Netsuite 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the transition period from_______________ to __________.

Commission file number 001-33870

NetSuite Inc.

(Exact name of registrant as specified in its charter)

Delaware	94-3310471
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2955 Campus Drive, Suite 100 San Mateo, California	94403-2511
(Address of principal executive offices)	(Zip Code)

(650) 627-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Large accelerated filer  ¨        Accelerated filer  ¨        Non-accelerated filer  x        Smaller reporting company  ¨

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

On July 31, 2008, 60,350,597 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

NetSuite Inc.

Index

Part I – Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of December 31, 2007 and June 30, 2008 (unaudited)	1
	Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2007 and 2008 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2007 and 2008 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
Part II – Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 4.	Submission of Matters to a Vote of Security Holders	41
Item 6.	Exhibits	42
Signatures		43

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PART I – Financial Information

ITEM 1. Financial Statements

NetSuite Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)

(unaudited)

	December 31, 2007			June 30, 2008
Assets
Current assets:
Cash and cash equivalents	$	169,408		$	137,370
Accounts receivable, net of allowances of $585 and $508 as of December 31, 2007 and June 30, 2008, respectively		18,698			21,478
Deferred commissions		13,241			12,908
Other current assets		1,778			2,059
Total current assets		203,125			173,815
Property and equipment, net		12,068			12,936
Deferred commissions, non-current		2,275			2,014
Goodwill		—			17,824
Other intangible assets, net		—			9,958
Other assets		1,309			1,479
Total assets	$	218,777		$	218,026
Liabilities, minority interest and stockholders’ equity
Current liabilities:
Accounts payable	$	2,788		$	4,639
Deferred revenue		65,875			68,919
Accrued compensation		8,552			9,603
Other current liabilities		13,784			11,154
Total current liabilities		90,999			94,315
Long-term liabilities:
Deferred revenue, non-current		11,111			9,269
Other long-term liabilities		4,257			3,707
Total long-term liabilities		15,368			12,976
Total liabilities		106,367			107,291
Minority interest		1,330			806
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock		601			602
Additional paid-in capital		355,155			359,033
Accumulated other comprehensive income		215			342
Accumulated deficit		(244,891	)		(250,048	)
Total stockholders’ equity		111,080			109,929
Total liabilities, minority interest and stockholders’ equity	$	218,777		$	218,026

See accompanying Notes to Condensed Consolidated Financial Statements.

1

NetSuite Inc.

Condensed Consolidated Statements of Operations

(Dollars and shares in thousands, except per share amounts)

(unaudited)

	Six months ended June 30,						Three months ended June 30,
	2007			2008			2007			2008
Revenue	$	48,742		$	70,671		$	25,513		$	36,553
Cost of revenue (1)		15,743			21,780			8,842			11,665
Gross profit		32,999			48,891			16,671			24,888
Operating expenses:
Product development (1)		15,030			8,534			6,605			4,452
Sales and marketing (1)		27,823			37,206			15,295			19,401
General and administrative (1)		8,675			10,612			4,045			5,145
Total operating expenses		51,528			56,352			25,945			28,998
Operating loss		(18,529	)		(7,461	)		(9,274	)		(4,110	)
Other income / (expense), net:
Interest income		72			2,696			—			1,078
Interest expense		(21	)		(137	)		(11	)		(1	)
Interest expense paid to related party		(375	)		(161	)		(207	)		(80	)
Other income / (expense), net		115			(154	)		7			(56	)
Total other income / (expense), net		(209	)		2,244			(211	)		941
Loss before income taxes and minority interest		(18,738	)		(5,217	)		(9,485	)		(3,169	)
Provision for income taxes		325			590			176			361
Loss before minority interest		(19,063	)		(5,807	)		(9,661	)		(3,530	)
Minority interest		234			650			109			402
Net loss	$	(18,829	)	$	(5,157	)	$	(9,552	)	$	(3,128	)
Net loss per common share, basic and diluted	$	(2.46	)	$	(0.09	)	$	(1.22	)	$	(0.05	)
Weighted average number of shares used in computing net loss per share		7,658			60,127			7,853			60,160

(1) Includes stock-based compensation expense and amortization of acquisition-related intangible assets as follows:

	Six months ended June 30,				Three months ended June 30,
	2007		2008		2007		2008
Cost of revenue	$	1,395	$	819	$	1,300	$	525
Product development		8,641		1,031		3,338		548
Sales and marketing		2,269		902		2,226		568
General and administrative		2,837		1,085		1,316		587
Total stock-based compensation expense and amortization of acquisition-related intangible assets	$	15,142	$	3,837	$	8,180	$	2,228

See accompanying Notes to Condensed Consolidated Financial Statements.

2

NetSuite Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

	Six months ended June 30,
	2007			2008
Cash flows from operating activities:
Net loss	$	(18,829	)	$	(5,157	)
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
Depreciation and amortization		1,514			2,484
Amortization of other intangible assets		—			180
Provision for accounts receivable allowances		241			228
Stock-based compensation		15,142			3,657
Amortization of deferred commissions		9,434			11,269
Loss on disposal of property and equipment		—			43
Minority interest		(234	)		(650	)
Accrued interest on notes receivable from stockholders		(56	)		—
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		(1,997	)		(3,031	)
Deferred commissions		(8,408	)		(10,663	)
Other current assets		(242	)		(217	)
Other assets		375			(112	)
Accounts payable		591			947
Accrued compensation		831			687
Deferred revenue		1,216			1,221
Other current liabilities		1,223			(1,464	)
Other long-term liabilities		(8	)		288
Net cash provided by / (used in) operating activities		793			(290	)
Cash flows from investing activities:
Proceeds from disposal of property and equipment		—			18
Purchases of property and equipment		(2,279	)		(2,713	)
Capitalized internal use software		(65	)		(159	)
Acquisition of OpenAir, net of cash received		—			(28,210	)
Net cash used in investing activities		(2,344	)		(31,064	)
Cash flows from financing activities:
Payment of offering costs		(251	)		(560	)
Proceeds from line of credit from related party		1,350			—
Payments on line of credit from related party		(349	)		—
Proceeds from notes receivable from stockholders		4,429			—
Payments under capital leases and long-term debt		(662	)		(783	)
Proceeds from issuance of common stock		442			248
Net cash provided by / (used in) financing activities		4,959			(1,095	)
Effect of exchange rate changes on cash and cash equivalents		(344	)		411
Net change in cash and cash equivalents		3,064			(32,038	)
Cash and cash equivalents at beginning of period		9,910			169,408
Cash and cash equivalents at end of period	$	12,974		$	137,370
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest paid on line of credit from related party	$	349		$	—
Interest for capital leases and long-term debt	$	28		$	181
Income taxes, net of tax refunds	$	24		$	1,066
Noncash financing and investing activities:
Lapse of restrictions on common stock related to early exercise of stock options	$	676		$	59
Fixed assets acquired under capital lease	$	422		$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

3

NetSuite Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1. Organization

NetSuite Inc. (the “Company��) provides an on-demand, integrated business management application suite that provides Accounting / Enterprise Resource Planning, Customer Relationship Management and Ecommerce functionality to small and medium-sized businesses and divisions of large companies. The Company’s headquarters are located in San Mateo, California. The Company conducts its business worldwide, with international locations in Canada, Europe, Asia, and Australia.

Note 2. Basis of Presentation

The Condensed Consolidated Financial Statements as of and for the three and six month periods ended June 30, 2007 and 2008 included in this Quarterly Report on Form 10-Q have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, (the “SEC”). The condensed consolidated balance sheet data as of December 31, 2007 was derived from the audited consolidated financial statements which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained in this Quarterly Report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements are meant to be, and should be, read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the financial position and results for the dates and periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its majority- and wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

As of June 30, 2008, the Company owned a 72% interest in NetSuite Kabushiki Kaisha (“NetSuite KK”), a Japanese corporation. Given the Company’s majority ownership interest, the accounts of NetSuite KK have been consolidated with the accounts of the Company, and a minority interest has been recorded for the minority investors’ interests in the net assets and operations of NetSuite KK to the extent of the minority investors’ individual investments.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Segments

The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”), who reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region. Accordingly, the Company has determined that it has a single reporting segment, specifically, the provision of on-demand, business management application suites.

4

Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income / (loss). Other comprehensive income / (loss) is comprised of foreign currency translation gains and losses, net of tax. This item has been excluded from net loss and is reflected instead in stockholders’ equity. The Company’s comprehensive loss was as follows for the periods presented:

	Six months ended June 30,						Three months ended June 30,
	2007			2008			2007			2008
	(dollars in thousands)
Net loss	$	(18,829	)	$	(5,157	)	$	(9,552	)	$	(3,128	)
Other comprehensive income / (loss):
Foreign currency translation gains and losses, net of tax		(227	)		126			(277	)		(329	)
Comprehensive loss	$	(19,056	)	$	(5,031	)	$	(9,829	)	$	(3,457	)

Concentration of Credit Risk and Significant Customers and Suppliers

Financial instruments potentially exposing the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, and trade accounts receivable. The Company maintains an allowance for doubtful accounts receivable balances. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with problem accounts. Credit risk arising from accounts receivable is mitigated due to the large number of customers comprising the Company’s customer base and their dispersion across various industries. At December 31, 2007 and June 30, 2008, there were no customers that represented more than 10% of the net accounts receivable balance. There were no customers that individually exceeded 10% of the Company’s revenue in any of the periods presented. At December 31, 2007 and June 30, 2008, long-lived assets located outside the United States were not significant.

Revenue by geographic region, based on the billing address of the customer, was as follows for the periods presented:

	Six months ended June 30,				Three months ended June 30,
	2007		2008		2007		2008
	(dollars in thousands)
Americas	$	40,376	$	56,991	$	21,015	$	29,228
International		8,366		13,680		4,498		7,325
Total revenue	$	48,742	$	70,671	$	25,513	$	36,553

No single country outside the United States represented more than 10% of revenue during the three months ended June 30, 2007 or 2008.

The Company maintains cash balances at several banks. Accounts located in the United States are insured by the Federal Deposit Insurance Corporation (“FDIC”), up to $100,000. Certain operating cash accounts may exceed the FDIC limits.

5

Goodwill and Other Intangible Assets

The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. The Company has determined that there was a single reporting unit for the purpose of goodwill impairment tests. For purposes of assessing the impairment of goodwill, the Company estimates the value of the reporting unit. That fair value estimate is then compared to the carrying value of the reporting unit. During the six months ended June 30, 2008 there were no impairments to goodwill.

Other intangible assets, which include acquired developed technology, tradename and customer relationships, are stated at cost less accumulated amortization. All other intangible assets have been determined to have definite lives and are amortized on a straight-line basis over their estimated remaining economic lives which range from two to seven years.

Long-lived Assets

The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of the long-lived assets, including property and equipment and other intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flow. If the future undiscounted cash flow is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize any intangible asset impairment charges during the six months ended June 30, 2008.

Note 3. Business Combinations – Acquisition of OpenAir

On June 4, 2008, the Company acquired all of the outstanding share capital of OpenAir Inc. (“OpenAir”), for initial aggregate consideration of approximately $35.1 million (the “Initial Consideration”). The Initial Consideration consists of the cash consideration paid to OpenAir’s former shareholders totaling $33.0 million and other direct transaction costs of $2.1 million consisting primarily of investment banking fees and other professional fees. The cash used in the acquisition was $28.2 million, net of $6.1 million in cash and cash equivalents acquired as part of the transaction. The Company also accrued $705,000 for other direct transaction costs that will be paid subsequent to June 30, 2008.

OpenAir is a provider of on-demand professional services automation software. NetSuite expects that the acquisition of OpenAir will accelerate the development of NetSuite’s products specifically designed for service companies, particularly project-and-time-based organizations in markets such as professional services, business and IT consulting, legal, accounting, and government contracting. As a result of the transaction, OpenAir became a wholly-owned subsidiary of the Company. The results of OpenAir’s operations have been included in the consolidated financial statements since the date of the closing of the acquisition.

In addition to the Initial Consideration, the Company may pay contingent consideration relating to any necessary adjustments to the working capital on the closing pre-acquisition balance of OpenAir which will be determined within 90 days of the close of the transaction. Such payments, if any, will be recorded as additional goodwill on the consolidated balance sheet at the time of payment.

Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. This amount represents buyer-specific value resulting from synergies that are not included in the fair values of assets that would not be available to another likely marketplace buyer. The factors that contributed to the recognition of goodwill in the acquisition of OpenAir included increased revenues and profits resulting from the expected enhancement of NetSuite’s application suite through the inclusion of OpenAir’s functionality designed specifically for services companies, the potential to cross-sell NetSuite’s fully integrated application suite to OpenAir’s clients, as well as the acquisition of a talented workforce.

6

The allocation of the Initial Consideration to the net assets acquired was as follows:

	(dollars in thousands)
Tangible assets:
Cash and cash equivalents	$	6,141
Accounts receivable		1,844
Other current assets		108
Property and equipment		296
Other non-current assets		39
Total tangible assets		8,428
Intangible assets:
Goodwill		17,824
Developed technology		4,502
Tradename		523
Customer relationships		5,113
Total intangible assets		27,962
Liabilities assumed:
Accounts payable and accrued liabilities		(1,334	)
Total liabilities assumed		(1,334	)
Net assets acquired	$	35,056

The Company is also undertaking an analysis of the tax attributes of the assets acquired and the liabilities assumed. The allocation of the Initial Consideration may be adjusted upon the completion of that analysis.

Pro Forma financial statements have not been included as the amounts are not material to the consolidated financial results of the Company.

Note 4. Financial Instruments

In the first quarter of 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 did not have a significant impact on the consolidated financial statements of the Company. SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:

• Level 1 - Quoted prices in active markets for identical assets or liabilities.

• Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

7

The Company measures certain financial assets at fair value on a recurring basis. As of June 30, 2008, those assets were comprised of cash equivalents invested in money market mutual funds. The fair value of these financial assets was determined using the following inputs at June 30, 2008:

			Fair value measurements at reporting date using
	Total		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
	(dollars in thousands)
Cash equivalents	$	120,995	$	120,995	$	—	$	—

Note 5. Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill for the six months ended June 30, 2008 was as follows:

	(dollars in thousands)
Balance as of January 1, 2008	$	—
Goodwill acquired during year		17,824
Balance as of June 30, 2008	$	17,824

The carrying amount of other intangible assets at June 30, 2008 was as follows:

	Gross carrying amount		Accumulated amortization			Net carrying amount
	(dollars in thousands)
Developed technology	$	4,502	$	(108	)	$	4,394
Tradename		523		(19	)		504
Customer relationships		5,113		(53	)		5,060
Total	$	10,138	$	(180	)	$	9,958

The total amortization expense for other intangible assets was $180,000 during the six and three month periods ended June 30, 2008. Amortization of acquired developed technology is included in cost of revenue and is being amortized over an estimated economic life of three years. Amortization of tradename and customer relationships is included in operating expenses – sales and marketing, and is being amortized over periods of two and seven years, respectively.

Future amortization of intangible assets recorded as of June 30, 2008 is expected to be as follows:

	(dollars in thousands)
Fiscal year ended:
December 31, 2008 (remainder of the year)	$	1,246
December 31, 2009		2,493
December 31, 2010		2,343
December 31, 2011		1,372
December 31, 2012		730
Thereafter		1,774
Total	$	9,958

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Note 6. Line of Credit

As of December 31, 2007, the Company had a $20.0 million secured line of credit agreement with Tako Ventures, LLC. The line of credit expired in February 2008. Tako Ventures, LLC was owned by the Company’s majority stockholder at the time the Company originally entered into the line of credit. There were no outstanding borrowings on the line of credit as of December 31, 2007 or prior to its expiration in 2008.

Note 7. Commitments and Contingencies

Sales and Use Taxes

Prior to the first quarter of 2007, the Company did not collect sales and use taxes from its customers. Based on the services provided to customers in certain states, and subsequent research of the applicable statutes, regulations, rulings and other authority, the Company determined that it was both probable and estimable that the Company owed uncollected sales and use tax in various states and local jurisdictions. Accordingly, the Company provided for that liability, including applicable penalties and interest that were considered reasonably estimable. During the six months ended June 30, 2008, the Company made settlement payments in several states that resulted in a reduction of the amount of the liability. Sales tax liabilities totaled $1.9 million as of December 31, 2007 and $1.4 million as of June 30, 2008.

Warranties

The Company’s application suite is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.

The Company includes service level commitments to its customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that the Company fails to meet those levels. To date, the Company has not incurred any material costs as a result of such commitments and has not accrued any liabilities related to such obligations.

Legal Proceedings

On April 18, 2008, a complaint was filed in the United States District Court for the Eastern District of Texas titled Triton IP, LLC v. NetSuite Inc., CDC Corporation and CDC Software, Inc. The complaint alleged infringement of a patent held by Triton IP, LLC by the Company and the other defendants. On April 30, 2008, an amended complaint was filed that changed the name of the plaintiff to SFA Systems, LLC and also added The Cobalt Group, Inc. and OnStation Corporation as additional defendants to the civil action. NetSuite filed its answer to the amended complaint and its counterclaims on July 18, 2008. The initial status conference has been set for August 21, 2008. To date, no discovery has occurred. The Company intends to defend the action vigorously. Based on the information currently available to the Company, it is currently unable to determine the likelihood of an adverse outcome or reasonably estimate the amount of loss, if any, that would be incurred as a result of such an outcome. Therefore, no liability related to this complaint has been recorded as of June 30, 2008.

As of June 30, 2008, the Company was not subject to any other material legal proceedings. From time to time, however, the Company is named as a defendant in legal actions arising from normal business activities. Although the Company cannot accurately predict the amount of its liability, if any, that could arise with respect to currently pending legal actions, it is not expected that any such liability will have a material adverse effect on the Company’s financial position, operating results or cash flows.

9

Other Commitments

The Company has agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that may enable the Company to recover a portion of any future amounts paid.

Note 8. Stock-based Compensation

Stock-based Plans

As of June 30, 2008, the Company maintained the 2007 Equity Incentive Plan (the “2007 Plan”) for the purpose of granting incentive stock options, nonstatutory stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, performance units, and performance shares to its employees and directors. Additionally, as of June 30, 2008, the Company has an additional plan with options outstanding from which it will not grant any additional awards, the 1999 Stock Plan (the “1999 Plan”) and has assumed unvested RSUs issued under a plan maintained by OpenAir prior to their acquisition on June 4, 2008.

The 2007 Plan, which was adopted by the Company’s Board of Directors in June 2007 and became effective in December 2007, reserved 2,375,000 shares of common stock for issuance under the plan. As of June 30, 2008, 1,899,218 options remained available for future grants under the 2007 Plan. Options cancelled under the 1999 Plan are added to the shares available for issuance under the 2007 Plan when those cancellations occur. The 2007 Plan also provides for annual increases in the number of shares available for issuance on the first day of each fiscal year, beginning in 2009, equal to the lower of a) 9,000,000 shares of the Company’s common stock; b) 3.5% of the Company’s aggregate common stock outstanding plus common stock issuable pursuant to outstanding awards under the Company’s equity plans; or c) such other amount as the Board of Directors may determine. The assumption of the RSUs issued by OpenAir did not impact the number of shares available for grant under the 2007 plan.

The exercise price for options granted under the 1999 Plan and the 2007 Plan is the fair market value of an underlying share of common stock on the date of grant. If an optionee, at the time the option is granted, owns stock totaling more than 10% of the total combined voting rights of all classes of stock of the Company (a “10% Owner”), the exercise price for such options will not be less than 110% of the fair value of an underlying share of common stock on the date of grant. Options generally vest over a four year period and have a term of 10 years from the date of grant. Options granted under the 2007 Plan to 10% Owners have a maximum term of 5 years.

The Company issues new shares of common stock upon the exercise of stock options, the granting of restricted stock and the vesting of RSUs.

As of June 30, 2008, all outstanding share-based payment awards qualified for classification as equity.

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Stock Options

A summary of the Company’s stock option activity during the six months ended June 30, 2008 was as follows:

	Shares		Weighted- average exercise price per share		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value
	(dollars and shares in thousands, except per share amounts)
Outstanding at January 1, 2008	8,234		$	6.40
Granted	215		$	22.57
Exercised	(81	)	$	3.04
Cancelled and forfeited	(65	)	$	12.33
Outstanding at June 30, 2008	8,303		$	6.81	7.3	$	115,617
Vested and expected to vest	8,009		$	6.53	7.3	$	113,582
Exercisable at June 30, 2008	6,872		$	5.06	7.0	$	106,030

The total intrinsic value of the options exercised was $2.5 million during the six months ended June 30, 2007 and $1.5 million during the six months ended June 30, 2008.

As of June 30, 2008, there was $16.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock option grants that are expected to be recognized over a weighted-average period of 3.4 years.

The Company uses the Black-Scholes pricing model to determine the fair value of stock options. The fair value of each option grant is estimated on the date of the grant. The weighted-average grant date fair value of options granted and the range of assumptions using the model are as follows for the six month periods presented:

	Six months ended June 30,
	2007			2008
Weighted-average fair value of options granted	$	6.48		$	13.20
Expected term (in years)		5.5			6.0
Expected volatility		52	%		61	%
Risk-free interest rate		4.83	%		2.95	%
Dividend yield		none			none

Expected Term.The Company utilized the midpoint between vesting date and contractual expiration date to determine expected term, in accordance with SEC Staff Accounting Bulletin No. 107, as amended by SEC Staff Accounting Bulletin No. 110.

Volatility.Since the Company is a newly public entity with limited historical data regarding the volatility of its own common stock price, the expected volatility being used is based on the historical and implied volatility of comparable companies from a representative industry peer group.

Risk Free Interest Rate.The risk free interest rate is based on U.S. Treasury zero coupon issues with remaining terms similar to the expected term on the options.

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Dividend Yield.The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Forfeitures.The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

Restricted Stock Units and Restricted Stock

A summary of the Company’s RSU and restricted stock activity during the six months ended June 30, 2008 is as follows:

	Shares		Weighted- average grant date fair value per share		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value
	(dollars and shares in thousands, except per share amounts)
Nonvested at January 1, 2008	5		$	26.00
Granted	90		$	22.75
Assumed	220		$	21.57
Vested	(5	)	$	26.00
Cancelled and forfeited	(2	)	$	22.79
Nonvested at June 30, 2008	308		$	21.97	1.9	$	6,300

Compensation expense for RSUs and restricted stock is determined based on the value of the underlying shares on the date of grant. Compensation expense for RSUs assumed as a part of the OpenAir acquisition was determined based on the value of the underlying shares on the date of the acquisition. As of June 30, 2008, there was $5.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to RSUs and restricted stock that is expected to be recognized over a weighted-average period of 1.9 years.

Reserved for Future Issuance

The Company has reserved the following shares of authorized but unissued common stock for future issuance:

	As of June 30, 2008
	(shares in thousands)
Options outstanding	8,303
RSUs and restricted stock awards outstanding	308
Warrants outstanding	10
Shares available for future grants	1,899
Total	10,520

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Note 9. Income Taxes

The Company has incurred annual operating losses since inception. As a result of those continuing losses, management has determined that it is more likely than not that the Company will not realize the benefits of its U.S. deferred tax assets and therefore has recorded a valuation allowance to reduce the carrying value of these deferred tax assets to zero. Accordingly, the Company has not recorded a provision for income taxes for any of the periods presented other than provisions for minimum and foreign income taxes.

During the quarter ended June 30, 2008, the Company recorded foreign deferred tax assets of approximately $117,000. Based on all available evidence, both positive and negative, management believes that it is more likely than not that the benefits of its foreign deferred tax assets will realized in full. No valuation allowance has been recorded to reduce the carrying value of the Company’s foreign deferred tax assets.

The Company’s only material uncertain tax position was its research and development credits. There were no material changes to the Company’s unrecognized tax benefits during the six months ended June 30, 2008. The Company does not anticipate either material changes in the total amount or composition of its unrecognized tax benefits within 12 months of the reporting date. The Company has not accrued any interest or penalties related to unrecognized tax benefits as of June 30, 2008.

The Company files federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to its net operating loss carryforwards, the Company’s income tax returns generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2004 through 2007 tax years generally remain subject to examination by their respective tax authorities.

Note 10. Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period less the weighted-average number of unvested common shares subject to the Company’s right of repurchase. Diluted net loss per common share is computed by giving effect to all potential dilutive common shares, including options, common stock subject to repurchase, warrants and convertible preferred stock. Basic and diluted net loss per common share were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.

The following table presents the calculation of the numerator and denominator used in the basic and diluted net loss per common share:

	Six months ended June 30,						Three months ended June 30,
	2007			2008			2007			2008
	(dollars and shares in thousands except per share amounts)
Numerator:
Net loss attributable to common stockholders	$	(18,829	)	$	(5,157	)	$	(9,552	)	$	(3,128	)
Denominator:
Weighted-average number of common shares outstanding		8,415			60,223			8,510			60,249
Less: Weighted-average number of common shares subject to repurchase		(757	)		(96	)		(657	)		(89	)
Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common share		7,658			60,127			7,853			60,160
Net loss per common share, basic and diluted	$	(2.46	)	$	(0.09	)	$	(1.22	)	$	(0.05	)

Outstanding common stock owned by employees and subject to repurchase by the Company is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.

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The following table presents the weighted average potential shares that are excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect:

	Six months ended June 30,		Three months ended June 30,
	2007	2008	2007	2008
	(shares in thousands)
Options to purchase shares of common stock and
RSUs	6,098	8,441	6,105	8,334
Warrants to purchase shares of common stock	10	10	10	10
Common stock subject to repurchase	757	96	657	89
Convertible preferred stock, on an if-converted basis	44,677	—	44,677	—
Total	51,542	8,547	51,449	8,433

Note 11. Related Party Transactions

In April 2008, the Company entered into a supplemental sponsorship agreement with the Oakland Athletics (the “Athletics”). A member of the Company’s Board of Directors, William L. Beane III, is also the General Manager of the Athletics. Under the terms of the supplemental sponsorship agreement, the Company will pay the Athletics $429,000 over the three year term of the agreement for certain sponsorship benefits. No payments have been made by the Company to the Athletics during the six months ended June 30, 2008 under either the supplemental sponsorship agreement or other pre-existing agreements in place as of December 31, 2007.

In May 2008, the Company entered into an agreement with the San Jose Earthquakes (the “Earthquakes”). The Earthquakes share common ownership with the Athletics. Under the terms of the agreement, the Company will receive certain sponsorship benefits from the Earthquakes during 2008 in exchange for the Earthquakes’ use of the Company’s on-demand application services through May 2009. Based on an estimate received from the Earthquakes, the Company determined the value of the sponsorship benefits to be approximately $112,000.

In 2008, the Company engaged Horn Productions to produce videos on behalf of the Company. Horn Productions is owned by the wife of the Company’s President and Chief Executive Officer, Zachary Nelson. For the six months ended June 30, 2008, the Company made payments to Horn Productions totaling $54,000. The Company also provides Horn Production the right to use the Company’s services at no consideration.

As described in Note 6, as of December 31, 2007, the Company had a $20.0 million secured line of credit agreement with Tako Ventures, LLC. The line of credit expired in February 2008. Tako Ventures, LLC was owned by the Company’s majority stockholder at the time the Company originally entered into the line of credit. There were no outstanding borrowings on the line of credit as of December 31, 2007 or at any time during 2008 prior to its expiration.

Additional related party transactions with the Oakland Athletics and other related parties are described in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this document and the discussion contained in our Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the SEC on March 26, 2008. Certain statements in this Quarterly Report constitute forward-looking statements and as such, involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” or “will,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. These statements are based on the beliefs and assumptions of our management based on information currently available to management. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

We provide an on-demand, integrated business management application suite that provides Accounting / Enterprise Resource Planning (“ERP”), Customer Relationship Management (“CRM”) and Ecommerce functionality to small and medium-sized businesses (“SMBs”) and divisions of large companies. We also offer customer support and professional services related to our suite. We deliver our suite over the Internet as a subscription service using the software-as-a-service (“SaaS”) model.

In 1999, we released our first application, NetLedger, which focused on accounting applications. We then released Ecommerce functionality in 2000 and CRM and sales force automation functionality in 2001. In 2002, we released our next generation suite under the name NetSuite to which we have regularly added features and functionality.

Our headquarters are located in San Mateo, California. We were incorporated in California in September 1998 and reincorporated in Delaware in November 2007. We conduct our business worldwide, with international locations in Canada, Europe, Asia and Australia.

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Key Components of Our Results of Operations

Revenue

Our annual revenue has grown from $17.7 million during 2004 to $108.5 million during 2007. Our revenues were $48.7 million for the six months ended June 30, 2007 and $70.7 million for the six months ended June 30, 2008.

We generate sales directly through our sales team and, to a lesser extent, indirectly through channel partners. We sell our service to customers across a broad spectrum of industries, and we have tailored our service for wholesalers/distributors, services companies and software companies. The primary target customers for our service are SMBs, which we define as companies with up to 1,000 employees. An increasing percentage of our customers and our revenue have been derived from larger businesses within this market. For the six months ended June 30, 2008, we did not have any single customer that accounted for more than 3% of our revenue.

We experience competitive pricing pressure where our products are compared with solutions that address a narrower range of customer needs or are not fully integrated (for example, when compared with Ecommerce or CRM stand-alone solutions). In addition, since we sell primarily to SMBs, we also face pricing pressure in terms of the more limited financial resources or budgetary constraints of many of our target customers. We do not currently experience significant pricing pressure from competitors that offer a similar on-demand integrated business management suite.

We sell our application suite pursuant to subscription agreements. The duration of these agreements is generally one year. Prior to 2006, the majority of our customers entered into multi-year agreements. We believe one year agreements are more customary in our industry, align more with customer preferences and provide us with a more predictable sales compensation structure. We rely in part on a large percentage of our customers to renew their agreements to drive our revenue growth. Our customers have no obligation to renew their subscriptions after the expiration of their subscription period.

We generally invoice our customers in advance in annual or quarterly installments, and typical payment terms provide that our clients pay us within 30 to 60 days of invoice. Amounts that have been invoiced where the customer has a legal obligation to pay are recorded in accounts receivable and deferred revenue. As of June 30, 2008, we had deferred revenue of $72.3 million, which excludes $5.9 million of deferred revenue related to agreements with Transcosmos, Inc., (“TCI”) and Miroku Jyoho Service Ltd., (“MJS”) as described below. The 2006 transition from multi-year agreements has contributed to a reduction of the balance of non-current deferred revenue.

In most instances, revenue is generated under sales agreements with multiple elements which are comprised of subscription fees for access to our application suite and customer support, and fees for professional services. We have determined that we do not have objective and reliable evidence of fair value for each element of our sale agreements that contain a subscription to our on-demand application suite and customer support, and fees for professional services. As a result, the elements within our multiple-element sales agreements do not qualify for treatment as separate units of accounting. Accordingly, we account for fees received under multiple-element arrangements as a single unit of accounting and recognize the entire arrangement ratably over the term of the related agreement, commencing upon the later of the agreement start date or when all revenue recognition criteria have been met.

Our subscription agreements provide service level commitments of 99.5% uptime per period, excluding scheduled maintenance. The failure to meet this level of service availability may require us to credit qualifying customers up to the value of an entire month of their subscription and support fees. In light of our historical experience with meeting our service level commitments, we do not currently have any reserves on our balance sheet for these commitments.

The percentage of our revenue generated outside of North America was 17% during the six months ended June 30, 2007 and 19% during the six months ended June 30, 2008. As part of our overall growth, we expect the percentage of our revenue generated outside of North America to continue to increase as we invest in and enter new markets.

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In March 2006, we formed a subsidiary, NetSuite KK, to exclusively market and sell our on-demand application suite in Japan. In March 2006, we and NetSuite KK entered into a reseller agreement, a development fund agreement and an investment agreement with TCI. Under the terms of these agreements, TCI paid us $16.5 million, including refundable prepaid royalties of $1.5 million, the unused portions of which are refundable upon the termination or expiration of the agreements, to acquire distribution rights in Japan for three years, a 20% stake in NetSuite KK, and to fund non-recoverable expenses related to localization of our on-demand application service in Japan. In October 2006, we and NetSuite KK entered into similar agreements with MJS. Under the terms of these agreements, MJS paid us $4.1 million, including refundable prepaid royalties of $394,000, the unused portions of which are refundable upon the termination or expiration of the agreements, to acquire distribution rights in Japan for five years, a 5% equity stake in NetSuite KK, and to fund non-recoverable expenses related to localization of our application suite in Japan. We recognized $1.5 million and $3.0 million in revenue related to these agreements during the three and six month periods ended June 30, 2008, respectively. No such revenue was earned during the same periods in 2007. See Note 3 to our Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for a further description of NetSuite KK.

Employees

As our revenues have increased, we have increased our number of full-time employees to 901 at June 30, 2008 as compared to 675 at December 31, 2007 and 544 at June 30, 2007. As of June 30, 2008, our headcount includes 300 employees in sales and marketing, 398 employees in operations, professional services, training and customer support, 101 employees in product development, and 102 employees in a general and administrative capacity.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting our application suite, providing customer support, data communications expenses, salaries and benefits of operations, support, professional services and training personnel, software license fees, costs associated with website development activities, allocated overhead, amortization expense associated with capitalized internal use software and acquired developed technology and related plant and equipment depreciation and amortization expenses. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our software services due to the labor costs associated with providing professional services.

We allocate overhead such as rent, information technology costs and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in each cost of revenue and operating expense category.

We expect cost of revenue to remain relatively stable as a percentage of revenue; however, it could fluctuate period to period depending on the growth of our professional services business and any associated increased costs relating to the delivery of professional services and the timing of significant expenditures. Additionally, we expect to further increase data center capacity in 2009, which will further increase our cost of revenue. We may also incur additional expenses associated with the acquisition of additional database software licenses in 2008.

Operating Expenses -Product Development

Product development expenses primarily consist of personnel and related costs for our product development employees and executives, including salaries, employee benefits and allocated overhead. Our product development efforts have been devoted primarily to increasing the functionality and enhancing the ease of use of our on-demand application suite. A key component of our strategy is to expand our business internationally. This will require us to conform our application to comply with local regulations and languages, which will cause us to incur additional expenses related to translation and localization of our application for use in other countries.

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We expect product development expenses to increase in absolute dollars as we extend our service offerings in other countries as we intend to expand and enhance our application suite technologies. Such expenses may vary due to the timing of these offerings and technologies.

Operating Expenses - Sales and Marketing

Sales and marketing expenses primarily consist of personnel and related costs for our sales and marketing employees and executives, including wages, benefits, bonuses and commissions, commissions paid to our channel partners, the cost of marketing programs such as on-line lead generation, promotional events and webinars, amortization of intangible assets related to tradename and customer relationships, and allocated overhead. We market and sell our application suite worldwide through our direct sales organization and indirect distribution channels such as strategic resellers. We capitalize and amortize our direct and channel sales commissions over the period the related revenue is recognized. The commission expense for customer renewals is at lower rates than for sales to new customers. As such, we expect our commission expense to decline as a percentage of revenue going forward as a larger percentage of our recognized revenue is expected to result from customer renewals.

We intend to continue to invest in sales and marketing to pursue new customers and expand relationships with existing customers. Our sales and marketing expenses have increased in absolute dollars although they have decreased as a percentage of total revenue over the past three years. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future.

Operating Expenses - General and Administrative

General and administrative expenses primarily consist of personnel and related costs for executive, finance, human resources and administrative personnel, professional fees and other corporate expenses and allocated overhead.

We expect our general and administrative expenses to increase in absolute dollars as we expand our business. During 2008 we also expect to see an increase in costs associated with operating as a public company, including higher legal, insurance and financial reporting expenses. We also expect to incur additional costs to achieve initial compliance with Section 404 of the Sarbanes-Oxley Act of 2002 which is required as of December 31, 2008.

Income Taxes

Since inception, we have incurred annual operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than provisions for minimum and foreign income taxes.

Critical Accounting Policies and Judgments

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

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In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, significant judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We consider these policies requiring significant management judgment to be critical accounting policies. These critical accounting policies are:

• Revenue recognition;

• Internal use software and website development costs;

• Deferred commissions;

• Accounting for stock-based compensation; and

• Goodwill and other intangible assets

A description of our critical accounting policies and judgments for goodwill and other intangible assets are presented below. A description of the remainder of our critical accounting policies and judgments appears in our 2007 Annual Report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Judgments.” In addition, please see Note 2 to Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 2 of the Notes to Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K for a description of our accounting policies.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We allocated a portion of the purchase price of the acquisition to intangible assets, including customer relationships, developed technology and tradenames that are being amortized over their estimated useful lives of two to seven years. We also allocated a portion of the purchase price to tangible assets and assessed the liabilities to be recorded as part of the purchase price. The estimates we made in allocating the purchase price to tangible and intangible assets, and in assessing liabilities recorded as part of the purchase, involved the application of judgment and the use of estimates, which could significantly affect our operating results and financial position.

We review the carrying value of goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value. We evaluate impairment by comparing the estimated fair value of each reporting unit to its carrying value. We estimate fair value by computing our expected future discounted operating cash flows based on historical trends, which we adjust to reflect our best estimate of future market and operating conditions. Actual results may differ materially from these estimates. The estimates we make in determining the fair value of each reporting unit involve the application of judgment, including the amount and timing of future cash flows, short- and long-term growth rates, and the weighted average cost of capital, which could affect the timing and size of any future impairment charges. Impairment of our goodwill could significantly affect our operating results and financial position. Based on our most recent assessment, there were no goodwill impairment indicators.

We continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Any write-downs are treated as permanent reductions in the carrying amount of the assets. We must use judgment in evaluating whether events or circumstances indicate that useful lives should change or that the carrying value of assets has been impaired. Any resulting revision in the useful life or the amount of impairment also requires judgment. Any of these judgments could affect the timing or size of any future impairment charges. Revision of useful lives or impairment charges could significantly affect our operating results and financial position.

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Results of Operations

Revenue

Information about revenue, cost of revenue and gross profit was as follows for the periods presented:

	Six months ended June 30,						Three months ended June 30,
	2007			2008			2007			2008
	(dollars in thousands)
Revenue	$	48,742		$	70,671		$	25,513		$	36,553
Cost of revenue		15,743			21,780			8,842			11,665
Gross profit	$	32,999		$	48,891		$	16,671		$	24,888
Gross margin		68	%		69	%		65	%		68	%
Stock-based compensation and amortization of acquisition-related intangible assets included in cost of revenue	$	1,395		$	819		$	1,300		$	525

For the Six Months Ended June 30, 2007 and 2008

Revenue for the six months ended June 30, 2008 increased $21.9 million, or 45%, compared to the same period in 2007.

$17.7 million of the increase in revenues was from new customers (those customers acquired after June 30, 2007). This increase in revenue from new customers reflects a 24% increase in the average revenue recognized per new customer during the six months ended June 30, 2008 as compared to the same period in 2007 due to these new customers adopting more elements of our service and due to broader adoption of more costly industry-specific vertical solutions.

The remainder of the increase in revenues was primarily a result of existing customers’ purchases of additional user subscriptions and modules (or “upsell”) exceeding decreases resulting from customer churn. Subscription and support revenues from existing customers (those customers acquired before June 30, 2007) increased by $5.1 million for the six months ended June 30, 2008 as compared to the same period in 2007. Those increases in sales and support revenues from existing customers were partially offset by nonrenewal of professional services from existing customers.

The Company did not recognize any of OpenAir’s deferred revenue that was on their balance sheet at the time of the acquisition in accordance with EITF 01-03 “Accounting in a Business Combination for Deferred Revenue of an Acquiree.”As such, the impact of the acquisition on our total revenue during all periods presented in 2008 was not significant.

The revenue generated outside of North America was $13.7 million, or 19%, of our revenue during the six months ended June 30, 2008, as compared to $8.4 million, or 17% of our revenue during the same period in 2007.

Cost of revenue for the six months ended June 30, 2008 increased $6.0 million, or 38%, compared to the same period in 2007. The increase was primarily the result of a $5.0 million increase in personnel costs, excluding share-based compensation and a $2.1 million increase in data center expenses resulting from an increase in capacity. The increase in personnel costs is associated with an increase in the number of employees primarily in professional services and support. Those increases were partially offset by a $1.4 million decrease in expenses for the use of external professional services that resulted from having additional in-house resources available to perform those services and a $684,000 reduction in stock-based compensation expense as a result of the immediate recognition of all compensation related to a grant that was made during the second quarter of 2007.

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Our gross margin increased to 69% during the six months ended June 30, 2008 compared to 68% for the same period in 2007. The increase in our gross margin resulted from economies of scale associated with increased revenue allowing for a more efficient utilization of our resources offset primarily by an increase in personnel costs in both professional services and support.

For the Three Months Ended June 30, 2007 and 2008

Revenue for the three months ended June 30, 2008 increased $11.0 million, or 43%, compared to the same period in 2007.

$10.6 million of the increase in revenues was from new customers (those customers acquired after June 30, 2007). This increase in revenue from new customers reflects a 24% increase in the average revenue recognized per new customer during the three months ended June 30, 2008 as compared to the same period in 2007 due to these new customers adopting more elements of our service and due to broader adoption of more costly industry-specific vertical solutions.

The remainder of the increase in revenues was primarily a result of existing customers’ upsell exceeding decreases resulting from customer churn. Subscription and support revenues from existing customers (those customers acquired before June 30, 2007) increased by $2.0 million for the three months ended June 30, 2008 as compared to the same period in 2007. Those increases in sales and support revenues from existing customers were partially offset by nonrenewal of professional services from existing customers.

The impact of the OpenAir acquisition on our total revenue during the three months ended June 30, 2008 was not significant.

The revenue generated outside of North America was $7.3 million, or 20%, of our revenue during the three months ended June 30, 2008, as compared to $4.5 million, or 18%, of our revenue during the same period in 2007.

Cost of revenue for the three months ended June 30, 2008 increased $2.8 million, or 32%, compared to the same period in 2007. The increase was primarily the result of a $2.8 million increase in personnel costs, excluding share-based compensation and a $1.1 million increase in data center expenses resulting from an increase in capacity. The increase in personnel costs is associated with an increase in the number of employees primarily in professional services and support. Those increases were partially offset by a $802,000 decrease in expenses for the use of external professional services and an $884,000 reduction in stock-based compensation expense.

Our gross margin increased to 68% during the three months ended June 30, 2008 compared to 65% for the same period in 2007. The increase in our gross margin resulted from economies of scale associated with increased revenue allowing for a more efficient utilization of our resources offset primarily by an increase in personnel coasts in both professional services and support.

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Operating Expenses

Operating expenses were as follows for the periods presented:

	Six months ended June 30,
	2007				2008
	Amount		% of revenue		Amount		% of revenue
	(dollars in thousands)
Operating expenses (1):
Product development	$	15,030	31	%	$	8,534	12	%
Sales and marketing		27,823	57	%		37,206	53	%
General and administrative		8,675	18	%		10,612	15	%
Total operating expenses	$	51,528	106	%	$	56,352	80	%
	Three months ended June 30,
	2007				2008
	Amount		% of revenue		Amount		% of revenue
	(dollars in thousands)
Operating expenses (1):
Product development	$	6,605	26	%	$	4,452	12	%
Sales and marketing		15,295	60	%		19,401	53	%
General and administrative		4,045	16	%		5,145	14	%
Total operating expenses	$	25,945	102	%	$	28,998	79	%

(1) Includes stock-based compensation expense and amortization of acquisition-related intangibles as follows:

	Six months ended June 30,				Three months ended June 30,
	2007		2008		2007		2008
	(dollars in thousands)
Product development	$	8,641	$	1,031	$	3,338	$	548
Sales and marketing		2,269		902		2,226		568
General and administrative		2,837		1,085		1,316		587
Total stock-based compensation expense and amortization of acquisition-related intangible assets	$	13,747	$	3,018	$	6,880	$	1,703

For the Six Months Ended June 30, 2007 and 2008

Product development expenses for the six months ended June 30, 2008 decreased $6.5 million, or 43%, as compared to the same period in 2007. The decreases were primarily the result of decreases in stock-based compensation expense which declined $7.6 million during the first half of 2008 as compared to the same period in 2007 as a result of awards that were subject to variable accounting during 2007. The decrease in stock-based compensation expense was partially offset by a $1.1 million increase in other personnel costs attributable to an increase in the number of employees during 2008 compared to 2007.

Sales and marketing expenses for the six months ended June 30, 2008 increased $9.4 million, or 34%, as compared to the same period in 2007. The increases were primarily the result of an $8.7 million increase in personnel costs, excluding stock-based compensation expense, resulting from an increase in the number of employees and a $684,000 increase in marketing expense. The increase in personnel costs include a $1.9 million increase in commission expense during the six months ended June 30, 2008 compared to the same period in 2007, resulting from the growth in revenue. Those increases were partially offset by a $1.4 million decrease in stock-based compensation expense during 2008 as compared to the same period in 2007 as a result of the immediate recognition of all compensation related to a grant made during the second quarter of 2007 that immediately became fully vested.

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General and administrative expenses for the six months ended June 30, 2008 increased $1.9 million, or 22%, as compared to the same period in 2007. The increases were primarily the result of a $1.9 million increase in personnel costs, excluding stock-based compensation expense, resulting from an increase in the number of employees and an $880,000 increase in building occupancy costs. Those increases were partially offset by a $1.8 million decrease in stock-based compensation expense during 2008 as a result of awards that were subject to variable accounting during 2007. During 2007, total general and administrative expenses were reduced by approximately $1.1 million due to the release of a previously established accrual for uncollected sales taxes as the amount was determined no longer to be probable of payment; there was no such benefit recorded during 2008. Legal and professional fees were relatively unchanged during 2008 as compared to the same period in 2007 primarily as a result of one-time accounting costs incurred during the second quarter of 2007 in preparation for our initial public offering which were substantially offset by additional compliance costs associated with operating as a public company incurred during the first quarter of 2008.

For the Three Months Ended June 30, 2007 and 2008

Product development expenses for the three months ended June 30, 2008 decreased $2.2 million or 33% as compared to the same period in 2007. The decreases were the result of decreases in stock-based compensation expense which declined $2.8 million for the second quarter of 2008 as compared to the same period in 2007 as a result of awards that were subject to variable accounting during 2007. The decrease in stock-based compensation expense was partially offset by an $808,000 increase in other personnel costs attributable to an increase in the number of employees during 2008 as compared to the same period in 2007.

Sales and marketing expenses for the three months ended June 30, 2008 increased $4.1 million, or 27% as compared to the same period in 2007. The increases were primarily the result of a $4.4 million increase in personnel costs, excluding stock-based compensation expense, resulting from an increase in the number of employees and a $587,000 increase in marketing expense. The increase in personnel costs include an $891,000 increase in commission expense during 2008 compared to the same period in 2007 resulting from the growth in revenue. Those increases were partially offset by a $1.7 million decrease in stock-based compensation expense during the second quarter of 2008 as compared to the same period in 2007.

General and administrative expenses for the three months ended June 30, 2008 increased $1.1 million, or 27%, as compared to the same period in 2007. The increases were primarily the result of a $930,000 increase in personnel costs, excluding stock-based compensation expense, resulting from an increase in the number employees and a $530,000 increase in building occupancy costs. These increases were partially offset by a $729,000 decrease in stock-based compensation expense during 2008 as a result of awards that were subject to variable accounting during 2007. During the second quarter of 2007, total general and administrative expenses were reduced by approximately $1.1 million due to the release of a previously established accrual for uncollected sales taxes as the amount was determined no longer to be probable of payment; there was no such benefit recorded during 2008. Legal and professional fees decreased $487,000 during the second quarter of 2008 as compared to the same period in 2007 primarily as a result of one-time accounting costs incurred during 2007 in preparation for our initial public offering.

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Non-operating Items

Non-operating items, including interest income and expense, other income / (expense), income taxes and the effect of minority interest were as follows for the periods presented:

	Six months ended June 30,
	2007					2008
	Amount			% of revenue		Amount			% of revenue
	(dollars in thousands)
Interest income	$	72		0	%	$	2,696		4	%
Interest expense, including amounts paid to related party		(396	)	-1	%		(298	)	0	%
Other income / (expense)		115		0	%		(154	)	0	%
Income taxes		(325	)	-1	%		(590	)	-1	%
Minority interest		234		0	%		650		1	%
	Three months ended June 30,
	2007					2008
	Amount			% of revenue		Amount			% of revenue
	(dollars in thousands)
Interest income	$	—		0	%	$	1,078		3	%
Interest expense, including amounts paid to related party		(218	)	-1	%		(81	)	0	%
Other income / (expense)		7		0	%		(56	)	0	%
Income taxes		(176	)	-1	%		(361	)	-1	%
Minority interest		109		0	%		402		1	%

Interest income for the six months ended June 30, 2008 increased $2.6 million compared to the same period in 2007. The increase for the three months ended June 30, 2008 was $1.1 million compared to the same period in 2007. The increase was primarily the result of interest earned on the proceeds of our December 2007 initial public offering (“IPO”) which was invested in interest earning Money Market Mutual Funds during 2008.

The decrease in other income / (expense) during the six months ended June 30, 2008 as compared to the same period during 2007 was primarily the result of a $173,000 increase in net foreign exchange rate losses recognized during those periods. The decrease in other income / (expense) during the three months ended June 30, 2008 as compared to the same period during 2007 was primarily the result of a $21,000 increase in net foreign exchange rate losses recognized during those periods.

Liquidity and Capital Resources

As of June 30, 2008, our primary sources of liquidity were our cash and cash equivalents totaling $137.4 million and $21.5 million in accounts receivable, net of allowance. Our cash and cash equivalents include the remaining unused portion of the $161.9 million in proceeds from our December 2007 IPO that was allocated for working capital purposes.

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A summary of our cash flow activities were as follows for the periods presented:

	Six months ended June 30,
	2007			2008
	(dollars in thousands)
Net cash provided by / (used in) operating activities	$	793		$	(290	)
Net cash used in investing activities		(2,344	)		(31,064	)
Net cash provided by / (used in) financing activities		4,959			(1,095	)
Effect of exchange rate changes on cash and cash equivalents		(344	)		411
Net change in cash and cash equivalents	$	3,064		$	(32,038	)

Cash provided by / used in operating activities was driven by sales of our application suite and costs incurred to deliver that service. The timing of our billings and collections relating to our sales, the level of the deferred revenue on these sales, and the timing of the payment of our liabilities all have a significant impact on our cash flows. Cash flows from operations declined during the six months ended June 30, 2008 as compared to the same period in 2007 in part as a result of increased payments on liabilities, including a $1.1 million payment of foreign income taxes, and an increase in billings that more than offset the benefits of our increased revenues.

Cash used in investing activities during the six months ended June 30, 2008 was primarily related to $28.2 million in cash used for the acquisition of OpenAir, net of cash received. Capital expenditures during 2008 included first quarter equipment purchased to facilitate our increased data center capacity. The six months ended June 30, 2008 and 2007 also included additional capital expenditures consisting of the purchase of software licenses, computer equipment, leasehold improvements and furniture and fixtures as we expanded our infrastructure and workforce.

The net cash used in financing activities for the six months ended June 30, 2008 was primarily related to payments on capital leases and the payment of issuance costs incurred during 2007 related to our initial public offering. The net cash provided by financing activities for the six months ended June 30, 2007 was primarily related to the repayments of notes receivable from our employees related to the exercise of stock options and advances on our line-of-credit. These cash inflows were partially offset by payments on capital leases.

As of June 30, 2008, we had an accumulated deficit of $250.0 million. Prior to our December 2007 IPO, we funded this deficit primarily through the net proceeds of private placements of preferred stock, and from debt financing activities. Our outstanding borrowings were repaid in December from the proceeds of our IPO.

Off-Balance Sheet Arrangements

During the three months ended June 30, 2007 and 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Contractual Obligations

On April 24, 2008, we entered into an Amendment of the Original Lease for our corporate headquarters located in San Mateo, California which commenced on June 1, 2008. Under the terms of the Amendment, we increased the rented area for our corporate headquarters by approximately 34,000 square feet. After the increase, the total area of the corporate headquarters is approximately 93,000 square feet. The Amendment expires on August 31, 2012, which is also the last day of the term of the Original Lease. We have the option to renew both the Original Lease and the Amendment for one five-year term. Under the Original Lease and the Amendment, the future minimum lease payments for our corporate headquarters are as follows:

Years ended December 31,	Original lease		Amendment		Total
	(dollars in thousands)
2008	$	1,469	$	773	$	2,242
2009		1,528		1,897		3,425
2010		1,563		1,973		3,536
2011		1,610		2,052		3,662
2012		1,105		1,411		2,516
Total	$	7,275	$	8,106	$	15,381

In addition to the above future minimum lease payments, we will be responsible for our pro rata share of expenses and taxes for the building, as defined in the Original Lease and the Amendment.

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). The standard requires entities to consider their own historical experience in renewing or extending similar arrangements when developing assumptions regarding the useful lives of intangible assets. The statement also mandates certain related disclosure requirements. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact of the pending adoption of FSP 142-3 on our consolidated financial statements.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance, SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact of the pending adoption of SFAS No. 141(R) on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as a part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. As a result of the minority interest in NetSuite KK, we currently believe that the adoption of SFAS No. 160 will require us to make the changes in presentation to our consolidated financial statements described above. We are currently evaluating any additional impact that the pending adoption of SFAS No. 160 will have, if any, on our consolidated financial statements.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

We had cash and cash equivalents of $137.4 million at June 30, 2008. These amounts were held primarily in money market funds.

Cash and cash equivalents are held for working capital purposes, and restricted cash amounts are held as security against various lease obligations. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates.

Foreign Currency Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound Sterling, Canadian Dollar, Australian Dollar, Euro, Japanese Yen, Singapore Dollar and Philippine Peso. Our revenue is generally denominated in the local currency of the contracting party. The majority of our billings are denominated in U.S. Dollars. Our expenses are generally denominated in the currencies of the countries in which our operations are located. Our expenses are incurred primarily in the United States, Canada and the UK, with a small portion of expenses incurred where our other international sales and operations offices are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any derivative financial instruments for trading or speculative purposes. Fluctuations in currency exchange rates could harm our business in the future. The effect of an immediate 10% adverse change in exchange rates on foreign denominated receivables as of June 30, 2008 would result in a loss of approximately $644,000. To date, we have not entered into any hedging contracts although we may do so in the future.

Fair Value of Financial Instruments

We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with a remaining maturity of three months or less. We do not use derivative financial instruments for speculative or trading purposes. However, this does not preclude our adoption of specific hedging strategies in the future.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of June 30, 2008 (as defined in Rules 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective as of June 30, 2008.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

On April 18, 2008, a complaint was filed in the United States District Court for the Eastern District of Texas titled Triton IP, LLC v. NetSuite Inc., CDC Corporation and CDC Software, Inc. The complaint alleged infringement of a patent held by Triton IP, LLC by us and the other defendants. On April 30, 2008, an amended complaint was filed that changed the name of the plaintiff to SFA Systems, LLC and also added The Cobalt Group, Inc. and OnStation Corporation as additional defendants to the civil action. NetSuite filed its answer to the amended complaint and its counterclaims on July 18, 2008. The initial status conference has been set for August 21, 2008. To date, no discovery has occurred. We intend to defend the action vigorously.

ITEM 1A. Risk Factors

A description of the risks and uncertainties associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risks and uncertainties associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. You should carefully consider such risks and uncertainties, together with the other information contained in this report, our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

Risks Related to Our Business

We have a history of losses and we may not achieve profitability in the future.

We have not been profitable on a quarterly or annual basis since our formation. We experienced a net loss of $5.2 million during the six months ended June 30, 2008 and $23.9 million during the year ended December 31, 2007. As of June 30, 2008, our accumulated deficit was $250.0 million. We expect to make significant future expenditures related to the development and expansion of our business. In addition, as a public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenue to achieve and maintain future profitability. While our revenue has grown in recent periods, this growth may not be sustainable and we may not achieve sufficient revenue to achieve or maintain profitability. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Quarterly Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses for the foreseeable future.

Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.

Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. A decline in general macroeconomic conditions could adversely affect our customers’ ability or willingness to purchase our application suite, which could adversely affect our operating results or financial outlook. Fluctuations in our quarterly operating results or financial outlook may also be due to a number of additional factors, including the risks and uncertainties discussed elsewhere in this Quarterly Report.

Fluctuations in our quarterly operating results could cause our stock price to decline rapidly, may lead analysts to change their long-term model for valuing our common stock, could cause us to face short-term liquidity issues, may impact our ability to retain or attract key personnel, or cause other unanticipated issues. If our quarterly operating results or financial outlook fall below the expectations of research analysts or investors, the price of our common stock could decline substantially.

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We believe that our quarterly revenue and operating results may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.

Our customers are small and medium-sized businesses and divisions of large companies, which may result in increased costs as we attempt to reach, acquire and retain customers.

We market and sell our application suite to SMBs and divisions of large companies. To grow our revenue quickly, we must add new customers, sell additional services to existing customers and encourage existing customers to renew their subscriptions. However, selling to and retaining SMBs can be more difficult than selling to and retaining large enterprises because SMB customers:

• are more price sensitive;

• are more difficult to reach with broad marketing campaigns;

• have high churn rates in part because of the nature of their businesses;

• often lack the staffing to benefit fully from our application suite’s rich feature set; and

• often require higher sales, marketing and support expenditures by vendors that sell to them per revenue dollar generated for those vendors.

If we are unable to cost-effectively market and sell our service to our target customers, our ability to grow our revenue quickly and become profitable will be harmed.

Our limited operating history makes it difficult to evaluate our current business and future prospects, and may increase the risk of your investment.

Our company has been in existence since 1998, and much of our growth has occurred since 2004, with our revenue increasing from $17.7 million during the year ended December 31, 2004 to $108.5 million during the year ended December 31, 2007. Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our business may be harmed.

Our business depends substantially on customers renewing, upgrading and expanding their subscriptions for our services. Any decline in our customer renewals, upgrades and expansions would harm our future operating results.

We sell our application suite pursuant to service agreements that are generally one year in length. Our customers have no obligation to renew their subscriptions after their subscription period expires, and these subscriptions may not be renewed at the same or higher levels. Moreover, under specific circumstances, our customers have the right to cancel their service agreements before they expire. In addition, in the first year of a subscription, customers often purchase a higher level of professional services than they do in renewal years. As a result, our ability to grow is dependent in part on customers purchasing additional subscriptions and modules after the first year of their subscriptions. We have limited historical data with respect to rates of customer subscription renewals, upgrades and expansions so we may not accurately predict future trends in customer renewals. Our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our services, the prices of our services, the prices of services offered by our competitors or reductions in our customers’ spending levels. If our customers do not renew their subscriptions for our services, renew on less favorable terms, or do not purchase additional functionality or subscriptions, our revenue may grow more slowly than expected or decline and our profitability and gross margin may be harmed.

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Our services are delivered primarily out of a single data center. Any disruption of service at this facility could interrupt or delay our ability to deliver our service to our customers.

We host our services and serve our customers primarily from a third-party data center facility with SAVVIS located in California. We do not control the operation of this facility. This facility is vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, terrorist attacks, power losses, telecommunications failures and similar events. Our data facility is located in an area known for seismic activity, increasing our susceptibility to the risk that an earthquake could significantly harm the operations of this facility. It also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct.

The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services. We currently operate and maintain an offsite facility for customers who specifically pay for accelerated disaster recovery services. For customers who do not pay for such services, although we maintain tape backups of their data, we do not operate or maintain a separate disaster recovery facility, which may increase delays in the restoration of our service for those customers.

We anticipate the addition of a second data center facility to increase capacity and for disaster recovery purposes during 2009. There can be no assurances that the addition of a second data center facility will be completed in a timely manner and will not result in errors, defects, disruptions or other performance problems with our services.

Our data center facility provider has no obligation to renew its agreement with us on commercially reasonable terms, or at all. If we are unable to renew our agreement with the facility provider on commercially reasonable terms or if in the future we add additional data center facility providers, we may experience costs or downtime in connection with the transfer to, or the addition of, a new data center facility.

Any errors, defects, disruptions or other performance problems with our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, cause customers to terminate their subscriptions and harm our renewal rates.

We may become liable to our customers and lose customers if we have defects or disruptions in our service or if we provide poor service.

Because we deliver our application suite as a service, errors or defects in the software applications underlying our service, or a failure of our hosting infrastructure, may make our service unavailable to our customers. Since our customers use our suite to manage critical aspects of their business, any errors, defects, disruptions in service or other performance problems with our suite, whether in connection with the day-to-day operation of our suite, upgrades or otherwise, could damage our customers’ businesses. If we have any errors, defects, disruptions in service or other performance problems with our suite, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or costly litigation.

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

Our success will depend, to a large extent, on the willingness of SMBs to accept on-demand services for applications that they view as critical to the success of their business. Many companies 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 application or to migrate these applications to on-demand services. Other factors that may affect market acceptance of our application include:

• the security capabilities, reliability and availability of on-demand services;

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• customer concerns with entrusting a third party to store and manage their data, especially confidential or sensitive data;

• our ability to minimize the time and resources required to implement our suite;

• our ability to maintain high levels of customer satisfaction;

• our ability to implement upgrades and other changes to our software without disrupting our service;

• the level of customization or configuration we offer;

• our ability to provide rapid response time during periods of intense activity on customer websites; and

• the price, performance and availability of competing products and services.

The market for these services may not develop further, or may develop more slowly than we expect, either of which would harm our business.

If our security measures are breached and unauthorized access is obtained to a customer’s data, we may incur significant liabilities, our service may be perceived as not being secure and customers may curtail or stop using our suite.

The services we offer involve the storage of large amounts of our customers’ sensitive and proprietary information. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and someone obtains unauthorized access to our customers’ data, we could incur significant liability to our customers and to individuals or businesses whose information was being stored by our customers, our business may suffer and our reputation will be damaged. Because techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers. Such an actual or perceived breach could also cause a significant and rapid decline in our stock price.

We provide service level commitments to our customers, which could cause us to issue credits for future services if the stated service levels are not met for a given period and could significantly harm our revenue.

Our customer agreements provide service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our service, we may be contractually obligated to provide these customers with credits for future services. Our revenue could be significantly impacted if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. In light of our historical experience with meeting our service level commitments, we do not currently have any reserves on our balance sheet for these commitments. Our service level commitment to all customers is 99.5% uptime per period, excluding scheduled maintenance. The failure to meet this level of service availability may require us to credit qualifying customers for the value of an entire month of their subscription fees, not just the value of the subscription fee for the period of the downtime. As a result, a failure to deliver services for a relatively short duration could cause us to issue these credits to all qualifying customers. Any extended service outages could harm our reputation, revenue and operating results.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

We have increased our annual revenue from $17.7 million during the year ended December 31, 2004 to $108.5 million during the year ended December 31, 2007. Our revenues were $48.7 million for the six months ended June 30, 2007 and $70.7 million for the six months ended June 30, 2008. We have increased our number of full-time employees from 296 at December 31, 2004 to 901 at June 30, 2008.

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Our expansion has placed, and our anticipated growth may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our overall business, customer base, headcount and operations. We also intend to continue expanding our operations internationally. Creating a global organization and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross margin or operating expenses in any particular quarter.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results may be harmed.

The markets for ERP, CRM and Ecommerce applications are intensely competitive and rapidly changing with relatively low barriers to entry. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margin or the failure of our service to achieve or maintain more widespread market acceptance. Often we compete to sell our application suite against existing systems that our potential customers have already made significant expenditures to install. Competition in our market is based principally upon service breadth and functionality; service performance, security and reliability; ability to tailor and customize services for a specific company, vertical or industry; ease of use of the service; speed and ease of deployment, integration and configuration; total cost of ownership, including price and implementation and support costs; professional services implementation; and financial resources of the vendor.

We face competition from both traditional software vendors and SaaS providers. Our principal competitors include Epicor Software Corporation, Intuit Inc., Microsoft Corporation, SAP, The Sage Group plc and salesforce.com, inc. Many of our actual and potential competitors enjoy substantial competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services and larger marketing budgets, as well as substantially greater financial, technical and other resources. In addition, many of our competitors have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers. If we are not able to compete effectively, our operating results will be harmed.

Our brand name and our business may be harmed by aggressive marketing strategies of our competitors.

Because of the early stage of development of our markets, we believe that building and maintaining brand recognition and customer goodwill is critical to our success. Our efforts in this area have, on occasion, been complicated by the marketing efforts of our competitors, which may include incomplete, inaccurate and false statements about our company and our services that could harm our business. Our ability to respond to our competitors’ misleading marketing efforts may be limited under certain circumstances by legal prohibitions on permissible public communications by us as a public company.

Many of our customers are price sensitive, and if the prices we charge for our services are unacceptable to our customers, our operating results will be harmed.

Many of our customers are price sensitive, and we have limited experience with respect to determining the appropriate prices for our services. As the market for our services matures, or as new competitors introduce new products or services that compete with ours, we may be unable to renew our agreements with existing customers or attract new customers at the same price or based on the same pricing model as previously used. As a result, it is possible that competitive dynamics in our market may require us to change our pricing model or reduce our prices, which could harm our revenue, gross margin and operating results.

If we do not effectively expand and train our direct sales force and our services and support teams, we may be unable to add new customers and retain existing customers.

We plan to continue to expand our direct sales force and our services and support teams both domestically and internationally to increase our customer base and revenue. We believe that there is significant competition for direct sales, service and support personnel with the skills and technical knowledge that we require. Our ability to

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achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of personnel to support our growth. New hires require significant training and, in most cases, take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business. If these expansion efforts are not successful or do not generate a corresponding increase in revenue, our business will be harmed.

If we are unable to develop new services or sell our services into new markets, our revenue growth will be harmed and we may not be able to achieve profitability.

Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing application suite and to introduce new services and sell into new markets. The success of any enhancement or new service depends on several factors, including the timely completion, introduction and market acceptance of the enhancement or service. Any new service we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to sell our application, including new vertical markets and new countries or regions, may not be receptive. If we are unable to successfully develop or acquire new services, enhance our existing services to meet customer requirements or sell our services into new markets, our revenue will not grow as expected and we may not be able to achieve profitability.

Because we are a global organization and our long-term success depends, in part, on our ability to expand the sales of our services to customers located outside of the United States, our business is susceptible to risks associated with international sales and operations.

We currently maintain offices outside of the United States and have sales personnel or independent consultants in several countries. We have limited experience operating in foreign jurisdictions and are rapidly building our international operations. Managing a global organization is difficult, time consuming and expensive. Our inexperience in operating our business outside of the United States increases the risk that any international expansion efforts that we may undertake will not be successful. In addition, conducting international operations subjects us to new risks that we have not generally faced in the United States. These risks include:

• localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements;

• lack of familiarity with and unexpected changes in foreign regulatory requirements;

• longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

• difficulties in managing and staffing international operations;

• fluctuations in currency exchange rates;

• potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;

• dependence on certain third parties, including channel partners with whom we do not have extensive experience;

• the burdens of complying with a wide variety of foreign laws and legal standards;

• increased financial accounting and reporting burdens and complexities;

• political, social and economic instability abroad, terrorist attacks and security concerns in general; and

• reduced or varied protection for intellectual property rights in some countries.

Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

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We rely on third-party software, including Oracle database software, that may be difficult to replace or which could cause errors or failures of our service that could lead to lost customers or harm to our reputation.

We rely on software licensed from third parties to offer our service, including database software from Oracle. This software may not continue to be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our service which could harm our business.

Assertions by a third party that we infringe its intellectual property, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses.

On April 18, 2008, a complaint was filed in the United States District Court for the Eastern District of Texas titled Triton IP, LLC v. NetSuite Inc., CDC Corporation and CDC Software, Inc. The complaint alleged infringement of a patent held by Triton IP, LLC by us and the other defendants. On April 30, 2008, an amended complaint was filed that changed the name of the plaintiff to SFA Systems, LLC and also added The Cobalt Group, Inc. and OnStation Corporation as additional defendants to the civil action. NetSuite filed its answer to the amended complaint and its counterclaims on July 18, 2008. The initial status conference has been set for August 21, 2008. To date, no discovery has occurred. We intend to defend the action vigorously.

The software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us may grow. Our technologies may not be able to withstand any third-party claims or rights against their use. Additionally, although we have licensed from other parties proprietary technology covered by patents, we cannot be certain that any such patents will not be challenged, invalidated or circumvented. Furthermore, many of our service agreements require us to indemnify our customers for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. These types of claims could harm our relationships with our customers, may deter future customers from subscribing to our services or could expose us to litigation for these claims. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party.

Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our suite to our customers and may require that we procure or develop substitute services that do not infringe.

For any intellectual property rights claim against us or our customers, we may have to pay damages or stop using technology found to be in violation of a third party’s rights. We may have to seek a license for the technology, which may not be available on reasonable terms, if at all, may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense.

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

We rely on a combination of patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We cannot assure you that any patents will issue from our currently pending patent applications in a manner that gives us the protection that we seek, if at all, or that any future patents issued to us will not be challenged, invalidated or circumvented. We do not have any issued patents and currently have eight patent applications pending. Any patents that may issue in the future from pending or future patent applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark or trademark registrations will be issued for pending or future applications or that any registered service marks or trademarks will be enforceable or provide adequate protection of our proprietary rights.

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We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. Enforcement of our intellectual property rights also depends on our successful legal actions against these infringers, but these actions may not be successful, even when our rights have been infringed.

Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are in the process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent auditors on our internal control over financial reporting. There can be no assurances that control deficiencies will not be identified in the future. Both we and our independent auditors will be testing our internal controls in connection with the audit of our financial statements for the year ending December 31, 2008 and, as part of that documentation and testing, identifying areas for attention and improvement.

Implementing any additional required changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes and add personnel and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls. Any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our service to new and existing customers.

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

The majority of our quarterly revenue is attributable to service agreements entered into during previous quarters. A decline in new or renewed service agreements in any one quarter will not be fully reflected in our revenue in that quarter but will harm our revenue in future quarters. As a result, the effect of significant downturns in sales and market acceptance of our services in a particular quarter may not be fully reflected in our operating results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, because revenue from new customers must be recognized over the applicable subscription term.

Material defects or errors in the software we use to deliver our services could harm our reputation, result in significant costs to us and impair our ability to sell our services.

The software applications underlying our services are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have from time to time found defects in our service, and new errors in our existing service may be detected in the future. Any defects that cause interruptions to the availability of our services could result in:

• a reduction in sales or delay in market acceptance of our services;

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• sales credits or refunds to our customers;

• loss of existing customers and difficulty in attracting new customers;

• diversion of development resources;

• harm to our reputation; and

• increased warranty and insurance costs.

After the release of our services, defects or errors may also be identified from time to time by our internal team and by our customers. The costs incurred in correcting any material defects or errors in our services may be substantial and could harm our operating results.

Government regulation of the Internet and Ecommerce is evolving, and unfavorable changes or our failure to comply with regulations could harm our operating results.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for ERP, CRM and Ecommerce solutions and restricting our ability to store, process and share our customers’ data. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business and operating results.

Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our application suite and harm our business.

Our customers can use our service to store personal or identifying information regarding their customers and contacts. Federal, state and foreign government bodies and agencies, however, have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers and other individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our service and reduce overall demand for it.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the gathering of personal information were to be curtailed, ERP, CRM and Ecommerce solutions would be less effective, which may reduce demand for our service and harm our business.

Our operating results may be harmed if we are required to collect sales taxes for our subscription service in jurisdictions where we have not historically done so.

In 2007, we began to collect sales tax from our customers and remit such taxes in states where we believe we are required to do so. However, additional states or one or more countries may seek to impose sales or other tax collection obligations on us, including for past sales by us or our resellers and other channel partners. We have recorded sales tax liabilities of $1.4 million as of June 30, 2008 in respect of sales and use tax liabilities in various states and local jurisdictions. A successful assertion that we should be collecting additional sales or other taxes on our service could result in substantial tax liabilities for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.

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Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.

A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business.

Unanticipated changes in our effective tax rate could harm our future operating results.

We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses arising from the new requirement to expense stock options and the valuation of deferred tax assets and liabilities, including our ability to utilize our net operating losses. Increases in our effective tax rate could harm our operating results.

We may be unable to integrate acquired businesses and technologies successfully or to achieve the expected benefits of such acquisitions. We may acquire or invest in additional companies, which may divert our management’s attention, result in additional dilution to our stockholders and consume resources that are necessary to sustain our business.

We have undertaken an acquisition in the past and may continue to evaluate and consider potential strategic transactions, including acquisitions and dispositions of businesses, technologies, services, products and other assets in the future. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the company’s software is not easily adapted to work with ours or we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities.

We may in the future seek to acquire or invest in additional businesses, products, technologies or other assets. We also may enter into relationships with other businesses to expand our service offerings or our ability to provide service in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:

• issue additional equity securities that would dilute our stockholders;

• use cash that we may need in the future to operate our business;

• incur debt on terms unfavorable to us or that we are unable to repay;

• incur large charges or substantial liabilities;

• encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and

• become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

Any of these risks could harm our business and operating results.

We rely on our management team and need additional personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.

Our success and future growth depends to a significant degree on the skills and continued services of our management team, especially Zachary Nelson, our President and Chief Executive Officer, and Evan M. Goldberg, our Chief Technology Officer and Chairman of the Board. We do not maintain key man insurance on any members

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of our management team, including Messrs. Nelson and Goldberg. Our future success also depends on our ability to attract, retain and motivate highly skilled technical, managerial, sales, marketing and service and support personnel, including members of our management team. Competition for sales, marketing and technology development personnel is particularly intense in the software and technology industries. As a result, we may be unable to successfully attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could harm our business.

Risks Related to Ownership of our Common Stock

Lawrence J. Ellison or members of his family, and related entities, beneficially own a majority of our outstanding shares of common stock, which may limit your ability to influence or control certain of our corporate actions. This concentration of ownership may also reduce the market price of our common stock and impair a takeover attempt of us.

Entities beneficially owned by Lawrence J. Ellison hold an aggregate of approximately 53.9% of our common stock as of June 30, 2008. Further, Mr. Ellison, his family members, trusts for their benefit, and related entities together beneficially own an aggregate of approximately 65.3% of our common stock as of June 30, 2008. Mr. Ellison is able to exercise control over approval of significant corporate transactions, including a change of control or liquidation. In addition, if the voting restrictions that apply to NetSuite Restricted Holdings LLC, the investment entity to which Mr. Ellison has transferred his shares, lapse or are amended, Mr. Ellison will be able to exercise control over additional corporate matters, including elections of our directors. So long as Mr. Ellison continues to be either an officer or director of Oracle, these voting restrictions cannot be changed without the approval of an independent committee of Oracle’s board of directors. Mr. Ellison’s interests and investment objectives may differ from our other stockholders. Mr. Ellison is also the Chief Executive Officer, a principal stockholder and a director of Oracle Corporation. Oracle supplies us with database software on which we rely to provide our service and is also a potential competitor of ours.

Our board of directors adopted resolutions, which renounce and provide for a waiver of the corporate opportunity doctrine as it relates to Mr. Ellison. As a result, Mr. Ellison will have no fiduciary duty to present corporate opportunities to us. In addition, Mr. Ellison’s indirect majority interest in us could discourage potential acquirers or result in a delay or prevention of a change in control of our company or other significant corporate transactions, even if a transaction of that sort would be beneficial to our other stockholders or in our best interest.

We are a “controlled company” within the meaning of the rules of the New York Stock Exchange and, as a result, will qualify for exemptions from certain corporate governance requirements.

Because a majority of our common stock is held by a single stockholder, we qualify for exemptions from certain corporate governance standards. Under the rules of the New York Stock Exchange, a company of which more than 50% of the voting power is held by a single person or a group of persons is a “controlled company” and may elect not to comply with certain corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the compensation of officers be determined, or recommended to the board of directors for determination, by a majority of the independent directors or a compensation committee comprised solely of independent directors and (3) the requirement that director nominees be selected, or recommended for the board of directors’ selection, by a majority of the independent directors or a nominating committee comprised solely of independent directors with a written charter or board resolution addressing the nomination process.

We incur significant costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and New York Stock Exchange, Inc. The expenses incurred by public companies for reporting and corporate governance

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purposes have increased dramatically. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are unable to currently estimate these costs with any degree of certainty. We also expect these new rules and regulations may 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 than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our application could reduce our ability to compete successfully.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

• develop or enhance our application and services;

• continue to expand our product development, sales and marketing organizations;

• acquire complementary technologies, products or businesses;

• expand operations, in the United States or internationally;

• hire, train and retain employees; or

• respond to competitive pressures or unanticipated working capital requirements.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell or otherwise dispose of, or indicate an intention to sell or dispose of, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. The lock-up agreements pertaining to our initial public offering expired after the market closed on June 16, 2008. As of June 30, 2008, we have outstanding a total of 60,270,210 shares of common stock, of which approximately 11,343,000 shares were freely tradable, without restriction, in the public market at that date. Excluding shares that are held by NetSuite Restricted Holdings LLC, which are subject to certain restrictions on disposition, approximately 16,876,000 of the remaining shares that were subject to these lock-up agreements became freely tradable on August 8, 2008, in accordance with our Insider Trading Compliance Policy. Additionally, as of June 30, 2008, there were 5,285,807 vested and exercisable options outstanding for which the underlying shares were subject to our Insider Trading Compliance Policy that also became freely tradable for the first time on August 8, 2008.

If a significant number of these shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

• authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

• limiting the liability of, and providing indemnification to, our directors and officers;

• limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

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• requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

• controlling the procedures for the conduct and scheduling of board and stockholder meetings;

• providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;

• limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and

• providing that directors may be removed by stockholders only for cause.

These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Under Section 203, our majority stockholder, which is beneficially owned by Lawrence J. Ellison, and our current stockholders associated with members of Mr. Ellison’s family are not subject to the prohibition from engaging in such business combinations.

Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

ITEM 4. Submission of Matters to a Vote of Security Holders

Our 2008 Annual Meeting of Stockholders was held on May 29, 2008. The two persons named below were elected to serve as directors for three years and until their successors are duly elected and qualified, subject to their earlier death, resignation or removal.

	For	Withheld
Zachary Nelson	54,553,842	400,052
Kevin Thompson	54,540,472	413,422

The other matter voted upon at our 2008 Annual Meeting of Stockholders was the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008. The results of such vote were:

For	Against	Abstain	Broker non-votes
54,233,280	120,614	599,999	0

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ITEM 6. Exhibits

The exhibits listed below are filed or incorporated by reference as part of this Report.

Exhibit No.	Description of Exhibits
10.1	NetSuite Inc. 2007 Equity Incentive Plan, as amended July 31, 2008*
10.2	Form of Notice of Grant of Stock Option under the NetSuite Inc. 2007 Equity Incentive Plan*
10.3	Form of Notice of Grant of Restricted Stock Units under the NetSuite Inc. 2007 Equity Incentive Plan*
10.4	Form of Notice of Grant of Performance Units under the NetSuite Inc. 2007 Equity Incentive Plan*
10.5	OpenAir, Inc. 2008 Restricted Stock Unit Plan*
10.6	Form of Notice of Grant of Restricted Stock Units under the OpenAir Inc. 2008 Restricted Stock Unit Plan*
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

* Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

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

Date: August 12, 2008	NETSUITE INC.
	By:	/s/ JAMES MCGEEVER
		James McGeever
		Chief Financial Officer

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