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, 2010

OR

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

Callidus Software Inc.
6200 Stoneridge Mall Road, Suite 500
Pleasanton, California 94588
(Address of principal executive offices, including zip code)
(925) 251-2200
(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 31,363,044 shares of the registrant’s common stock, par value $0.001, outstanding on July 30, 2010, 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	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35
Item 4. Controls and Procedures	37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 6. Exhibits	38
Signatures	39
Exhibit Index	40
EX-10.3.1
EX-10.8.1
EX-10.26
EX-10.27
EX-31.1
EX-32.1

^© 1998-2010 Callidus Software Inc. All rights reserved. Callidus Software, the Callidus Software logo and TrueComp Manager are trademarks, servicemarks or registered trademarks of Callidus Software Inc. in the United States and other countries. All other brand, service or product names are trademarks or registered trademarks of their respective companies or owners.

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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,
	2010			2009
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,456		$	11,565
Short-term investments		16,181			21,985
Accounts receivable, net of allowances of $337 in 2010 and $563 in 2009		14,319			12,715
Deferred income taxes		170			170
Prepaid and other current assets		4,560			3,872
Total current assets		47,686			50,307
Long-term investments		1,102			1,142
Property and equipment, net		5,623			4,355
Goodwill		8,054			5,528
Intangible assets, net		5,256			2,993
Deferred income taxes, noncurrent		1,255			1,255
Deposits and other assets		1,975			679
Total assets	$	70,951		$	66,259
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,430		$	3,407
Accrued payroll and related expenses		3,468			3,929
Accrued expenses		7,578			3,219
Deferred income taxes		1,229			1,229
Deferred revenue		24,841			21,440
Capital lease obligations, short-term		130			—
Total current liabilities		39,676			33,224
Long-term deferred revenue		4,406			668
Other liabilities		761			1,136
Capital lease obligations, long-term		386			—
Total liabilities		45,229			35,028
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 31,363 and 30,561 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		31			30
Additional paid-in capital		216,578			212,435
Deferred Compensation		203			—
Accumulated other comprehensive income		87			244
Accumulated deficit		(191,177	)		(181,478	)
Total stockholders’ equity		25,722			31,231
Total liabilities and stockholders’ equity	$	70,951		$	66,259

See accompanying notes to unaudited condensed consolidated financial statements.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
				(Unaudited)
Revenues:
Recurring	$	13,265		$	11,802		$	25,551		$	23,499
Services		3,488			9,407			7,134			20,609
License		387			1,161			616			4,162
Total revenues		17,140			22,370			33,301			48,270
Cost of revenues:
Recurring		6,120			5,416			12,535			11,201
Services		4,045			7,671			8,457			16,980
License		87			251			197			442
Total cost of revenues		10,252			13,338			21,189			28,623
Gross profit		6,888			9,032			12,112			19,647
Operating expenses:
Sales and marketing		3,993			5,444			8,638			11,306
Research and development		2,427			3,673			5,564			7,474
General and administrative		3,627			2,683			6,859			6,250
Restructuring		451			639			1,170			805
Total operating expenses		10,498			12,439			22,231			25,835
Operating loss		(3,610	)		(3,407	)		(10,119	)		(6,188	)
Interest and other income (expense), net		(100	)		161			(94	)		190
Loss before provision (benefit) for income taxes		(3,710	)		(3,246	)		(10,213	)		(5,998	)
Provision (benefit) for income taxes		38			88			(514	)		146
Net loss	$	(3,748	)	$	(3,334	)	$	(9,699	)	$	(6,144	)
Net loss per share — basic and diluted
Net loss per share	$	(0.12	)	$	(0.11	)	$	(0.31	)	$	(0.21	)
Shares used in basic and diluted per share computation		31,284			29,942			31,125			29,747

See accompanying notes to unaudited condensed consolidated financial statements.

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

	Six Months Ended June 30,
	2010			2009
	(unaudited)
Cash flows from operating activities:
Net loss	$	(9,699	)	$	(6,144	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense		1,095			1,436
Amortization of intangible assets		1,271			848
Provision for doubtful accounts and service remediation reserves		(167	)		(46	)
Stock-based compensation		3,051			2,212
Stock-based compensation related to acquisition contingent consideration		203			—
Revaluation of acquisition contingent consideration		41			—
Release of valuation allowance		(614	)		—
Net amortization on investments		104			15
Put option loss		52			306
Gain on investments classified as trading securities		(118	)		(373	)
Changes in operating assets and liabilities:
Accounts receivable		(421	)		7,704
Prepaid and other current assets		(748	)		935
Other assets		(702	)		189
Accounts payable		(945	)		234
Accrued expenses		1,348			(2,270	)
Accrued payroll and related expenses		(446	)		(1,814	)
Accrued restructuring		(117	)		(488	)
Deferred revenue		7,008			(2,442	)
Deferred income taxes		89			72
Net cash provided by operating activities		285			374
Cash flows from investing activities:
Purchases of investments		(6,703	)		(13,260	)
Proceeds from maturities and sale of investments		12,504			3,450
Purchases of property and equipment		(760	)		(1,147	)
Purchases of intangible assets		(1,554	)		(506	)
Acquisition, net of cash acquired		(1,922	)		(14	)
Change in restricted cash		(600	)		202
Net cash provided by (used in) investing activities		965			(11,275	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		854			990
Repurchases of stock		—			(742	)
Repurchase of common stock from employees for payment of taxes on		(220	)		(319	)
vesting of restricted stock units
Repayment of debt assumed through acquisition		(899	)		—
Net cash used in financing activities		(265	)		(71	)
Effect of exchange rates on cash and cash equivalents		(94	)		83
Net increase (decrease) in cash and cash equivalents		891			(10,889	)
Cash and cash equivalents at beginning of period		11,565			35,390
Cash and cash equivalents at end of period	$	12,456		$	24,501

See accompanying notes to unaudited condensed consolidated financial statements.

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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, 2009. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2010 and the three and six months ended June 30, 2010 and 2009 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, 2009.

     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, 2010.

     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, Singapore and the United Kingdom. All intercompany transactions and balances have been eliminated upon 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 substantial disruptions in these industries under the current economy 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. Continued macroeconomic weakness may keep potential customers from purchasing or renewing 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 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 for business acquisitions, uncertain tax liabilities, 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. 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.

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     Foreign Currency Translation

     The functional currencies of the Company’s foreign subsidiaries are their respective local currencies. Accordingly, the foreign currencies are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average rates during each reporting period for the results of operations. Adjustments resulting from the translation of the financial statements of the foreign subsidiaries are reported as a separate component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in interest and other income, net in the accompanying consolidated statements of operations.

     Fair Value of Financial Instruments and Concentrations of Credit Risk

     The fair value of some of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their respective carrying value due to their short maturity. See Note 5 — Financial Instruments for discussion regarding the valuation of the Company’s financial instruments for which the fair value does not approximate the carrying value. 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 ongoing assessment of counterparty risk, the Company will adjust its exposure to various counterparties.

     Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s customer base and the dispersion of such customer base across different geographic locations throughout the world. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of June 30, 2010 and December 31, 2009, the Company had no customers comprising greater than 10% of net accounts receivable.

     Restricted Cash

     Included in prepaid and other current assets and deposits and other assets in the consolidated balance sheets at June 30, 2010 and December 31, 2009 is restricted cash totaling $832,000 and $232,000, respectively, related to security deposits on leased facilities for the Company’s New York, New York, San Jose, California and Pleasanton, California offices. The restricted cash represents investments in certificates of deposit required by landlords to meet security deposit requirements for the leased facilities. Restricted cash is included in prepaid and other current assets and deposits and other assets based on the 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 and time-based term license offering and providing related professional services to its customers, as well as by licensing software on a perpetual basis and providing related software support. 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, and they have access to the hosting environment. In both perpetual and time-based term licensing arrangements, the Company considers delivery to have occurred when the customer either (a) takes possession of the software via a download (i.e., when the customer takes possession of the electronic data on its hardware) or (b) has been provided with access codes that allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software. The Company’s typical end-user license agreement does not include customer acceptance provisions.

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     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 perpetual licensing 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, time-based term license 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. Time-based term license revenues are derived from fees earned through the licensing of the Company’s software bundled with maintenance for a specified period of time. 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 purchasing maintenance services.

     On-Demand Revenue. In arrangements where the Company provides its software applications as a service, the Company has considered accounting guidance for arrangements that include the right to use software stored on another entity’s hardware and 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 software revenue recognition guidance. Accordingly, the Company follows the provisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and accounting guidance for revenue arrangements with multiple deliverables. Customers will typically prepay for the Company’s on-demand services, which amounts the Company defers and recognizes 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. 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 all of the 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 date the on-demand services begin to be performed. Implementation and configuration services, when sold with the on-demand offering, are recognized as the services are rendered for time-and-materials contracts. The majority of the Company’s implementation and configuration services for on-demand arrangements are accounted for in this manner. If implementation and configuration services 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 on-demand contract once the implementation is complete. 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.

8

     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 condensed consolidated balance sheets for these consulting arrangements totaled $2.4 million and $1.8 million at June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010 and December 31, 2009, $1.5 million and $1.4 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 condensed 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 $1.3 million and $1.0 million at June 30, 2010 and December 31, 2009, respectively.

     Time-Based Term License. The Company offers on-premise licenses of its software as a time-based term license arrangement. Such arrangements typically include an initial fee, which covers the time-based term license for a specified period and the maintenance and support for the first year of the arrangement. If a customer wishes to receive maintenance after the first year, then the customer must pay the maintenance fee for each year it wishes to receive maintenance.

     For a Single-Year Time-based Term License that is sold with multiple elements, the entire arrangement fee is recognized ratably. In these arrangements, both the time-based term licenses and the maintenance agreements have durations of one year; therefore, the fair value of the bundled maintenance services is not reliably measured by reference to a maintenance renewal rate. In these situations, the Company will defer all revenue until either the services or the maintenance is the only undelivered element. If the maintenance term expires before the services are completed, the entire arrangement fee would be recognized ratably over the remaining period during which the services are completed (beginning upon expiration of the maintenance term). If services are completed before the maintenance term expires, the entire fee will be recognized ratably over the remaining maintenance period. In these arrangements, the Company will defer all direct costs of the implementation and configuration services, and amortize those costs over the same time period as the related revenue is recognized. Sales commissions and partner fees attributable to the sale of Time-based Term Licenses are deferred and amortized over the same period as the related revenue is recognized.

     Multi-Year Time-based Term License arrangements often include multiple elements (e.g., software technology, maintenance, training, consulting and other services). The Company allocates revenue to each element of the arrangement based on vendor-specific objective evidence (“VSOE”) of each element’s fair value when the Company can demonstrate that sufficient evidence exists of the fair value for the undelivered elements. The fair value of each element in multiple element arrangements is determined based on either (i) in the case of maintenance, providing the customer with the ability during the term of the arrangement to renew maintenance at a substantive renewal rate, or (ii) selling the element on a stand-alone basis.

     In Multi-Year Time-based Term License arrangements that include multiple elements and for which fair value of VSOE cannot be established for the undelivered elements, the entire arrangement fee is recognized ratably upon completion of professional services, if any.

     Similar to certain on-demand arrangements as described above, the Company will defer the direct costs, and amortize those costs over the same time period as the related revenue is recognized. The deferred costs on the Company’s condensed consolidated balance sheets for these arrangements totaled $0.4 million and $0.1 million at June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, $0.1 million of the deferred costs are included in prepaid and other current assets, with the remaining amount included in deposits and other assets in the condensed consolidated balance sheets. As of December 31, 2009, no amounts of the deferred costs are included in deposits and other assets in the condensed consolidated balance sheets. The deferred costs mainly represent commission payments to the Company’s direct sales force for time-based term license arrangements, 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.

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     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 services contracts on a monthly basis, if possible, 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.

     In certain arrangements, the Company has provided for unique acceptance criteria associated with the delivery of professional services. In these instances, the Company has recognized revenue in accordance with the provisions of SAB 104. To the extent there is contingent revenue in these arrangements, the Company will defer the revenue until the contingency has lapsed.

     Perpetual License Revenue

     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.

     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.

     Cost of Revenues

     Cost of recurring revenues consists primarily of salaries, benefits, allocated overhead costs related to on-demand operations and technical support personnel, as well as allocated amortization of purchased technology. Cost of license revenues consists primarily of amortization of purchased technology. Cost of services revenues consists primarily of salaries, benefits, travel and allocated overhead costs related to consulting, training and other professional services personnel, including cost of services provided by third-party consultants engaged by the Company.

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     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, 2010 and 2009, 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,
	2010		2009		2010		2009
Restricted stock		2,115		1,066		1,765		1,096
Stock options		6,507		6,646		6,543		6,660
ESPP		142		302		123		265
Totals		8,764		8,014		8,431		8,021

     The weighted-average exercise price of stock options excluded from weighted average common shares during the three and six months ended June 30, 2010 was $4.47 and $4.54 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, 2009 of $4.83 and $4.84 per share, respectively.

     Recent Accounting Pronouncements

     In January 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on improving disclosures about fair value measurements to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements and the transfers between Levels 1, 2 and 3. Levels 1, 2 and 3 of fair value measurements are defined in Note 5 below. We adopted the new disclosure requirements and clarifications of existing disclosures in the first quarter of 2010, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for interim and annual periods beginning after December 15, 2010. The adoption has no impact on the Company’s condensed consolidated financial statements for the three or six months ended June 30, 2010.

2. Acquisition

     On January 1, 2010, the Company entered into a Stock Purchase Agreement for the purchase of all of the issued and outstanding shares of common stock of Actek, Inc. Actek delivers commission and incentive compensation software solutions to automate the process of calculating and managing complex commission, incentive and bonus pay arrangements. The acquisition expanded the Company’s product offerings to include commissions and compliance software for complex selling environments for the insurance and financial services industries.

     The acquisition has been accounted for under the FASB’s accounting standard for business combinations, which the Company adopted as of the beginning of fiscal 2009. Assets acquired and liabilities assumed were recorded at their estimated fair values as of January 1, 2010. The Company has included the financial results of Actek in its condensed consolidated financial statements from the date of acquisition. For the three and six months ended June 30, 2010, Actek contributed $0.6 million and $1.4 million, respectively, to the Company’s total revenues. During the three and six months ended June 30, 2010, the net loss produced by Actek was insignificant to the Company’s net operating results. The acquisition was not material to the Company’s condensed consolidated financial statements.

     The following table summarizes the aggregate purchase price consideration paid for Actek as of the date of acquisition (in thousands):

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Closing Cash Payment	$	1,651
Closing Stock Issuance — Common Stock and Additional Paid-in Capital		453
Fair value of liability-classified contingent consideration		517
Additional purchase price for net working capital adjustment		270
Fair value of total consideration transferred	$	2,891

     On January 1, 2010, upon the closing of the acquisition, the Company paid Actek’s sole stockholder $2.1 million in a combination of cash and common stock. The fair value of the common stock issued as part of the consideration paid for Actek was determined on the basis of the closing market price of the Company’s common stock on the acquisition date.

     As part of the acquisition, the Company also agreed to pay additional consideration contingent on Actek retaining 90% of its recurring revenue during the one-year period following the acquisition (the “Milestone”). The Milestone payment consists of three components: (i) $600,000 in cash (the “Cash”); (ii) 100,000 shares of the Company’s common stock in the form of a restricted stock unit (the “RSU”); and (iii) 200,000 shares of the Company’s common stock in the form of a non-qualified stock option (the “Option”). The RSU and the Option were awarded and granted, respectively, after the acquisition on the last trading day of January 2010. The Cash will be paid if Actek has retained 90% of its recurring revenue in the first year subsequent to the acquisition date, and the RSU and Option shall each vest in full, if the Company’s board of directors determines after the one-year anniversary of the acquisition that: i) the former sole stockholder of Actek is still employed with the Company on the first anniversary of the acquisition or was earlier terminated by the Company other than for cause and has signed an acceptable full release of claims and ii) Actek has retained 90% of its recurring revenue.

     The fair value of the contingent consideration arrangement was probability-weighted to reflect the likelihood that the Milestone will be achieved at the valuation date. Because the vesting of the RSU and Option are subject to the continued employment of Actek’s sole stockholder, these contingent payments are considered compensatory and thus not part of the purchase price. The fair value of the contingent consideration associated with the RSU and Option of $0.5 million is recorded as stock-based compensation in general and administrative expenses over the service period of one year, while the cash contingent consideration is included in the total purchase price, and will be paid upon the achievement of the related contingencies. The RSU and Option compensation is classified as equity, and will not be remeasured after the acquisition date. The cash contingent consideration is classified as a liability. Subsequent changes in fair value for liability-classified contingent consideration are recognized in earnings and not as an adjustment to the purchase price.

     As of June 30, 2010, the amount recognized for the contingent consideration arrangement, the range of outcomes and the assumptions used to develop the estimates have not materially changed. The possibility of achieving the Milestone slightly increased, resulting in an increase in the fair value of cash contingent consideration of $41,000 from January 1, 2010, which we recorded as operating expense in the condensed consolidated statements of operations for the six months ended June 30, 2010. We also paid $270,000 in June 2010 for the additional purchase price for net working capital adjustment.

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     Purchase Price Allocation

     The total purchase price for Actek was allocated to the assets acquired and liabilities assumed based upon their preliminary fair value at the acquisition date as set forth below. The Company finalized the purchase price allocations during the second quarter of 2010 with no adjustments to the preliminary amounts.

(in thousands)
Cash and cash equivalents	$	3
Accounts receivable		1,045
Other current assets		13
Fixed assets		341
Intangible assets		1,510
Accounts payable		(11	)
Accrued payroll and related expenses		(117	)
Deferred revenue		(147	)
Other accrued liabilities		(759	)
Notes payable		(899	)
Deferred tax liability		(614	)
Total identifiable net assets		365
Goodwill		2,526
Total Purchase Price	$	2,891

     The Company considered uncertainty about collections and future cash flow when determining the fair value of the accounts receivable. The fair value of accounts receivable of $1.0 million represents gross contractual accounts receivable as all amounts were determined to be collectible.

     Valuation of Intangible Assets Acquired

     The following table sets forth each component of intangible assets acquired in connection with the acquisition:

			Estimated
	Preliminary		Useful
(in thousands)	Fair Value		Life
Customer relationships	$	644	12 years
Developed Technology		524	7 years
Tradename		302	Indefinite
Favorable Lease		40	4 years
Total Intangible Assets	$	1,510

     Customer relationships represent the fair value of the underlying customer support contracts and related relationships with Actek’s existing customers. The estimated useful life of 12 years was primarily based on projected customer retention rates. Developed technology represents the fair values of Actek’s products that have reached technological feasibility. The estimated useful life of 7 years was primarily based on projected product cycle and technology evolution. The tradename represents the fair value of brand and name recognition associated with the marketing of Actek’s products and services. The Company intends to use Actek’s tradename indefinitely. The favorable lease represents the fair value of a below market operating lease assumed by the Company related to an office facility located in Alabama. The estimated useful life was based on the remaining lease term. The Company utilized the income approach applying assumptions for future cash flow and discount rates using current market trends to determine the fair value.

     Of the liabilities assumed by the Company through the acquisition, $759,000 was related to sales tax payable and $899,000 was related to debt that was repaid in the first quarter of 2010.

     The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The goodwill arising from the acquisition mainly consists of the entity-specific synergies and economies of scale expected from combining the operations of the two companies.

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     Acquisition Related Expenses

     Acquisition related expenses mainly consist of direct transaction costs such as professional service fees. For the six months ended June 30, 2010, the Company incurred a total of $121,000 acquisition-related expenses associated with the Actek acquisition. These direct transactions costs were recorded as expenses in the Company’s condensed consolidated statements of operations.

3. Restructuring

     In February and April 2010, management approved cost savings programs to reduce the Company’s workforce. The Company incurred restructuring charges of $0.5 million and $1.2 million in the three and six months ended June 30, 2010, respectively, in connection with severance and termination-related costs, most of which are severance-related cash expenditures. These cost savings programs were substantially completed as of the end of the second quarter of 2010.

     Total costs of the Company’s restructuring programs incurred to date of $7.3 million include restructuring charges of $1.5 million in 2007, $1.6 million in 2008, $3.0 million in 2009 and $1.2 million in the first half of 2010.

     The following table sets forth a summary of accrued restructuring charges for the first six months of 2010 (in thousands):

	December 31,		Cash								June 30,
	2009		Payments			Additions		Adjustments			2010
Severance and termination-related costs	$	146	$	(1,309	)	$	1,208	$	(17	)	$	28
Total accrued restructuring charges	$	146	$	(1,309	)	$	1,208	$	(17	)	$	28

4. Goodwill and Intangible Assets

     Goodwill as of June 30, 2010 and December 31, 2009 was $8.0 million and $5.5 million, respectively. The change is related to goodwill acquired associated with the Actek acquisition. (See Note 2 — Acquisition above for details).

     Intangible assets consisted of the following as of June 30, 2010 and December 31, 2009 (in thousands):

												Weighted
												Average
			December 31,							June 30,		Amortization
			2009				Amortization			2010		Period
	Cost		Net		Additions		Expense			Net		(Years)
Purchased technology	$	5,422	$	1,972	$	2,548	$	(987	)	$	3,533		3.33
Customer relationships		2,000		1,021		644		(277	)		1,388		7.56
Tradename		—		—		302		—			302		N/A
Favorable Lease		—		—		40		(7	)		33		4.00
Total intangible assets, net	$	7,422	$	2,993	$	3,534	$	(1,271	)	$	5,256

     Intangible assets include third-party software licenses used in the Company’s products, acquired assets related to the Compensation Technologies (“CT”) acquisition completed in 2008 and acquired assets related to the Actek acquisition completed in the first quarter of 2010 (see Note 2 — Acquisition above for details). Costs incurred to renew or extend the term of a recognized intangible asset are expensed in the period incurred. Amortization expense related to intangible assets was $0.4 million and $1.3 million for the three and six months ended June 30, 2010, as compared to amortization expense of $0.4 million and $0.8 million for the three and six months ended June 30, 2009. Of these amounts, $0.2 million and $0.9 million were included in cost of sales for the three and six months ended June 30, 2010, respectively; and $0.3 million and $0.5 million were included in cost of sales for the three and six months ended June 30, 2009, respectively.

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     The Company’s intangible assets are amortized over their estimated useful lives of one to twelve years, except for tradename, which has an indefinite life. As of June 30, 2010, total future expected amortization is as follows (in thousands):

	Purchased		Customer		Favorable
	Technology		Relationships		Lease
Quarter Ending June 30:
Remainder of 2010	$	839	$	275	$	7
2011		1,613		554		13
2012		781		75		13
2013		75		54		—
2014		75		54		—
2015 and beyond		150		376		—
Total expected future amortization	$	3,533	$	1,388	$	33

5. Financial Instruments

     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 auction rate securities that are classified as trading are designated as short-term investments due to a contractual agreement that allows the Company to sell the securities at par value beginning on June 30, 2010. The Company exercised such right as of June 30, 2010 (see below for more details).

     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 maturity date being longer than one year and the security not being highly liquid 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 classified as available-for-sale securities were as follows at June 30, 2010 (in thousands):

								Total Other
								Than Temporary
								Impairment		Gain (Loss) on
					Total Unrealized			Recorded In		Investments
					Losses in Other			Other		Recorded in the
	Amortized		Unrealized		Comprehensive			Comprehensive		Statement of		Estimated
June 30, 2010	Cost		Gains		Income (Loss)			Income (Loss)		Operations		Fair Value
Short-term investments:
Certificate of deposits	$	480	$	—	$	—		$	—	$	—	$	480
Corporate notes and obligations		6,976		12		(6	)		—		—		6,982
U.S. government and agency obligations		7,519		2		(2	)		—		—		7,519
Long-term investments:
Auction rate securities classified as available for sale		800		—		(13	)		—		—		787
Investments in debt and equity securities	$	15,775	$	14	$	(21	)	$	—	$	—	$	15,768

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     The Company had no realized gains or losses on sales of its available-for-sale investments for the three and six months ended June 30, 2010 and 2009, respectively. The Company had proceeds of $5.7 million and $12.4 million from maturities and sales of investments for the three and six months ended June 30, 2010, respectively. All proceeds from sales and maturities of investments were equal to the par value of the securities.

     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, 2010 and December 31, 2009 (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, 2010	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	7,101	$	7,101	$	—	$	—
U.S. treasury bills (2)		4,518		4,518		—		—
Certificate of deposits (2)		480		—		480		—
Corporate notes and obligations (2)		6,982		—		6,982		—
U.S. government agency obligations (2)		3,001		—		3,001		—
Auction-rate securities(2) (3)		1,987		1,200		—		787
Warrants (4)		3		—		—		3
Publicly traded securities (4)		312		312		—		—
Total	$	24,384	$	13,131	$	10,463	$	790

(1)	Included in cash and cash equivalents on the condensed consolidated balance sheet.
(2)	Except as indicated in (3), included in short-term investments on the condensed consolidated balance sheet.
(3)	$787 included in long-term investments on the condensed consolidated balance sheet.
(4)	Included in long-term investments 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, 2009	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds (1)	$	6,644	$	6,644	$	—	$	—
U.S. treasury bills (2)		5,043		5,043		—		—
Certificate of deposits (2)		720		—		720		—
Corporate notes and obligations (2)		5,962		—		5,962		—
U.S. government agency obligations (2)		6,695		—		6,695		—
Auction-rate securities (2), (3)		4,458		—		—		4,458
Asset associated with put option (4)		102		—		—		102
Warrants (5)		25		—		—		25
Publicly traded securities (5)		225		225		—		—
Total	$	29,874	$	11,912	$	13,377	$	4,585

(1)	Included in cash and cash equivalents on the condensed consolidated balance sheet.
(2)	Except as indicated in (3), included in short-term investments on the condensed consolidated balance sheet.
(3)	$892 included in long-term investments on the condensed consolidated balance sheet.
(4)	Included in prepaid and other current assets on the condensed consolidated balance sheet.
(5)	Included in long-term investments on the condensed consolidated balance sheet.

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

											Gain (Loss)
	Balance at										Recorded in						Balance at
	December 31,							Transfers out of			Statement of			Unrealized			June 30,
	2009		Addition		Disposition			Level 3			Operations			Gain (Loss)			2010
Auction rate securities classified as trading	$	3,566	$	—	$	(2,500	)	$	(1,200	)	$	134		$	—		$	—
Auction rate securities classified as available for sale		892		—		(100	)		—			—			(5	)		787
Asset associated with put option		102		—		—			—			(102	)		—			—
Warrants		25		—		—			—			(22	)		—			3
Total	$	4,585	$	—	$	(2,600	)		(1,200	)	$	10		$	(5	)	$	790

Valuation of Investments and Put Option

     Level 1 and Level 2

     The Company’s available-for-sale securities include certificate of deposits, corporate notes and obligations and U.S. government and agency obligations at June 30, 2010 and December 31, 2009. The Company values these securities using a pricing matrix from a reputable pricing service, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs). However, the Company classifies all of its available-for-sale securities, except for U.S. treasury and certain auction rated securities, as having Level 2 inputs. The Company validates the estimated fair value received from the reputable pricing service on a quarterly basis. The valuation techniques used to measure the fair value of the financial instruments having Level 2 inputs, all of which have counterparties with high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data.

     In December 2009, the Company executed a “Subscription Agreement for Units” (the “Agreement”) with ForceLogix Technologies, Inc. (“ForceLogix”). ForceLogix is a Canada-based public company that delivers on-demand sales management process optimization solutions for sales organizations. Pursuant to the Agreement, the Company purchased 2,639,000 units of ForceLogix for an aggregate of $250,000. Each unit consists of one common share and three quarters (3/4) of one common share purchase warrant of ForceLogix. In April 2010, the Company executed another “Subscription Agreement for Common Shares” with ForceLogix to purchase an additional 2,003,800 common shares of ForceLogix for a total of $150,000. The Company owns approximately 8% of the outstanding common shares of ForceLogix as of June 30, 2010 and does not have the ability to exercise significant influence. The Company valued the investment in the common stock using observable inputs (Level 1 inputs) and the related warrants using unobservable inputs (Level 3 inputs).

     There were no transfers between Level 1 and 2 fair value hierarchy during the three or six months ended June 30, 2010.

     Level 3

     The Company valued its auction rate securities classified as available-for-sale 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 an unrealized loss on auction rate securities classified as available-for-sale of $11,000 and $5,000 for the three and six months ended June 30, 2010, respectively.

     In connection with certain auction rate securities, in October 2008, one financial institution with whom the Company holds auction rate securities issued certain put option rights to the Company, which entitled 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. Two such auction rate securities were redeemed at par by the financial institution during the quarter. The Company exercised its option to sell the remaining one auction rate security on June 30, 2010. The transaction was settled immediately after quarter end at par, or $1.2 million. As the put option was exercised on June 30, 2010, the Company has valued the assets at nil as of June 30, 2010. As a result of the redemption, the Company recorded a realized gain on sales of its auction rate securities classified as trading of $93,000 and $134,000, partially offset by a realized loss on the put option of $70,000 and $102,000, for the three and six months ended June 30, 2010, respectively. The Company recorded a gain of $0.3 million and $0.4 million on auction rate securities classified as trading, partially offset by a loss on the put option of $0.2 million and $0.3 million, during the three and six months ended June 30, 2009, respectively.

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     As of June 30, 2010, since the remaining aforementioned auction rate security was sold at its par value of $1.2 million on July 1, 2010, the Company valued it at par using Level 1 inputs.

     The Company valued the ForceLogix warrants using the Black-Scholes-Merton option pricing model. At June 30, 2010, the fair value of the warrants is insignificant.

6. 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.

     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, 2010, such liabilities recorded were insignificant. The Company believes that it has valid defenses with respect to the legal matters pending against the Company, and that a material loss under such matters is not probable or estimable, nor are any losses considered to be reasonably possible.

     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 accounting for contingencies. To date, the Company has not incurred any costs related to warranty obligations for its software products.

     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 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.

7. Segment, Geographic and Customer Information

     The accounting principles guiding 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 and related services. 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, 2010 and 2009 by geographic areas (in thousands):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Americas	$	15,561	$	19,744	$	30,100	$	40,865
EMEA		1,100		2,452		2,563		6,767
Asia Pacific		479		174		638		638
	$	17,140	$	22,370	$	33,301	$	48,270

     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.

     In the three and six months ended June 30, 2010 and 2009, no customer accounted for more than 10% of the Company’s total revenues.

8. 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 following table sets forth the components of comprehensive loss for the three and six months ended June 30, 2010 and 2009 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net loss	$	(3,748	)	$	(3,334	)	$	(9,699	)	$	(6,144	)
Other comprehensive loss:
Change in unrealized loss on investments, net		(52	)		68			(57	)		139
Change in cumulative translation adjustments		(15	)		135			(100	)		133
Comprehensive loss	$	(3,815	)	$	(3,131	)	$	(9,856	)	$	(5,872	)

9. Stock-based Compensation

     Expense Summary

     The table below sets forth a summary of stock-based compensation expenses for the three and six months ended June 30, 2010 and 2009, respectively (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Stock-based Compensation Expenses:
Options	$	539	$	377	$	954	$	853
Restricted Stock Units		1,087		589		1,885		1,014
ESPP		149		269		212		345
Actek Acquisition Compensation		126		—		203		—
	$	1,901	$	1,235	$	3,254	$	2,212

     As of June 30, 2010, there was $3.4 million, $7.3 million and $0.3 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 2.5 years, 2.16 years and 0.6 years, respectively.

19

     The table below sets forth the functional classification of stock-based compensation expense for the three and six months ended June 30, 2010 and 2009 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Stock-based compensation:
Cost of recurring revenues	$	113	$	131	$	237	$	294
Cost of services revenues		201		243		442		256
Sales and marketing		307		342		579		574
Research and development		249		267		468		409
General and administrative		1,031		252		1,528		679
Total stock-based compensation	$	1,901	$	1,235	$	3,254	$	2,212

     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,
	2010		2009		2010		2009
Stock Option Plans
Expected life (in years)		2.50 to 3.50		0.50 to 3.50		2.50 to 3.50		0.50 to 3.50
Risk-free interest rate	0.88% to 1.38%		0.30% to 1.50%		0.88% to 1.52%		0.30% to 1.50%
Volatility	68% to 76%		67% to 106%		67% to 76%		63% to 106%
Dividend Yield		—		—		—		—
Employee Stock Purchase Plan
Expected life (in years)		0.50 to 1.00		0.49 to 1.00		0.50 to 1.00		0.49 to 1.00
Risk-free interest rate	0.18% to 0.34%		0.46% to 0.62%		0.18% to 0.34%		0.46% to 0.62%
Volatility	49% to 60%		97% to 126%		49% to 60%		97% to 126%
Dividend Yield		—		—		—		—

10. Related-Party Transactions

     The Company did not have any significant transactions with its related parties in the three and six months ended June 30, 2010 and 2009.

20

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 2009 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: our ability to achieve profitability, 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 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 2009 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, 2010

     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, support and maintenance agreements associated with our product licenses, all of which is recognized ratably over the term of the related agreement.

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Recurring Revenue Growth and Momentum

     During the second quarter of 2010, our user base (e.g., payees) continued to grow. Our recurring revenues increased in the second quarter of 2010 by 8% to $13.3 million compared to $12.3 million in the first quarter of 2010; and by 12% from $11.8 million in the second quarter of 2009. Recurring revenue accounted for 77% of total revenues in the second quarter of 2010, as compared to 76% in the first quarter of 2010 and 53% in the same period of 2009, continuing to reflect the diminished significance of perpetual license and services in our Software-as-a-Service (“SaaS”) business model. We expect recurring revenues to continue to run at approximately 75% of revenues through 2010. Recurring revenue gross margin for the second quarter was 54%, equal to the same period last year and up from 48% in the prior quarter. The increase in margin from the prior quarter reflects the increase in recurring revenues while third-party royalty costs were down from the prior quarter. Customer attrition remains low as our retention rates for our core SaaS offering and our legacy on-premise customers continue to be above 90%.

     We generally recognize revenue ratably over the non-cancelable term of the customer contract for our subscription and support revenues. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Primarily due to growth in our installed base for recurring subscriptions to our on-demand services and maintenance, total deferred revenue (including both short-term and long-term) increased by $1.9 million and $7.1 million to $29.2 million as of June 30, 2010 compared to $27.3 million as of March 31, 2010 and $22.1 million as of December 31, 2009, respectively. This represents an increase of 7% quarter over quarter and a 32% increase from the end of 2009.

Cost Control and Cash Flows

     During the quarter, we continued to make progress on reducing our operating expenses as we realized the benefits of our recent cost cutting actions to better align our cost base with our new business model. Excluding stock-based compensation, amortization of acquired intangible assets and restructuring expenses, our second quarter 2010 operating expenses of $8.3 million have been reduced by $1.6 million from the 2010 first quarter’s $9.9 million and by $2.5 million from the 2009 second quarter’s $10.8 million. This represents a decrease of 16% quarter over quarter and 23% year over year.

     As a result of our recurring revenue growth and reductions in cost, we generated $0.3 million of cash from operating activities during the six months ended June 30, 2010, which was driven by $2.2 million cash generated from operating activities during the second quarter partially offset by $1.9 million cash used for operating activities during the first quarter of 2010. We finished the second quarter with $29.7 million in cash and investments. This is a decrease of $0.5 million from the prior quarter. The decrease was the result of generating $2.2 million in cash from operations, offset by a combination of deposits for our new premises, acquisition of intangible assets and capital expenditures.

Service Business

     Services revenues for the quarter were $3.5 million, down 4% sequentially and 63% from the same period last year. The decrease from the prior quarter was driven by the fact that a number of customers signed in prior quarters delayed the start of their implementation projects negatively impacting both revenues and gross margin. The decrease in services revenues from the prior year was mostly as expected as we transition to shorter and less expensive on-demand implementations.

     Services gross margin for the second quarter was negative 16%, up from negative 21% in the prior quarter and down from 18% in the prior year. The negative services margin reflects lower than planned utilization resulting from the delay in projects and a decrease in our average billing rate. With all the major deals we signed in prior quarters now underway and the improved utilization, we expect improvement in the margin for the next quarter. In the quarter, we saw some signs of recovery as we booked more dollars from services-related statements of work (“SOW”) in the quarter than we have had in any quarter in the last two years. These SOWs will generate revenues over the remainder of 2010 and into 2011. We expect to see the benefit of our second quarter Services Executive leadership change start to have a measureable impact in driving services revenues while improving our services margin in the coming quarters. Over the longer term, we expect to see margin improvement as we drive higher revenues and leverage less expensive third-party consulting resources. While we expect improvement in our services margin, we do expect services revenue to remain substantially below the level it was under our old perpetual license business model.

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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 also provides more predictable quarterly revenues for us. During 2008, we were able to sustain positive margins on this service offering for the first time since its launch in 2006. 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 products as a time-based term license arrangement. We believe this offering will better address the needs of our customers that prefer our on-premise solution, and at the same time, will provide us with more predictable revenue streams. 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 time-based term license offering fails to achieve market acceptance, our business and operating results may be materially and adversely affected.

     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 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 suite of products.

     Historically, a substantial portion of our revenues has been derived from sales of our products and services to customers in the financial and insurance industries. Consolidations and business failures in these industries could result in substantially reduced demand for our products and services. In addition, future disruptions in these industries and international financial crisis may cause 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.

     We remain committed to achieving non-GAAP profitability in the second half of this year. Non-GAAP operating results exclude stock-based compensation, amortization of acquired intangible assets and restructuring expenses. Non-GAAP net losses during the first quarter and the second quarter of 2010 were $3.7 million and $1.2 million, respectively. We continue to execute on a number of our key operating objectives that are critical to this endeavor. Although our efforts in adding new customers and retaining existing customers, reorganizing our business structure, reducing our operating expenses and excess capacity in the prior quarters have resulted in significant cost savings and improved profitability, we must continue to make progress towards these objectives. Many of the factors affecting our ability to achieve these objectives are wholly or partially beyond our control. If our efforts prove insufficient or ineffective or result in unanticipated disruption to our business, our ability to achieve or sustain profitability may be materially impaired.

     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 and Item 1A — “Risk Factors” of Part I, in our Annual Report on Form 10-K for our fiscal year ended December 31, 2009.

Application of Critical Accounting Policies and Use of Estimates

     The discussion and analysis of our financial condition and results of operations which 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 assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosure regarding these items. We base our assumptions, judgments and estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates under different assumptions or conditions. 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. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with our Audit Committee of the Board of Directors.

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     We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, allowance for doubtful accounts and service remediation reserve, stock-based compensation, goodwill impairment, long-lived asset impairment and income taxes have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. It is also noted that we noted no indications of impairment of goodwill in our reporting unit as of June 30, 2010.

     There were no significant changes in our critical accounting policies and estimates during the three or six months ended June 30, 2010 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, 2009.

     Recent Accounting Pronouncements

     In October 2009, the FASB issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to use management’s best estimate of selling price to value individual deliverables when those deliverables do not have vendor-specific objective evidence of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods beginning after June 15, 2010; however early adoption is permitted. The Company is currently evaluating the impact of adopting these new standards on our consolidated financial position, results of operations and cash flows.

     See Note 1 of our Notes to Condensed Consolidated Financial Statements for information regarding the effect of newly adopted accounting pronouncements on our financial statements.

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2010 and 2009, and the Three Months Ended March 31, 2010

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, 2010 compared to the three and six months ended June 30, 2009 (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
	2010			Revenues			2009		Revenues			(Decrease)			Year
Revenues:
Recurring	$	13,265			77	%	$	11,802		53	%	$	1,463			12	%
Services		3,488			20	%		9,407		42	%		(5,919	)		(63	)%
License		387			2	%		1,161		5	%		(774	)		(67	)%
Total revenues	$	17,140			100	%	$	22,370		100	%	$	(5,230	)		(23	)%
	Three						Three
	Months						Months								Percentage
	Ended			Percentage			Ended		Percentage			Year to Year			Change
	June 30,			of Related			June 30,		of Related			Increase			Year over
	2010			Revenues			2009		Revenues			(Decrease)			Year
Cost of revenues:
Recurring	$	6,120			46	%	$	5,416		46	%	$	704			13	%
Services		4,045			116	%		7,671		82	%		(3,626	)		(47	)%
License		87			22	%		251		22	%		(164	)		(65	)%
Total cost of revenues	$	10,252					$	13,338				$	(3,086	)
Gross profit:
Recurring	$	7,145			54	%	$	6,386		54	%	$	759			12	%
Services		(557	)		(16	)%		1,736		18	%		(2,293	)		(132	)%
License		300			78	%		910		78	%		(610	)		(67	)%
Total gross profit	$	6,888			40	%	$	9,032		40	%	$	(2,144	)		(24	)%

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	Six						Six
	Months						Months								Percentage
	Ended			Percentage			Ended		Percentage			Year to Year			Change
	June 30,			of Total			June 30,		of Total			Increase			Year over
	2010			Revenues			2009		Revenues			(Decrease)			Year
Revenues:
Recurring	$	25,551			77	%	$	23,499		49	%	$	2,052			9	%
Services		7,134			21	%		20,609		43	%		(13,475	)		(65	)%
License		616			2	%		4,162		9	%		(3,546	)		(85	)%
Total revenues	$	33,301			100	%	$	48,270		100	%	$	(14,969	)		(31	)%
	Six						Six
	Months						Months								Percentage
	Ended			Percentage			Ended		Percentage			Year to Year			Change
	June 30,			of Related			June 30,		of Related			Increase			Year over
	2010			Revenues			2009		Revenues			(Decrease)			Year
Cost of revenues:
Recurring	$	12,535			49	%	$	11,201		48	%	$	1,334			12	%
Services		8,457			119	%		16,980		82	%		(8,523	)		(50	)%
License		197			32	%		442		11	%		(245	)		(55	)%
Total cost of revenues	$	21,189					$	28,623				$	(7,434	)
Gross profit:
Recurring	$	13,016			51	%	$	12,298		52	%	$	718			6	%
Services		(1,323	)		(19	)%		3,629		18	%		(4,952	)		(136	)%
License		419			68	%		3,720		89	%		(3,301	)		(89	)%
Total gross profit	$	12,112			36	%	$	19,647		41	%	$	(7,535	)		(38	)%

26

     The table below sets forth the changes in revenues, cost of revenues and gross profit for the three months ended June 30, 2010 compared to the three months ended March 31, 2010 (in thousands, except for percentage data):

	Three					Three
	Months					Months					Quarter to			Percentage
	Ended		Percentage			Ended		Percentage			Quarter			Change
	June 30,		of Total			March 31,		of Total			Increase			Quarter over
	2010		Revenues			2010		Revenues			(Decrease)			Quarter
Revenues:
Recurring	$	13,265		77	%	$	12,287		76	%	$	978			8	%
Services		3,488		20	%		3,645		23	%		(157	)		(4	)%
License		387		2	%		229		1	%		158			69	%
Total revenues	$	17,140		100	%	$	16,161		100	%	$	979			6	%

	Three						Three
	Months						Months						Quarter to			Percentage
	Ended			Percentage			Ended			Percentage			Quarter			Change
	June 30,			of Related			March 31,			of Related			Increase			Quarter over
	2010			Revenues			2010			Revenues			(Decrease)			Quarter
Cost of revenues:
Recurring	$	6,120			46	%	$	6,414			52	%	$	(294	)		(5	)%
Services		4,045			116	%		4,412			121	%		(367	)		(8	)%
License		87			22	%		110			48	%		(23	)		(21	)%
Total cost of revenues	$	10,252					$	10,936					$	(684	)
Gross profit:
Recurring	$	7,145			54	%	$	5,873			48	%	$	1,272			22	%
Services		(557	)		(16	)%		(767	)		(21	)%		210			(27	)%
License		300			78	%		119			52	%		181			152	%
Total gross profit	$	6,888			40	%	$	5,225			32	%	$	1,663			32	%

Revenues

     Total Revenues. Total second quarter revenues were $17.1 million, down 23% from the same period last year. Total revenues for the six months ended June 30, 2010 were $33.3 million, down 31% from prior year. The decrease in total revenues was primarily due to the change in our business model. The second quarter decline in license and services revenues as compared to the prior year was mostly as expected and is reflective of our new business model. The decrease year over year was partially offset by the revenues generated from the January Actek acquisition. Sequentially, total revenues increased by $1.0 million. The increase was primarily attributable to the increase in recurring revenues.

     Recurring Revenues. Recurring revenues, consisting of on-demand revenues, time-based term licenses and maintenance revenues, increased by $1.5 million, or 12%, in the three months ended June 30, 2010 compared to the same period last year. Recurring revenues increased by $2.1 million, or 9%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increases were primarily due to the growth in our on-demand subscription revenues and our time-based term licenses, which together were up 24% and 19% compared to the three and six months ended June 30, 2009, respectively. Maintenance revenues associated with perpetual licenses decreased by $0.2 million and $0.4 million in the three and six months ended June 30, 2010, respectively, primarily due to a number of on-premise customers converting to our on-demand service as well as decreased perpetual license sales to new customers partially offset by a small benefit from the January Actek acquisition.

27

     On a sequential basis, compared to the first quarter of 2010, recurring revenues were up 8%, reflecting a 13% increase in on-demand and time-based term licenses. The increase resulted from new bookings in the last few quarters, as well as the accelerated recognition of approximately $0.3 million of deferred revenues related to a customer conversion from on-demand to on-premise. Support revenues for maintenance services associated with our perpetual licenses are flat sequentially.

     Services Revenues. Services revenues decreased by $5.9 million, or 63%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Services revenues decreased by $13.5 million, or 65%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease from prior year was expected as we transition to shorter and less expensive on-demand implementations. On a sequential basis from the first quarter of 2010, services revenue decreased 4%. The decrease from the prior quarter was driven by the fact that a number of customers signed in prior quarters delayed the start of their implementation projects, negatively impacting both revenues and gross margin. The decrease in services revenues in the second quarter was also offset by a one-time benefit of approximately $0.3 million related to the previously mentioned customer conversion from on-demand to on-premise.

     License Revenues. In the three and six months ended June 30, 2010, perpetual license revenues decreased as expected by $0.8 million, or 67%, and by $3.5 million, or 85%, respectively, compared to the same periods in 2009. The decrease was primarily attributable to our transition from a perpetual license business to a recurring revenue SaaS-oriented company. As a result, our perpetual license business continues to diminish in importance. We do not expect perpetual license revenue to return to its historical levels.

Cost of Revenues and Gross Margin

     Cost of Recurring Revenues. Cost of recurring revenues increased by $0.7 million, or 13%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Cost of recurring revenues increased by $1.3 million, or 12%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The cost as a percentage of revenue stayed flat on a year-over-year basis. The increase was primarily due to increased amortization of intangible assets resulting from increased costs of third-party technology used in our products. The impacts of these costs was $0.2 million and $0.9 million, for the three and six months ended June 30, 2010, respectively. The increase also reflected increased infrastructure cost of $0.4 million and $0.8 million for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively, offset slightly by headcount efficiencies. The increase in infrastructure cost was primarily due to fulfilling a higher level of customer orders resulting from the increase in on-demand subscriptions, for which revenue may or may not have been recognized. The costs associated with supporting our on-demand offering are generally higher than the cost of maintenance related to our on-premise customers, as we are responsible for the full operation of the software that the customer has contracted for in our hosting facility.

     On a sequential basis from the first quarter of 2010, cost of recurring revenues decreased by $0.3 million, or 5%, mainly due to decreased amortization of intangible assets associated with the reduction in the use of a particular third-party technology. We expect the amortization expense to stay relatively flat throughout the remainder of 2010.

     Cost of Services Revenues. Cost of services revenues decreased by $3.6 million, or 47%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Cost of services revenues decreased by $8.5 million, or 50%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Sequentially, cost of services revenue decreased by $0.4 million, or 8%. The decrease year over year and from prior quarter was primarily attributable to the decrease in headcount related to the reduction in services revenues as discussed above.

     Cost of License Revenues. Cost of license revenues decreased by $0.2 million, or 65%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Cost of license revenues decreased by $0.2 million, or 55%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Sequentially, cost of license revenues decreased by $23,000, or 21%. The decrease year over year was primarily the result of our transition to a recurring revenue business. As a result of the transition, we have allocated to the cost of license revenues a lower portion of the amortization expense for intangible assets comprised of third-party technology used in our products. The decrease from the prior quarter was mainly due to the lower amortization expenses for intangible assets in the second quarter of 2010.

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     Gross Margin. Overall gross margin decreased to 36% in the six months ended June 30, 2010 from 41% in the six months ended June 30, 2009. This was primarily due to the decrease in services gross margin as a result of lower than planned utilization and a decrease in our average billing rate. The decrease was also a result of our business model shifting to on-demand from perpetual license sales, which historically has had a higher margin. Our overall gross margin was 40% in the three months ended June 30, 2010, consistent with the same period last year. On a sequential basis, we saw a recovery of 8% in the overall margin primarily due to the improvement in our recurring revenue margin.

     Our recurring revenue gross margin of 54% in the three months ended June 30, 2010, while consistent with the three months ended June 30, 2009, reflected an improvement over the gross margin of 48% in the three months ended March 31, 2010. Recurring revenue gross margin in the first half of 2010 was 51% compared to 52% in the same period of 2009. Sequentially, recurring revenue gross margin increased from 48% in the prior quarter. The increase reflects the increase in recurring revenues, while third-party technology costs were down from the prior quarter.

     Services gross margin decreased from 18% in the second quarter of 2009 to negative 16% in the second quarter of 2010. Services gross margin decreased from 18% in the first half of 2009 to negative 19% in the first half of 2010. Sequentially, services gross margin was up from negative 21% in the prior quarter. The negative services margin reflects lower than planned utilization resulting from the delay in projects and a decrease in our average billing rate. With all the major deals we signed in prior quarters now underway and the improved utilization, we expect improvement in the margin for the next quarter. Over the longer term, we expect to see margin improvement as we drive higher revenues and leverage cheaper third party consulting resources. While we expect improvement in our services margin, we do not expect it to return to the level it was under our traditional perpetual license business model.

     License gross margin remained at 78% in the second quarter of 2010 compared to the second quarter of 2009. License gross margin decreased from 89% in the first half of 2009 to 68% in the first half of 2010. The decrease in license gross margin reflects the lower license revenue offset against the fixed cost of license, including the amortization expense for intangible assets allocated to license sales. Sequentially, license gross margin increased from 52% in the prior quarter. The increase reflects the increase in license revenues, while third-party technology costs were down from the prior quarter.

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Operating Expenses

     The table below sets forth the changes in operating expenses for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, and the three months ended March 31, 2010 (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
	2010		Revenues			2009		Revenues			(Decrease)			Year
Operating expenses:
Sales and marketing	$	3,993		23	%	$	5,444		24	%	$	(1,451	)		(27	)%
Research and development		2,427		14	%		3,673		16	%		(1,246	)		(34	)%
General and administrative		3,627		21	%		2,683		12	%		944			35	%
Restructuring		451		3	%		639		3	%		(188	)		(29	)%
Total operating expenses	$	10,498		61	%	$	12,439		56	%	$	(1,941	)		(16	)%

	Six					Six
	Months					Months								Percentage
	Ended		Percentage			Ended		Percentage			Year to Year			Change
	June 30,		of Total			June 30,		of Total			Increase			Year over
	2010		Revenues			2009		Revenues			(Decrease)			Year
Operating expenses:
Sales and marketing	$	8,638		26	%	$	11,306		23	%	$	(2,668	)		(24	)%
Research and development		5,564		17	%		7,474		15	%		(1,910	)		(26	)%
General and administrative		6,859		21	%		6,250		13	%		609			10	%
Restructuring		1,170		4	%		805		2	%		365			45	%
Total operating expenses	$	22,231		67	%	$	25,835		54	%	$	(3,604	)		(14	)%

	Three					Three
	Months					Months					Quarter to			Percentage
	Ended		Percentage			Ended		Percentage			Quarter			Change
	June 30,		of Total			March 31,		of Total			Increase			Quarter over
	2010		Revenues			2010		Revenues			(Decrease)			Quarter
Operating expenses:
Sales and marketing	$	3,993		23	%	$	4,645		29	%	$	(652	)		(14	)%
Research and development		2,427		14	%		3,138		19	%		(711	)		(23	)%
General and administrative		3,627		21	%		3,232		20	%		395			12	%
Restructuring		451		3	%		719		4	%		(268	)		(37	)%
Total operating expenses	$	10,498		61	%	$	11,734		73	%	$	(1,236	)		(11	)%

     Sales and Marketing. Sales and marketing expenses decreased $1.5 million, or 27%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease was primarily due to a $0.7 million decrease in payroll expenses as a result of reductions in headcount, a $0.2 million decrease in marketing expenses as part of the cost reduction initiative and a $0.2 million decrease in commission expense reflecting the decrease in total revenues.

     Sales and marketing expenses decreased $2.7 million, or 24%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily due to a $1.3 million decrease in payroll expenses as a result of reductions in headcount, a $0.7 million decrease in sales commissions as a result of decrease in total revenues and a $0.3 million decrease in marketing expenses and less overhead allocations as a result of reductions in headcount.

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     On a sequential basis, sales and marketing expense decreased $0.7 million, or 14%, from the prior quarter. The decrease was primarily due to a $0.2 million decrease in personnel related costs as a result of reductions in headcount and a $0.2 million decrease in travel expenses.

     Research and Development. Research and development expenses decreased $1.2 million, or 34%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Research and development expenses decreased $1.9 million, or 26%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily due to a $1.2 million and $1.8 million decrease in payroll expenses as a result of reductions in headcount in the three and six months ended June 30, 2010, respectively.

     On a sequential basis, research and development expense decreased $0.7 million, or 23%, as compared to the prior quarter. The decrease was primarily due to a $0.5 million decrease in payroll expenses as a result of reductions in headcount.

     General and Administrative. General and administrative expenses increased $0.9 million, or 35%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase was primarily due to a $0.8 million increase in stock-based compensation expenses related to a large grant of restricted stock units at the beginning of 2010 resulting in higher period expense allocation. The large restricted stock units grant is for retention purposes in lieu of the salary freeze in the current year.

     General and administrative expenses increased $0.6 million, or 10%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase was primarily due to a $0.9 million increase in stock-based compensation expenses, partially offset by a $0.3 million decrease in personnel cost due to no bonus payout during the six months ended June 30, 2010.

     On a sequential basis, general and administrative expenses increased $0.4 million, or 12%, compared to the prior quarter. The increase was due to a $0.4 million increase in stock-based compensation expenses primarily as a result of annual option and restricted stock unit grants to the board members during the quarter.

     Restructuring. Restructuring charges were $0.5 million and $1.2 million, respectively, in the second quarter and first half of 2010 compared to $0.6 million and $0.8 million, respectively, in the second quarter and first half of 2009. Sequentially, restructuring charges decreased $0.3 million from the prior quarter. These charges are mainly related to severance and termination-related costs, most of which were severance-related cash expenditures. The cost savings program in the first half of 2010 was substantially completed as of June 30, 2010.

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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, 2010 compared to the three and six months ended June 30, 2009 (in thousands, except percentage data):

	Three		Three
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	June 30,		June 30,		Increase			Year over
	2010		2009		(Decrease)			Year
Stock-based compensation:
Cost of recurring revenues	$	113	$	131	$	(18	)		(14	)%
Cost of services revenues		201		243		(42	)		(17	)%
Sales and marketing		307		342		(35	)		(10	)%
Research and development		249		267		(18	)		(7	)%
General and administrative		1,031		252		779			309	%
Total stock-based compensation	$	1,901	$	1,235	$	666			54	%

	Six		Six
	Months		Months					Percentage
	Ended		Ended		Year to Year			Change
	June 30,		June 30,		Increase			Year over
	2010		2009		(Decrease)			Year
Stock-based compensation:
Cost of recurring revenues	$	237	$	294	$	(57	)		(19	)%
Cost of services revenues		442		256		186			73	%
Sales and marketing		579		574		5			1	%
Research and development		468		409		59			14	%
General and administrative		1,528		679		849			125	%
Total stock-based compensation	$	3,254	$	2,212	$	1,042			47	%

     Total stock-based compensation expenses increased $0.7 million, or 54%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Total stock-based compensation expenses increased $1.0 million, or 47%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase was primarily due to a large grant of restricted stock units at the beginning of 2010 resulting in higher period expense allocation. The large restricted stock units grant is for retention purposes in lieu of the salary freeze in the current year. The increase is also attributable to the amortized expense of the Actek acquisition contingent consideration that is considered compensatory (see Note 2 — Acquisition above for details).

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Other Items

     The table below sets forth the changes in other items for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 (in thousands, except percentage data):

	Three			Three
	Months			Months					Percentage
	Ended			Ended					Change
	June 30,			June 30,		Year to Year			Year over
	2010			2009		Decrease			Year
Interest and other income (expense)	$	(100	)	$	161	$	(261	)		(162	)%
Provision for income taxes	$	38		$	88	$	(50	)		(57	)%

	Six			Six
	Months			Months					Percentage
	Ended			Ended					Change
	June 30,			June 30,		Year to Year			Year over
	2010			2009		Decrease			Year
Interest and other income (expense)	$	(94	)	$	190	$	(284	)		(149	)%
Provision for (benefit from) income taxes	$	(514	)	$	146	$	(660	)		(452	)%

     Interest and Other Income

     Interest and other income decreased $0.3 million, or 162%, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Interest and other income decreased $0.3 million, or 149%, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily attributable to a loss on our forward exchange contract and a loss due to remeasurement of our receivables denominated in foreign currencies, as a result of a weaker US dollar.

     Provision (benefit) for Income Taxes

     Provision for income taxes was $38,000 in the three months ended June 30, 2010 compared to $88,000 in the three months ended June 30, 2009. Benefit from income taxes was $514,000 in the six months ended June 30, 2010 compared to provision for income taxes of $146,000 in the six months ended June 30, 2009.

     The provision for the three months ended June 30, 2010 was primarily due to income taxes related to our foreign operations. The provision for the three months ended June 30, 2009 was primarily due to foreign withholding taxes and income taxes related to our foreign operations. The tax benefit in the six months ended June 30, 2010 was mainly due to the recognition of deferred tax liabilities related to the intangible assets acquired from Actek and the associated release of a valuation allowance on the Company’s deferred tax assets of $0.6 million, partially offset by a $0.1 million provision for income taxes in the six months ended June 30, 2010.

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Liquidity and Capital Resources

     As of June 30, 2010, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $28.6 million and accounts receivable of $14.3 million.

     The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (in thousands):

	Six Months Ended June 30,
	2010			2009
Net cash provided by (used in):
Operating activities	$	285		$	374
Investing activities		965			(11,275	)
Financing activities		(265	)		(71	)

     Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased $89,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily attributable to a decrease of $16.5 million in cash collections resulting from the decrease in revenues, offset by a $11.3 million decrease in payroll-related costs as a result of decrease in headcount, a $5.0 million decrease in professional service costs and a $0.2 million decrease in employee expense reimbursements and other expenses as a result of our cost reduction initiatives.

     Net Cash Provided by (Used in) Investing Activities. Net cash provided by investing activities was $1.0 million for the six months ended June 30, 2010 compared to net cash used in investing activities of $11.3 million for the six months ended June 30, 2009. Net cash provided by investing activities during the six months ended June 30, 2010 was attributable to proceeds from maturities and sales of investments of $12.5 million, partially offset by purchases of marketable investments of $6.7 million, payment made for the Actek acquisition of $1.9 million, payments made to acquire certain intangible assets of $1.6 million, purchases of property and equipment of $0.8 million and an increase in restricted cash of $0.6 million related to our new Pleasanton office lease. 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 Used in Financing Activities. Net cash used in financing activities was $265,000 for the six months ended June 30, 2010 compared to net cash used in financing activities of $71,000 for the six months ended June 30, 2009. Net cash used in financing activities during the six months ended June 30, 2010 was due to repayment of $0.9 million of debt assumed through the Actek acquisition, and cash used to repurchase common stock from employees for payment of taxes on vesting of restricted stock units of $0.2 million, partially offset by cash received from the exercise of stock options and shares purchased under our employee stock purchase plan of $0.9 million. 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.

Auction Rate Securities

     See Note 5 — Financial Instruments of our notes to condensed consolidated financial statements for information regarding our auction rate securities.

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Contractual Obligations and Commitments

     The following table summarizes our contractual cash obligations (in thousands) at June 30, 2010. 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										2015
Contractual Obligations	Total		2010		2011		2012		2013		2014		and beyond
Operating lease commitments	$	7,873	$	825	$	1,765	$	1,172	$	998	$	904	$	2,209
Unconditional purchase commitments	$	734	$	302	$	330	$	102	$	—	$	—	$	—

     In April 2010, we entered into a new lease agreement to relocate our headquarters to Pleasanton, California. The new location consists of 32,000 square feet of office space. This new lease replaces the existing office lease in San Jose, which will expire in the third quarter of 2010. The annual rental expense is approximately $0.7 million. Compared with the existing annual rental expense of $1.8 million related to the San Jose lease, the new Pleasanton lease will decrease our annual rental expense by $1.1 million. The new lease expires in July 2017.

     For our New York, New York, San Jose, California and Pleasanton, California offices, we had three certificates of deposit totaling approximately $832,000 as of June 30, 2010. For our New York, New York and San Jose, California offices, we had two certificates of deposit totaling approximately $232,000 as of December 31, 2009. These certificates of deposit were 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 5 — Financial Instruments 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.

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     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, 2010, the average maturity of our investments was approximately 7 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, 2010 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	$	10,972		$	4,004		$	14,976	$	14,981
Weighted average interest rate		0.54	%		0.94	%

     Our exposure to interest rate 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, 2010, we had no outstanding indebtedness for borrowed money. Therefore, we currently have no exposure to interest rate risk related to debt instruments. To the extent we enter into or issue debt instruments in the future, we will have interest rate risk.

     Foreign Currency Exchange Risk. Our revenues and expenses, except those related to our non-United States operations, are generally denominated in United States dollars. For the three and six months ended June 30, 2010 approximately 5.4% and 6.5%, respectively, of our total revenues were denominated in foreign currency. At June 30, 2010, approximately 12.8% 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, 2010, as compared to the three and six months ended June 30, 2009, was partially offset by a $42,000 favorable effect due to currency exchange rate fluctuations. 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.

     We had $0.1 million of loss related to the forward exchange contracts in the three and six months ended June 30, 2010. As of June 30, 2010, we had no outstanding foreign currency forward exchange contracts.

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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 or six months ended June 30, 2010 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, 2009. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described 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 2009 and those factors included in our quarterly reports on Form 10-Q filed subsequently thereto, if any, 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

We cannot accurately predict customer subscription or maintenance renewal rates or the impact these renewal rates will have on our future revenues or operating results.

     Our customers have no obligation to renew their subscriptions for our on-demand services, term licenses or maintenance support for term or perpetual license transactions after the expiration of their initial subscription or maintenance period, which is typically 12 to 24 months, and some customers have elected not to renew. Our customers may also renew for fewer payees or renew for shorter contract lengths. In addition, we recently began to offer a pay-as-you-go model, whereby customers can pay for our on-demand service on a monthly basis without a long-term commitment. To the extent this new model gains acceptance, the rate of customer non-renewals may be greater than what we anticipated and thus negatively affect our recurring revenue during any reporting period. Accordingly, we cannot accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their reduced spending levels, their decision to do more of the work themselves internally or dissatisfaction with our service. If our customers do not renew their subscriptions for our on-demand services or maintenance support, our revenue will decline and our business will suffer.

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Item 6. Exhibits

(a) Exhibits

Exhibit
Number		Description
	10.3.1	Amended and Restated 2003 Stock Incentive Plan
	10.8.1	Form of Director Change of Control Agreement — Full Single-Trigger
	10.26	Offer Letter with Saied Karamooz dated April 27, 2010
	10.27	Offer Letter with Meredith Calvert dated June 16, 2010
	31.1	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
	32.1	Certification Pursuant to Section 906 of the Sarbanes-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.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 6, 2010.

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

39

EXHIBIT INDEX
TO
CALLIDUS SOFTWARE INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010

Exhibit
Number		Description
	10.3.1	Amended and Restated 2003 Stock Incentive Plan
	10.8.1	Form of Director Change of Control Agreement — Full Single-Trigger
	10.26	Offer Letter with Saied Karamooz dated April 27, 2010
	10.27	Offer Letter with Meredith Calvert dated June 16, 2010
	31.1	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
	32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

EX-10.3.1

Exhibit 10.3.1

CALLIDUS SOFTWARE INC.
2003 STOCK INCENTIVE PLAN
(Amended and Restated as of June 1, 2010)

     1. Purposes of the Plan. The purposes of this Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business.

     2. Definitions. As used herein, the following definitions shall apply:

     (a) “Administrator” means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof.

     (b) “Applicable Laws” means the requirements relating to the administration of stock plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Awards are granted under the Plan.

     (c) “Award” means any Option or other stock-based award granted under this Plan.

     (d) “Board” means the Board of Directors of the Company.

     (e) “Code” means the U.S. Internal Revenue Code of 1986, as amended.

     (f) “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 hereof.

     (g) “Common Stock” means the common stock, par value $0.001 per share, of the Company.

     (h) “Company” means Callidus Software Inc., a Delaware corporation.

     (i) “Consultant” means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity.

     (j) “Director” means a member of the Board of Directors of the Company.

     (k) “Employee” means any person employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or protected as a matter of local law or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

     (l) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

     (m) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

     (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination (or if such date is not a trading date, on the previous trading date), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

     (ii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

     (n) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

     (o) “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

     (p) “Option” means a stock option granted pursuant to the Plan.

     (q) “Option Agreement” means an agreement evidencing the terms and conditions of an individual Option grant. Any Option Agreement is subject to the terms and conditions of the Plan.

     (r) “Optionee” means the holder of an outstanding Option granted under the Plan.

     (s) “Outside Director” means a Director who is not an Employee.

     (t) “Participant” means the holder of an outstanding Award granted under the Plan.

     (u) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

     (v) “Plan” means this 2003 Stock Incentive Plan.

     (w) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3.

     (x) “Service Provider” means an Employee, Director or Consultant.

2

     (y) “Share” means a share of the Common Stock, as adjusted in accordance with Section 13 below.

     (z) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

     3. Stock Subject to the Plan.

     (a) Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be issued under the Plan is 2,000,000 shares, plus (x) any Shares remaining available for grant of awards under the Company’s 1997 Stock Option Plan on the effective date of the Plan and (y) an annual increase on July 1 of each year during the term of the Plan beginning July 1, 2004, in each case in an amount equal to the lesser of (i) 2,800,000 shares, (ii) 5.0% of the outstanding shares on the immediately preceding date or (iii) an amount determined by the Board. The Shares may be authorized but unissued, or reacquired, shares or treasury shares.

     (b) No Participant may receive Options and stock appreciation rights under the Plan in any calendar year that relate to more than 1,500,000 Shares.

     (c) If any Shares covered by an Award, or to which such an Award relates, are forfeited, or if an Award otherwise terminates in whole or in part without the delivery of the full number of Shares related thereto, then the Shares covered by such Award, or to which such Award relates, to the extent of any such forfeiture or termination, shall again be, or shall become, available for issuance under the Plan. Shares that have been issued but are repurchased by, or surrendered or forfeited to, the Company shall become available for future grant under the Plan. For purposes of this paragraph, awards and options granted under the Company’s 1997 Stock Option Plan shall be treated as Awards.

     4. Administration of the Plan.

     (a) The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws.

     (i) To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “non-employee directors” within the meaning of Section 162(m) of the Code.

     (ii) To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

     (b) Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion:

3

     (i) to determine the Fair Market Value;

     (ii) to select the Service Providers to whom Awards may from time to time be granted hereunder;

     (iii) to determine the number of Shares to be covered by each such award granted hereunder;

     (iv) to approve forms of agreement for use under the Plan;

     (v) to determine the terms and conditions, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

     (vi) to amend the terms of any Award; provided that (A) no such amendment shall directly or indirectly reduce the exercise price of any Award without the approval of the Company’s stockholders and (B) no such amendment shall impair the rights of any Participant without the consent of the Participant;

     (vii) to grant Awards with such terms as the Administrator deems necessary or appropriate in order to comply with or take advantage of the laws of any jurisdiction in which a Participant resides or is employed or to establish a sub-plan under this Plan for such purposes;

     (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established by the Administrator for the purpose of qualifying for preferred tax treatment under foreign tax laws or complying with foreign securities or other legal requirements;

     (ix) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Award that number of Shares having a Fair Market Value equal to the amount required to be withheld; and

     (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan.

     (c) All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants.

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     5. Eligibility.

     (a) Awards may be granted to Service Providers as determined by the Administrator in its sole discretion, except that Incentive Stock Options may be granted only to Employees.

     (b) Neither the Plan nor any Award shall confer upon any Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Company or its Subsidiary, nor shall it interfere in any way with his or her right or the right of the Company or its Subsidiary, as appropriate, to terminate such relationship at any time, with or without cause.

     6. Term of Plan. The Plan shall become effective as determined by the Board. It shall continue in effect for a term of ten years unless sooner terminated under Section 14 of the Plan.

     7. Terms of Options.

     (a) The term of each Option shall be stated in the Option Agreement; provided that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

     (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 7(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

     (c) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but in the case of any Incentive Stock Option shall be subject to the following:

     (A) the exercise price of any Incentive Stock Option granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary shall be no less than 110% of the Fair Market Value per Share on the date of grant; and

5

     (B) the exercise price of any Incentive Stock Option granted to any other Employee shall be no less than 100% of the Fair Market Value per Share on the date of grant.

     (d) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

     8. Exercise of Option.

     (a) Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise or unless required by local law, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

     (b) An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan.

     (c) Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

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     9. Termination of Relationship as a Service Provider.

     (a) Termination. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least 30 days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the vested portion of the Option shall remain exercisable for 90 days following the Optionee’s termination. If, after termination, the Optionee does not exercise his or her Option within the time specified herein or in the Option Agreement, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

     (b) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee’s disability, the Optionee may exercise an Option to the extent the Option is vested as of the date of termination, but only within 12 months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement). If such disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option on the day three months and one day following such termination. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

     (c) Death of Employee Participant. If an Employee Participant dies while a Service Provider, all shares subject to all outstanding Awards that are held by such Employee Participant at the time of death will have the vesting of such shares automatically accelerated 12 months on the date of death. If the Award(s) is an Option(s), it may be exercised at any time within 12 months following the date of death (but in no event later than the expiration of the term of such Option(s) as set forth in the Option Agreement(s)) to the extent vested as of the date of death (after giving effect to the 12 month vesting acceleration set forth in the preceding sentence).

     (d) Death of Consultant or Outside Director Service Provider. If a Participant who is a Consultant or Outside Director dies while a Service Provider, all outstanding Options may be exercised at any time within 12 months following the date of death (but in no event later than the expiration of the term of such Option(s) as set forth in the Option Agreement(s)) to the extent vested as of the date of death. Unless otherwise specifically approved by the Administrator in writing, no Consultant or Outside Director shall be entitled to accelerated vesting of any kind upon death.

     (e) The Option(s) referenced in subsections (c) and (d) above may be exercised by the executor or administrator of the Optionee’s estate or, if none, by the person(s) entitled to exercise the Option(s) under the Optionee’s will or the laws of descent or distribution. If the Option(s) is not so exercised within the time specified

7

herein, the Option(s) shall terminate, and the Shares covered by such Option(s) shall revert to the Plan.

     (f) Buyout Provisions. The Administrator may at any time offer to buy out, for a payment in cash or Shares, an Award previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Participant at the time that such offer is made.

     10. Formula Grants to Outside Directors. Awards may be granted to Outside Directors in accordance with the policies established from time to time by the Board specifying the number of shares (if any) to be subject to each such award and the time(s) at which such awards shall be granted. The current policy with respect to Awards granted to Outside Directors under this Section effective as of the date set forth under the title of this Plan and continuing until modified or revoked by the Board from time to time, is as follows:

     (a) Initial Grants. As of the date on which any Outside Director first becomes a member of the Board, whether by election by the stockholders or appointment by the Board, such individual shall be:

     (i) Granted automatically a Nonstatutory Stock Option to purchase 25,000 Shares (an “Initial Option”); and

     (ii) Awarded automatically a restricted stock unit to purchase 7,500 Shares (an “Initial RSU Award”).

     (b) Annual Grants and Awards. Immediately after the Company’s regularly scheduled annual meeting of stockholders each year, the following grant and award shall be made (each, an “Annual Option” or “Annual RSU Award,” as applicable):

     (i) Each Outside Director shall be granted automatically a Nonstatutory Stock Option to purchase 15,000 Shares; provided that if such Outside Director has served on the Board for less than one year, the number of Shares subject to such Annual Option shall be reduced pro rata based on the portion of the year that such Outside Director has served on the Board.

     (ii) Each Outside Director (other than the chair of the Board and Lead Independent Director of the Board) shall be awarded automatically a restricted stock unit to purchase 5,000 Shares; provided that if such Outside Director has served on the Board for less than one year, the number of Shares subject to such Annual RSU Award shall be reduced pro rata based on the portion of the year that such Outside Director has served on the Board.

     (iii) The chair of the Board (so long as the chair is an Outside Director) and the Lead Independent Director of the Board each shall be awarded automatically a restricted stock unit to purchase 15,000 and 10,000 Shares, respectively; provided that if such chair of the Board or Lead Independent Director has served on the Board for less than one year, the number of Shares

8

subject to such Annual RSU Award shall be reduced pro rata based on the portion of the year that such for such individual has served on the Board..

     (c) Terms of Options. Options granted to Outside Directors pursuant to this Section 10 shall be on the following terms, unless otherwise determined by the Board:

     (i) The exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option.

     (ii) Each Initial Option shall vest and become exercisable over four years, with the first 25% vesting on the first anniversary of the grant date and the remainder vesting monthly thereafter.

     (iii) Each Annual Option shall be fully vested and exercisable immediately.

     (iv) The term of each such Option shall be five years unless otherwise specified in the Option Agreement, provided that the term may not exceed ten (10) years.

     (d) Terms of RSU Awards. RSUs awarded to Outside Directors pursuant to this Section 10 shall be on the following terms, unless otherwise determined by the Board:

     (i) Each Initial RSU Award and Annual RSU Award shall be fully vested immediately; provided, however, no Shares shall be issued pursuant to an Initial RSU Award or Annual RSU Award until the earlier of date of the applicable Outside Director’s departure from the Board (whether by resignation, death or failure to be reelected) or upon a change in control, at which time all of the Shares subject to the applicable Outside Director’s RSU Awards shall be released.

     11. Non-Transferability of Awards. Except as otherwise determined by the Administrator, Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant.

     12. Other Stock Awards. The Administrator is hereby authorized to grant to Participants such other Awards (including, without limitation, grants of restricted stock, restricted stock units, stock bonus awards, and stock appreciation rights) that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares) as are deemed by the Administrator to be consistent with the purposes of the Plan. Subject to the terms of the Plan, the Administrator shall determine the terms and conditions of such Awards, which shall be set forth in an Award Agreement.

     13. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.

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     (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Award, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per share of Common Stock covered by each such outstanding Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award.

     (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Award prior to such transaction, including Shares as to which the Award would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Award shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

     (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, each outstanding Award shall be continued or assumed or an equivalent award substituted by the Company or the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that any Award is not so continued, assumed or substituted, such Award shall become fully vested and exercisable. If an Award becomes fully vested and exercisable in lieu of continuation, assumption or substitution, the Administrator shall notify the Participant in writing or electronically that the Award shall be fully exercisable for a period of no less than 15 days from the date of such notice, and the Award shall terminate upon the expiration of such period. For the purposes of this paragraph, the Award shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share subject to the Award immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided that if such consideration received is not solely common stock of the successor corporation or its

10

Parent, the Administrator may provide for the consideration to be received upon the exercise of the Award, for each Share subject to the Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock.

     14. Amendment and Termination of the Plan.

     (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

     (b) Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

     (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan by the Board shall impair the rights of any Participant with the consent of the Participant. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

     15. Conditions Upon Issuance of Shares.

     (a) Legal Compliance. Shares shall not be issued pursuant to any Award granted hereunder unless the issuance and delivery of such Shares shall comply with Applicable Laws.

     (b) Tax Withholding. The Administrator shall require payment of any amount the Company may determine to be necessary to withhold for any income, employment or social insurance taxes or contributions, as applicable, as a result of the exercise of an award.

     16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

     17. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws.

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EX-10.8.1

Exhibit 10.8.1

Form of Director Change of Control Agreement — Full Single-Trigger

[Date]

[Name]
[Title]
Callidus Software Inc.

Dear [Name]:

This letter modifies any Stock Option Agreement (“Option Agreement”) and any Restricted Stock Unit Agreement or other agreement documenting any equity award (as applicable, any “Equity Award Agreement”) you may now or hereafter have with respect to the common stock of Callidus Software Inc. (the “Company”) and any prior agreement between you and the Company regarding the Equity Award Agreements including, without limitation, any prior change of control agreement(s). This letter provides for accelerated vesting of your Company stock options, restricted stock awards, restricted stock units and other equity-based awards, as applicable (collectively, the “Equity Awards”) under the conditions described below.

In the event of any “Change of Control” of the Company you shall receive 100% vesting of your Equity Awards as of the effective date and time of the Change of Control.

     For purposes of the above, “Change of Control” means:

(i)

The acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) of “beneficial ownership” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities (it being understood that securities owned by any person on the date hereof shall not be counted against such limit with respect to such person); or

(ii)

A change in the composition of the Board of Directors of the Company (the “Board”) occurring within a rolling two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are members of the Board as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board); or

(iii) A merger or consolidation involving the Company other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the Surviving Entity (including the parent corporation of such Surviving Entity)) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such Surviving Entity outstanding immediately after such merger or consolidation, or a sale or disposition by the Company of all or substantially all the Company’s assets.

The term “Surviving Entity” shall refer to the entity surviving the merger, consolidation or sale of substantially all of the assets and continuing with the assets or business of the Company in the case of a Change of Control event described in clause (iii) above.

The modification to the terms of the vesting schedule of your Equity Awards as described in this letter has been approved by the Board and is effective immediately.

Sincerely,

[Insert Name]
[Insert Title]

AGREED AND ACCEPTED this            day of                      20     .

                                                            
[Name]

2

EX-10.26

Exhibit 10.26

April 27, 2010

Saied R Karamooz
1 Cross Gate
Wayne, PA 19087

Dear Saied:

Congratulations on your new position as Senior Vice President, Client Services, effective as of May 3, 2010 reporting to Leslie Stretch, President and Chief Executive Officer.

Your starting salary will be $230,000.00 per year, which equals $19,167.00 per month, subject to periodic review. In addition, you will be eligible to participate in an annual executive incentive compensation plan of 100% of your base salary which may be over or under achieved based upon Company performance and your ability to meet your objectives under the plan. As a further incentive, we will recommend to the Board of Directors (or an applicable Subcommittee) that you be granted an non-qualified option to purchase 100,000 shares of Callidus Software Inc. common stock subject to the terms and conditions of the Company’s stock plan, and the Company’s policies and procedures. Such Option shall be granted effective as of the last business day of the month in which you commence your employment with the Company (“Grant Date”) and shall vest over a period of four (4) years with 25% of the shares vesting one (1) year after the Grant Date and the remaining 75% of the shares vesting in equal monthly installments thereafter over the remaining three (3) years, subject to your continued employment with the Company. In addition, we will recommend to the Board of Directors that you be awarded 100,000 shares of restricted stock units, subject to the terms and conditions of the Company’s stock plan and the Company’s policies and procedures. Such RSU shall be awarded effective on the last trading day of the month in which you commence your employment with the Company (the “Award Date”) and such RSU shall vest over a period of three (3) years with 33.33% of the shares vesting on the first standard quarterly Company vesting date one (1) year after the Award Date and the remaining 66.67% of the shares vesting in standard quarterly installments over the remaining two (2) years thereafter subject to your continued employment with the Company.

As this position requires you to reside in California, the Company will also provide you with an initial expense allowance paid in a lump sum of $20,000 to cover some of the costs associated with the relocation of you and your family from Pennsylvania to Pleasanton, California. These expenses may include packing and movement of household goods, transit insurance for household effects, transportation expenses to new location, temporary living expenses (lodging and food), and house hunting trip. Please note you are responsible to contract with a moving company and will be responsible for filing any and all claims for losses or damage directly with

Callidus Software Inc.	Phone 408 808 6400
160 West Santa Clara Street, Suite 1500	Fax 408 271 2662
San Jose, CA 95113	www.callidussoftware.com

Offer Letter — Senior Vice President, Client Services
Page 2

the carrier. Under no circumstances will Callidus Software assume the responsibility for personal or property damage incurred while traveling or moving.

The expense allowance will be included in your W-2 as ordinary income and is subject to withholding of applicable income and employment taxes. The company will provide you a lump sum payment with the May 30, 2010, paycheck. Please retain your original receipts for your own records in anticipation of your 2010 personal tax reporting, and defer to the IRS regulation on permissible expenses.

In addition, to cover some of your housing expenses in California, starting on May 30, 2010 the Company will pay you in a lump sum with your May 30, 2010 paycheck $30,000. This payment will be reported as taxable wages on your W-2 Form. In the event that you resign your position or your employment at Callidus Software is terminated for Cause within the 12 months following your receipt of an expense allowance, you agree to repay any relocation expense or housing allowance paid by Callidus Software to you or on your behalf. You agree that your repayment to Callidus of the relocation expense or housing allowance previously paid to you by Callidus shall be made by you no later than thirty (30) days after your termination date. However, should Callidus Software terminate your employment for any reason other than for cause you will not be obligated to repay any relocation expenses paid by Callidus Software to you or on your behalf.

As a new member of executive management, we will also recommend to the Board that you be classified as a Section 16 officer of Callidus, and that you should therefore be granted benefits in connection with a corporate change of control and indemnification in the case of litigation. Copies of our Board approved Change of Control Agreement and Indemnification Agreement are included for your review and execution. You will need to execute and return these agreements to me for them to become effective and they are subject to Board approval.

As a regular, full-time employee, you are eligible to participate in Callidus’ benefits programs, including medical, vision, and dental insurance, and 401(k) and ESPP plans, as set forth in our Callidus Benefits Guidebook. This offer is contingent on you having a reasonably clean driving record and credit history and that we successfully complete a background check. This offer is also contingent upon your completing and executing an Employment, Confidential Information and Invention Assignment Agreement (“Invention Agreement”).

The Company is an “at will” employer, which means that the employment relationship may be terminated at any time by either the Company or by you, with or without notice and with or without cause.

Offer Letter — Senior Vice President, Client Services
Page 3

By signing below, you acknowledge that your employment at Callidus is for an unspecified duration, and neither this letter, nor your acceptance thereof, constitutes a contract of employment. Should you be involuntarily terminated other than for cause at any time, you shall receive a 7- month base pay severance payment (lump sum) and payment of your applicable COBRA for 7 months, in return for signing a full release of rights.

Upon separation from the Company for any reason, you also agree to return to the Company any equipment that has been provided to you or reimburse the Company the cost for such equipment. The Company reserves the right to deduct such costs from any final payments made to you in accordance with state and federal laws.

For purposes of federal immigration law, you will be required to provide to Callidus documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire with Callidus, or our employment relationship with you may be terminated for cause. The Company’s standard policy also requires that you participate in our direct deposit payroll program.

On behalf of Callidus Software, we very much look forward to your acceptance of this offer. I have enclosed two executed copies of this offer letter. As evidence of your acceptance, please sign both letters and return one original along with the signed Invention Agreement to V. Holly Albert, Senior Vice President and General Counsel via the enclosed Federal Express envelope or otherwise to: Callidus Software, Attn: V. Holly Albert, Senior Vice President and General Counsel, 160 West Santa Clara Street, Suite 1300, San Jose, CA 95113, not later than April 28, 2010 at Noon PST.

Callidus Software Inc.	Phone 408 808 6400
160 West Santa Clara Street, Suite 1500	Fax 408 271 2662
San Jose, CA 95113	www.callidussoftware.com

Offer Letter — Senior Vice President, Client Services
Page 4

We look forward to working with you at Callidus Software. If you have any questions regarding any points in this letter please feel free to contact me. Welcome aboard!

Sincerely,

/s/ Leslie Stretch

Leslie Stretch
President and Chief Executive Officer
Callidus Software Inc.

I accept the terms of this letter and agree to keep the terms of this letter confidential.

/s/ Saied Karamooz	27 April 2010
Signature of Saied Karamooz	Date

I agree to start work for Callidus Software on: May 3, 2010 (“Start Date”)

EX-10.27

Exhibit 10.27

June 16, 2010

Meredith Calvert
Callidus Software, Inc.
9050 Capital of Texas Hwy North
Suite 260
Austin, TX 78759

Dear Meredith:

Congratulations on your new position as Senior Vice President, Customer Support and Services effective June 18, 2010, reporting to Leslie Stretch, President and Chief Executive Officer.

Your starting salary will be $200,000.00 per year, which equals $16,666.67 per month, subject to periodic review. In addition, you will be eligible to participate in an annual executive incentive compensation plan of 60% of your base salary which may be over or under achieved based upon Company performance and your ability to meet your objectives under the plan. As a further incentive, we will recommend to the Board of Directors that you be granted a non-qualified option (the “Option”) to purchase 75,000 shares of Callidus Software Inc. common stock subject to the terms and conditions of the Company’s stock plan, and the Company’s policies and procedures. Such Option shall be granted effective as of the last trading day of a month in which no trading restrictions or trading freeze are in place under the Company’s Insider Trading Policy in accordance with the Company’s Equity Award Administration Policy currently in effect (Administration Policy), which in this case is expected to be the last trading day of July 2010 (the “Grant Date”).The Option shall vest over a period of four years in equal monthly installments and shall have an exercise price equal to the fair market value of Callidus common stock on the Grant Date, determined in accordance with the 2003 Stock Incentive Plan, as amended.

In addition, we will recommend to the Board that you be awarded 35,000 shares of Callidus common stock in the form of restricted stock units (the “RSU”), subject to the terms and conditions of the Company’s 2003 Stock Incentive Plan and the Company’s policies and procedures.

Such RSU shall be awarded effective on the last trading day of a month in which no trading restrictions or trading freeze are in place under the Company’s Insider Trading Policy in accordance with the Administration Policy, which is expected to be the last trading day of July 2010 (“Award Date”); and the RSU shall vest over a period of three years in quarterly installments on the Company’s standard vesting dates which are the on the last trading days of each January, April, July and October.

Vesting of the Option and RSU are each subject to your continued employment with the Company on each applicable vesting date.

As a new member of executive management, we will also recommend to the Board that you be classified as a Section 16 officer of Callidus, and that you should therefore be granted benefits in connection with a corporate change of control and indemnification in the case of litigation. Copies of our Board approved Change of Control Agreement and Indemnification Agreement are included for your review and execution. You will need to execute and return these agreements to me for them to become effective.

The Company is an “at will” employer, which means that the employment relationship may be terminated at any time by either the Company or by you, with or without notice and with or without cause. By signing below, you acknowledge that your employment at Callidus is for an unspecified duration, and neither this letter, nor your acceptance thereof, constitutes a contract of employment. Should you be involuntarily terminated other than for cause at any time, you shall receive a 7-month base pay severance payment (lump sum) and payment of your applicable COBRA for 7 months, in return for signing a full release of rights.

Upon separation from the Company for any reason, you also agree to return to the Company any equipment that has been provided to you or reimburse the Company the cost for such equipment. The Company reserves the right to deduct such costs from any final payments made to you in accordance with state and federal laws.

Welcome to the Executive Team!

Sincerely,

/s/ Leslie Stretch

Leslie Stretch
President and Chief Executive Officer
Callidus Software Inc.

I accept the terms of this letter and agree to keep the terms of this letter confidential.

/s/ Meredith Calvert	6/16/10
Signature of Meredith Calvert	Date

EX-31.1

EXHIBIT 31.1

302 CERTIFICATIONS

I, Leslie J. Stretch, certify that:

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

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(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.

Date: August 6, 2010

/s/ LESLIE J. STRETCH  

Leslie J. Stretch 

President and Chief Executive Officer 

I, Ronald J. Fior, certify that:

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

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(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.

Date: August 6, 2010

/s/ RONALD J. FIOR  

Ronald J. Fior 

Chief Financial Officer, Senior Vice President, Finance and Operations 

EX-32.1

EXHIBIT 32.1

906 CERTIFICATION

     The certification set forth below is being submitted in connection with this quarterly report of Callidus Software Inc. on Form 10-Q (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

     Leslie J. Stretch, the Chief Executive Officer and Ronald J. Fior, the Chief Financial Officer of Callidus Software Inc., each certifies that, to the best of his knowledge:

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.

Date: August 6, 2010

/s/ LESLIE J. STRETCH  

Leslie J. Stretch 

President and Chief Executive Officer 

/s/ RONALD J. FIOR  

Ronald J. Fior 

Chief Financial Officer, Senior Vice President, Finance and Operations