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

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

Commission file number: 000-50463

Callidus Software Inc.

(Exact name of registrant as specified in its charter)

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

160 West Santa Clara Street, Suite 1500
San Jose, CA 95113
(Address of principal executive offices, including zip code)
(408) 808-6400
(Registrant’s telephone number, including area code)

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

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

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

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

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

     There were 30,434,979 shares of the registrant’s common stock, par value $0.001, outstanding on October 30, 2009, the latest practicable date prior to the filing of this report.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 6. Exhibits			40
Signatures			41
Exhibit Index			42
EX-10.1
EX-31.1
EX-32.1

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	22,308			$	35,390
Short-term investments			13,637				1,455
Accounts receivable, net			12,072				22,710
Deferred income taxes			360				360
Prepaid and other current assets			3,474				4,104
Total current assets			51,851				64,019
Long-term investments			897				3,828
Property and equipment, net			4,825				4,890
Goodwill			5,528				5,655
Intangible assets, net			3,601				3,208
Deferred income taxes, noncurrent			811				811
Deposits and other assets			675				1,468
Total assets		$	68,188			$	83,879
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,523			$	2,447
Accrued payroll and related expenses			5,127				7,128
Accrued expenses			3,456				5,027
Deferred income taxes			816				816
Deferred revenue			19,168				21,881
Total current liabilities			31,090				37,299
Long-term deferred revenue			394				1,202
Deferred income taxes, noncurrent			111				—
Other liabilities			1,430				1,412
Total liabilities			33,025				39,913
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 30,409 and 29,240 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			30				29
Additional paid-in capital			211,312				207,493
Accumulated other comprehensive income			230				121
Accumulated deficit			(176,409	)			(163,677	)
Total stockholders’ equity			35,163				43,966
Total liabilities and stockholders’ equity		$	68,188			$	83,879

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(Unaudited)
Revenues:
Recurring		$	11,170			$	10,874			$	34,669			$	29,208
Services			5,349				10,597				25,958				37,992
License			872				6,782				5,034				12,638
Total revenues			17,391				28,253				65,661				79,838
Cost of revenues:
Recurring			5,711				4,147				16,912				11,095
Services			5,054				10,092				22,034				33,739
License			214				355				656				705
Total cost of revenues			10,979				14,594				39,602				45,539
Gross profit			6,412				13,659				26,059				34,299
Operating expenses:
Sales and marketing			4,586				7,748				15,892				22,337
Research and development			3,397				3,808				10,871				10,958
General and administrative			3,072				3,529				9,322				10,261
Restructuring			1,973				—				2,778				397
Total operating expenses			13,028				15,085				38,863				43,953
Operating loss			(6,616	)			(1,426	)			(12,804	)			(9,654	)
Interest and other income (expense), net			49				103				239				914
Loss before provision (benefit) for income taxes			(6,567	)			(1,323	)			(12,565	)			(8,740	)
Provision (benefit) for income taxes			173				64				319				407
Net loss		$	(6,740	)		$	(1,387	)		$	(12,884	)		$	(9,147	)
Net loss per share — basic and diluted
Net loss per share		$	(0.22	)		$	(0.05	)		$	(0.43	)		$	(0.31	)
Shares used in basic and diluted per share computation			30,205				30,063				29,901				29,937

See accompanying notes to unaudited condensed consolidated financial statements.

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

		Nine Months Ended September 30,
		2009				2008
		(Unaudited)
Cash flows from operating activities:
Net loss		$	(12,884	)		$	(9,147	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense			2,184				1,782
Amortization of intangible assets			1,450				2,138
Provision for doubtful accounts and service remediation reserves			(128	)			451
Stock-based compensation			3,217				5,890
(Gain) loss on disposal of property			—				24
Deferred income taxes			111				—
Net (accretion) amortization on investments			32				(159	)
Put option (gain) loss			387				—
(Gain) loss on investments classified as trading securities			(472	)			—
Changes in operating assets and liabilities:
Accounts receivable			10,921				8,744
Prepaid and other current assets			610				(1,007	)
Other assets			232				730
Accounts payable			(57	)			(1,031	)
Accrued expenses			(2,252	)			(2,808	)
Accrued payroll and related expenses			(1,640	)			(1,200	)
Accrued restructuring			(417	)			(972	)
Deferred revenue			(3,542	)			1,906
Net cash provided by (used in) operating activities			(2,248	)			5,341
Cash flows from investing activities:
Purchases of investments			(18,311	)			(13,919	)
Proceeds from maturities and sale of investments			9,670				35,720
Purchases of property and equipment			(1,554	)			(1,927	)
Purchases of intangible assets			(1,487	)			(280	)
Acquisition, net of cash acquired			(14	)			(7,500	)
Change in restricted cash			202				—
Net cash provided by (used in) investing activities			(11,494	)			12,094
Cash flows from financing activities:
Net proceeds from issuance of common stock			1,719				4,785
Repurchases of stock			(742	)			(5,140	)
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units			(372	)			—
Net cash (used in) provided by financing activities			605				(355	)
Effect of exchange rates on cash and cash equivalents			55				30
Net increase (decrease) in cash and cash equivalents			(13,082	)			17,110
Cash and cash equivalents at beginning of period			35,390				21,813
Cash and cash equivalents at end of period		$	22,308			$	38,923
Supplemental disclosures of cash flow information:
Cash paid for income taxes		$	—			$	8
Non-cash investing and financing activities:
Purchases of property and equipment not paid as of quarter-end		$	113			$	533
Purchases of intangible assets not paid as of quarter-end		$	456			$	81
Deferred direct stock-based compensation costs		$	2			$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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

1. Summary of Significant Accounting Policies

     Basis of Presentation

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

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

     Reclassifications

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

     Principles of Consolidation

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

     Certain Risks and Uncertainties

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

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

     Use of Estimates

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

     Fair Value of Financial Instruments and Concentrations of Credit Risk

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

     The Company’s customer base consists of businesses throughout the Americas, Europe Middle East Africa and Asia-Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of September 30, 2009, the Company had one customer comprising greater than 10% of net accounts receivable. As of December 31, 2008, the Company had no customers comprising greater than 10% of net accounts receivable. See Note 6 for information regarding revenues from significant customers.

     Reserve Accounts

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

     The service remediation reserve is the Company’s best estimate of the probable amount of remediation services it will have to provide for ongoing professional service arrangements. To determine the adequacy of the service remediation reserve, the Company analyzes historical experience of actual remediation service claims as well as current information on service remediation requests. Provisions to the allowance for doubtful accounts are recorded in general and administrative expenses, while provisions for service remediation reduce services revenues.

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

		Balance at				Provision,								Balance at
		Beginning				Net of								End of
		of Period				Recoveries				Write-Offs				Period
Allowance for doubtful accounts
Three months ended September 30, 2009		$	539			$	53			$	(238	)		$	354
Three months ended September 30, 2008			113				102				(34	)			181
Nine months ended September 30, 2009			550				126				(322	)			354
Nine months ended September 30, 2008			154				61				(34	)			181

		Balance at								Remediation				Balance at
		Beginning								Service				End of
		of Period				Provision				Claims				Period
Service remediation reserve
Three months ended September 30, 2009		$	280			$	17			$	(152	)		$	145
Three months ended September 30, 2008			211				886				(482	)			615
Nine months ended September 30, 2009			399				669				(923	)			145
Nine months ended September 30, 2008			225				1,385				(995	)			615

     The decrease in service remediation reserve is consistent with the decrease in overall services revenues during the three and nine months ended September 30, 2009, as compared to the three and nine months ended September 30, 2008, due to the shift in focus to our on-demand solution, which requires less implementation time than our traditional on-premise perpetual licenses.

     Restricted Cash

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

     Revenue Recognition

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

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

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

     Delivery. In on-demand arrangements, the Company considers delivery to have occurred as the service is provided to the customer. In both perpetual and Time Based Term licensing arrangements,

the Company considers delivery to have occurred when media containing the licensed programs is provided to a common carrier, or in the case of electronic delivery, the customer is given access to the licensed programs. The Company’s typical end-user license agreement does not include customer acceptance provisions.

     Fixed or Determinable Fee. The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within its standard payment terms. The Company considers payment terms greater than 90 days to be beyond its customary payment terms. If the fee is not fixed or determinable, the Company recognizes the revenue as amounts become due and payable.

     In 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 Licenses 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 Licenses revenues are derived from fees earned through the licensing of our 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 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 and recognized as revenues as the services are performed. In determining whether the consulting services can be accounted for separately from on-demand revenues, the Company considers the following factors for each consulting agreement: availability of the consulting services from other vendors; whether objective and reliable evidence of fair value exists for the undelivered elements; the nature of the consulting services; the timing of when the consulting contract is signed in comparison to the on-demand service contract and the contractual dependence of the consulting work on the on-demand service.

     For those arrangements where the elements qualify for separate units of accounting, the on-demand revenues are recognized ratably over the non-cancelable contract term, which is typically 12 to 24 months, beginning on the 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, and are recognized utilizing the proportional performance method of accounting for

fixed-price contracts. For arrangements with multiple deliverables, the Company allocates the total contractual arrangement to the separate units of accounting based on their relative fair values, as determined by the fair value of the undelivered and delivered items when sold separately.

     If consulting services for implementation and configuration associated with an on-demand arrangement do not qualify as a separate unit of accounting, the Company will recognize the revenue from implementation and configuration services ratably over the remaining non-cancelable term of the subscription contract once the implementation is complete. In addition, the Company will defer the direct costs of the implementation and configuration services and amortize those costs over the same time period as the related revenue is recognized. The deferred costs on the Company’s consolidated balance sheets for these consulting arrangements totaled $1.5 million and $2.6 million at September 30, 2009 and December 31, 2008, respectively. As of September 30, 2009 and December 31, 2008, $1.1 million and $2.0 million, respectively, of the deferred costs are included in prepaid and other current assets, with the remaining amount included in deposits and other assets in the consolidated balance sheets.

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

     Time Based Term License. The Company’s Time Based Term License arrangements typically include an initial fee, which covers the time based term license for a specified number of years 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 they wish to receive maintenance.

     Time Based Term License arrangements which are sold on a stand-alone basis (i.e. license and maintenance bundle only) are recognized ratably over the term of the arrangement if there is no vendor-specific objective evidence of fair value for the undelivered element per the software revenue recognition accounting guidance.

     Multi-Year Time Based Term License arrangements often include multiple elements (e.g., software technology, maintenance, training, consulting and other services). We allocate revenue to each element of the arrangement based on vendor-specific objective evidence of each element’s fair value when we 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 cannot be established for the undelivered elements the entire arrangement fee is recognized ratably over the longer of the term of the arrangement or over the period during which the services are expected to be performed.

     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 a duration of one year; therefore the fair value of the bundled maintenance services is not reliably measured by reference to a maintenance renewal rate. As a result, revenue cannot be allocated to the various elements of the arrangement and therefore it will be recognized ratably over the longer of the maintenance term or over the period during which the services are expected to be performed.

     Maintenance Revenue. Under perpetual software license arrangements, a customer typically pre-pays maintenance for the first twelve months, and the related revenues are deferred and recognized ratably over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis

thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

     Services Revenue

     Professional Service Revenue. Professional service revenues primarily consist of integration services related to the installation and configuration of the Company’s products as well as training. The Company’s installation and configuration services do not involve customization to, or development of, the underlying software code. Generally, the Company’s professional services arrangements are on a time-and-materials basis. Reimbursements, including those related to travel and out-of-pocket expenses, are included in services revenues, and an equivalent amount of reimbursable expenses is included in cost of services revenues. For professional service arrangements with a fixed fee, the Company recognizes revenue utilizing the proportional performance method of accounting. The Company estimates the proportional performance on fixed-fee contracts on a monthly basis, 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 consulting 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

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

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

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

     The Company allocates revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately. For a certain class of transactions, the fair value of the maintenance portion of the Company’s arrangements is based on substantive stated renewal rates rather than stand-alone sales. The fair value of the professional services

portion of the arrangement is based on the hourly rates that the Company charges for these services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. If the only undelivered element is maintenance, then the entire amount of revenue is recognized over the maintenance delivery period.

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

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

     Net Loss Per Share

     Basic net loss per share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, the release of restricted stock, and purchases of employee stock purchase plan (ESPP) shares to the extent these shares are dilutive. For the three and nine months ended September 30, 2009 and 2008, the diluted net loss per share calculation was the same as the basic net loss per share calculation, as all potential common shares were anti-dilutive.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Restricted stock			932				1,291				1,041				1,095
Stock options			6,643				6,434				6,654				6,789
ESPP			96				93				297				218
Totals			7,671				7,818				7,992				8,102

     The weighted-average exercise price of stock options excluded from weighted average common shares during the three and nine months ended September 30, 2009 was $4.71 and $4.11 per share, respectively, as compared to the weighted average exercise price of stock options excluded from weighted average common shares during the three and nine months ended September 30, 2008 of $5.07 and $5.19 per share, respectively.

     Recent Accounting Pronouncements

     In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Arrangements with Multiple Deliverables (ASU 2009-13). ASU 2009-13 amends ASC 650-25, Revenue Recognition — Multiple-Element Arrangements, to eliminate the requirement that all undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in the fiscal year beginning on or after June 15, 2010. Early adoption will be permitted. If early adoption is elected, the requirements are applied retrospectively to the beginning of the fiscal year. The Company is currently evaluating the impact ASU 2009-13 will have on its condensed consolidated financial statements.

     In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 amends ASC 985-605, Software-Revenue Recognition, to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption will be permitted. ASU 2009-14 will not have an impact on the Company’s condensed consolidated financial statements.

2. Restructuring

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

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

     In July and August 2009, management approved cost savings programs to further reduce the Company’s workforce. The Company incurred restructuring charges of $2.0 million in the third quarter of 2009 in connection with severance and termination-related costs, most of which are severance-related cash expenditures. The July 2009 and August 2009 cost savings programs will be fully completed in the fourth quarter of 2009. As of September 30, 2009 accrued restructuring charges were $0.4 million.

     Total costs for all programs approved to date and total costs expected to be incurred of $5.9 million include restructuring charges of $1.5 million in 2007, $1.6 million in 2008, $0.2 million in the first quarter of 2009, $0.6 million in the second quarter of 2009 and $2.0 million in the third quarter of 2009.

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

		December 31,				Cash												September 30,
		2008				Payments				Additions				Adjustments				2009
Severance and termination-related costs		$	810			$	(3,190	)		$	2,822			$	(45	)		$	397
Total accrued restructuring charges		$	810			$	(3,190	)		$	2,822			$	(45	)		$	397

     The following table sets forth a summary of total costs for all programs approved to date and total costs expected to be incurred (in thousands):

		Total Costs				Total Costs
		Incurred to				Expected to
		Date				be Incurred
Severance and termination-related costs		$	5,877			$	5,877

3. Goodwill and Intangible Assets

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

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

		December 31,				December 31,												September 30,
		2008				2008								Amortization				2009
		Cost				Net				Additions				Expense				Net
Purchased technology		$	3,579			$	1,624			$	1,843			$	(1,012	)		$	2,455
Customer backlog			1,500				63				—				(63	)			—
Customer relationships			2,000				1,521				—				(375	)			1,146
Total intangible assets, net		$	7,079			$	3,208			$	1,843			$	(1,450	)		$	3,601

     Intangible assets include third-party software licenses used in our products and acquired assets related to the Compensation Technologies (CT) acquisition completed in 2008. Costs incurred to renew or extend the term of a recognized intangible asset are expensed in the period incurred. The $1.8 million added in fiscal 2009 is for purchases of third-party software licenses used in our products, and include $0.4 million purchased in the first quarter of 2009, $1.0 million purchased in the second quarter of 2009, and $0.5 million purchased in the third quarter of 2009. Amortization expense related to intangible assets was $0.6 million and $1.4 million for the three and nine months ended September 30, 2009, respectively, as compared to amortization expense of $0.8 million and $2.2 million for the three and nine months ended September 30, 2008, respectively, and was charged to cost of revenues for purchased technology and customer backlog and sales and marketing expense for customer relationships. The Company’s intangible assets are amortized over their estimated useful lives of one to five years. Total future expected amortization is as follows (in thousands):

		Purchased				Customer
		Technology				Relationships
Year Ending December 31:
Remainder of 2009		$	482			$	125
2010			1,241				500
2011			524				500
2012			208				21
2013			—				—
2014 and beyond			—				—
Total expected future amortization		$	2,455			$	1,146

4. Investments

     The Company classifies debt and marketable equity securities based on the liquidity of the investment and management’s intention on the date of purchase and re-evaluates such designation as of each balance sheet date. Except for certain auction rate securities that are classified as trading, debt and marketable equity securities are classified as available for sale and carried at estimated fair value, which is determined based on the inputs discussed below. Those securities that are classified as trading are designated as short-term investments due to a contractual agreement that allows the Company to sell securities at par value beginning June 30, 2010. The total estimated fair value of such trading securities at September 30, 2009 was $3.6 million, which includes gains on investments of $0.1 million and $0.5 million for the three and nine months ended September 30, 2009, respectively.

     The Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. The Company considers all investments that are available for sale that have a maturity date of longer than three months to be short-term investments, including those investments with a maturity date of longer than one year that are highly liquid and for which the Company does not have a positive intent to hold to maturity. The auction rate security classified as available for sale is designated as a long-term investment due to the 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 September 30, 2009 (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
September 30, 2009		Cost				Gains				Income (Loss)				Income (Loss)				Operations				Fair Value
Money market funds		$	17,036			$	—			$	—			$	—			$	—			$	17,036
Auction rate securities classified as available for sale			900				20				(23	)			—				—				897
Corporate notes and obligations			4,052				11				(1	)			—				—				4,062
U.S. government and agency obligations			6,002				20				—				—				—				6,022
Investments in debt and equity securities		$	27,990			$	51			$	(24	)		$	—			$	—			$	28,017

		September 30,				December 31,
		2009				2008
Recorded as:
Cash equivalents		$	17,036			$	27,202
Short-term investments			13,637				1,455
Long-term investments			897				3,828
		$	31,570			$	32,485

     The Company had no realized gains or losses on sales of investments for the three and nine months ended September 30, 2009. The Company had realized losses on the sales of investments of $22,000 for the three and nine months ended September 30, 2008. The Company had proceeds of $6.2 million and $9.7 million from maturities and sales of investments for the three and nine months ended September 30, 2009, 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 September 30, 2009 and December 31, 2008 (in thousands):

		Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
September 30, 2009		Total				(Level 1)				(Level 2)				(Level 3)
Money market funds (1)		$	17,036			$	17,036			$	—			$	—
Auction rate securities (2), (3)			4,450				—				—				4,450
Corporate notes and obligations (3)			4,062				—				4,062				—
U.S. government and agency obligations (3)			6,022				—				6,022				—
Asset associated with put option (4)			105				—				—				105
Total		$	31,675			$	17,036			$	10,084			$	4,555

		Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
December 31, 2008		Total				(Level 1)				(Level 2)				(Level 3)
Money market funds (1)		$	27,202			$	27,202			$	—			$	—
Auction rate securities (2)			3,828				—				—				3,828
Corporate notes and obligations (3)			1,455				—				1,455				—
Asset associated with put option (4)			492				—				—				492
Total		$	32,977			$	27,202			$	1,455			$	4,320

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

														Cumulative
														Effect
						Gain (Loss)								Adjustment
		Balance at				Recorded in								as a Result				Balance at
		December 31,				Statement of				Unrealized				of Adopting				September 30,
		2008				Operations				Gain (Loss)				ASC 320-10-65-1				2009
Auction rate securities classified as trading		$	3,081			$	472			$	—			$	—			$	3,553
Auction rate securities classified as available for sale			747				—				(3	)			153				897
Asset associated with put option			492				(387	)			—				—				105
Total		$	4,320			$	85			$	(3	)		$	153			$	4,555

Valuation of Investments and Put Option

     Level 2

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

     Level 3

     The Company valued its auction rate securities using unobservable inputs (Level 3). The Company utilized the income approach applying assumptions for interest rates using current market trends and an estimated term based on expectations from brokers for liquidity in the market and redemption periods agreed to by other broker-dealers. The Company also applied an adjustment for the lack of liquidity to the value determined by the income approach utilizing a put option model. As a result of the valuation assessment, the Company recorded a gain on auction rate securities classified as trading securities of $0.1 million and $0.5 million for the three and nine months ended September 30, 2009, respectively, and an unrealized gain on auction rate securities classified as available-for-sale of $20,000 and $0.1 million for the

three and nine months ended September 30, 2009, respectively. As a result of the adoption of recognition and presentation of other-than-temporary impairments accounting guidance, the Company recorded a cumulative effect adjustment of $0.2 million to increase the second quarter 2009 beginning unrealized loss on auction rate securities classified as available for sale and to decrease the second quarter 2009 beginning accumulated deficit. See further discussion below.

     In connection with certain of the auction rate securities, in October 2008, one financial institution where the Company holds auction rate securities issued certain put option rights to the Company, which entitles the Company to sell its auction rate securities to the financial institution for a price equal to the par value plus any accrued and unpaid interest. These rights to sell the securities are exercisable at any time during the period from June 30, 2010 to July 2, 2012, after which the rights will expire. As a result of the valuation assessment, the Company recorded a loss on the put option of $0.1 million and $0.4 million for the three and nine months ended September 30, 2009, respectively. The auction rate securities to which the put option applies were recorded as short-term investments and the asset associated with the put option was recorded as prepaid and other current assets as of September 30, 2009, as the put may be exercised beginning June 30, 2010. These auction rate securities were recorded as long-term investments and the asset associated with the put option was recorded as deposits and other assets on the condensed consolidated balance sheets as of December 31, 2008.

Adoption of Recognition and Presentation of Other-Than-Temporary Impairments Guidance

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

     Changes in value of the Company’s auction rate securities since June 30, 2009 were allocated between credit loss factors and other factors. The Company considered the following factors when determining credit loss:

	•		Adverse conditions specifically related to the security, industry, or geographic area (i.e., financial condition of the issuer, financial condition of the underlying assets, changes to the underlying business, and changes in the quality of the underlying assets);
	•		the historical and implied volatility of the security;
	•		the payment structure of the debt security (i.e., the increased/decreased probability of repayment);
	•		failure of the issuer to make payments or default on obligations;
	•		changes to the rating of the security; and
	•		declines in value of the underlying assets.

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

5. Commitments and Contingencies

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

     In accordance with accounting for contingencies, 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 September 30, 2009, the Company has not recorded any such liabilities in accordance with accounting for contingencies. The Company believes that it has valid defenses with respect to the legal matters pending against the Company, if any, and that the probability of a loss under such matters is not probable.

     Other Contingencies

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

     The Company’s product license and on-demand agreements typically include a limited indemnification provision for claims by third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. To date, the Company has not incurred and therefore has not accrued for any costs related to such indemnification provisions.

6. Segment, Geographic and Customer Information

     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 nine months ended September 30, 2009 and 2008 by geographic areas (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Americas		$	15,626			$	25,378			$	56,491			$	68,069
EMEA			1,571				2,590				8,338				10,776
Asia Pacific			194				285				832				993
		$	17,391			$	28,253			$	65,661			$	79,838

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

     The following table summarizes revenues to significant customers (including resellers when product is sold through them to an end user) as a percentage of total revenues:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Customer 1			10	%			6	%			8	%			7	%
Customer 2			1	%			10	%			1	%			4	%

7. Comprehensive Loss

     Comprehensive loss is the total of net loss, unrealized gains and losses on investments and foreign currency translation adjustments. Unrealized gains and losses on investments and foreign currency translation adjustment amounts are excluded from net loss and are reported in other comprehensive loss in the accompanying condensed consolidated financial statements. The cumulative effect adjustment for the adoption of recognition and presentation of other-than-temporary impairments guidance is not included in other comprehensive loss for the nine months ended September 30, 2009 as it is an adjustment to the second quarter of 2009 beginning balances.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net loss		$	(6,740	)		$	(1,387	)		$	(12,884	)		$	(9,147	)
Other comprehensive loss:
Change in unrealized gain (loss) on investments, net			30				(130	)			169				(413	)
Change in cumulative translation adjustments			(40	)			(3	)			93				(31	)
Comprehensive loss		$	(6,750	)		$	(1,520	)		$	(12,622	)		$	(9,591	)

8. Stock-based Compensation

     Expense Summary

     Under the provisions of the accounting for share-based payment, $1.0 million and $3.2 million of stock-based compensation expense was recorded for the three and nine months ended September 30, 2009, respectively, in the condensed consolidated statements of operations. Of the total stock-based compensation expense, approximately $0.3 million and $1.2 million was related to stock options for the three and nine months ended September 30, 2009, respectively, $0.2 million and $0.5 million was related to purchases of common stock under the ESPP and $0.5 million and $1.5 million was related to restricted stock units. For the three and nine months ended September 30, 2008, $2.0 million and $5.9 million of stock-based compensation expense was recorded. Of the total stock-based compensation expense, approximately $0.5 million and $1.9 million was related to stock options for the three and nine months ended September 30, 2008, respectively, $0.3 million and $0.8 million was related to purchases of common stock under the ESPP and $1.2 million and $3.2 million was related to restricted stock units.

     As of September 30, 2009, there was $4.7 million, $3.9 million and $0.5 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 2.64 years, 1.97 years and 0.48 years, respectively.

     The table below sets forth the functional classification of stock-based compensation expense for the three and nine months ended September 30, 2009 and 2008 (in thousands, except percentage data):

		Three				Three
		Months				Months
		Ended				Ended
		September 30,				September 30,
		2009				2008
Stock-based compensation:
Cost of recurring revenues		$	108			$	184
Cost of services revenues			185				320
Sales and marketing			221				401
Research and development			181				294
General and administrative			310				795
Total stock-based compensation		$	1,005			$	1,994

		Nine				Nine
		Months				Months
		Ended				Ended
		September 30,				September 30,
		2009				2008
Stock-based compensation:
Cost of recurring revenues		$	402			$	497
Cost of services revenues			441				970
Sales and marketing			795				1,487
Research and development			590				915
General and administrative			989				2,021
Total stock-based compensation		$	3,217			$	5,890

     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 September 30,

Nine Months Ended September 30,

2009

2008

2009

2008

Stock Option Plans

Expected life (in years)

3.50

*

0.50 to 3.50

2.50 to 3.50

Risk-free interest rate

1.78%

*

0.30% to 1.78%

2.48% to 2.58%

Volatility

67%

*

63% to 106%

42% to 44%

Dividend Yield

—

*

—

—

Employee Stock Purchase Plan

Expected life (in years)

0.50 to 0.99

0.50 to 1.00

0.49 to 1.00

0.50 to 1.00

Risk-free interest rate

0.27% to 0.46%

1.97% to 2.18%

0.27% to 0.62%

1.97% to 2.18%

Volatility

68% to 101%

58% to 59%

68% to 126%

48% to 61%

Dividend Yield

—

—

—

—

9. Stockholders’ Equity

     Repurchase Program

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

10. Related-Party Transactions

     In 2005, the Company entered into a service agreement with Saama Technologies, Inc. for software consulting services. William Binch, who was appointed to the Company’s Board of Directors in April 2005, is also currently a member of Saama’s board of directors. The Company incurred no expenses for services rendered by Saama for the three and nine months ended September 30, 2009 and expenses of approximately $32,000 and $227,000 for services rendered by Saama for the three and nine months ended September 30, 2008, respectively.

     In 2007, CT entered into an operating lease agreement with CCT Properties LLC for its office space. Robert Conti, who was appointed as Senior Vice President, Client Services, in January 2008 in connection with the acquisition of CT, is also a part owner of CCT Properties LLC. The Company incurred rent expense for the office space owned by CCT Properties of approximately $41,000 for the three months ended March 31, 2009 and rent expense for the office space owned by CCT Properties of approximately $49,000 and $139,000 for the three and nine months ended September 30, 2008, respectively. Mr. Conti resigned from his position with the Company effective March 31, 2009.

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

ended March 31, 2009 and expenses of approximately $163,000 and $453,000 for services rendered by The Alexander Group for the three and nine months ended September 30, 2008, respectively.

     Subsequent to the acquisition of CT in 2008, the Company continued to purchase hosting services from Level 3 Communications, Inc. Michele Vion, who was appointed to the Company’s Board of Directors in September 2005, is also currently the Senior Vice President, Human Resources, at Level 3 Communications. The Company incurred expenses of approximately $24,000 and $74,000 for hosting services rendered by Level 3 Communications for the three and nine months ended September 30, 2009, respectively, and expenses of approximately $24,000 and $66,000 for hosting services rendered by Level 3 Communications for the three and nine months ended September 30, 2008, respectively.

     The Company believes all of these agreements represent arm’s length transactions.

11. Subsequent Events

     The Company has evaluated the effects of any subsequent events through November 6, 2009, which is the date the financial statements were issued.

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

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

Overview of the Results for the Three and Nine Months Ended September 30, 2009

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

     We sell our products both directly through our sales force and in conjunction with our strategic partners. We also offer professional services, including configuration, integration and training, generally on a time-and-materials basis. We generate recurring subscription and support revenues from our on-demand service, support and maintenance agreements associated with our product licenses and, beginning in the third quarter of 2009, our recently introduced on-premise licenses of our software as a time based term license arrangement, all of which is recognized ratably over the term of the related agreement.

Recurring Revenue Model Gaining Momentum

     During the third quarter of 2009, we continued to build momentum in our recurring revenue business model. A key metric in our model is quarterly additions to net annual contract value (ACV) generated from the sale of our on-demand and time based term license offerings. Our net ACV grew by $3.6 million during the third quarter of 2009 to $28.6 million in cumulative net ACV, an increase of 15% from $24.8 million at the end of the third quarter of 2008. Net ACV booked in the third quarter is comprised of gross ACV of $4.3 million offset by attrition of $0.7 million. The attrition is due to the loss of one customer and reduction in commitment from two continuing customers.

     Our financial results for the third quarter of 2009 reflect the progress we have made in the past year transitioning to a recurring revenue business. Recurring revenue accounted for 64% of total revenues in the third quarter of 2009 as compared to 38% in the third quarter of 2008. Recurring revenue accounted for 53% of our total revenues in the nine months ended September 30, 2009 compared to 37% in the same period of 2008. Our recurring revenue increased in the third quarter of 2009 by 3% to $11.2 million as compared to $10.9 million in the third quarter of 2008. Recurring revenue increased 19% to $34.7 million in the nine months ended September 30, 2009 as compared to $29.2 million in the same period of 2008.

     Primarily as a result of our transition toward a recurring revenue business, our services and license revenues declined as expected. Services revenue decreased by $5.2 million, or 50%, in the three months ended September 30, 2009 compared to the three months ended September 30, 2008. Services revenue decreased by $12.0 million, or 32%, in the nine months ended September 30, 2009 compared to the same period in 2008. License revenue decreased by $5.9 million, or 87%, in the three months ended September 30, 2009 compared to the three months ended September 30, 2008. License revenue decreased by $7.6 million, or 60%, compared to the same period in 2008.

     We made the shift in the revenue mix targeting more predictable recurring revenues. This shift in revenue mix from license revenue to recurring revenue has reduced our services revenue per our expectations, as the average implementation time for an on-demand arrangement is significantly less than for an on-premise arrangement. As part of our transition, we presently expect services revenues to stabilize at approximately $4 million per quarter.

Cost Control

     During the past year of our transition to a recurring revenue business model, we have made significant progress in reducing our operating expenses to better align our cost base with our new business model. Excluding restructuring expenses and stock-based compensation, we have reduced our operating expenses by $3.3 million, or 24%, to $10.3 million for the third quarter of 2009 from $13.6 million for the third quarter of 2008. Restructuring expenses increased by $2.0 million, while stock-based compensation decreased by $0.8 million in the third quarter of 2009 compared to the prior year period.

     Our progress in reducing our operating expenses is also reflected in the comparison for the nine months ended September 30, 2009 to the same period in 2008. Excluding restructuring expenses and stock-based compensation, we have reduced our operating expenses by $5.4 million, or 14%, to $33.7 million in the nine months ended September 30, 2009 as compared to $39.1 million in the same period of 2008. Restructuring expenses increased by $2.4 million while stock-based compensation decreased by $2.0 million in the nine months ended September 30, 2009 compared to the prior year period.

Other Business Highlights

     During the third quarter of 2009, we launched Commissions Manager, a 100% native Force.com solution that enables sales professionals to manage commissions as part of the Salesforce CRM solution. This self-service solution enables sales professionals to project their target earnings in-line with their opportunities, initiate claims for credit and payment approval, and track the status and amounts of paid and pending commissions, all as part of their day-to-day opportunity management.

     In October 2009, we announced our Monaco Fall ‘09 release with new features for the market-leading on-demand SPM suite to deliver unprecedented agility and rapid ROI. Monaco Fall ‘09 offers various enhancements, including Callidus Communicator, a new solution that enables accelerated plan distribution and approval to ensure sales teams receive compensation updates quickly and on-time. The solution also includes a pre-packaged plans library. In addition, the Monaco Suite now enables mobile support and allows the sales force to access up-to-date compensation reports on the go for increased convenience and faster processing.

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. However, over recent quarters we have experienced slower growth in our net new annual contract value for on-demand services and in the second quarter of 2009, our cumulative ACV for on-demand business declined on a consecutive quarter basis. 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. While we have sold on-premise time based term licenses during the third quarter of 2009, there is no assurance that this new offering will achieve market acceptance. If we are unable to significantly grow our on-demand business or continue to provide our on-demand services on a consistently profitable basis in the future, or if our new on-premise time based term license offering fails to achieve market acceptance, our business and operating results may be materially and adversely affected.

     Our transition to a recurring revenue model has accelerated our decline in services revenues, as implementations of our on-demand offering generally are faster and require lower customer investment than our on-premise business. This transition coupled with delays in a couple on-premise implementation projects has resulted in lower utilization of our services personnel, and a corresponding adverse effect on our services gross margins. We do not expect our services revenues to return to historical levels, and have taken steps to align our costs to anticipated revenues. However, there is no assurance that the steps we have taken, or may take in the future, will be adequate. If they are not, our overall gross margins and our ability to achieve or sustain profitability will be adversely affected.

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

     From a business perspective, we have a number of sales opportunities in process and additional opportunities coming from our sales pipeline; however, we continue to experience wide variances in the timing and size of our 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. The recent substantial disruptions in these industries have resulted and may in the future result in these customers deferring or cancelling future planned expenditures on our products and services. Further, consolidations and business failures in these industries could result in substantially reduced demand for our products and services. In addition, the disruptions in these industries and the concurrent international financial crisis may cause other potential customers to defer or cancel future purchases of our products and services as they seek to conserve

resources in the face of economic turmoil and the drastically reduced availability of capital in the equity and debt markets. Any of these developments, or the combination of these developments, may materially and adversely affect our revenues, operating results and financial condition in future periods.

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

Application of Critical Accounting Policies and Use of Estimates

     The discussion and analysis of our financial condition and results of operations that follows is based upon our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The application of GAAP requires our management to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures regarding these items. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations will be affected.

     In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatments for similar transactions. We believe that the accounting policies discussed below and in our 2008 Form 10-K are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

     See Note 1 of our notes to the condensed consolidated financial statements for changes in our critical accounting policies and estimates during the three or nine months ended September 30, 2009 as compared to the critical accounting policies and estimates disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

     Recent Accounting Pronouncements

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

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2009 and 2008

Revenues, cost of revenues and gross profit

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

		Three								Three
		Months								Months												Percentage
		Ended				Percentage				Ended				Percentage				Year to Year				Change
		September 30,				of Total				September 30,				of Total				Increase				Year over
		2009				Revenues				2008				Revenues				(Decrease)				Year
Revenues:
Recurring		$	11,170				64	%		$	10,874				38	%		$	296				3	%
Services			5,349				31	%			10,597				38	%			(5,248	)			(50	)%
License			872				5	%			6,782				24	%			(5,910	)			(87	)%
Total revenues		$	17,391				100	%		$	28,253				100	%		$	(10,862	)			(38	)%

		Three								Three
		Months								Months												Percentage
		Ended				Percentage				Ended				Percentage				Year to Year				Change
		September 30,				of Related				September 30,				of Related				Increase				Year over
		2009				Revenues				2008				Revenues				(Decrease)				Year
Cost of revenues:
Recurring		$	5,711				51	%		$	4,147				38	%		$	1,564				38	%
Services			5,054				94	%			10,092				95	%			(5,038	)			(50	)%
License			214				25	%			355				5	%			(141	)			(40	)%
Total cost of revenues		$	10,979							$	14,594							$	(3,615	)
Gross profit:
Recurring		$	5,459				49	%		$	6,727				62	%		$	(1,268	)			(19	)%
Services			295				6	%			505				5	%			(210	)			(42	)%
License			658				75	%			6,427				95	%			(5,769	)			(90	)%
Total gross profit		$	6,412				37	%		$	13,659				48	%		$	(7,247	)			(53	)%

		Nine								Nine
		Months								Months												Percentage
		Ended				Percentage				Ended				Percentage				Year to Year				Change
		September 30,				of Total				September 30,				of Total				Increase				Year over
		2009				Revenues				2008				Revenues				(Decrease)				Year
Revenues:
Recurring		$	34,669				53	%		$	29,208				37	%		$	5,461				19	%
Services			25,958				40	%			37,992				48	%			(12,034	)			(32	)%
License			5,034				8	%			12,638				16	%			(7,604	)			(60	)%
Total revenues		$	65,661				100	%		$	79,838				100	%		$	(14,177	)			(18	)%

		Nine								Nine
		Months								Months												Percentage
		Ended				Percentage				Ended				Percentage				Year to Year				Change
		September 30,				of Related				September 30,				of Related				Increase				Year over
		2009				Revenues				2008				Revenues				(Decrease)				Year
Cost of revenues:
Recurring		$	16,912				49	%		$	11,095				38	%		$	5,817				52	%
Services			22,034				85	%			33,739				89	%			(11,705	)			(35	)%
License			656				13	%			705				6	%			(49	)			(7	)%
Total cost of revenues		$	39,602							$	45,539							$	(5,937	)
Gross profit:
Recurring		$	17,757				51	%		$	18,113				62	%		$	(356	)			(2	)%
Services			3,924				15	%			4,253				11	%			(329	)			(8	)%
License			4,378				87	%			11,933				94	%			(7,555	)			(63	)%
Total gross profit		$	26,059				40	%		$	34,299				43	%		$	(8,240	)			(24	)%