SecProbe.io

CORRESP
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August 30, 2005

Ms. Kathleen Collins

Accounting Branch Chief

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C.  20549

  RE:

  Opsware Inc.

  Form 10-K for Fiscal Year
  Ended January 31, 2005

  Filed April 15, 2005 (the
  “Form 10-K”)

  Form 10-Q for Fiscal
  Quarter Ended April 30, 2005

  Filed June 9, 2005 (the
  “Form 10-Q”)

Dear Ms. Collins:

On behalf of Opsware Inc. (“Opsware”), we are
furnishing this letter to respond to the Staff’s comments contained in your
letter dated July 28, 2005.  For
your convenience, we have included the comments presented by the Staff,
followed by Opsware’s responses.

Form 10-K for the Fiscal
Year Ended January 31, 2005

Note
8 – Transactions with EDS, page 62

1.              Provide
us a detailed summary of your transactions with EDS along with an analysis and
explanation of your accounting, with references to the respective authoritative
accounting literature.  At a minimum,
please address the following:

•                  Explain why you believe
you have objective and reliable evidence of fair value for both the value of
the Managed Services Business (MSB) and the separate EDS license and
maintenance agreement.  Explain why you
believe the renewal rates stated in the EDS License provide you with this
evidence for both the MSB and the license and maintenance agreement.

•                  Clarify the nature of the ‘renewal
rates’ you used to establish objective evidence of fair value.  Compare and contrast this to your statement
that indicates that you do not have vendor specific objective evidence (VSOE)
of fair value for your maintenance.

•                  You indicate that you ‘allocated
20% of the total license fees’ to maintenance revenue, which is consistent with
the pricing of license and maintenance agreements with other customers.  Compare and contrast this to your statement
that indicates that you do not have VSOE of fair value for your
maintenance.  Explain the purpose of this
allocation and what it represents.

•                  Explain how you determined
that the EDS License entailed a separate earnings process and therefore did not
affect the quality of use or the value paid by EDS

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for the MSB.
Explain if and to what extent the MSB had value to EDS without the
License agreement.

•                  Provide us with any
additional information that will help us understand and evaluate these
arrangements with EDS and your underlying accounting.

Response:

EDS Transactions

On August 15, 2002, Opsware (formerly Loudcloud, Inc.)
completed the sale of its Managed Services Business through an asset purchase
agreement (the “Asset Purchase Agreement”), which included approximately 40
active customer contracts, to EDS for $63.5 million in cash and the assumption
of certain liabilities subject to adjustment. Contemporaneous with the
execution of the Asset Purchase Agreement, Opsware separately executed a
license agreement (the “License Agreement”) with EDS under which EDS would pay
minimum license fees of $52.0 million in the aggregate over the three-year term
of the license, provided Opsware subsequently developed specified features and
functions as set forth in the License Agreement.  This license also provided limited
exclusivity rights for EDS whereby we could not license our software to a named
list of EDS competitors.

Accounting Treatment of License
Agreement and Asset Purchase Agreement

Authoritative Literature

In order to determine whether the $52.0 million License
Agreement could be segmented and accounted for separately from the $63.5
million Asset Purchase Agreement,  we
considered whether there was objective and reliable evidence of fair value for
each element as noted above. We determined that EITF 00-21,”Accounting for
Revenue Arrangements with Multiple Deliverables” was the appropriate
authoritative literature to review, even though it was not effective at the
time of transaction, because EITF 00-21 addresses multiple elements in a single
revenue arrangement and the criteria for determining if an independent unit of
accounting exists. Although the transactions between EDS and Opsware were not a
single revenue transaction but rather a license agreement and the sale of the Managed
Services Business to EDS, the criteria in EITF 00-21 provided a reasonable
framework in which to view the transaction.

The working model recommended by the EITF 00-21
working group provided that a deliverable in an arrangement should be segmented
and accounted for separately from the remainder of the arrangement as an
independent unit of accounting only if there is (i) objective
and reliable evidence of fair value to allocate the consideration to
the separate deliverables in the arrangement and (ii) the deliverable
meets at least one of the following criteria at the inception of the
arrangement:

a.                               The
deliverable does not affect the quality of use or the value to the customer of
the other deliverables in the arrangement; or

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b.                              The
deliverable can be purchased from another unrelated vendor without affecting
the quality of use or the value to the customer of the remaining deliverables
in the arrangement.

Fair Value of Managed Services Business

In order to determine the relative fair value of the
sale of the Managed Services Business, Opsware obtained objective and reliable
information from two primary valuation sources.

Independent
Appraisal: On June 4, 2002, Opsware obtained a valuation
analysis of the stand-alone Managed Services Business from an independent third
party.  This analysis was based on a
number of valuation techniques and validation points including a Net Asset
Approach, a Market Approach and an Income Approach. Based on review of this
independent valuation process, the estimated value assignable to the Managed Services
Business ranged from a low of $55.0 million using the Net Asset Approach to a high
of $65.0 million using the Market Approach, with an average value of $60.3
million.

Fairness
Opinion: As part of the approval of the Asset Purchase Agreement,
an independent third party was engaged to comment on whether the transaction
itself should be considered “fair” to Opsware shareholders. The investment bank
Credit Suisse First Boston issued their Fairness Opinion after performing a
detailed valuation of the Managed Services Business. The Fairness Opinion
included the assets and the assumption of liabilities related to the Managed Services
Business. The Fairness Opinion was supported by 1) a discounted cash flow
analysis on the Managed Services Business, primarily based on the managed
service customer contracts, and to a lesser degree, 2) a precedent transaction
analysis, and 3) a selected company analysis. The Credit Suisse First Boston
opinion specifically stated that a) they did not consider the financial terms
of the Software License Agreement in performing their valuation calculations,
and b) they did opine that the transaction based was fair consideration for the
Managed Services Business on a $63.5 million purchase price.

Fair Value of License Agreement

In order to determine the relative value of the
License Agreement, Opsware looked at the following objective and reliable
evidence of fair value.

License Pricing:  EDS prepared a detailed analysis to estimate
the amount of savings that could result from its use of Opsware’s IT automation
products and technology throughout its installed customer base. This analysis formed
the basis by which Opsware and EDS arrived at a price for the software license.
Specifically, EDS disclosed in a public press release by them that “Under the
terms of the license agreement, EDS would pay $52.0 million over three
years.  The agreement provides the
foundation for widespread automation of service delivery and applications
management – first within EDS’ managed web hosting business, and overtime,
throughout EDS’ global network of over 50,000 servers in 14 major data centers
and 140 client owned and regional data centers worldwide”.  Within the press release they quantified
their potential savings as “well over $100 million in savings over the term of
the agreement”.

License Renewal Rates: Under the
terms of the License Agreement, upon expiration of the initial three-year  term, EDS was required to either: 1) renew
the License Agreement by paying year four and five annual license fees at the
higher of (i) the then current rate of usage or

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(ii) the
contractual minimum for the right to continue use of the software beyond the
initial term (i.e., the same as the initial license fee) or, 2) if not renewed,
immediately discontinue all use of the technology, erase all copies of the
software from their computers and return or destroy all copies of the
technology and documentation. This initial license agreement had an initial
term of three years plus two one-year renewal periods and any additional use
beyond the 2nd renewal term of the software by EDS would require a
separately negotiated license agreement. Therefore, the optional year four and
five renewal rates, which were the same as the initial license fee, represented
objective and reliable evidence of fair value.

Other Factors

We also analyzed the following factors in assessing
whether the sale of the Managed Services Business under the Asset Purchase
Agreement and the License Agreement were separate units of accounting that
could be accounted for separately.

Quality of Use or Value Paid:  As part of the sale of the Managed Services Business,
EDS received the rights to all active Loudcloud customer contracts, vendor
contracts, fixed assets, accounts receivable and other assets. Additionally, as
part of the purchase price, we granted EDS a separate, limited license,
including maintenance, to use the Opsware automation technology to service
those customer contracts transferred as part of the sale. This license could
only be used by EDS for the duration of the term of those aforementioned
customer contracts which covered approximately 1,100 total deployed devices,
compared to the 18,500 devices subject to license under the separate $52
million License Agreement.

Furthermore, the Asset Purchase Agreement contained
two purchase price adjustment contingencies prior to closing: 1) an average
contractual monthly recurring revenue as of closing, for 10 specifically
identified customer contracts, equal to or greater than the monthly recurring
revenue at the date of contract signing, and 2)  EDS’s final determination of the fair value of
the assets of the Managed Services Business upon closing. Neither of these
contingencies considered or affected the terms or price of the $52 million License
Agreement.

Also, under the terms of the $52 million License Agreement,
Opsware was obligated to meet specific delivery requirements which, if not met,
could delay or eliminate EDS’ payment of license fees. Unlike the limited license
received as part of the $63.5 million sale of the managed service business, where
there was no specific delivery requirement, these functions and features that
were agreed upon at the time of the License Agreement execution (August 2002)
were not developed and accepted until January 2003.  However, failure of Opsware to meet its
contractual obligations under the License Agreement did not in any way affect
the terms of the Asset Purchase Agreement, including the price paid by EDS.

Availability of Other Vendors:  In addition, at the time of the Asset Purchase
Agreement, there were several other vendors that could have supplied IT
automation software of similar quality as that which was licensed under the
License Agreement to EDS, including Altiris, BladeLogic, Hewlett-Packard, IBM,
Sun Microsystems, and VERITAS Software.

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Accordingly, for the factors noted above, the separate
License Agreement did not affect the quality of use or value to EDS of the Managed
Services Business assets and liabilities sold separately.

Accounting for Sale of Managed Services Business

We considered Statement of Financial Accounting
Concepts No. 5, “Recognition and Measurement in Financial Statements of
Business Enterprises” (SFAS 5) in determining when to recognize the value of
the sale of the Managed Services Business. SFAS 5 indicates the recognition of
gains should follow the principle that gains often result from transactions,
and other events, that involve no “earnings process”; therefore, in terms of
recognition, it is more significant that the gain be realized rather than
earned. Accordingly, Opsware recognized the gain from the sale of the Managed Services
Business upon the closing of the transaction in the quarter ended September 30,
2002, computed as the excess of the $63.5 million of cash proceeds from the
sale over the carrying value of the net assets sold.

Accounting for the Software License

Under the License Agreement, Opsware was obligated to
deliver the Opsware System 3.5 software and several specific new features not
available at the date of license execution including “Auto Discovery” and Unix
operating system compatibility. Failure to deliver these features could have
resulted in forfeiture of up to 100% of the license fees.

Accordingly, Opsware deferred recognition of all revenue
under the arrangement until the aforementioned specified deliverables were
delivered to and accepted in writing by EDS in October of 2002.  At that point, Opsware was obligated to continue
to provide PCS for the remainder of the license term. However, because this transaction
represented Opsware’s initial license of its IT automation software, it had not
previously marketed or sold PCS on a standalone basis and, therefore, had not
established vendor specific objective evidence (VSOE) of fair value for its PCS
services.  Accordingly, pursuant to
paragraph No. 58 of SOP 97-2, Opsware determined that the license fee
should be recognized ratably over the remainder of the license term, which was
co-terminus with the PCS term.

However, because the license fees were payable in
monthly minimum installments over the three year license term, Opsware
determined that the arrangement included extended payment terms and, as a
result, revenue to be recognized each period should be the lesser of the
proportion of the $52 million minimum fees recognizable on a straight-line
basis or those payments which became due in that period. While Opsware had not
yet established VSOE for PCS at the time of the License Agreement,, we believed
we had a reasonable and rational basis for allocating a portion of the fee to “services”
in order to meet the separate revenue caption presentation requirements of Rule 5-03
of Reg. S-X, and that this disclosure provided useful information to the
readers of the financial statements in order to better understand the relative
contribution of license fees and services to total revenue. Management, with
the relevant authority, had established the list price for PCS services as 20%
of the net license fee paid by it customers. Subsequently, we established VSOE
for maintenance at 20% of the net license fee paid by its customers.

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Form 10-Q for the Fiscal
Quarter Ended April 30, 2005

Item
4.  Controls and Procedures, page 41

2. We note your disclosure that your “Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by Opsware in reports that we file under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms as of December 31,
2004.”  Tell us how your officers
considered Exchange Act Rule 13a-15(e) in concluding that your
disclosure controls and procedures are also effective to ensure that
information required to be disclosed in the reports that you file or submit
under the Exchange Act is accumulated and com