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		77-0438629
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     There were 32,249,878 shares of the registrant’s common stock, par value $0.001, outstanding on November 01, 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-3.2
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.

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,
		2010				2009
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	10,729			$	11,565
Short-term investments			16,168				21,985
Accounts receivable, net of allowances of $357 in 2010 and $563 in 2009			16,748				12,715
Deferred income taxes			170				170
Prepaid and other current assets			5,044				3,872
Total current assets			48,859				50,307
Long-term investments			945				1,142
Property and equipment, net			6,566				4,355
Goodwill			8,054				5,528
Intangible assets, net			5,067				2,993
Deferred income taxes, noncurrent			1,255				1,255
Deposits and other assets			1,947				679
Total assets		$	72,693			$	66,259
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,405			$	3,407
Accrued payroll and related expenses			3,380				3,929
Accrued expenses			6,946				3,219
Deferred income taxes			1,229				1,229
Deferred revenue			24,482				21,440
Capital lease obligations, short-term			526				—
Total current liabilities			39,968				33,224
Long-term deferred revenue			4,305				668
Other liabilities			1,634				1,136
Capital lease obligations, long-term			944				—
Total liabilities			46,851				35,028
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 31,716 and 30,561 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			31				30
Additional paid-in capital			218,256				212,435
Deferred compensation			333				—
Accumulated other comprehensive income (loss)			(15	)			244
Accumulated deficit			(192,763	)			(181,478	)
Total stockholders’ equity			25,842				31,231
Total liabilities and stockholders’ equity		$	72,693			$	66,259

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,
		2010				2009				2010				2009
						(Unaudited)
Revenues:
Recurring		$	13,231			$	11,170			$	38,783			$	34,669
Services			3,600				5,349				10,734				25,958
License			1,638				872				2,254				5,034
Total revenues			18,469				17,391				51,771				65,661
Cost of revenues:
Recurring			6,664				5,711				19,198				16,912
Services			3,306				5,054				11,763				22,034
License			92				214				290				656
Total cost of revenues			10,062				10,979				31,251				39,602
Gross profit			8,407				6,412				20,520				26,059
Operating expenses:
Sales and marketing			3,537				4,586				12,174				15,892
Research and development			2,524				3,397				8,088				10,871
General and administrative			3,511				3,072				10,371				9,322
Restructuring			450				1,973				1,620				2,778
Total operating expenses			10,022				13,028				32,253				38,863
Operating loss			(1,615	)			(6,616	)			(11,733	)			(12,804	)
Interest and other income (expense), net			79				49				(14	)			239
Loss before provision (benefit) for income taxes			(1,536	)			(6,567	)			(11,747	)			(12,565	)
Provision (benefit) for income taxes			51				173				(462	)			319
Net loss		$	(1,587	)		$	(6,740	)		$	(11,285	)		$	(12,884	)
Net loss per share — basic and diluted
Net loss per share		$	(0.05	)		$	(0.22	)		$	(0.36	)		$	(0.43	)
Shares used in basic and diluted per share computation			31,546				30,205				31,267				29,901

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,
		2010				2009
		(unaudited)
Cash flows from operating activities:
Net loss		$	(11,285	)		$	(12,884	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense			1,731				2,184
Amortization of intangible assets			1,916				1,450
Provision for doubtful accounts and service remediation reserves			137				(128	)
Stock-based compensation			4,322				3,217
Stock-based compensation related to acquisition contingent consideration			333				—
Revaluation of acquisition contingent consideration			63				—
Release of valuation allowance			(614	)			—
Leasehold improvement allowance			961				—
Net amortization on investments			166				32
Put option loss			52				387
Gain on investments classified as trading securities			(118	)			(472	)
Changes in operating assets and liabilities:
Accounts receivable			(3,155	)			10,921
Prepaid and other current assets			(1,235	)			610
Other assets			(674	)			232
Accounts payable			46				(57	)
Accrued expenses			1,076				(2,252	)
Accrued payroll and related expenses			(540	)			(1,640	)
Accrued restructuring			251				(417	)
Deferred revenue			6,547				(3,542	)
Deferred income taxes			128				111
Net cash provided by (used in) operating activities			108				(2,248	)
Cash flows from investing activities:
Purchases of investments			(13,432	)			(18,311	)
Proceeds from maturities and sale of investments			19,184				9,670
Purchases of property and equipment			(2,632	)			(1,554	)
Proceeds from disposal of property and equipment			19				—
Purchases of intangible assets			(1,668	)			(1,487	)
Acquisition, net of cash acquired			(1,922	)			(14	)
Change in restricted cash			(600	)			202
Net cash used in investing activities			(1,051	)			(11,494	)
Cash flows from financing activities:
Net proceeds from issuance of common stock			1,407				1,719
Repurchases of stock			—				(742	)
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units			(363	)			(372	)
Repayment of debt assumed through acquisition			(899	)			—
Net cash provided by financing activities			145				605
Effect of exchange rates on cash and cash equivalents			(38	)			55
Net decrease in cash and cash equivalents			(836	)			(13,082	)
Cash and cash equivalents at beginning of period			11,565				35,390
Cash and cash equivalents at end of period		$	10,729			$	22,308

See accompanying notes to unaudited condensed consolidated financial statements.

CALLIDUS SOFTWARE INC.

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 September 30, 2010 and the three and nine months ended September 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.

     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 September 30, 2010, the Company had one customer comprising greater than 10% of net accounts receivable. The Company had no customers comprising greater than 10% of net accounts receivable as of December 31, 2009.

     Restricted Cash

     Included in prepaid and other current assets and deposits and other assets in the consolidated balance sheets at September 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 providing related professional services to its customers, as well as by licensing software on a perpetual basis or on a time-based term 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.

     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.

     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 $2.9 million and $1.8 million at September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, $2.2 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 September 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. Revenue for these arrangements is generally recognized ratably over the term of the agreement.

     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) in the case of professional services, 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 over the remaining non-cancellable term of the arrangement after 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 $0.6 million and $0.1 million at September 30, 2010 and December 31, 2009, respectively. As of September 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.

     Maintenance Revenue. Under perpetual software license arrangements, a customer typically pre-pays maintenance for the first twelve months, and the related maintenance 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 integration and configuration of the Company’s products as well as training. The Company’s integration 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 recognizes 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 for 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). 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.

     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, 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 September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Restricted stock			2,277				932				1,938				1,041
Stock options			6,317				6,643				6,467				6,654
ESPP			49				96				140				297
Totals			8,643				7,671				8,545				7,992

     The weighted-average exercise price of stock options excluded from weighted average common shares during the three and nine months ended September 30, 2010 was $4.44 and $4.52 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, 2009 of $4.71 and $4.11 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 nine months ended September 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 nine months ended September 30, 2010, Actek contributed $0.9 million and $2.4 million, respectively, to the Company’s total revenues. 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):

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 September 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 $63,000 from January 1, 2010, which we recorded as operating expense in the condensed consolidated statements of operations for the nine months ended September 30, 2010. We also paid $270,000 in the second quarter of 2010 for the additional purchase price for the net working capital adjustment.

     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:

(in thousands)

						Estimated
		Preliminary				Useful
		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.

     Acquisition Related Expenses

     Acquisition related expenses mainly consist of direct transaction costs such as professional service fees. For the nine months ended September 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

     During the first nine months of 2010, the Company approved cost savings programs to reduce the workforce and certain facilities. The Company incurred restructuring charges of $0.5 million and $1.7 million in the three and nine months ended September 30, 2010, respectively, associated with these programs. These cost savings programs were substantially completed as of the end of the third quarter of 2010. Total costs of the Company’s restructuring programs incurred to date were $7.8 million.

     The following table sets forth a summary of accrued restructuring charges for the nine months ended September 30, 2010 (in thousands):

		December 31,				Cash												September 30,
		2009				Payments				Additions				Adjustments				2010
Severance and termination-related costs		$	146			$	(1,431	)		$	1,336			$	(17	)		$	34
Facilities restructuring costs			—				(36	)			399				—				363
Total accrued restructuring charges		$	146			$	(1,467	)		$	1,735			$	(17	)		$	397

4. Goodwill and Intangible Assets

     Goodwill as of September 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 September 30, 2010 and December 31, 2009 (in thousands):

																						Weighted
																						Average
						December 31,												September 30,				Amortization
						2009								Amortization				2010				Period
		Cost				Net				Additions				Expense				Net				(Years)
Purchased technology		$	5,422			$	1,972			$	3,004			$	(1,490	)		$	3,486				3.37
Customer relationships			2,000				1,021				644				(416	)			1,249				7.87
Tradename			—				—				302				—				302				N/A
Favorable Lease			—				—				40				(10	)			30				4.00
Total intangible assets, net		$	7,422			$	2,993			$	3,990			$	(1,916	)		$	5,067

     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 $0.6 million and $1.9 million for the three and nine months ended September 30, 2010, as compared to amortization expense of $0.6 million and $1.4 million for the three and nine months ended September 30, 2009. Of these amounts, $0.5 million and $1.4 million were included in cost of sales for the three and nine months ended September 30, 2010, respectively; and $0.5 million and $1.0 million were included in cost of sales for the three and nine months ended September 30, 2009, respectively.

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

		Purchased				Customer				Favorable
		Technology				Relationships				Lease
Quarter Ending September 30:
Remainder of 2010		$	489			$	136			$	4
2011			1,916				554				13
2012			781				75				13
2013			75				54				—
2014			75				54				—
2015 and beyond			150				376				—
Total expected future amortization		$	3,486			$	1,249			$	30

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. As of September 30, 2010, all 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.

     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. Except for the auction rate security and the ForceLogix investment (see below), 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. The ForceLogix investment is also classified as a long-term investment, as the Company intends to hold it for more than one year.

     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, 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
September 30, 2010		Cost				Gains				Income (Loss)				Income (Loss)				Operations				Fair Value
Short-term investments:
Corporate notes and obligations			9,159				17				(12	)			—				—				9,164
U.S. government and agency obligations			7,003				1				—				—				—				7,004
Long-term investments:
Auction rate securities			800				—				(17	)			—				—				783
Publicly traded securities			375								(213	)											162
Investments in debt and equity securities		$	17,337			$	18			$	(242	)		$	—			$	—			$	17,113

     The Company had no realized gains or losses on sales of its available-for-sale investments for the three and nine months ended September 30, 2010 and 2009. The Company had proceeds of $6.7 million and $19.1 million from maturities and sales of investments for the three and nine months ended September 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 September 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
September 30, 2010		Total				(Level 1)				(Level 2)				(Level 3)
Money market funds (1)		$	5,961			$	5,961			$	—			$	—
U.S. treasury bills (2)			5,003				5,003				—				—
Corporate notes and obligations (2)			9,164				—				9,164				—
U.S. government agency obligations (2)			2,001				—				2,001				—
Auction-rate securities (3)			783				—				—				783
Publicly traded securities (3)			162				—				162				—
Total		$	23,074			$	10,964			$	11,327			$	783

		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

     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,												Statement of				Unrealized				September 30,
		2009				Addition				Disposition				Operations				Gain (Loss)				2010
Auction rate securities classified as trading		$	3,566			$	—			$	(3,700	)		$	134			$	—			$	—
Auction rate securities classified as available for sale			892				—				(100	)			—				(9	)			783
Asset associated with put option			102				—				—				(102	)			—				—
Warrants			25				—				—				(25	)			—				—
Total		$	4,585			$	—			$	(3,800	)		$	7			$	(9	)		$	783

Valuation of Investments and Put Option

     Level 1 and Level 2

     The Company’s available-for-sale securities include corporate notes and obligations, U.S. government and agency obligations, or certificate of deposits at September 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 September 30, 2010 and does not have the ability to exercise significant influence.

     Prior to the third quarter of 2010, the Company valued the investment in the ForceLogix common stock using observable inputs (Level 1 inputs) and the related warrants using unobservable inputs (Level 3 inputs). Due to the reduced trading volume of ForceLogix’s common shares on the Canadian Stock Exchange in the third quarter of 2010, the Company considered that the share price was no longer qualified for Level 1 inputs which are defined as quoted prices in active markets. The share price was thus considered significant other observable inputs (Level 2 inputs) and the Company transferred the ForceLogix common stock investment of $162,000 from Level 1 to Level 2 in the fair value hierarchy as of September 30, 2010. There were no other transfers between Level 1 and Level 2 fair value hierarchies during the three and nine months ended September 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 $4,000 and $9,000 for the three and nine months ended September 30, 2010, respectively.

     In connection with certain auction rate securities, in October 2008, one financial institution with whom the Company held 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 were exercisable at any time during the period from June 30, 2010 to July 2, 2012, after which the rights will expire. During the second quarter of 2010, two such auction rate securities were redeemed at par by the financial institution. The Company exercised its option to sell the remaining one auction rate security on June 30, 2010. The transaction was settled on July 1 at par. As a result of the disposal, 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 nine months ended September 30, 2010, respectively. The Company recorded a gain of $0.1 million and $0.5 million on auction rate securities classified as trading, partially offset by a loss on the put option of $0.1 million and $0.4 million, during the three and nine months ended September 30, 2009, respectively. As of September 30, 2010, the Company does not have any auction rate securities classified as trading.

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

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 September 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 nine months ended September 30, 2010 and 2009 by geographic areas (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Americas		$	16,088			$	15,626			$	46,189			$	56,491
EMEA			1,338				1,571				3,901				8,338
Asia Pacific			1,043				194				1,681				832
		$	18,469			$	17,391			$	51,771			$	65,661

     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 nine months ended September 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 nine months ended September 30, 2010 and 2009 (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Net loss		$	(1,587	)		$	(6,740	)		$	(11,285	)		$	(12,884	)
Other comprehensive loss:
Change in unrealized loss on investments, net			(163	)			30				(220	)			169
Change in cumulative translation adjustments			61				(40	)			(39	)			93
Comprehensive loss		$	(1,689	)		$	(6,750	)		$	(11,544	)		$	(12,622	)

9. Stock-based Compensation

     Expense Summary

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Stock-based Compensation Expenses:
Options		$	376			$	350			$	1,331			$	1,207
Restricted Stock Units			791				470				2,676				1,484
ESPP			103				185				315				526
Actek Acquisition Compensation			130				—				333				—
		$	1,400			$	1,005			$	4,655			$	3,217

     As of September 30, 2010, there was $2.8 million, $8.8 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 2.39 years, 2.2 years and 0.7 years, respectively.

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Stock-based compensation:
Cost of recurring revenues		$	157			$	108			$	394			$	402
Cost of services revenues			157				185				599				441
Sales and marketing			180				221				760				795
Research and development			245				181				712				590
General and administrative			661				310				2,190				989
Total stock-based compensation		$	1,400			$	1,005			$	4,655			$	3,217

     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,

2010

2009

2010

2009

Stock Option Plans

Expected life (in years)

3.50

3.50

2.50 to 3.50

0.50 to 3.50

Risk-free interest rate

0.81%

1.78%

0.81% to 1.52%

0.30% to 1.78%

Volatility

68%

67%

67% to 76%

63% to 106%

Dividend Yield

—

—

—

—

Employee Stock Purchase Plan

Expected life (in years)

0.50 to 1.00

0.50 to 1.00

0.50 to 1.00

0.50 to 1.00

Risk-free interest rate

0.19% to 0.26%

0.27% to 0.46%

0.18% to 0.34%

0.27% to 0.62%

Volatility

39% to 44%

68% to 101%

39% to 60%

68% to 126%

Dividend Yield

—

—

—

—

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 Nine months Ended September 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.

     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.

Revenue Growth

     During the third quarter of 2010, we grew total revenues sequentially for the third quarter in a row and we also grew total revenues year over year. Our revenues increased in the third quarter of 2010 by 8% to $18.5 million compared with $17.1 million in the second quarter of 2010; and by 6% from $17.4 million in the third quarter of 2009. Our sales force in North America, Europe, the Middle East and Africa (“EMEA”) stayed focused on driving recurring revenues streams. Recurring revenues accounted for 72% of total revenues in the third quarter of 2010, as compared to 77% in the second quarter of 2010 and 64% in the same period of 2009. The slight decrease of recurring revenues as a percentage of total revenues was a result of higher perpetual license revenues generated by sales to distributors in Asia Pacific and Latin America markets. We expect recurring revenues to run at approximately 75% of revenues through the remainder of 2010. Customer attrition remains low as our retention rates for our Software-as-a-Service (“SaaS”) offering and our legacy on-premise customers continue to be around 90%.

Cost Control and Non-GAAP Profitability

     During the quarter, we continued to benefit from our prior quarter cost-cutting actions to better align our cost base with our new business model. Operating expenses in the third quarter of 2010 were $10.0 million, compared to $10.5 million in the second quarter of 2010 and $13.0 million in the third quarter of 2009. To supplement our operating results presented on a GAAP basis, we use non-GAAP measures of operating results to analyze our cost-cutting actions. We believe non-GAAP operating result is also useful as one of the bases for comparing the impact of our cost control measures between periods. The presentation of non-GAAP operating results is not meant to be considered in isolation or as an alternative to operating expenses as an indicator of our performance. Non-GAAP operating results exclude stock-based compensation, restructuring expenses and amortization of acquired intangible assets. For the three months ended September 30, 2010, June 30, 2010 and September 30, 2009, stock-based compensation expenses were $1.4 million, $1.9 million and $1.0 million (including operating related stock-based compensation expenses of $1.1 million, $1.6 million and $0.7 million for each period, respectively); restructuring expenses were $0.5 million, $0.5 million and $2.0 million, respectively; amortization of acquired intangible assets was $0.1 million in each of these periods. Our third quarter 2010 non-GAAP operating expenses were $8.3 million, consistent with the level of the second quarter of 2010 and down 18% from $10.2 million in the third quarter of 2009, respectively. The decrease from the same period last year reflected our discipline in managing costs and our drive to achieve value from all of our resources. Our cost control combined with higher gross margin helped us realize a non-GAAP operating profit of $0.4 million during the third quarter of 2010. This is in contrast to the non-GAAP net loss of $1.2 million in the prior quarter and non-GAAP net loss of $3.5 million in the same period of 2009. We expect to incur some additional operating costs in the fourth quarter of 2010 related to increased legal, audit and SOX compliance fees. The increase in legal fees is related to a certain pending patent suit, which we believe is without merit and intend to vigorously defend.

Service Business

     Services revenues for the quarter were $3.6 million, up 3% from the second quarter of 2010 and down 33% from the third quarter of 2009. 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 third quarter was 8%, up from negative 16% in the prior quarter; representing a positive swing of 24%. Utilization and average billing rate improved, as our broad based services offerings enjoyed strong demand throughout the quarter. With all the major projects we signed in prior quarters now underway and the higher utilization, we also expect slight improvement in the margin for the next quarter. Over the longer term, we expect to see further margin improvement as we drive moderately higher revenues and leverage less expensive third-party consulting resources. While we expect long-term improvement in our services margin, it is likely to fluctuate from period to period and we do expect services revenue to remain substantially below the level it was under our old perpetual license business model.

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 gross margins on this on-demand offering for the first time since its launch in 2006. In the third quarter of 2009, as a further step in our transition to a recurring revenue business model, we began offering our on-premise products as a time-based term license arrangement. We believe this offering better addresses 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, while we have a number of sales opportunities in process and additional opportunities coming from our sales pipeline, we continue to experience wide variances in the timing and size of our transactions and the timing of revenue recognition resulting from flexibility in contract terms. We believe one of our major challenges continues to be 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 and sustaining profitability going forward. However, we will need to continue to execute on a number of our key operating initiatives to ensure attainment of this goal, including adding new customers and retaining existing customers, improving recurring revenues and services revenues margins and managing operating expenses. Many of the factors affecting our ability to succeed in these initiatives 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 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.

     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 September 30, 2010.

     There were no significant changes in our critical accounting policies and estimates during the three or nine months ended September 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 September 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.

Results of Operations

Comparison of the Three and Nine months Ended September 30, 2010 and 2009, and the Three Months Ended June 30, 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 nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009 (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
		2010				Revenues				2009				Revenues				(Decrease)				Year
Revenues:
Recurring		$	13,231				72	%		$	11,170				64	%		$	2,061				18	%
Services			3,600				19	%			5,349				31	%			(1,749	)			(33	)%
License			1,638				9	%			872				5	%			766				88	%
Total revenues		$	18,469				100	%		$	17,391				100	%		$	1,078				6	%
Cost of revenues:
Recurring		$	6,664				50	%		$	5,711				51	%		$	953				17	%
Services			3,306				92	%			5,054				94	%			(1,748	)			(35	)%
License			92				6	%			214				25	%			(122	)			(57	)%
Total cost of revenues		$	10,062							$	10,979							$	(917	)
Gross profit:
Recurring		$	6,567				50	%		$	5,459				49	%		$	1,108				20	%
Services			294				8	%			295				6	%			(1	)			(0	)%
License			1,546				94	%			658				75	%			888				135	%
Total gross profit		$	8,407				46	%		$	6,412				37	%		$	1,995				31	%

		Nine								Nine
		Months								Months												Percentage
		Ended				Percentage				Ended				Percentage				Year to Year				Change
		September 30,				of Total				September 30,				of Total				Increase				Year over
		2010				Revenues				2009				Revenues				(Decrease)				Year
Revenues:
Recurring		$	38,783				75	%		$	34,669				53	%		$	4,114				12	%
Services			10,734				21	%			25,958				40	%			(15,224	)			(59	)%
License			2,254				4	%			5,034				8	%			(2,780	)			(55	)%
Total revenues		$	51,771				100	%		$	65,661				100	%		$	(13,890	)			(21	)%
Cost of revenues:
Recurring		$	19,198				50	%		$	16,912				49	%		$	2,286				14	%
Services			11,763				110	%			22,034				85	%			(10,271	)			(47	)%
License			290				13	%			656				13	%			(366	)			(56	)%
Total cost of revenues		$	31,251							$	39,602							$	(8,351	)
Gross profit:
Recurring		$	19,585				50	%		$	17,757				51	%		$	1,828				10	%
Services			(1,029	)			(10	)%			3,924				15	%			(4,953	)			(126	)%
License			1,964				87	%			4,378				87	%			(2,414	)			(55	)%
Total gross profit		$	20,520				40	%		$	26,059				40	%		$	(5,539	)			(21	)%