FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-50463

Callidus Software Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0438629 (I.R.S. Employer Identification Number)

Callidus Software Inc.
160 West Santa Clara Street, Suite 1500
San Jose, CA 95113
(Address of principal executive offices, including zip code)
(408) 808-6400
(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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


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

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

There were 30,051,875 shares of the registrant’s common stock, par value $0.001, outstanding on July 31, 2009, the latest practicable date prior to the filing of this report.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			40

PART II. OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 4. Submission of Matters to a Vote of Security Holders			41
Item 6. Exhibits			42
Signatures			43
Exhibit Index			44
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-31.1
EX-32.1

Callidus Software^®, the Callidus Software logo, Callidus TrueAnalytics™, TrueComp^®, TrueComp^® Grid, TrueComp^® Manager, TrueConnection^®, TrueFoundation™, TrueInformation^®, TruePerformance™, TruePerformance Index™, TruePerformance Indicator™, TrueMBO™, TrueAllocation™, TrueProducer™, TrueQuota™, TrueReferral™, TrueResolution^®, TrueTarget™ and TrueService+™, among others not referenced in this quarterly report on Form 10-Q, are trademarks, servicemarks, or registered trademarks of Callidus Software Inc. in the United States and other countries. All other brand, service or product names referred to in this report are trademarks or registered trademarks of their respective companies or owners.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)


	June 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	24,501		$	35,390
Short-term investments		14,713			1,455
Accounts receivable, net		15,225			22,710
Deferred income taxes		360			360
Prepaid and other current assets		3,079			4,104

Total current assets		57,878			64,019
Long-term investments		877			3,828
Property and equipment, net		5,443			4,890
Goodwill		5,528			5,655
Intangible assets, net		3,747			3,208
Deferred income taxes, noncurrent		811			811
Deposits and other assets		871			1,468

Total assets	$	75,155		$	83,879


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,672		$	2,447
Accrued payroll and related expenses		4,888			7,128
Accrued expenses		4,191			5,027
Deferred income taxes		816			816
Deferred revenue		20,159			21,881

Total current liabilities		32,726			37,299
Long-term deferred revenue		505			1,202
Deferred income taxes, noncurrent		72			—
Other liabilities		1,621			1,412

Total liabilities		34,924			39,913


Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized;
29,970 and 29,240 shares issued and outstanding at
June 30, 2009 and December 31, 2008, respectively		30			29
Additional paid-in capital		209,629			207,493
Accumulated other comprehensive income		240			121
Accumulated deficit		(169,668	)		(163,677	)

Total stockholders’ equity		40,231			43,966

Total liabilities and stockholders’ equity	$	75,155		$	83,879

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
				(Unaudited)
Revenues:
Recurring	$	11,802		$	10,051		$	23,499		$	18,335
Services		9,407			11,539			20,609			27,394
License		1,161			1,872			4,162			5,856

Total revenues		22,370			23,462			48,270			51,585
Cost of revenues:
Recurring		5,416			3,670			11,201			6,949
Services		7,671			10,956			16,980			23,644
License		251			108			442			350

Total cost of revenues		13,338			14,734			28,623			30,943

Gross profit		9,032			8,728			19,647			20,642


Operating expenses:
Sales and marketing		5,444			7,213			11,306			14,589
Research and development		3,673			3,465			7,474			7,150
General and administrative		2,683			3,339			6,250			6,733
Restructuring		639			—			805			397

Total operating expenses		12,439			14,017			25,835			28,869


Operating loss		(3,407	)		(5,289	)		(6,188	)		(8,227	)
Interest and other income (expense), net		161			280			190			811


Loss before provision (benefit) for income taxes		(3,246	)		(5,009	)		(5,998	)		(7,416	)
Provision (benefit) for income taxes		88			122			146			343


Net loss	$	(3,334	)	$	(5,131	)	$	(6,144	)	$	(7,759	)


Net loss per share - basic and diluted
Net loss per share	$	(0.11	)	$	(0.17	)	$	(0.21	)	$	(0.26	)


Shares used in basic and diluted per share computation		29,942			29,989			29,747			29,873

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Six Months Ended June 30,
	2009			2008
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(6,144	)	$	(7,759	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense		1,433			1,141
Amortization of intangible assets		848			1,367
Provision for doubtful accounts and service remediation reserves		(46	)		(55	)
Stock-based compensation		2,212			3,896
Loss on disposal of property		3			2
Deferred income taxes		72			—
Net accretion on investments		15			(140	)
Put option (gain) loss		306			—
(Gain) loss on investments classified as trading securities		(373	)		—
Changes in operating assets and liabilities:
Accounts receivable		7,704			11,318
Prepaid and other current assets		935			(984	)
Other assets		189			559
Accounts payable		234			(1,518	)
Accrued expenses		(2,270	)		(2,521	)
Accrued payroll and related expenses		(1,814	)		(1,347	)
Accrued restructuring		(488	)		(972	)
Deferred revenue		(2,442	)		4,366

Net cash provided by (used in) operating activities		374			7,353


Cash flows from investing activities:
Purchases of investments		(13,260	)		(13,919	)
Proceeds from maturities and sale of investments		3,450			23,600
Purchases of property and equipment		(1,147	)		(1,258	)
Purchases of intangible assets		(506	)		(100	)
Acquisition, net of cash acquired		(14	)		(7,500	)
Change in restricted cash		202			—

Net cash provided by (used in) investing activities		(11,275	)		823


Cash flows from financing activities:
Net proceeds from issuance of common stock		990			3,497
Repurchases of stock		(742	)		(3,721	)
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units		(319	)		—

Net cash (used in) provided by financing activities		(71	)		(224	)

Effect of exchange rates on cash and cash equivalents		83			(29	)

Net increase (decrease) in cash and cash equivalents		(10,889	)		7,923
Cash and cash equivalents at beginning of period		35,390			21,813

Cash and cash equivalents at end of period	$	24,501		$	29,736


Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	—		$	1

Non-cash investing and financing activities:
Purchases of property and equipment not paid as of quarter-end	$	1,445		$	1,082

Purchases of intangible assets not paid as of quarter-end	$	981		$	—

Deferred direct stock-based compensation costs	$	(3	)	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements included in the Callidus Software Inc. Annual Report on Form 10-K for the year ended December 31, 2008. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission (SEC) rules and regulations regarding interim financial statements. All amounts included herein related to the condensed consolidated financial statements as of June 30, 2009 and the three and six months ended June 30, 2009 and 2008 are unaudited and should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, the accompanying condensed consolidated financial statements include all necessary adjustments for the fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the full fiscal year ending December 31, 2009.

Corrections of Immaterial Errors

As disclosed in the 2008 Form 10-K, the Company made immaterial revisions to prior periods. As part of the revisions, $88,000 was recorded to interest and other income in the three and six months ended June 30, 2008 in this filing.

Reclassifications

Certain immaterial amounts from prior quarters in 2008 as reported in the condensed consolidated statements of operations and statement of cash flows have been reclassified to conform to the current period presentation.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Callidus Software Inc. and its wholly owned subsidiaries (collectively, the Company), which include wholly owned subsidiaries in Australia, Canada, Germany, Hong Kong and the United Kingdom. All intercompany transactions and balances have been eliminated in consolidation.

Certain Risks and Uncertainties

The Company’s products and services are concentrated in the software industry, which is characterized by rapid technological advances and changes in customer requirements. A critical success factor is management’s ability to anticipate or to respond quickly and adequately to technological developments in its industry and changes in customer requirements. Any significant delays in the development or introduction of products or services could have a material adverse effect on the Company’s business and operating results.

Historically, a substantial portion of the Company’s revenues have been derived from sales of its products and services to customers in the financial and insurance industries. The recent substantial

disruptions in these industries may result in these customers deferring or cancelling future planned expenditures on the Company’s products and services. The Company is also subject to fluctuations in sales for the TrueComp product, and its license revenues are typically dependent on a small volume of transactions. Continued macroeconomic weakness may keep potential customers from purchasing the Company’s products.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (SEC) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting period and the accompanying notes. Estimates are used for, but not limited to, the allocation of the value of purchase consideration, reserves related to income taxes, valuation of certain investments, allowances for doubtful accounts and service remediation reserves, the useful lives of fixed assets and intangible assets, goodwill and intangible asset impairment charges, accrued liabilities and other contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates such estimates and assumptions on an ongoing basis using historical experience and considers other factors, including the current economic environment, for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such evaluation. Illiquid credit markets, volatile equity and foreign currency markets and declines in IT spending by companies have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates. Changes in those estimates, if any, resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Fair Value of Financial Instruments and Concentrations of Credit Risk

The fair value of the Company’s financial instruments, including cash and cash equivalents and short-term investments, accounts receivable and accounts payable, approximate their respective carrying value due to their short maturity. See Note 4 – Investments for discussion regarding the valuation of the Company’s auction rate securities. Financial instruments that potentially subject the Company to concentrations of credit risk are short-term investments, long-term investments and trade receivables. The Company mitigates concentration of risk by monitoring ratings, credit spreads and potential downgrades for all bank counterparties on at least a quarterly basis. Based on the Company’s on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties.

The Company’s customer base consists of businesses throughout the Americas, Europe Middle East Africa and Asia-Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of June 30, 2009, the Company had one customer comprising greater than 10% of net accounts receivable. As of December 31, 2008, the Company had no customers comprising greater than 10% of net accounts receivable.

Reserve Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company offsets gross trade accounts receivable with its allowance for doubtful accounts and service remediation reserve. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days are reviewed individually for collectibility. Account balances are charged against the allowance after reasonable means of collection have been exhausted and the potential for recovery is considered remote.

The service remediation reserve is the Company’s best estimate of the probable amount of remediation services it will have to provide for ongoing professional service arrangements. To determine the adequacy

of the service remediation reserve, the Company analyzes historical experience of actual remediation service claims as well as current information on remediation service requests. Provisions to the allowance for doubtful accounts are recorded in general and administrative expenses, while provisions for service remediation reduce services revenues.

Below is a summary of the changes in the Company’s reserve accounts for the three and six months ended June 30, 2009 and 2008 (in thousands):


	Balance at		Provision,						Balance at
	Beginning		Net of						End of
	of Period		Recoveries			Write-Offs			Period
Allowance for doubtful accounts
Three months ended June 30, 2009	$	581	$	16		$	(58	)	$	539
Three months ended June 30, 2008		128		(15	)		—			113
Six months ended June 30, 2009		550		73			(84	)		539
Six months ended June 30, 2008		154		(41	)		—			113


	Balance at				Remediation			Balance at
	Beginning				Service			End of
	of Period		Provision		Claims			Period
Service remediation reserve
Three months ended June 30, 2009	$	382	$	162	$	(264	)	$	280
Three months ended June 30, 2008		288		178		(255	)		211
Six months ended June 30, 2009		399		652		(771	)		280
Six months ended June 30, 2008		225		499		(513	)		211

Restricted Cash

Included in prepaid and other current assets and deposits and other assets in the condensed consolidated balance sheets at June 30, 2009 and December 31, 2008 is restricted cash totaling $232,000 and $434,000, respectively, related to security deposits on leased facilities for our New York, New York and San Jose, California offices. The restricted cash represents investments in certificates of deposit and secured letters of credit required by landlords to meet security deposit requirements for the leased facilities. Restricted cash is included in either prepaid and other current assets or deposits and other assets based on the remaining contractual term for the release of the restriction.

Revenue Recognition

The Company generates revenues by providing its software applications as a service through its on-demand subscription offering, licensing its software and providing related support and professional services to its customers. The Company presents revenue net of sales taxes and any similar assessments.

The Company recognizes revenues in accordance with accounting standards for software and service companies. The Company will not recognize revenue until persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is deemed probable. The Company evaluates each of these criteria as follows:

Evidence of an Arrangement. The Company considers a non-cancelable agreement signed by it and the customer to be evidence of an arrangement.

Delivery. In on-demand arrangements, the Company considers delivery to have occurred as the service is provided to the customer. In perpetual licensing arrangements, the Company considers delivery to have occurred when media containing the licensed programs is provided to a common

carrier, or in the case of electronic delivery, the customer is given access to the licensed programs. The Company’s typical end-user license agreement does not include customer acceptance provisions.

Fixed or Determinable Fee. The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within its standard payment terms. The Company considers payment terms greater than 90 days to be beyond its customary payment terms. If the fee is not fixed or determinable, the Company recognizes the revenue as amounts become due and payable. In arrangements where the customer is obligated to pay at least 90% of the license amount within normal payment terms and the remaining 10% is to be paid within a year from the contract effective date, the Company will recognize the license revenue for the entire arrangement upon delivery assuming all other revenue recognition criteria have been met. This policy is effective as long as the Company continues to maintain a history of providing similar terms to customers and collecting from those customers without providing any contractual concessions.

Collection is Deemed Probable. The Company conducts a credit review for all significant transactions at the time of the arrangement to determine the creditworthiness of the customer. Collection is deemed probable if the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not probable, the Company defers the recognition of revenue until cash collection.

Recurring Revenue

Recurring revenues include on-demand revenues and maintenance revenues. On-demand revenues are principally derived from technical operation fees earned through the Company’s services offering of the on-demand TrueComp suite, as well as revenues generated from business operations services. Maintenance revenues are derived from maintaining, supporting and providing periodic updates for the Company’s licensed software. Customers that own perpetual licenses can receive the benefits of upgrades, updates, and support from either subscribing to the Company’s on-demand services or maintenance services.

On-Demand Revenue. In arrangements where the Company provides its software applications as a service, the Company has considered Emerging Issues Task Force Issue No. 00-3 (EITF 00-3), Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware and EITF No. 03-5 (EITF 03-5), Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software, and has concluded that these transactions are considered service arrangements and fall outside of the scope of SOP 97-2. Accordingly, the Company follows the provisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. Customers will typically prepay for the Company’s on-demand services, which amounts the Company will defer and recognize ratably over the non-cancelable term of the customer contract. In addition to the on-demand services, these arrangements may also include implementation and configuration services, which are billed on a time-and-materials basis and recognized as revenues as the services are performed. In determining whether the consulting services can be accounted for separately from on-demand revenues, the Company considers the following factors for each consulting agreement: availability of the consulting services from other vendors; whether objective and reliable evidence of fair value exists for the undelivered elements; the nature of the consulting services; the timing of when the consulting contract is signed in comparison to the on-demand service contract and the contractual dependence of the consulting work on the on-demand service.

For those arrangements where the elements qualify for separate units of accounting, the on-demand revenues are recognized ratably over the non-cancelable contract term, which is typically 12 to 24 months, beginning on the service commencement date. Implementation and configuration services, when sold with the on-demand offering, are recognized as the services are rendered for time-and-materials contracts, and are recognized utilizing the proportional performance method of accounting for fixed-price contracts. For arrangements with multiple deliverables, the Company allocates the total contractual arrangement to the

separate units of accounting based on their relative fair values, as determined by the fair value of the undelivered and delivered items when sold separately.

If consulting services for implementation and configuration associated with an on-demand arrangement do not qualify as a separate unit of accounting, the Company will recognize the revenue from implementation and configuration services ratably over the remaining non-cancelable term of the subscription contract once the implementation is complete. In addition, the Company will defer the direct costs of the implementation and configuration services and amortize those costs over the same time period as the related revenue is recognized. The deferred costs on the Company’s consolidated balance sheets for these consulting arrangements totaled $1.3 million and $2.6 million at June 30, 2009 and December 31, 2008, respectively. As of June 30, 2009 and December 31, 2008, $0.9 million and $2.0 million, respectively, of the deferred costs are included in prepaid and other current assets, with the remaining amount included in deposits and other assets in the consolidated balance sheets.

Included in the deferred costs for on-demand arrangements is the deferral of commission payments to the Company’s direct sales force, which the Company amortizes over the non-cancelable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements. The deferral of commission expenditures related to the Company’s on-demand offering was $0.5 million and $0.8 million at June 30, 2009 and December 31, 2008, respectively.

Maintenance Revenue. Under perpetual software license arrangements, a customer typically pre-pays maintenance for the first twelve months, and the related revenues are deferred and recognized ratably over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

Services Revenue

Professional Service Revenue. Professional service revenues primarily consist of integration services related to the installation and configuration of the Company’s products as well as training. The Company’s installation and configuration services do not involve customization to, or development of, the underlying software code. Generally, the Company’s professional services arrangements are on a time-and-materials basis. Reimbursements, including those related to travel and out-of-pocket expenses, are included in services revenues, and an equivalent amount of reimbursable expenses is included in cost of services revenues. For professional service arrangements with a fixed fee, the Company recognizes revenue utilizing the proportional performance method of accounting. The Company estimates the proportional performance on fixed-fee contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of performance. To the extent the Company enters into a fixed-fee services contract, a loss will be recognized any time the total estimated project cost exceeds project revenues.

Perpetual License Revenue

Perpetual Licensing. The Company’s perpetual software license arrangements typically include: (i) an end-user license fee paid in exchange for the use of its products, generally based on a specified number of payees, and (ii) a maintenance arrangement that provides for technical support and product updates, generally over renewable twelve month periods. If the Company is selected to provide integration and configuration services, then the software arrangement will also include professional services, generally priced on a time-and-materials basis. Depending upon the elements in the arrangement and the terms of the

related agreement, the Company recognizes license revenues under either the residual or the contract accounting method.

Certain arrangements result in the payment of customer referral fees to third parties that resell the Company’s software products. In these arrangements, license revenues are recorded, net of such referral fees, at the time the software license has been delivered to a third-party reseller and an end-user customer has been identified.

Residual Method. Perpetual license fees are recognized upon delivery whether licenses are sold separately from or together with integration and configuration services, provided that (i) the criteria described above have been met, (ii) payment of the license fees is not dependent upon performance of the integration and configuration services, and (iii) the services are not otherwise essential to the functionality of the software. The Company recognizes these license revenues using the residual method pursuant to the requirements of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. Under the residual method, revenues are recognized when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e., professional services and maintenance), but does not exist for one or more of the delivered elements in the arrangement (i.e., the software product). Each license arrangement requires careful analysis to ensure that all of the individual elements in the license transaction have been identified, along with the fair value of each undelivered element.

The Company allocates revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately. For a certain class of transactions, the fair value of the maintenance portion of the Company’s arrangements is based on substantive stated renewal rates rather than stand-alone sales. The fair value of the professional services portion of the arrangement is based on the hourly rates that the Company charges for these services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. If the only undelivered element is maintenance, then the entire amount of revenue is recognized over the maintenance delivery period.

Contract Accounting Method. For arrangements where services are considered essential to the functionality of the software, such as where the payment of the license fees is dependent upon performance of the services, both the license and services revenues are recognized in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). The Company generally uses the percentage-of-completion method because the Company is able to make reasonably dependable estimates relative to contract costs and the extent of progress toward completion. However, if the Company cannot make reasonably dependable estimates, the Company uses the completed-contract method. If total cost estimates exceed revenues, the Company accrues for the estimated loss on the arrangement at the time such determination is made.

In certain arrangements, the Company has provided for unique acceptance criteria associated with the delivery of consulting services. In these instances, the Company has recognized revenue in accordance with the provisions of SOP 81-1. To the extent there is contingent revenue in these arrangements, the Company measures the level of profit that is expected based on the non-contingent revenue and the total expected project costs. If the Company is assured of a certain level of profit excluding the contingent revenue, the Company recognizes the non-contingent revenue on a percentage-of-completion basis and recognizes the contingent revenue upon final acceptance.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the exercise of

outstanding common stock options, the release of restricted stock, and purchases of employee stock purchase plan (ESPP) shares to the extent these shares are dilutive. For the three and six months ended June 30, 2009 and 2008, the diluted net loss per share calculation was the same as the basic net loss per share calculation, as all potential common shares were anti-dilutive.

Diluted net loss per share does not include the effect of the following potential weighted average common shares because to do so would be anti-dilutive for the periods presented (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Restricted stock		1,066		1,211		1,096		995
Stock options		6,646		6,636		6,660		6,969
ESPP		302		219		265		187

Totals		8,014		8,066		8,021		8,151

The weighted-average exercise price of stock options excluded from weighted average common shares during the three and six months ended June 30, 2009 was $4.83 and $4.84 per share, respectively, as compared to the weighted average exercise price of stock options excluded from weighted average common shares during the three and six months ended June 30, 2008 of $5.22 and $5.19 per share, respectively.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements, as the FASB had previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 was effective for fiscal years beginning after November 15, 2007. The Company adopted the accounting pronouncement as it relates to financial assets and liabilities as of January 1, 2008. Effective January 1, 2009, the Company adopted SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The adoption had no impact on the Company’s financial position or results of operations in the three and six months ended June 30, 2009.

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R requires the use of “full fair value” to record all the identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Effective January 1, 2009, the Company adopted SFAS 141R. The adoption did not have an impact on the Company’s condensed consolidated financial statements as the Company did not acquire any businesses nor did it have an impact from existing goodwill from previous acquisitions in the three and six months ended June 30, 2009.

In April 2009, the FASB issued FASB Staff Position FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141(R)-1. This FSP applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of SFAS 5 if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in SFAS 141R. FSP FAS 141(R)-1 is effective for annual periods beginning on or after December 15, 2008. Effective January 1, 2009, the Company adopted SFAS 141R. The adoption did not have an impact

on the Company’s condensed consolidated financial statements as the Company did not acquire any businesses in the three and six months ended June 30, 2009.

In December 2007, the FASB issued FASB Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 requires the noncontrolling interests (minority interests) to be recorded at fair value and reported as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. Effective January 1, 2009, the Company adopted SFAS 160. The Company does not have any noncontrolling interests (minority interests). As such, the adoption of SFAS 160 had no initial impact on the Company’s condensed consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods therein beginning after December 15, 2008. Effective January 1, 2009, the Company adopted FSP 142-3. The adoption did not have an impact on the condensed consolidated financial statements as none of the Company’s assumptions have changed.

In September 2008, the FASB issued Emerging Issues Task Force No. 08-7 Accounting for Defensive Intangible Assets (EITF 08-7). EITF 08-7 requires that an acquired defensive intangible asset be accounted for as a separate unit of accounting at acquisition, not combined with the acquirer’s recognized or unrecognized intangible assets. An intangible asset acquired in a business combination or an asset acquisition that an entity does not intend to actively use but does intend to prevent others from using, has been commonly referred to as a “defensive asset” or a “locked-up asset” because while the asset is not being actively used, it is likely contributing to an increase in the value of other assets owned by the entity. The useful life of the asset should be determined as the period over which the reporting entity expects a defensive asset to contribute directly or indirectly to the entity’s future cash flows, in accordance with paragraph 11 of SFAS 142. EITF 08-7 is effective for defensive assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and shall be applied prospectively. Effective January 1, 2009, the Company adopted EITF 08-7. The adoption did not have an impact on our condensed consolidated financial statements as the Company did not acquire any defensive intangible assets in the three and six months ended June 30, 2009.

In April 2009, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). This FSP provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS 157 states is the objective of fair value measurement – to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Company adopted FSP FAS-157-4 in the second quarter of 2009. See Note 4 – Investments for additional discussion.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). This FSP enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 107-1 and APB 28-1 relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values of these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP FAS 107-1 and APB 28-1 are effective

for interim and annual periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 in the second quarter of 2009. Since FSP FAS 107-1 and APB 28-1 only requires additional disclosures and all financial instruments are reflected on the balance sheet at fair value, the adoption did not have an impact on the condensed consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. The FSP also requires increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after June 15, 2009. The Company adopted FSP FAS 115-2 and FSP FAS 124-2 in the second quarter of 2009. See Note 4 — Investments for additional discussion.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS 165), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date — that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted SFAS 165 in the second quarter of 2009. Since SFAS 165 only requires additional disclosures, the adoption will not have an impact on the condensed consolidated financial statements. See Note 11 – Subsequent Events for additional discussion.

In July 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). The Codification will become the exclusive authoritative reference for nongovernmental U.S. GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The change divides nongovernmental U.S. GAAP into the authoritative Codification and guidance that is nonauthoritative. The contents of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth in SFAS 162, which has been superseded by SFAS 168. The Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. Since SFAS 168 only requires modified disclosures, the adoption will not have an impact on the condensed consolidated financial statements.

2. Restructuring

In October 2008, management approved a cost savings program to reduce the Company’s workforce. The Company incurred restructuring charges of $1.2 million in the fourth quarter of 2008 and $0.2 million in the first quarter of 2009 in connection with severance and termination-related costs, most of which are severance-related cash expenditures. The October 2008 cost savings program was substantially completed in the fourth quarter of 2008 and was fully completed in the first half of 2009.

In May and June 2009, management approved cost savings programs to reduce the Company’s workforce. The Company incurred restructuring charges of $0.6 million in the second quarter of 2009 in connection with severance and termination-related costs, most of which are severance-related cash expenditures. The May 2009 cost savings program was fully completed in the second quarter of 2009. The June 2009 cost savings program will be fully completed in the second half of 2009. As of June 30, 2009 accrued restructuring charges were $0.3 million.

Total costs incurred to date and total costs expected to be incurred of $3.9 million include restructuring charges of $1.5 million in 2007, $1.6 million in 2008, $0.2 million in the first quarter of 2009 and $0.6 million in the second quarter of 2009.

The following table sets forth a summary of accrued restructuring charges for 2009 (in thousands):


													Total Costs		Total Costs
	December 31,		Cash								June 30,		Incurred to		Expected to
	2008		Payments			Additions		Adjustments			2009		Date		be Incurred
Severance and termination related costs	$	810	$	(1,269	)	$	826	$	(41	)	$	326	$	3,904	$	3,904


Total accrued restructuring charges	$	810	$	(1,269	)	$	826	$	(41	)	$	326	$	3,904	$	3,904

See Note 11 — Subsequent Events for further discussion.

3. Goodwill and Intangible Assets

Goodwill as of June 30, 2009 and December 31, 2008 was $5.5 million and $5.7 million, respectively. The change is due to an adjustment to the previous estimates for the lease liability valuation associated with the CT acquisition as a result of actual operating costs.

Intangible assets consisted of the following as of June 30, 2009 and December 31, 2008 (in thousands):


	December 31,		December 31,							June 30,
	2008		2008				Amortization			2009
	Cost		Net		Additions		Expense			Net
Purchased technology	$	3,579	$	1,624	$	1,387	$	(535	)	$	2,476
Customer backlog		1,500		63		—		(63	)		—
Customer relationships		2,000		1,521		—		(250	)		1,271


Total intangible assets, net	$	7,079	$	3,208	$	1,387	$	(848	)	$	3,747

Intangible assets include third-party software licenses used in our products and acquired assets related to the Compensation Technologies (CT) acquisition completed in 2008. Costs incurred to renew or extend the term of a recognized intangible asset are expensed in the period incurred. The $1.4 million in additions are for purchases of third-party software licenses used in our products, and include $0.4 million purchased in the first quarter of 2009 and $1.0 million purchased in the second quarter of 2009. Amortization expense related to intangible assets was $0.4 million and $0.8 million for the three and six months ended June 30, 2009, respectively, as compared to amortization expense of $0.7 million and $1.4 million for the three and six months ended June 30, 2008, respectively, and was charged to cost of revenues for purchased technology and customer backlog and sales and marketing expense for customer relationships. The Company’s intangible assets are amortized over their estimated useful lives of one to five years. Total future expected amortization is as follows (in thousands):


	Purchased		Customer
	Technology		Relationships
Year Ending December 31:
Remainder of 2009	$	807	$	250
2010		937		500
2011		524		500
2012		208		21
2013		—		—
2014 and beyond		—		—


Total expected future amortization	$	2,476	$	1,271

4. Investments

The Company classifies debt and marketable equity securities based on the liquidity of the investment and management’s intention on the date of purchase and re-evaluates such designation as of each balance sheet date. Except for certain auction rate securities that are classified as trading, debt and marketable equity securities are classified as available for sale and carried at estimated fair value, which is determined based on the inputs discussed below. Those securities that are classified as trading are designated as short-term investments due to a contractual agreement that allows the Company to sell securities at par value within the next year. The total estimated fair value of such trading securities at June 30, 2009 was $3.5 million, which includes gains on investments of $0.3 million and $0.4 million for the three and six months ended June 30, 2009, respectively.

The Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. The Company considers all investments that are available for sale that have a maturity date of longer than three months to be short-term investments, including those investments with a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity. The auction rate security classified as available for sale is designated as a long-term investment due to the inability to sell this security in the current market.

Interest is included in interest and other income, net, in the accompanying condensed consolidated financial statements. Realized gains and losses are calculated using the specific identification method. The components of the Company’s debt and marketable equity securities were as follows at June 30, 2009 (in thousands):


								Gain (Loss) on
								Investments
								Recorded in the
	Amortized		Unrealized		Unrealized			Statement of		Estimated
June 30, 2009	Cost		Gains		Losses			Operations		Fair Value
Money market funds	$	17,759	$	—	$	—		$	—	$	17,759
Certificates of deposit		720		—		—			—		720
Auction-rate securities classified as available for sale		900		—		(23	)		—		877
Corporate notes and obligations		6,018		9		—			—		6,027
U.S. government and agency obligations		4,500		12		(1	)		—		4,511


Investments in debt and equity securities	$	29,897	$	21	$	(24	)	$	—	$	29,894


	June 30,		December 31,
	2009		2008
Recorded as:
Cash equivalents	$	17,759	$	27,202
Short-term investments		14,713		1,455
Long-term investments		877		3,828


	$	33,349	$	32,485

The Company had no realized gains or losses on sales of investments for the three and six months ended June 30, 2009 and 2008, respectively. The Company had proceeds of $3.5 million par value from maturities and sales of investments for the three months ended June 30, 2009.

The Company measures financial assets at fair value on an ongoing basis. The estimated fair value of the Company’s financial assets was determined using the following inputs at June 30, 2009 and December 31, 2008 (in thousands):


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2009	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	17,759	$	17,759	$	—	$	—
Certificates of deposit (3)		720		—		720		—
Auction-rate securities (2), (3)		4,332		—		—		4,332
Corporate notes and obligations (3)		6,027		—		6,027		—
U.S. government and agency obligations (3)		4,511		—		4,511		—
Asset associated with put option (4)		186		—		—		186


Total	$	33,535	$	17,759	$	11,258	$	4,518


(1)		Included in cash and cash equivalents on the condensed consolidated balance sheet

(2)		$877K included in long-term investments on the condensed consolidated balance sheet

(3)		Except as indicated in (2), included in short-term investments on the condensed consolidated balance sheet

(4)		Included in prepaid and other current assets on the condensed consolidated balance sheet


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2008	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	27,202	$	27,202	$	—	$	—
Auction-rate securities (2)		3,828		—		—		3,828
Corporate notes and obligations (3)		1,455		—		1,455		—
Asset associated with put option (4)		492		—		—		492


Total	$	32,977	$	27,202	$	1,455	$	4,320


(1)		Included in cash and cash equivalents on the consolidated balance sheet

(2)		Included in long-term investments on the consolidated balance sheet

(3)		Included in short-term investments on the consolidated balance sheet

(4)		Included in deposits and other assets on the consolidated balance sheet

The table below presents the changes during the period related to balances measured using significant unobservable inputs (Level 3) (in thousands):


									Cumulative
									Effect
			Gain (Loss)						Adjustment
	Balance at		Recorded in						as a Result		Balance at
	December 31,		Statement of			Unrealized			of Adopting		June 30,
	2008		Operations			Gain (Loss)			FSP FAS 115-2		2009
Auction-rate securities classified as trading	$	3,081	$	374		$	—		$	—	$	3,455
Auction-rate securities classified as available for sale		747		—			(23	)		153		877
Asset associated with put option		492		(306	)		—			—		186


Total	$	4,320	$	68		$	(23	)	$	153	$	4,518

Valuation of Investments and Put Option

Level 2

The Company’s corporate notes and obligations were valued using a pricing matrix from a reputable pricing service in order to calculate the amortized cost of the security (Level 2). The Company validates the estimated fair value received from the reputable pricing service on a quarterly basis.

Level 3

The Company valued its auction rate securities using unobservable inputs (Level 3). The Company utilized the income approach applying assumptions for interest rates using current market trends and an estimated term based on expectations from brokers for liquidity in the market and redemption periods agreed to by other broker-dealers. The Company also applied an adjustment for the lack of liquidity to the value determined by the income approach utilizing a put option model. As a result of the valuation assessment, the Company recorded a gain on investments classified as trading securities of $0.3 million and $0.4 million for the three and six months ended June 30, 2009, respectively, and an unrealized gain on investments classified as available-for-sale of $37,000 and $0.1 million for the three and six months ended

June 30, 2009, respectively. As a result of the adoption of FSP FAS 115-2 and FAS 124-2, the Company recorded a cumulative effect adjustment of $153,000 to increase the second quarter 2009 beginning unrealized loss on auction rate securities classified as available for sale, bringing the total unrealized gain/loss to $23,000, and decrease the second quarter 2009 beginning accumulated deficit. See further discussion below.

In connection with certain of the auction rate securities, in October 2008, one financial institution where the Company holds auction rate securities issued certain put option rights to the Company, which entitles the Company to sell its auction rate securities to the financial institution for a price equal to the par value plus any accrued and unpaid interest. These rights to sell the securities are exercisable at any time during the period from June 30, 2010 to July 2, 2012, after which the rights will expire. As a result of the valuation assessment, the Company recorded a loss on the put option of $0.2 million and $0.3 million for the three and six months ended June 30, 2009, respectively. The auction rate securities to which the put option applies were recorded as short-term investments and the asset associated with the put option was recorded as prepaid and other current assets as of June 30, 2009, as the put may be exercised beginning June 30, 2010. These auction rate securities were recorded as long-term investments and the asset associated with the put option was recorded as deposits and other assets on the condensed consolidated balance sheets as of December 31, 2008.

Adoption of FSP FAS 115-2 and FAS 124-2

The Company recorded a cumulative effect adjustment of $153,000 to increase the second quarter 2009 beginning unrealized loss on investments and decrease the second quarter 2009 beginning accumulated deficit. This adjustment to beginning accumulated other comprehensive loss records the noncredit component of the impairment previously recognized in 2008 as the Company does not intend to sell its auction rate security and it is not more-likely-than-not that the Company will be required to sell that security before recovery. The cumulative effect adjustment relates to the Company’s one auction rate security classified as available for sale with an estimated fair value of $0.9 million, and was measured based on the discounted cash flows as of April 1, 2009.

Changes in value of the Company’s auction rate securities since March 31, 2009 were allocated between credit loss factors and other factors. The Company considered the following factors when determining credit loss:

	•		Adverse conditions specifically related to the security, industry, or geographic area (i.e., financial condition of the issuer, financial condition of the underlying assets, changes to the underlying business, and changes in the quality of the underlying assets);

	•		the historical and implied volatility of the security;

	•		the payment structure of the debt security (i.e., the increased / decreased probability of repayment);

	•		failure of the issuer to make payments or default on obligations;

	•		changes to the rating of the security; and

	•		declines in value of the underlying assets.

As the Company concluded that there was no other-than-temporary-impairment as of December 31, 2008 when using the modified definitions in FAS 115-2, the Company recorded the full impairment as an adjustment to opening accumulated deficit. In addition, the Company evaluated the credit loss and determined it was immaterial.

5. Commitments and Contingencies

The Company is from time to time a party to various litigation matters and customer disputes incidental to the conduct of its business. At the present time, the Company believes that none of these matters is likely to have a material adverse effect on the Company’s future financial results.

In accordance with SFAS No. 5, Accounting for Contingencies (SFAS 5), the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At June 30, 2009, the Company has not recorded any such liabilities in accordance with SFAS 5. The Company believes that it has valid defenses with respect to the legal matters pending against the Company and that the probability of a loss under such matters is not probable.

Other Contingencies

The Company generally warrants that its products shall perform to its standard documentation. Under the Company’s standard warranty, should a product not perform as specified in the documentation within the warranty period, the Company will repair or replace the product or refund the license fee paid. Such warranties are accounted for in accordance with SFAS 5. To date, the Company has not incurred any costs related to warranty obligations for its software product.

The Company’s product license and on-demand agreements typically include a limited indemnification provision for claims by third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. To date, the Company has not incurred and therefore has not accrued for any costs related to such indemnification provisions.

6. Segment, Geographic and Customer Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining which information is reported is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision maker is considered to be the Company’s chief executive officer (CEO). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. By this definition, the Company operates in one operating segment, which is the development, marketing and sale of enterprise software. The Company’s TrueComp Suite is its only product line, which includes all of its software application products.

The following table summarizes revenues for the three and six months ended June 30, 2009 and 2008 by geographic areas (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Americas	$	19,744	$	19,938	$	40,865	$	42,690
EMEA		2,452		3,343		6,767		8,186
Asia Pacific		174		181		638		709


	$	22,370	$	23,462	$	48,270	$	51,585

Substantially all of the Company’s long-lived assets are located in the United States. Long-lived assets located outside the United States are not significant.

The Company had no individual customers responsible for 10% or more of its total revenues for the three and six months ended June 30, 2009 or 2008.

7. Comprehensive Loss

Comprehensive loss is the total of net loss, unrealized gains and losses on investments and foreign currency translation adjustments. Unrealized gains and losses on investments and foreign currency translation adjustment amounts are excluded from net loss and are reported in other comprehensive loss in the accompanying condensed consolidated financial statements. The cumulative effect adjustment for the adoption of FSP FAS 115-2 and FAS 124-2 is not included in other comprehensive loss for the three and six months ended June 30, 2009 as it is an adjustment to the second quarter of 2009 beginning balances.

The following table sets forth the components of comprehensive loss for the three and six months ended June 30, 2009 and 2008 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net loss	$	(3,334	)	$	(5,131	)	$	(6,144	)	$	(7,759	)
Other comprehensive loss:
Change in unrealized gain (loss) on investments, net		68			(49	)		139			(283	)
Change in cumulative translation adjustments		135			(5	)		133			(28	)


Comprehensive loss	$	(3,131	)	$	(5,185	)	$	(5,872	)	$	(8,070	)

8. Stock-based Compensation

Expense Summary

Under the provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R), $1.2 million and $2.2 million of stock-based compensation expense was recorded for the three and six months ended June 30, 2009, respectively, in the condensed consolidated statements of operations. Of the total stock-based compensation expense, approximately $0.4 million and $0.9 million was related to stock options for the three and six months ended June 30, 2009, respectively, $0.2 million and $0.3 million was related to purchases of common stock under the ESPP and $0.6 million and $1.0 million was related to restricted stock units. For the three and six months ended June 30, 2008, $2.2 million and $3.9 million of stock-based compensation expense was recorded. Of the total stock-based compensation expense, approximately $0.7 million and $1.4 million was related to stock options for the three and six months ended June 30, 2008, respectively, $0.3 million and $0.5 million was related to purchases of common stock under the ESPP and $1.2 million and $2.0 million was related to restricted stock units.

As of June 30, 2009, there was $5.0 million, $4.5 million and $0.6 million of total unrecognized compensation expense related to stock options, restricted stock units and the ESPP, respectively. This expense related to stock options, restricted stock units and the ESPP is expected to be recognized over a weighted average period of 2.40 years, 2.19 years and 0.63 years, respectively.

Determination of Fair Value

The fair value of each restricted stock unit is estimated based on the market value of the Company’s stock on the date of grant. The fair value of each option award is estimated on the date of grant and the fair value of the ESPP is estimated on the beginning date of the offering period using the Black-Scholes valuation model and the assumptions noted in the following table.

Three Months Ended June 30,

Six Months Ended June 30,

2009

2008

2009

2008

Stock Option Plans

Expected life (in years)

0.50 to 3.50

2.50

0.50 to 3.50

2.50 to 3.50

Risk-free interest rate

0.30% to 1.50%

2.48

0.30% to 1.50%

2.48% to 2.58%

Volatility

67% to 106%

63% to 106%

42% to 44%

Dividend Yield

—

Employee Stock Purchase Plan

Expected life (in years)

0.49 to 1.00

0.50 to 1.00

0.49 to 1.00

0.50 to 1.00

Risk-free interest rate

0.46% to 0.62%

2.05% to 2.10%

0.46% to 0.62%

2.05% to 2.10%

Volatility

97% to 126%

48% to 61%

97% to 126%

48% to 61%

Dividend Yield

—

9. Stockholders’ Equity

Repurchase Program

On November 27, 2007, the Company’s Board of Directors authorized a one-year program for the repurchase of up to $10 million of the Company’s outstanding common stock. On October 21, 2008, the Company’s Board of Directors re-authorized the program for the repurchase of up to $5 million of its outstanding common stock, which represented the unused balance of the program initially approved in 2007. During 2008 under these repurchase programs the Company executed the repurchase of 1,994,000 shares for a total cost of approximately $8.0 million. During the three months ended March 31, 2009 under these repurchase programs the Company executed the repurchase of 248,000 shares for a total cost of approximately $0.7 million. The repurchased shares have been constructively retired for accounting purposes. During the three months ended March 31, 2009, the Company’s Board of Directors suspended the repurchase program.

10. Related-Party Transactions

In 2005, the Company entered into a service agreement with Saama Technologies, Inc. for software consulting services. William Binch, who was appointed to the Company’s Board of Directors in April 2005, is also currently a member of Saama’s board of directors. The Company incurred no expenses for services rendered by Saama for the three and six months ended June 30, 2009 and expenses of approximately $71,000 and $195,000 for services rendered by Saama for the three and six months ended June 30, 2008, respectively.

In 2007, CT entered into an operating lease agreement with CCT Properties LLC for its office space. Robert Conti, who was appointed as Senior Vice President, Client Services, in January 2008 in connection with the acquisition of CT, is also a part owner of CCT Properties LLC. The Company incurred rent expense for the office space owned by CCT Properties of approximately $41,000 for the three months ended March 31, 2009 and rent expense for the office space owned by CCT Properties of approximately $45,000 and $90,000 for the three and six months ended June 30, 2008, respectively. Mr. Conti resigned from his position with the Company effective March 31, 2009.

Subsequent to the acquisition of CT in 2008, the Company continued its service agreement with The Alexander Group, Inc. for software consulting services. Robert Conti, who was appointed as Senior Vice President, Client Services, in January 2008 in connection with the acquisition of CT, is also a part owner of The Alexander Group and continues to serve as its Senior Vice President and CFO. The Company incurred expenses of approximately $123,000 for services rendered by The Alexander Group for the three months ended March 31, 2009 and expenses of approximately $252,000 and $289,000 for services rendered by The Alexander Group for the three and six months ended June 30, 2008, respectively.

Subsequent to the acquisition of CT in 2008, the Company continued to purchase hosting services from Level 3 Communications, Inc. Michele Vion, who was appointed to the Company’s Board of Directors in September 2005, is also currently the Senior Vice President, Human Resources, at Level 3 Communications. The Company incurred expenses of approximately $24,000 and $51,000 for hosting services rendered by Level 3 Communications for the three and six months ended June 30, 2009, respectively, and expenses of approximately $21,000 and $42,000 for hosting services rendered by Level 3 Communications for the three and six months ended June 30, 2008, respectively.

The Company believes all of these agreements represent arms length transactions.

11. Subsequent Events

The Company has evaluated the effects of any subsequent events through August 7, 2009, which is the date the financial statements were issued.

Restructuring

In July 2009, management approved a cost savings program to reduce the Company’s workforce. The Company expects to incur restructuring charges of $1.6 million in the third quarter of 2009 in connection with severance and termination-related costs, most of which are severance-related cash expenditures. The July 2009 cost savings program will be fully completed in the second half of 2009.

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

The following discussion of financial condition and results of operations should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K for 2008 and with the unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q . This section of the Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our future plans, objectives, expectations, prospects, intentions and financial performance and the assumptions that underlie these statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following: changes in and expectations with respect to our business strategy and products revenues and gross margins, future operating expense levels, the impact of quarterly fluctuations of revenue and operating results, levels of annual contract value bookings and recurring revenues, staffing and expense levels, the impact of foreign exchange rate fluctuations and the adequacy of our capital resources to fund operations and growth. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. Many of these trends and uncertainties are described in “Risk Factors” set forth in our Annual Report on Form 10-K for 2008 and elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Overview of the Results for the Three and Six Months Ended June 30, 2009

We are the market and technology leader in Sales Performance Management (SPM) software solutions designed to align internal sales resources and distribution channels with corporate strategy. Our software enhances core processes in sales management, such as the structuring of sales territories, the management of sales force talent, the establishment of sales targets and the creation and execution of sales incentive plans. Using our SPM software solutions, companies can tailor these core processes to further their strategic objectives, including coordinating sales efforts with long-range strategies regarding sales and margin targets, growth initiatives, sales force talent development, territory expansion and market penetration. Our customers can also use our SPM solutions to address more tactical objectives, such as successful new product launches and effective cross-selling strategies. Leading companies worldwide in the financial services, insurance, communications, high-technology, life sciences and retail industries rely on our solutions for their sales performance management and incentive compensation needs. Our SPM solutions can be purchased and delivered as either an on-demand service or an on-premise software solution. Our on-demand service allows customers to use our software products through a web interface rather than purchase computer equipment and install our software at their locations, and we believe the benefits of this deployment method will make our on-demand offering our most popular product choice.

We sell our products both directly through our sales force and in conjunction with our strategic partners. We also offer professional services, including configuration, integration and training, generally on a time-and-materials basis. We generate recurring subscription and support revenues from our on-demand service and from support and maintenance agreements associated with our product licenses and we recently introduced on-premise licenses of our software on a subscription basis, all of which is recognized ratably over the term of the agreement.

We have been working towards reducing our reliance on perpetual license revenues and continuing to focus on building a recurring revenue business while prudently managing expenses. We have now reached

the point where we are ready to offer on-premise customers an attractive alternative to perpetual licenses. Going forward, for customers who wish to run our software on their own premises we intend to enter into time-based arrangements that will include software license and maintenance services. While the actual accounting treatment for these arrangements may vary depending on contract terms negotiated by our customers, we are developing the standard structure of our agreements to target the treatment we describe here. We expect that customers will typically prepay for these term license and maintenance services. In addition to the term license and maintenance services, these arrangements may also include implementation and configuration services. In multiple element arrangements we will allocate revenue to each element based on vendor-specific objective evidence (VSOE) of each element’s fair value using the residual method when we can demonstrate evidence of the fair value of those elements that are undelivered. For those arrangements where we can demonstrate VSOE for the undelivered elements, the term license and maintenance service revenues will be recognized ratably over the non-cancelable contract term and the implementation and configuration services will be recognized as the services are rendered. If we are unable to demonstrate VSOE for the undelivered elements the Company will recognize the revenue from implementation and configuration services ratably over the non-cancelable term of the contract. In addition, the Company will defer the direct costs of the implementation and configuration services and amortize those costs over the same time period as the related revenue is recognized. We will also defer commission payments made to our direct sales force in relation to these arrangements. The Company will amortize these amounts over the non-cancelable term of the contract as the related revenue is recognized. The commission payments are a direct and incremental cost of the revenue arrangements.

By taking this step in our transition to recurring revenues, we intend to further reduce our dependency on one-time license revenues and be able to rely on the predictability of a recurring revenue model that allows us to better align our cost structure. In addition, in connection with the shift to a recurring revenue based business model and the cost reduction action discussed in more detail below, we have reorganized our sales organization and marketing department under new leadership to be 100% focused on expanding our on-demand and subscription-based business. At the same time, we continue to invest in research and development of our product and service offerings, which led to the release of Monaco in the first quarter of 2009, as well as certain other products, which we believe strengthens our position as a market leader in SPM.

Annual Contract Value (ACV)

We ended the second quarter with $25.0 million in on-demand cumulative annual contract value (ACV). While we closed significant on-demand business early in the quarter and ended with sixteen customers increasing their annual recurring commitment by a total of $1.9 million, we unfortunately also experienced attrition, coming from five customers. Two of the five customers cancelled their on-demand contracts with us completely while the other three decreased their annual contracts by reducing their level of business operations services. “Business Operations” is a recurring supplement to both our on-demand and on-premise offerings. It is important to note that these three customers continue to pay us an aggregate of over $3.5 million annually for maintenance and “Technical Operations,” which is our core on-demand offering. The ACV attrition that resulted from these cancellations and reductions totaled $3.4 million. As a result of this attrition, combined with the addition of $1.9 million, our cumulative ACV for the quarter decreased by $1.5 million.

Recurring Revenues

Historically, recurring revenues have included revenues from our on-demand business as well as maintenance for on-premise perpetual licenses. Going forward, recurring revenues will also include any subscription on-premise licenses we may sell. Our recurring revenues increased in the second quarter of

2009 by 17% to $11.8 million compared to $10.0 million in the second quarter of 2008. Recurring revenues increased 28% to $23.5 million in the six months ended June 30, 2009 as compared to $18.3 million in the same period of 2008. The increase in recurring revenues reflects the shift in business focus and strategy to emphasize our on-demand offering. Recurring revenues accounted for 53% of our total revenues in the second quarter of 2009 compared to 43% in the second quarter of 2008. Recurring revenues accounted for 49% of our total revenues in the six months ended June 30, 2009 compared to 36% in the same period of 2008.

On a consecutive quarter basis, our recurring revenue of $11.8 million in the second quarter of 2009 was essentially flat with recurring revenues of $11.7 million in the first quarter of 2009. As a result of the decline in cumulative ACV noted above, we expect recurring revenues in the third quarter of 2009 to be slightly lower than in the second quarter of 2009.

Services Revenues

Services revenues decreased by $2.1 million, or 18%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Services revenues decreased by $6.8 million, or 25%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decreases were due to the shift in our business model to on-demand, which results in quicker implementation times, several customers finishing their implementations and going live not being offset with new projects, and customer project delays due to budget constraints. In the near term we continue to see downward pressure on our services revenue as a few of our larger customers with phased rollouts have suspended part of their projects until next year.

Cost Reduction

During the second quarter of 2009 we continued to make progress streamlining our cost model. These efforts led to continued improvement in our services margin and further decreases to our operating costs. Services margin improved to 18% for both the three and six months ended June 30, 2009. This compares to our second quarter 2008 services margin of 5% and the 2008 full year services margin of 10%. Operating expenses decreased both on a year on year and consecutive quarter basis. Operating expenses decreased by $1.6 million, or 11%, in the second quarter of 2009 compared to the second quarter of 2008 and decreased by $1.0 million, or 7%, in the second quarter of 2009 compared to the first quarter of 2009.

As a result of our business model change and the lower associated revenues in the short term, the Company took significant additional action in July to reduce expenses. We anticipate the annual cost savings from this action and the action taken in the second quarter of 2009 to be more than $10.0 million. Approximately $2.5 million of the reduction will come from cost of sales and the remaining amount will be realized in lower operating expenses. Given the timing of these actions we will only realize a portion of these savings in the third quarter of 2009.

Challenges and Risks

In response to market demand, we shifted our primary business focus from the sale of perpetual licenses for our products to the provision of our software as a service through our on-demand offering. Our on-demand model provides more predictable quarterly revenues. During 2008 we were able to sustain positive margins on this service offering for the first time since launching the offering in 2006. However, over recent quarters we have experienced slower growth in our net new annual contract value for on-demand services than we had previously and in the second quarter of 2009, our cumulative ACV for on-demand business declined on a consecutive quarter basis as described above. As a further step in our transition to a recurring revenue business model, in the third quarter of 2009 we began offering our on-premise product on a subscription basis. We believe this offering will better address the needs of our customers that prefer our on-premise solution, and at the same time will also contribute more predictable revenue streams. However, we have not yet sold any on-premise subscription licenses, and there is no assurance when or if this new offering will achieve market acceptance. If we are unable to significantly grow our on-demand business or continue to provide our on-demand services on a consistently profitable basis in the future, or if our new

on-premise subscription license offering fails to achieve market acceptance, our business and operating results may be materially and adversely affected. In connection with our transition to a recurring revenue business model, in July 2009 we reorganized our sales organization and marketing department to more effectively focus on our market opportunity and at the same time took other significant action to reduce costs. If these steps prove insufficient or ineffective or result in unanticipated disruption to our business, our ability to achieve or sustain profitability may be materially impaired.

From a business perspective, we have a number of sales opportunities in process and additional opportunities coming from our sales pipeline; however, we continue to experience wide variances in the timing and size of our on-demand and license transactions and the timing of revenue recognition resulting from greater flexibility in contract terms. We believe one of our major remaining challenges is increasing prospective customers’ prioritization of purchasing our products and services over competing IT projects. To address this challenge, we have set goals that include expanding our sales efforts, promoting our on-demand services, and continuing to develop new products and enhancements to our TrueComp suite of products.

Historically, a substantial portion of our revenues have been derived from sales of our products and services to customers in the financial and insurance industries. The recent substantial disruptions in these industries have resulted and may in the future result in these customers deferring or cancelling future planned expenditures on our products and services. Further, consolidations and business failures in these industries could result in substantially reduced demand for our products and services. In addition, the disruptions in these industries and the concurrent international financial crisis may cause other potential customers to defer or cancel future purchases of our products and services as they seek to conserve resources in the face of economic turmoil and the drastically reduced availability of capital in the equity and debt markets. Any of these developments, or the combination of these developments, may materially and adversely affect our revenues, operating results and financial condition in future periods.

If we are unable to grow our revenues, we may be unable to achieve and sustain profitability. In addition to these risks, our future operating performance is subject to the risks and uncertainties described in Item 1A – “Risk Factors” of Part II of this quarterly report on Form 10-Q.

Application of Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations that follows is based upon our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The application of GAAP requires our management to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures regarding these items. 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 of our financial condition or results of operations will be affected.

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, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatments for similar transactions. We believe that the accounting policies discussed below and in our 2008 Form 10-K are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

There have been no significant changes in our critical accounting policies and estimates during the three or six months ended June 30, 2009 as compared to the critical accounting policies and estimates disclosed

in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

See Note 1 of our notes to condensed consolidated financial statements for information regarding the effect of new accounting pronouncements on our financial statements.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2009 and 2008

Revenues, cost of revenues and gross profit

The table below sets forth the changes in revenues, cost of revenues and gross profit for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 (in thousands, except for percentage data):


	Three					Three
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Total			June 30,		of Total			Increase			Year over
	2009		Revenues			2008		Revenues			(Decrease)			Year
Revenues:
Recurring	$	11,802		53	%	$	10,051		43	%	$	1,751			17	%
Services		9,407		42	%		11,539		49	%		(2,132	)		(18	)%
License		1,161		5	%		1,872		8	%		(711	)		(38	)%


Total revenues	$	22,370		100	%	$	23,462		100	%	$	(1,092	)		(5	)%


	Three					Three
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Related			June 30,		of Related			Increase			Year over
	2009		Revenues			2008		Revenues			(Decrease)			Year
Cost of revenues:
Recurring	$	5,416		46	%	$	3,670		37	%	$	1,746			48	%
Services		7,671		82	%		10,956		95	%		(3,285	)		(30	)%
License		251		22	%		108		6	%		143			132	%


Total cost of revenues	$	13,338				$	14,734				$	(1,396	)


Gross profit:
Recurring	$	6,386		54	%	$	6,381		63	%	$	5			*	%
Services		1,736		18	%		583		5	%		1,153			198	%
License		910		78	%		1,764		94	%		(854	)		(48	)%


Total gross profit	$	9,032		40	%	$	8,728		37	%	$	304			3	%


	Six					Six
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Total			June 30,		of Total			Increase			Year over
	2009		Revenues			2008		Revenues			(Decrease)			Year
Revenues:
Recurring	$	23,499		49	%	$	18,335		36	%	$	5,164			28	%
Services		20,609		43	%		27,394		53	%		(6,785	)		(25	)%
License		4,162		9	%		5,856		11	%		(1,694	)		(29	)%


Total revenues	$	48,270		100	%	$	51,585		100	%	$	(3,315	)		(6	)%


	Six					Six
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Related			June 30,		of Related			Increase			Year over
	2009		Revenues			2008		Revenues			(Decrease)			Year
Cost of revenues:
Recurring	$	11,201		48	%	$	6,949		38	%	$	4,252			61	%
Services		16,980		82	%		23,644		86	%		(6,664	)		(28	)%
License		442		11	%		350		6	%		92			26	%


Total cost of revenues	$	28,623				$	30,943				$	(2,320	)


Gross profit:
Recurring	$	12,298		52	%	$	11,386		62	%	$	912			8	%
Services		3,629		18	%		3,750		14	%		(121	)		(3	)%
License		3,720		89	%		5,506		94	%		(1,786	)		(32	)%


Total gross profit	$	19,647		41	%	$	20,642		40	%	$	(995	)		(5	)%

* Less than 1%

Revenues

Recurring Revenues. Recurring revenues increased by $1.8 million, or 17%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Recurring revenues increased by $5.2 million, or 28%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The increases were primarily the result of increases of $2.0 million and $5.7 million in on-demand subscription revenues in the three and six months ended June 30, 2009, respectively. This increase is attributable to the increase in the number of existing on-demand customers for which we recognized revenue as all elements of the related customer contracts were delivered during the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008. Support revenues for maintenance services decreased by $0.2 million and $0.5 million in the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008, respectively, which was a result of a number of on-premise customers converting to our on-demand service and decreased license sales to new customers.

Services Revenues. Services revenues decreased by $2.1 million, or 18%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Services revenues decreased by $6.8 million, or 25%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decreases were due to shorter on-demand implementation cycles and the completion of several

customer implementations during the first half of 2009 that were not immediately replaced with new projects. The decreases for the three and six months ended June 30, 2009 also reflects $0.3 million and $0.7 million in adverse effects due to currency exchange rate fluctuations. Services revenue for the six months ended June 30, 2008 benefitted from a one-time fee of approximately $0.8 million paid to us by one of our customers that was acquired and terminated our services.

License Revenues. Perpetual license revenues decreased $0.7 million, or 38%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Perpetual license revenues decreased $1.7 million, or 29%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease for the six months ended June 30, 2009 also reflects a $0.5 million adverse effect due to currency exchange rate fluctuations. With the introduction of subscription-based on-premise licenses, we do not expect perpetual license revenues to constitute a material portion of our revenues going forward.

Cost of Revenues and Gross Margin

Cost of Recurring Revenues. Cost of recurring revenues increased by $1.7 million, or 48%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Cost of recurring revenues increased by $4.3 million, or 61%, in the six month ended June 30, 2009 compared to the six months ended June 30, 2008. The increase was due to the increase in our on-demand business year-over year and the incremental cost associated with the large number of customers who went live with our on-demand services during the first half of 2009. As these customers transitioned from implementation to fully operational, additional resources were utilized to ensure a smooth transition process. In addition, we are continuing to invest in new service offerings and the mid-market, which also contributed to the increase in cost of recurring revenues.

Cost of Services Revenues. Cost of services revenues decreased by $3.3 million, or 30%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Cost of services revenues decreased by $6.7 million, or 28%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was attributable to the decrease in related services revenues as discussed above and decreases in personnel and subcontractor costs.

Cost of License Revenues. Cost of license revenues increased by $0.1 million, or 132% in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Cost of license revenues increased by $0.1 million, or 26%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The increase was primarily the result of amortization expense for additional purchases of intangible assets comprised of third-party software licenses used in our products.

Gross Margin. Our overall gross margin increased to 40% in the three months ended June 30, 2009 from 37% in the three months ended June 30, 2008. Overall gross margin increased to 41% in the six months ended June 30, 2009 from 40% in the six months ended June 30, 2008. Our recurring revenue gross margin declined from 63% in the second quarter of 2008 to 54% in the second quarter of 2009. Recurring revenue gross margin declined from 62% in the first half of 2008 to 52% in the first half of 2009. The decreases were primarily due to the incremental cost associated with the large number of customers who went live with our on-demand services during the first half of 2009 and our investment in new services offerings as discussed above. We expect our overall recurring revenue margin to fluctuate in future periods based on our ability to close new business and control costs as well as the rate at which customer implement our solutions and go-live. Services gross margin increased from 5% in the second quarter of 2008 to 18% in the second quarter of 2009. Services gross margin increased from 14% in the first half of 2008 to 18% in the first half of 2009. The increases reflect the progress we have made over the last several months to improve utilization, which has led to increased profitability of our services business. License gross margin decreased from 94% in the second quarter of 2008 to 78% in the second quarter of 2009. License gross margin decreased from 94% in the first half of 2008 to 89% in the first half of 2009. The decrease in license gross margin reflects the lower license revenue offset against the fixed cost of license generated by the amount of intangible amortization allocated to license sales.

Operating Expenses

The table below sets forth the changes in operating expenses for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 (in thousands, except percentage data):


	Three					Three
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Total			June 30,		of Total			Increase			Year over
	2009		Revenues			2008		Revenues			(Decrease)			Year
Operating expenses:
Sales and marketing	$	5,444		24	%	$	7,213		31	%	$	(1,769	)		(25	)%
Research and development		3,673		16	%		3,465		15	%		208			6	%
General and administrative		2,683		12	%		3,339		14	%		(656	)		(20	)%
Restructuring		639		3	%		—		—	%		639			100	%


Total operating expenses	$	12,439		56	%	$	14,017		60	%	$	(1,578	)		(11)	%


	Six					Six
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Total			June 30,		of Total			Increase			Year over
	2009		Revenues			2008		Revenues			(Decrease)			Year
Operating expenses:
Sales and marketing	$	11,306		23	%	$	14,589		28	%	$	(3,283	)		(23	)%
Research and development		7,474		15	%		7,150		14	%		324			5	%
General and administrative		6,250		13	%		6,733		13	%		(483	)		(7	)%
Restructuring		805		2	%		397		1	%		408			103	%


Total operating expenses	$	25,835		54	%	$	28,869		56	%	$	(3,034	)		(11)	%

Sales and Marketing. Sales and marketing expenses decreased $1.8 million, or 25%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease was primarily attributable to decreases in personnel costs of $0.8 million due to reductions in headcount and a decrease in commission payments resulting from decreased license sales. The decrease was also driven by a decrease in travel costs of $0.4 million, a decrease in partner selling fees of $0.4 million and a decrease in stock-based compensation as discussed below.

Sales and marketing expenses decreased $3.3 million, or 23%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was primarily attributable to decreases in personnel costs of $1.8 million due to reductions in headcount and a decrease in commission payments resulting from decreased license sales. The decrease was also driven by a decrease in travel costs of $0.5 million, a decrease in partner selling fees of $0.4 million, a decrease in professional fees of $0.1 million and a decreased in stock-based compensation as discussed below. The reductions in commission expenses are, in part, reflective of the shift of our business focus to our on-demand offering and away from the license model. Commission expenses associated with on-demand arrangements are deferred and then amortized over the non-cancelable term of the contract as the related revenue is recognized; whereas commission expenses related to license sales are incurred in the period the transaction occurs. Commission

expenses associated with the new subscription-based licenses will have the same treatment as commission expenses associated with on-demand arrangements.

Research and Development. Research and development expenses increased $0.2 million, or 6%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The increase was primarily due to an increase in professional fees of $0.2 million for costs related to our new offshore resource center. The offshore resource center has helped us reduce overall engineering costs, as the cost to headcount ratio for an onshore engineer versus an offshore engineer is 3 to 1. As such, we have been able to increase our engineering support and development while keeping expenses relatively constant. The increase was also partially offset by a decrease in stock-based compensation as discussed below.

Research and development expenses increased $0.3 million, or 5%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The increase was primarily due to an increase in professional fees of $0.5 million for costs related to our new offshore resource center, partially offset by a decrease in stock-based compensation as discussed below.

General and Administrative. General and administrative expenses decreased $0.7 million, or 20%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease was primarily due to a decrease in professional fees of $0.1 million, a decrease in travel and expenses of $0.1 million and a decrease in stock-based compensation as discussed below.

General and administrative expenses decreased $0.5 million, or 7%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was primarily due to a decrease in professional fees of $0.1 million, a decrease in travel and expenses of $0.1 million and a decrease in stock-based compensation as discussed below.

Restructuring. Restructuring charges were $0.6 million and $0.8 million in the second quarter and first half of 2009, respectively, compared to zero and $0.4 million in the second quarter and first half of 2008, respectively, in connection with severance and termination-related costs, most of which were severance-related cash expenditures. The May 2009 cost savings program was fully completed in the second quarter of 2009. The June 2009 cost savings program will be fully completed in the second half of 2009. As of June 30, 2009 accrued restructuring charges related to the June 2009 cost savings program were $0.3 million. We expect to incur additional restructuring charges of $1.6 million in the third quarter of 2009 as part of the July 2009 cost savings program approved by management in July 2009.

Stock-Based Compensation

The following table sets forth a summary of our stock-based compensation expenses for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 (in thousands, except percentage data):


	Three		Three
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	June 30,		June 30,		Increase			Year over
	2009		2008		(Decrease)			Year
Stock-based compensation:
Cost of recurring revenues	$	131	$	177	$	(46	)		(26)	%
Cost of services revenues		243		359		(116	)		(32)	%
Sales and marketing		342		597		(255	)		(43)	%
Research and development		267		331		(64	)		(19)	%
General and administrative		252		701		(449	)		(64)	%


Total stock-based compensation	$	1,235	$	2,165	$	(930	)		(43)	%


	Six		Six
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	June 30,		June 30,		Increase			Year over
	2009		2008		(Decrease)			Year

Stock-based compensation:
Cost of recurring revenues	$	294	$	314	$	(20	)		(6)	%
Cost of services revenues		256		649		(393	)		(61)	%
Sales and marketing		574		1,086		(512	)		(47)	%
Research and development		409		621		(212	)		(34)	%
General and administrative		679		1,226		(547	)		(45)	%


Total stock-based compensation	$	2,212	$	3,896	$	(1,684	)		(43)	%

Total stock-based compensation expenses decreased $0.9 million, or 43%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Total stock-based compensation expenses decreased $1.7 million, or 43%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The overall decreases were primarily attributable to the decrease in our stock price over the past two years and employees with unvested options and awards having left the Company. There have also been fewer grants due to the decreased headcount.

Other Items

The table below sets forth the changes in other items for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 (in thousands, except percentage data):


	Three		Three
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	June 30,		June 30,		Increase			Year over
	2009		2008		(Decrease)			Year
Interest and other income (expense)	$	161	$	280	$	(119	)		(43)	%

Provision (benefit) for income taxes	$	88	$	122	$	(34	)		(28)	%


	Six		Six
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	June 30,		June 30,		Increase			Year over
	2009		2008		(Decrease)			Year
Interest and other income	$	190	$	811	$	(621	)		(77)	%

Provision (benefit) for income taxes	$	146	$	343	$	(197	)		(57)	%

Interest and Other Income

Interest and other income decreased $0.1 million, or 43%, in the three months ended June 30, 2009, compared to the three months ended June 30, 2008. The decrease was primarily attributable to the $0.3 million decrease in interest income generated on our investments as a result of a lower average investments balance in the second quarter of 2009 compared to the second quarter of 2008 and lower interest rates in the second quarter of 2009 compared to the second quarter of 2008. The decrease also included the put option loss of $0.2 million. These decreases were partially offset by the gain on investments of $0.3 million recorded on our auction rate securities as compared to no gain or loss in the three months ended June 30, 2008 and a $0.2 million increase in gain on foreign currency transactions as a result of a weaker U.S. dollar.

Interest and other income decreased $0.6 million, or 77%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was primarily attributable to the $0.6 million decrease in interest income generated on our investments as a result of a lower average investments balance in the first half of 2009 compared to the first half of 2008 and lower interest rates in the first half of 2009 compared to the first half of 2008. The decrease also included the put option loss of $0.3 million. These decreases were partially offset by the gain on investments of $0.4 million recorded on our auction rate securities.

Provision for Income Taxes

Provision for income taxes was $88,000 in the three months ended June 30, 2009 compared to $122,000 in the three months ended June 30, 2008. Provision for income taxes was $146,000 in the six months ended June 30, 2009 compared to $343,000 in the six months ended June 30, 2008. The decreases were due to research and development credits discussed below.

The provisions in the second quarter and first half of 2009 were primarily the result of $0.2 million in foreign withholding taxes partially offset by a $0.1 million benefit for research and development and alternative minimum tax credits, which we elected to accelerate in lieu of bonus depreciation, in accordance with the American Recovery and Reinvestment Act of 2009. Under this act, which extended for one additional year the special provision enacted as part of the Housing and Economic Recovery Act of 2008, corporations eligible for 50% bonus depreciation on property placed in service during the period January 1

through December 31, 2009 may elect to claim a special refundable credit amount in lieu of bonus depreciation. In making the election, we will receive a cash benefit from the current utilization of carry forward credits, in exchange for relinquishing a larger net operating loss otherwise generated by bonus depreciation.

Liquidity and Capital Resources

As of June 30, 2009, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $39.2 million and accounts receivable of $15.2 million.

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $0.4 million for the six months ended June 30, 2009 compared to $7.4 million for the six months ended June 30, 2008. The significant cash receipts and outlays for the two periods are as follows (in thousands):


	Six Months Ended June 30,
	2009			2008
Cash collections	$	54,593		$	60,421
Payroll related costs		(33,282	)		(36,058	)
Professional services		(11,973	)		(10,705	)
Employee expense reports		(3,192	)		(3,989	)
Facilities related costs		(2,739	)		(2,715	)
Third-party royalty payments		(333	)		(313	)
Restructuring payments		(1,269	)		(971	)
Other		(1,431	)		1,683

Net cash provided by operating activities	$	374		$	7,353

Net cash provided by operating activities decreased $7.0 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was primarily attributable to a $5.8 million decrease in cash collections resulting from lower average accounts receivable balances as a result of the decrease in revenues, a $2.4 million increase in employee reimbursable expenses and other costs, a $1.3 million increase in professional services costs related to the increased use of our offshore resource center and a $0.3 million increase in restructuring payments due to additional cost savings actions, partially offset by a $2.8 million decrease in payroll-related costs due to a decrease in headcount.

Net Cash (Used in) Provided by Investing Activities. Net cash used in investing activities was $11.3 million for the six months ended June 30, 2009 compared to net cash provided by investing activities of $0.8 million for the six months ended June 30, 2008. Net cash used in investing activities during the six months ended June 30, 2009 was due to purchases of investments of $13.3 million, purchases of property and equipment of $1.1 million and purchases of intangible assets of $0.5 million, partially offset by proceeds from maturities and sale of investments of $3.4 million and change in restricted cash of $0.2 million. Net cash provided by investing activities during the six months ended June 30, 2008 was due to proceeds from maturities and sale of investments of $23.6 million, partially offset by purchases of investments of $13.9 million, cash paid for the Compensation Technologies acquisition of $7.5 million, purchases of property and equipment of $1.3 million and purchases of intangible assets of $0.1 million.

Net Cash Used in Financing Activities. Net cash used in financing activities was $71,000 for the six months ended June 30, 2009 compared to $224,000 for the six months ended June 30, 2008. Net cash used in financing activities during the six months ended June 30, 2009 was due to cash paid for repurchases of stock of $0.7 million and cash used to net share settle equity awards of $0.3 million, partially offset by cash received from the exercise of stock options and shares purchased under our employee stock purchase plan of $1.0 million. Net cash used in financing activities for the six months ended June 30, 2008 was due to cash paid for repurchases of stock of $3.7 million, partially offset by cash received from the exercise of stock options and shares purchased under our employee stock purchase plan of $3.5 million.

Auction Rate Securities

See Note 4 – Investments of our notes to condensed consolidated financial statements for information regarding our auction rate securities.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations (in thousands) at June 30, 2009. Contractual cash obligations that are cancelable upon notice and without significant penalties are not included in the table. In addition, to the extent that payments for unconditional purchase commitments for goods and services are based, in part, on volume or type of services required by us, we included only the minimum volume or purchase commitment in the table below.


	Payments due by Period
			Remaining										2014
Contractual Obligations	Total		2009		2010		2011		2012		2013		and beyond
Operating lease commitments	$	5,331	$	1,325	$	2,125	$	984	$	316	$	201	$	380

Unconditional purchase commitments	$	3,517	$	1,200	$	1,548	$	667	$	102	$	—	$	—

For our New York, New York and San Jose, California offices, we had two certificates of deposit totaling approximately $232,000 and $434,000 as of June 30, 2009 and December 31, 2008, respectively, pledged as collateral to secure letters of credit required by our landlords for security deposits.

Our future capital requirements will depend on many factors, including revenues we generate, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, market acceptance of our on-demand service offering, our ability to offer on-demand service on a consistently profitable basis and the continuing market acceptance of our other products. However, based on our current business plan and revenue projections, we believe our existing cash and investment balances will be sufficient to meet our anticipated cash requirements as well as the contractual obligations listed above for the next twelve months.

Off-Balance Sheet Arrangements

With the exception of the above contractual cash obligations, we have no material off-balance sheet arrangements that have not been recorded in our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is also a result of fluctuations in interest rates and foreign exchange rates. See Note 4 š Investments of our notes to condensed consolidated financial statements for information regarding our auction rate securities.

We do not hold or issue financial instruments for trading purposes except for certain auction rate securities, and we invest in investment grade securities. We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our investment portfolios, which is approved by our Board of Directors. The guidelines also establish credit quality standards, limits on

exposure to any one security issue, limits on exposure to any one issuer and limits on exposure to the type of instrument.

Financial instruments that potentially subject us to market risk are short-term investments, long-term investments and trade receivables. We mitigate market risk by monitoring ratings, credit spreads and potential downgrades for all bank counterparties on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.

Interest Rate Risk. We invest our cash in a variety of financial instruments, consisting primarily of investments in money market accounts, certificates of deposit, high quality corporate debt obligations, United States government obligations, auction rate securities and the related put option asset.

Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair market value of fixed-rate securities may be adversely affected by a rise in interest rates, while floating rate securities, which typically have a shorter duration, may produce less income than expected if interest rates fall. Due in part to these factors, our investment income may decrease in the future due to changes in interest rates. At June 30, 2009, the average maturity of our investments was approximately four months, and all investment securities other than auction rate securities had maturities of less than 24 months. The following table presents certain information about our financial instruments except for auction rate securities at June 30, 2009 that are sensitive to changes in interest rates (in thousands, except for interest rates):


	Expected Maturity
							Total		Total
	1 Year			More Than			Principal		Fair
	or Less			1 Year			Amount		Value
Available-for-sale securities	$	22,492		$	6,505		$	28,997	$	29,017
Weighted average interest rate		0.33	%		1.36	%

Our exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on our outstanding debt instruments. As of June 30, 2009, we had no outstanding indebtedness for borrowed money. Therefore, we currently have no exposure to market risk related to debt instruments. To the extent we enter into or issue debt instruments in the future, we will have interest rate market risk.

Foreign Currency Exchange Risk. Our revenues and our expenses, except those related to our United Kingdom, Germany, Canada and Australia operations, are generally denominated in U.S. dollars. For the three and six months ended June 30, 2009 approximately 11% and 14% of our total revenues were denominated in foreign currency, respectively. At June 30, 2009, approximately 14% of our total accounts receivable was denominated in foreign currency. Our exchange risks and foreign exchange losses have been minimal to date. The overall decrease in revenue for the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008 reflected a $0.4 million and $1.3 million adverse effect due to currency exchange rate fluctuations, respectively. We expect to continue to transact a majority of our business in U.S. dollars.

Occasionally, we may enter into forward exchange contracts to reduce our exposure to currency fluctuations on our foreign currency transactions. The objective of these contracts is to minimize the impact of foreign currency exchange rate movements on our operating results. We do not use these contracts for speculative or trading purposes.

As of June 30, 2009 we had an aggregate of $0.6 million (notional amount) of outstanding short-term foreign currency forward exchange contracts denominated in Mexican Pesos (MXN).

We had $0.1 million of losses related to forward exchange contracts in the three and six months ended June 30, 2009. We do not anticipate any material adverse effect on our financial condition, results of

operations or cash flows resulting from the use of these instruments in the immediate future. However, we cannot provide any assurance that our foreign exchange rate contract investment strategies will be effective or that transaction losses can be minimized or forecasted accurately. In particular, generally, we hedge only a portion of our foreign currency exchange exposure. We cannot assure you that our hedging activities will eliminate foreign exchange rate exposure. Failure to do so could have an adverse effect on our business, financial condition, results of operations or cash flows.

The following table provides information about our foreign currency forward exchange contracts as of June 30, 2009. All of our foreign currency forward exchange contracts will settle within the next 12 months.

As of June 30, 2009

Average

Notional

Contract

Estimated

Amount

Exchange Rate

Fair Value

(In thousands except contract rates)

Foreign currency forward contracts:

Mexican Pesos (MXN)

613

13.5343

Item 4. Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer did not identify any changes in our internal control over financial reporting during the three months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time a party to various litigation matters incidental to the conduct of our business, none of which, at the present time is likely to have a material adverse effect on our future financial results.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2008. The risks discussed below and in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described below and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Factors That Could Affect Future Results

We operate in a dynamic and rapidly changing environment that involves numerous risks and

uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Because of the factors discussed below and in our Annual Report on Form 10-K for 2008, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

RISKS RELATED TO OUR BUSINESS

Our failure to effectively implement and manage the offering of our on-premise product on a term license or subscription basis or the restructuring of our sales and marketing organizations in connection with our transition to a recurring revenue business model may harm our business and financial results.

In the third quarter of 2009, we began offering our on-premise product on a term license or subscription basis. We have not yet sold any term license or on-premise subscription licenses, and there is no assurance when or if this new offering will achieve market acceptance. If our new term license or on-premise subscription license offering fails to achieve market acceptance, our business and operating results may be materially and adversely affected. In connection with our transition to a recurring revenue business model, in July 2009, we reorganized our sales organization and marketing department to more effectively focus on market opportunities and concurrently took other significant action to reduce costs. The reorganization has and will continue to take time for management to implement and there are no guarantees that it will be successful. If these steps prove insufficient or ineffective or result in unanticipated disruption to our business, our ability to achieve or sustain profitability may be materially impaired.

Uncertain Economic Conditions May Adversely Impact Our Business

Our business may be adversely affected by the ongoing credit crises and deteriorating worldwide economic conditions. A weakening global economy, or decline in confidence in the economy, could adversely impact our business in a number of important respects. These include (i) reduced bookings and revenues, as a result of longer sales cycles, reduced, deferred or cancelled customer purchases and lower average selling prices; (ii) increased operating losses and reduced cash flows from operations; (iii) greater than anticipated uncollectible accounts receivables and increased allowances for doubtful accounts receivable; and (iv) impairment in the value of our financial and non-financial assets resulting in non-cash impairment charges.

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of amounts identified for specific customers. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, and we may be required to defer revenue recognition on sales to affected customers, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.

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

The Company’s Annual Meeting of Stockholders (Annual Meeting) was held on June 2, 2009. Two matters were voted on at the Annual Meeting. A brief description of each of these matters and the results of the votes thereon, are as follows:

Proposal 1. Election of Directors

Immediately prior to the commencement of the Annual Meeting, the Company’s Board of Directors consisted of seven members divided into three classes (Classes I through III). The Class III members of the Board of Directors were scheduled for election at the Annual Meeting, each to serve three-year terms to expire at the Annual Meeting in 2012 or until their successors are duly elected and qualified. The nominees of the Board to serve as Class III members were Charles M. Boesenberg and Leslie J. Stretch. There were

no other nominees. Mr. Boesenberg and Mr. Stretch were each elected at the Annual Meeting as Class III directors by the following votes:


Nominees of the Board of Directors	For		Withheld
Charles M. Boesenberg		24,534,641		938,050
Leslie J. Stretch		24,175,106		1,297,585

The Company’s other directors whose terms of office continued after the Annual Meeting are George B. James, David B. Pratt and Robert H. Youngjohns (Class I), and William B. Binch and Michele Vion (Class II).

Proposal 2. Ratification of the Appointment of KPMG LLP as the Company’s Independent Public Accountants for the Fiscal Year ending December 31, 2009.


For	Against	Abstain
25,390,480	82,126	85

Item 6. Exhibits

(a) Exhibits


Exhibit
Number		Description
10.1		Offer Letter with V. Holly Albert dated August 8, 2006.
10.2		Employment Agreement with Merritt Alberti dated January 16, 2008.
10.3		Relocation Expense Allowance agreement with Merritt Alberti dated June 18, 2009.
10.4		Offer Letter with Jimmy Duan dated September 24, 2008.
10.5		Offer Letter with Michael Graves dated February 6, 2007.
10.6		Offer Letter with Jeffrey Saling dated January 8, 2004.
10.7		Letter agreement with Jeffrey Saling dated April 8, 2008.
31.1		Certifications Pursuant to Section 302 of the Sarbanex-Oxley Act
32.1		Certification Pursuant to Section 906 of the Sarbanex-Oxley Act

Availability of this Report

We intend to make this quarterly report on Form 10-Q publicly available on our website (www.callidussoftware.com) without charge immediately following our filing with the Securities and Exchange Commission. We assume no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, unless we are required to do so by law.


	CALLIDUS SOFTWARE INC.
	By:	/s/ RONALD J. FIOR
		Ronald J. Fior
		Chief Financial Officer, Senior Vice President, Finance and Operations


/s/ V. Holly Albert		August 11, 1006


Signature of Virginia Albert	Date

		August 28, 2006
I agree to start work for Callidus Software on:
	Start Date


	/s/ Merritt Alberti	1-16-08
Agreed and Accepted:		Date:


/s/ Jimmy Duan		10/1/2008
Signature of Jimmy Duan		Date

I agree to start work for Callidus Software on:		10/6/2008
		Start Date


/s/ Michael Graves Signature of Michael L. Graves		2/26/2007 Date

I agree to start work for Callidus Software on:		2/26/2007 Start Date

	1.		I have reviewed this quarterly report of Callidus Software Inc. on Form 10-Q;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in according with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



	/s/ LESLIE J. STRETCH
	Leslie J. Stretch
	President and Chief Executive Officer

	1.		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

	2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Callidus Software Inc.