 2007:    The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 404 employees as of December 31, 2008 from 285 employees as of December 31, 2007. The increase in employees resulted in higher salary expense and employee related benefits. Additionally,

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commission expense increased in the year ended December 31, 2008 as compared to the year ended December 31, 2007 due to increased revenue and personnel. Salaries and related benefits, bonuses and commissions accounted for $24.4 million, marketing related activities accounted for $2.8 million, facilities and information technology expenses accounted for $3.2 million and travel and entertainment expenses accounted for $3.3 million of the $45.0 million increase in sales and marketing expenses. Stock-based compensation, which was $23.6 million in the year ended December 31, 2008 compared to $15.2 million in the year ended December 31, 2007, accounted for approximately $8.4 million of the increase in sales and marketing expenses.

2007 Compared to 2006:    The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 285 employees as of December 31, 2007 from 151 employees as of December 31, 2006. The increase in employees resulted in higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the year ended December 31, 2007 as compared to the year ended December 31, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $18.5 million, marketing related activities accounted for $5.3 million, facilities and information technology expenses attributable to sales and marketing accounted for $4.8 million, and travel and entertainment expenses accounted for $3.5 million of the $47.6 million increase in sales and marketing expenses. Stock-based compensation, which was $15.2 million in the year ended December 31, 2007 compared to $4.6 million in the year ended December 31, 2006, accounted for approximately $10.6 million of the increase in sales and marketing expenses.

Sales and Marketing Expenses

Sales and
marketing expenses represent the largest component of our operating expenses and include personnel costs, sales commissions, marketing programs and facilities costs. Marketing programs are intended to generate revenue from new and existing
customers, and are expensed as incurred. We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel
worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to
increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces
short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

Quarter Ended September 30, 2008 Compared to the Quarter Ended September 30, 2007: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 379 employees as of September 30, 2008 from 250 employees as of September 30, 2007. The increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 due to increased revenue and personnel. Salaries and related benefits, bonuses and commissions accounted for $6.4 million, marketing related activities accounted for $489,000, facilities and information technology expenses accounted for $561,000 and travel and entertainment expenses accounted for $512,000 of the $9.7 million increase in sales and marketing expenses. Stock-based compensation, which was $5.9 million in the three months ended September 30, 2008 compared to $4.5 million in the three months ended September 30, 2007, accounted for approximately $1.4 million of the increase in sales and marketing expenses.

We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees. The increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to the increase in revenue and additional personnel. Salaries and related benefits, bonuses and commissions accounted for $21.4 million, marketing related activities accounted for $2.2 million, facilities and information technology expenses accounted for $2.8 million, and travel and entertainment expenses accounted for $2.5 million of the $38.0 million increase in sales and marketing expenses. Stock-based compensation, which was $17.9 million in the nine months ended September 30, 2008 compared to $10.7 million in the nine months ended September 30, 2007, accounted for approximately $7.2 million of the increase in sales and marketing expenses.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

Quarter Ended June 30, 2008 Compared to the Quarter Ended June 30, 2007: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 361 employees as of June 30, 2008 from 204 employees as of June 30, 2007. The increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 due to increased revenue and personnel. Salaries, bonuses and commissions accounted for $6.9 million, facilities and information technology expenses accounted for $1.0 million and travel and entertainment expenses accounted for $1.3 million of the $14.1 million increase in sales and marketing expenses. Stock-based compensation, which was $6.6 million in the three months ended June 30, 2008 compared to $3.5 million in the three months ended June 30, 2007, accounted for approximately $3.1 million of the increase in sales and marketing expenses.

We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

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Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees. The increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 due to the increase in revenue and additional personnel. Salaries, bonuses and commissions accounted for $12.8 million, marketing related activities accounted for $1.7 million, facilities and information technology expenses accounted for $2.3 million, and travel and entertainment expenses accounted for $2.0 million of the $28.2 million increase in sales and marketing expenses. Stock-based compensation, which was $11.9 million in the six months ended June 30, 2008 compared to $6.3 million in the six months ended June 30, 2007, accounted for approximately $5.6 million of the increase in sales and marketing expenses.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

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Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 336 employees as of March 31, 2008 from 175 employees as of March 31, 2007. The increase in employees resulted in higher salary expense and employee related benefits. Additionally, commission expense increased in the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $5.9 million, marketing related activities accounted for $1.7 million, facilities and information technology expense accounted for $1.2 million and travel and entertainment expenses accounted for $755,000 of the $14.1 million increase in sales and marketing expenses. Stock-based compensation, which was $5.4 million in the three months ended March 31, 2008 compared to $2.7 million in the three months ended March 31, 2007, accounted for approximately $2.7 million of the increase in sales and marketing expenses.

We plan to continue to make investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally, sales personnel are not immediately productive and sales and marketing expenses do not immediately result in increased revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

2007 Compared to 2006:     The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 285 employees as of December 31, 2007 from 151 employees as of December 31, 2006. The increase in employees resulted in higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the year ended December 31, 2007 as compared to the year ended December 31, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $18.5 million, marketing related activities accounted for $5.3 million, facilities and information technology expenses attributable to sales and marketing accounted for $4.8 million, and travel and entertainment expenses accounted for $3.5 million of the $47.6 million increase in sales and marketing expenses. Stock-based compensation, which was $15.2 million in the year ended December 31, 2007 compared to $4.6 million in the year ended December 31, 2006, accounted for approximately $10.6 million of the increase in sales and marketing expenses.

We plan to continue to make significant investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

2006 Compared to 2005:    The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 151 employees as of December 31, 2006 from 77 employees as of December 31, 2005. The increase in employees resulted in higher salary expense, employee-related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the year ended December 31, 2006 as compared to the year ended December 31, 2005 due to the substantial increase in revenue. Salaries and commissions accounted for $15.3 million, travel and entertainment expenses accounted for $2.2 million, and marketing related activities accounted for $1.8 million of the $28.4 million increase in sales and marketing expenses. Stock-based compensation, which was $4.6 million in the year ended December 31, 2006 compared to $482,000 in the year ended December 31, 2005, accounted for approximately $4.2 million of the increase in sales and marketing expenses. The percentage of sales and marketing expenses incurred internationally grew to 34% in the year ended December 31, 2006 from 27% in the year ended December 31, 2005.

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Sales and Marketing Expenses

FACE="ARIAL" SIZE="2">Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

2007 Compared to 2006:     The increase in sales and marketing expenses was
primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 285 employees as of December 31, 2007 from 151 employees as of December 31, 2006. The increase in employees resulted in
higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the year ended December 31, 2007 as compared to the year ended December 31, 2006 due to the
substantial increase in revenue. Salaries, bonuses and commissions accounted for $18.5 million, marketing related activities accounted for $5.3 million, facilities and information technology expenses attributable to sales and marketing accounted for
$4.8 million, and travel and entertainment expenses accounted for $3.5 million of the $47.6 million increase in sales and marketing expenses. Stock-based compensation, which was $15.2 million in the year ended December 31, 2007 compared to $4.6
million in the year ended December 31, 2006, accounted for approximately $10.6 million of the increase in sales and marketing expenses.

We plan
to continue to make significant investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and
international sales and marketing activities, increasing channel penetration, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most
significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales
personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

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Quarter Ended September 30, 2007 Compared to the Quarter Ended September 30, 2006: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 250 employees as of September 30, 2007 from 138 employees as of September 30, 2006. The increase in employees resulted in higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $4.9 million, marketing related activities accounted for $1.2 million, facilities and information technology expenses attributable to sales and marketing accounted for $1.3 million, and travel and entertainment expenses accounted for $964,000 of the $13.0 million increase in sales and marketing expenses. Stock-based compensation, which was $4.5 million in the three months ended September 30, 2007 compared to $1.1 million in the three months ended September 30, 2006, accounted for approximately $3.4 million of the increase in sales and marketing expenses.

We plan to continue to make significant investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees. The increase in employees resulted in higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $11.1 million, marketing related activities accounted for $3.1 million, facilities and information technology expenses attributable to sales and marketing accounted for $3.2 million, and travel and entertainment expenses accounted for $2.2 million of the $31.3 million increase in sales and marketing expenses. Stock-based compensation, which was $10.7 million in the nine months ended September 30, 2007 compared to $2.2 million in the nine months ended September 30, 2006, accounted for approximately $8.5 million of the increase in sales and marketing expenses.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

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Quarter Ended June 30, 2007 Compared to the Quarter Ended June 30, 2006: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 204 employees as of June 30, 2007 from 127 employees as of June 30, 2006. The increase in employees resulted in higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $2.7 million, marketing related activities accounted for $1.1 million, facilities and information technology expenses attributable to sales and marketing accounted for $1.0 million, and travel and entertainment expenses accounted for $434,000 of the $9.2 million increase in sales and marketing expenses. Stock-based compensation, which was $3.5 million in the three months ended June 30, 2007 compared to $668,000 in the three months ended June 30, 2006, accounted for approximately $2.9 million of the increase in sales and marketing expenses.

We plan to continue to make significant investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees. The increase in employees resulted in higher salary expense, employee related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the six months ended June 30, 2007 as compared to the six months ended June 30, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $6.3 million, marketing related activities accounted for $1.9 million, facilities and information technology expenses attributable to sales and marketing accounted for $1.8 million, and travel and entertainment expenses accounted for $1.2 million of the $18.3 million increase in sales and marketing expenses. Stock-based compensation, which was $6.3 million in the six months ended June 30, 2007 compared to $1.1 million in the six months ended June 30, 2006, accounted for approximately $5.2 million of the increase in sales and marketing expenses.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

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Quarter Ended March 31, 2007 Compared to the Quarter Ended March 31, 2006: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 175 employees as of March 31, 2007 from 109 employees as of March 31, 2006. The increase in employees resulted in higher salary expense, employee-related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 due to the substantial increase in revenue. Salaries, bonuses and commissions accounted for $3.5 million, travel and entertainment expenses accounted for $776,000, and marketing related activities accounted for $809,000 of the $9.1 million increase in sales and marketing expenses. Stock-based compensation, which was $2.7 million in the three months ended March 31, 2007 compared to $465,000 in the three months ended March 31, 2006, accounted for approximately $2.3 million of the increase in sales and marketing expenses.

We plan to continue to make significant investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

2006 Compared to 2005:    The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 151 employees as of December 31, 2006 from 77 employees as of December 31, 2005. The increase in employees resulted in higher salary expense, employee-related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the year ended December 31, 2006 as compared to the year ended December 31, 2005 due to the substantial increase in revenue. Salaries and commissions accounted for $15.3 million, travel and entertainment expenses accounted for $2.2 million, and marketing related activities accounted for $1.8 million of the $28.4 million increase in sales and marketing expenses. Stock-based compensation, which was $4.6 million in the year ended December 31, 2006 compared to $482,000 in the year ended December 31, 2005, accounted for approximately $4.2 million of the increase in sales and marketing expenses. The percentage of sales and marketing expenses incurred internationally grew to 34% in the year ended December 31, 2006 from 27% in the year ended December 31, 2005. We plan to continue to make significant investments in sales and marketing with the intent to add new customers and increase penetration within our existing customer base by increasing the number of sales personnel worldwide, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. If we are successful in achieving our business objectives, we expect that sales and marketing expenses will decrease as a percentage of revenue over time.

2005 Compared to 2004:    The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as sales and marketing headcount grew to 77 employees as of December 31, 2005 from 32 employees as of December 31, 2004. International

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headcount growth accounted for 34% of the total headcount increase as we expanded our worldwide sales operations in 2005. The increase in headcount resulted in higher salary expense, employee-related benefits, commissions, travel and entertainment, and recruiting fees. Salaries and commissions accounted for $7.2 million and travel and entertainment expenses accounted for $1.4 million of the $14.1 million increase in sales and marketing expenses. Commission expense increased from 2004 to 2005 due to the substantial increase in revenue. Stock-based compensation expense, which was $482,000 in 2005 compared to $78,000 in 2004, accounted for $404,000 of the increase in sales and marketing expenses. As the number of sales and marketing employees increased, we experienced an increase in facilities costs related to additional space at our headquarters as well as sales offices worldwide.

Sales and Marketing Expenses

Sales and marketing expenses primarily include personnel costs, sales commissions, marketing programs and facilities costs.

Quarter Ended September 30, 2006 Compared to the Quarter Ended September 30, 2005. The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, which grew to 138 employees at September 30, 2006 from 59 employees at September 30, 2005. The increase in employees resulted in higher salary expense, employee-related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the quarter ended September 30, 2006 as compared to the quarter ended September 30, 2005 due to the substantial increase in revenue. Salaries and commissions accounted for $3.9 million, travel and entertainment expenses accounted for $600,000 and marketing activities accounted for $472,000 of the $7.1 million increase in sales and marketing expenses. Stock-based compensation, which was $1.1 million in the quarter ended September 30, 2006 compared to $148,000 in the quarter ended September 30, 2005, accounted for $907,000 of the increase in sales and marketing expenses.

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The percentage of sales and marketing expenses incurred internationally increased to 33% in the quarter ended September 30, 2006 from 26% in the quarter ended September 30, 2005.

We plan to continue to make significant investments in sales and marketing by increasing the number of sales personnel worldwide with the intent to add new customers and increase penetration within our existing customer base, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We expect future sales and marketing expenses to continue to increase and continue to be our most significant operating expense. Generally sales personnel are not immediately productive and sales and marketing expenses do not immediately result in revenue. Hiring additional sales personnel reduces short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of sales personnel hiring and the rate at which they become productive will affect our future performance. If we are successful in achieving our business objectives, we expect that sales and marketing expenses will decrease as a percentage of revenue over time.

Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005: The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing employees, as average sales and marketing headcount grew to 124 employees for the nine months ended September 30, 2006 from 47 employees for the nine months ended September 30, 2005. The increase in employees resulted in higher salary expense, employee-related benefits and fees for recruitment of new employees. Additionally, commission expense increased in the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005 due to the substantial increase in revenue. Salaries and commissions accounted for $10.1 million, travel and entertainment expenses accounted for $1.7 million, and marketing related activities accounted for $1.7 million of the $19.4 million increase in sales and marketing expenses. Stock-based compensation, which was $2.2 million in the nine months ended September 30, 2006 compared to $277,000 in the nine months ended September 30, 2005, accounted for $1.9 million of the increase in sales and marketing expenses. The percentage of sales and marketing expenses incurred internationally grew to 33% in the nine months ended September 30, 2006 from 23% in the nine months ended September 30, 2005.