UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the quarterly period ended MARCH 31, 2009





or





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


EXCHANGE
ACT OF 1934





For
the transition period from ____________________ to
____________________





Commission
file number: 0-30141




LIVEPERSON,
      INC.(Exact
      Name of Registrant as Specified in Its
Charter)





DELAWARE
                
                13-3861628(State
      or Other Jurisdiction of
                  Incorporation
      or Organization)
                
                (IRS
      Employer Identification
No.)





462
      SEVENTH AVENUE
                  NEW
      YORK, NEW YORK
                
                10018(Address
      of Principal Executive Offices)
                
                (Zip
      Code)





(212)
      609-4200(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 x No  ̈




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
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one).


Large
      accelerated filer  ̈
              Accelerated
      filer xNon-accelerated
      filer  ̈
              Smaller
      reporting company   ̈(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 x





As of May
1, 2009, there were 47,597,612 shares of the issuer’s common stock
outstanding.





LIVEPERSON,
INC.


MARCH
31, 2009


FORM
10-Q


INDEX




PAGEPART
      I.
                  FINANCIAL
      INFORMATION
                  4ITEM
      1.
                  CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS
                  4CONDENSED
      CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2009 (UNAUDITED) AND DECEMBER
      31, 2008
                  4UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
      MARCH 31, 2009 AND 2008
                  5UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
      MARCH 31, 2009 AND 2008
                  6NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  7ITEM
      2.
                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                  18ITEM
      3.
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                  26ITEM
      4.
                  CONTROLS
      AND PROCEDURES
                  26PART
      II.
                  OTHER
      INFORMATION
                  27ITEM
      1.
                  LEGAL
      PROCEEDINGS
                  27ITEM
      1A.
                  RISK
      FACTORS
                  28ITEM
      2.
                  PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER
                  28ITEM
      6.
                  EXHIBITS
                  29


2


FORWARD-LOOKING
STATEMENTS





STATEMENTS
IN THIS REPORT ABOUT LIVEPERSON, INC. THAT ARE NOT HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT LIVEPERSON AND OUR INDUSTRY. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL FUTURE EVENTS OR RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS.
ANY SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. IT IS
ROUTINE FOR OUR INTERNAL PROJECTIONS AND EXPECTATIONS TO CHANGE AS THE QUARTER
AND YEAR PROGRESS, AND THEREFORE IT SHOULD BE CLEARLY UNDERSTOOD THAT THE
INTERNAL PROJECTIONS AND BELIEFS UPON WHICH WE BASE OUR EXPECTATIONS MAY CHANGE
PRIOR TO THE END OF EACH QUARTER OR THE YEAR. ALTHOUGH THESE EXPECTATIONS MAY
CHANGE, WE ARE UNDER NO OBLIGATION TO INFORM YOU IF THEY DO. ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE PROJECTIONS OR
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN PART II, ITEM 1A, “RISK
FACTORS.”


3


PART
I. FINANCIAL INFORMATION





ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS





LIVEPERSON,
INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)




March 31, 2009
                                        
                                        
                                        December 31, 2008(Unaudited)
                                        
                                        
                                        (Note
      1(B))ASSETSCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        28,009
                                        
                                        
                                        $
                                        25,500Accounts
      receivable, net of allowance for doubtful accounts of $340 as of March 31,
      2009 and December 31, 2008, respectively
                                        
                                        
                                        9,131
                                        
                                        
                                        
                                        7,574Prepaid
      expenses and other current assets
                                        
                                        
                                        1,568
                                        
                                        
                                        
                                        1,706Deferred
      tax assets, net
                                        
                                        
                                        1,242
                                        
                                        
                                        
                                        1,772Total
      current assets
                                        
                                        
                                        39,950
                                        
                                        
                                        
                                        36,552Property
      and equipment, net
                                        
                                        
                                        7,123
                                        
                                        
                                        
                                        7,473Intangibles,
      net
                                        
                                        
                                        3,740
                                        
                                        
                                        
                                        4,319Goodwill
                                        
                                        
                                        24,469
                                        
                                        
                                        
                                        24,388Deferred
      tax assets, net
                                        
                                        
                                        7,536
                                        
                                        
                                        
                                        7,330Deferred
      implementation costs
                                        
                                        
                                        134
                                        
                                        
                                        
                                        147Security
      deposits
                                        
                                        
                                        330
                                        
                                        
                                        
                                        349Other
      assets
                                        
                                        
                                        1,222
                                        
                                        
                                        
                                        1,390Total
      assets
                                        
                                        $
                                        84,504
                                        
                                        
                                        $
                                        81,948LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                        
                                        $
                                        4,033
                                        
                                        
                                        $
                                        3,555Accrued
      expenses
                                        
                                        
                                        7,778
                                        
                                        
                                        
                                        9,088Deferred
      revenue
                                        
                                        
                                        4,857
                                        
                                        
                                        
                                        3,985Total
      current liabilities
                                        
                                        
                                        16,668
                                        
                                        
                                        
                                        16,628Deferred
      revenue, net of current
                                        
                                        
                                        372
                                        
                                        
                                        
                                        347Other
      liabilities
                                        
                                        
                                        1,222
                                        
                                        
                                        
                                        1,390Total
      liabilities
                                        
                                        
                                        18,262
                                        
                                        
                                        
                                        18,365Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares
      issued and outstanding at March 31, 2009 and December 31,
    2008
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Common
      stock, $.001 par value per share; 100,000,000 shares authorized,
      47,582,413 shares issued and outstanding at March 31, 2009 and 47,357,017
      shares issued and outstanding at December 31, 2008
                                        
                                        
                                        48
                                        
                                        
                                        
                                        47Additional
      paid-in capital
                                        
                                        
                                        182,282
                                        
                                        
                                        
                                        180,869Accumulated
      deficit
                                        
                                        
                                        (115,924
                                        )
                                        
                                        
                                        (117,195
                                        )Accumulated
      other comprehensive loss
                                        
                                        
                                        (164
                                        )
                                        
                                        
                                        (138
                                        )Total
      stockholders’ equity
                                        
                                        
                                        66,242
                                        
                                        
                                        
                                        63.583Total
      liabilities and stockholders’ equity
                                        
                                        $
                                        84,504
                                        
                                        
                                        $
                                        81,948





SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS.


4


LIVEPERSON,
INC.





CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


UNAUDITED






Three Months Ended
                                                      March 31,2009
                                                    
                                                    
                                                    2008Revenue
                                                    
                                                    $
                                                    19,919
                                                    
                                                    
                                                    $
                                                    17,085Operating
      expenses:Cost
      of revenue
                                                    
                                                    
                                                    4,285
                                                    
                                                    
                                                    
                                                    4,886Product
      development
                                                    
                                                    
                                                    2,701
                                                    
                                                    
                                                    
                                                    3,074Sales
      and marketing
                                                    
                                                    
                                                    6,504
                                                    
                                                    
                                                    
                                                    5,798General
      and administrative
                                                    
                                                    
                                                    3,521
                                                    
                                                    
                                                    
                                                    3,180Amortization
      of intangibles
                                                    
                                                    
                                                    272
                                                    
                                                    
                                                    
                                                    391Total
      operating expenses
                                                    
                                                    
                                                    17,283
                                                    
                                                    
                                                    
                                                    17,329Income
      (loss) from operations
                                                    
                                                    
                                                    2,636
                                                    
                                                    
                                                    
                                                    (244
                                                    )Other (expense) income:Financial
      expense
                                                    
                                                    
                                                    (119
                                                    )
                                                    
                                                    
                                                    (40
                                                    )Interest
      income
                                                    
                                                    
                                                    34
                                                    
                                                    
                                                    
                                                    121Total
      other (expense) income, net
                                                    
                                                    
                                                    (85
                                                    )
                                                    
                                                    
                                                    81Income
      (loss) before provision for income taxes
                                                    
                                                    
                                                    2,551
                                                    
                                                    
                                                    
                                                    (163
                                                    )Provision
      for income taxes
                                                    
                                                    
                                                    1,280
                                                    
                                                    
                                                    
                                                    49Net
      income (loss)
                                                    
                                                    $
                                                    1,271
                                                    
                                                    
                                                    $
                                                    (212
                                                    )Basic
      net income (loss) per common share
                                                    
                                                    $
                                                    0.03
                                                    
                                                    
                                                    $
                                                    (0.00
                                                    )Diluted
      net income (loss) per common share
                                                    
                                                    $
                                                    0.03
                                                    
                                                    
                                                    $
                                                    (0.00
                                                    )Weighted
      average shares outstanding used in basic net income (loss) per common
      share calculation
                                                    
                                                    
                                                    47,468,781
                                                    
                                                    
                                                    
                                                    47,892,703Weighted
      average shares outstanding used in diluted net income (loss) per common
      share calculation
                                                    
                                                    
                                                    48,031,054
                                                    
                                                    
                                                    
                                                    47,892,703





Net
income for the three months ended March 31, 2009 and 2008 includes stock-based
compensation expense related to SFAS No. 123(R) in the amount of $1,161 and
$959, respectively. See note 1(D).





SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS.


5


LIVEPERSON,
INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)


UNAUDITED





Three
      Months Ended
                                          March
      31,2009
                                        
                                        
                                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                        
                                        $
                                        1,271
                                        
                                        
                                        $
                                        (212
                                        )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Stock-based
      compensation expense
                                        
                                        
                                        1,161
                                        
                                        
                                        
                                        959Depreciation
                                        
                                        
                                        801
                                        
                                        
                                        
                                        323Amortization
      of intangibles
                                        
                                        
                                        579
                                        
                                        
                                        
                                        698Deferred
      income taxes
                                        
                                        
                                        324
                                        
                                        
                                        
                                        (13
                                        )Provision
      for doubtful accounts
                                        
                                        
                                        —
                                        
                                        
                                        
                                        68CHANGES
      IN OPERATING ASSETS AND LIABILITIES:Accounts
      receivable
                                        
                                        
                                        (1,557
                                        )
                                        
                                        
                                        (1,289
                                        )Prepaid
      expenses and other current assets
                                        
                                        
                                        137
                                        
                                        
                                        
                                        (20
                                        )Deferred
      implementation costs
                                        
                                        
                                        13
                                        
                                        
                                        
                                        (22
                                        )Security
      deposits
                                        
                                        
                                        18
                                        
                                        
                                        
                                        162Accounts
      payable
                                        
                                        
                                        497
                                        
                                        
                                        
                                        1,231Accrued
      expenses
                                        
                                        
                                        (1,307
                                        )
                                        
                                        
                                        (3,153
                                        )Deferred
      revenue
                                        
                                        
                                        871
                                        
                                        
                                        
                                        890Deferred
      revenue, net of current
                                        
                                        
                                        25
                                        
                                        
                                        
                                        51Net
      cash provided by (used in) operating activities
                                        
                                        
                                        2,833
                                        
                                        
                                        
                                        (327
                                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment, including capitalized software
                                        
                                        
                                        (469
                                        )
                                        
                                        
                                        (2,453
                                        )Acquisition
      of Kasamba, net of cash
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (78
                                        )Acquisition
      of Proficient
                                        
                                        
                                        (81
                                        )
                                        
                                        
                                        (56
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (550
                                        )
                                        
                                        
                                        (2,587
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repurchase
      of common stock
                                        
                                        
                                        (28
                                        )
                                        
                                        
                                        (2,023
                                        )Excess
      tax benefit from the exercise of employee stock options
                                        
                                        
                                        159
                                        
                                        
                                        
                                        (70
                                        )Proceeds
      from issuance of common stock in connection with the exercise of
      options
                                        
                                        
                                        121
                                        
                                        
                                        
                                        335Net
      cash provided by (used in) financing activities
                                        
                                        
                                        252
                                        
                                        
                                        
                                        (1,758
                                        )Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                                        
                                        
                                        (26
                                        )
                                        
                                        
                                        (8
                                        )Net
      increase (decrease) in cash and cash equivalents
                                        
                                        
                                        2,509
                                        
                                        
                                        
                                        (4,680
                                        )Cash
      and cash equivalents at the beginning of the period
                                        
                                        
                                        25,500
                                        
                                        
                                        
                                        26,222Cash
      and cash equivalents at the end of the period
                                        
                                        $
                                        28,009
                                        
                                        
                                        $
                                        21,542





Supplemental
disclosure of non-cash investing activities:





Cash
flows from investing for the three months ended March 31, 2009 does not include
the purchase of approximately $258 of capitalized equipment as the corresponding
invoice was included in accounts payable at March 31, 2009, and therefore did
not have an impact on cash flows in the three month
period.





Cash
flows from investing for the three months ended March 31, 2008 does not include
the purchases of approximately $165 of capitalized equipment as the
corresponding invoice was included in accounts payable at March 31, 2008, and
therefore did not have an impact on cash flows in the three month
period.





Cash
flows from financing for the three months ended March 31, 2008 does not include
a repurchase of the Company’s common stock in the amount of approximately $339
as the corresponding payment was made in April 2008, and therefore did not have
an impact on cash flows in the three month period.





SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS.


6


LIVEPERSON,
INC.





NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)





(1)   SUMMARY OF OPERATIONS AND SIGNIFICANT
ACCOUNTING POLICIES





(A)   SUMMARY OF
OPERATIONS




LivePerson,
Inc. (the “Company” or “LivePerson”) was incorporated in the State of Delaware
in 1995. The Company commenced operations in 1996. LivePerson provides online
engagement solutions that facilitate real-time assistance and expert
advice.




The
Company’s primary revenue source is from the sale of the LivePerson services to
businesses of all sizes. The Company also facilitates online transactions
between independent service providers (“Experts”) who provide expert online
advice to individual consumers (“Users”). Headquartered in New York City, the
Company’s product development staff, help desk, and online sales support are
located in Israel. The Company also maintains sales and professional
services offices in Atlanta and the United Kingdom.





(B)   UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL INFORMATION





The
accompanying condensed consolidated financial statements as of March 31, 2009
and for the three months ended March 31, 2009 and 2008 are unaudited. In the
opinion of management, the unaudited condensed consolidated financial statements
have been prepared on the same basis as the annual financial statements and
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly the consolidated financial position of LivePerson as
of March 31, 2009, and the consolidated results of operations and cash flows for
the interim periods ended March 31, 2009 and 2008. The financial data and other
information disclosed in these notes to the condensed consolidated financial
statements related to these periods are unaudited. The results of operations for
any interim period are not necessarily indicative of the results of operations
for any other future interim period or for a full fiscal year. The condensed
consolidated balance sheet at December 31, 2008 has been derived from audited
consolidated financial statements at that date.





Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”). These unaudited interim condensed consolidated
financial statements should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto for the year ended December
31, 2008, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 13, 2009.





(C)   REVENUE
RECOGNITION





The
majority of the Company’s revenue is generated from monthly service revenues and
related professional services from the sale of the LivePerson services. Because
the Company provides its application as a service, the Company follows the
provisions of SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” and
Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables”. The Company charges a monthly fee, which varies by service and
client usage. The majority of the Company’s larger clients also pay a
professional services fee related to implementation. The Company defers these
implementation fees and associated direct costs and recognizes them ratably over
the expected term of the client relationship upon commencement of the hosting
services. The Company may also charge professional service fees related to
additional training, business consulting and analysis in support of the
LivePerson services.





The
Company also sells certain of the LivePerson services directly via Internet
download. These services are marketed as LivePerson Pro and LivePerson Contact
Center for small and mid-sized businesses (“SMBs”), and are paid for almost
exclusively by credit card. Credit card payments accelerate cash flow and reduce
the Company’s collection risk, subject to the merchant bank’s right to hold back
cash pending settlement of the transactions. Sales of LivePerson Pro and
LivePerson Contact Center may occur with or without the assistance of an online
sales representative, rather than through face-to-face or telephone contact that
is typically required for traditional direct sales.


7




The
Company recognizes monthly service revenue based upon the fee charged for the
LivePerson services, provided that there is persuasive evidence of an
arrangement, no significant Company obligations remain, collection of the
resulting receivable is probable and the amount of fees to be paid is fixed or
determinable. The Company’s service agreements typically have twelve month terms
and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice
without penalty. When professional service fees provide added value to the
customer on a standalone basis and there is objective and reliable evidence of
the fair value of each deliverable, the Company recognizes professional service
fees upon completion and customer acceptance. If a professional services
arrangement does not qualify for separate accounting, the Company recognizes the
fees, and the related labor costs, ratably over a period of 36 months,
representing the Company’s current estimate of the term of the client
relationship.




For
revenue generated from online transactions between experts and consumers, the
Company recognizes revenue net of the expert fees in accordance with Emerging
Issues Task Force (“EITF”) 99-19, “Reporting Revenue Gross as a Principle versus
Net as an Agent” due to the fact that the Company performs as an agent without
any risk of loss for collection. The Company collects a fee from the consumer
and retains a portion of the fee, and then remits the balance to the expert.
Revenue from these transactions is recognized when there is persuasive evidence
of an arrangement, no significant Company obligations remain, collection of the
resulting receivable is probable and the amount of fees to be paid is fixed or
determinable.





(D)   STOCK-BASED
COMPENSATION




On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
SFAS No. 123(R) “Share-Based Payment,” (“SFAS No. 123(R) (revised 2004)”), which
addresses the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, with a primary focus on transactions
in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) is a revision to SFAS No. 123, “Accounting for
Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
implementation guidance. SFAS No. 123(R) requires measurement of the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). Incremental
compensation costs arising from subsequent modifications of awards after the
grant date must be recognized.




The
Company adopted SFAS No. 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006, the first day of the Company’s fiscal year. The Company’s Consolidated
Financial Statements as of and for the three months ended March 31, 2009 and
2008 reflect the impact of SFAS No. 123(R). SFAS No. 123(R) requires companies
to estimate the fair value of share-based payment awards on the date of grant
using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service
periods in the Company’s Consolidated Statements of Income. Stock-based
compensation recognized in the Company’s Consolidated Statement of Income for
the three months ended March 31, 2009 and 2008 includes compensation expense for
share-based awards granted prior to, but not fully vested as of January 1, 2006
based on the grant date fair value estimated in accordance with SFAS No. 123 as
well as compensation expense for share-based awards granted subsequent to
January 1, 2006 in accordance with SFAS No. 123(R). The Company currently uses
the Black-Scholes option pricing model to determine grant date fair
value.





The
following table summarizes stock-based compensation expense related to employee
stock options under SFAS No. 123(R) included in Company’s Statement of Income
for the three months ended March 31, 2009 and 2008:




Three
      Months Ended
                          March
      31,2009
                        
                        
                        2008Cost
      of revenue
                        
                        $
                        159
                        
                        
                        $
                        114Product
      development expense
                        
                        
                        302
                        
                        
                        
                        291Sales
      and marketing expense
                        
                        
                        308
                        
                        
                        
                        289General
      and administrative expense
                        
                        
                        392
                        
                        
                        
                        265Total
      stock based compensation included in operating expenses
                        
                        $
                        1,161
                        
                        
                        $
                        959


8


The per
share weighted average fair value of stock options granted and assumed during
the three months ended March 31, 2009 and 2008 was $1.05 and $1.97,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:




Three Months Ended
                                    March 31,2009
                                  
                                  2008Dividend
      yield
                                  
                                  
                                  0.0
                                  %
                                  0.0
                                  %Risk-free
      interest rate
                                  
                                  
                                  2.8%
      - 3.1%
                                  %
                                  3.5% - 3.8
                                  %Expected
      life (in years)
                                  
                                  
                                  5.0
                                  
                                  4.2Historical
      volatility
                                  
                                  
                                  68.1%
      - 68.2
                                  %
                                  71.5
                                  %





During
1998, the Company established the Stock Option and Restricted Stock Purchase
Plan (the “1998 Plan”). Under the 1998 Plan, the Board of Directors could issue
incentive stock options or nonqualified stock options to purchase up to
5,850,000 shares of common stock.





The
Company established a successor to the 1998 Plan, the 2000 Stock Incentive Plan
(the “2000 Plan”). Under the 2000 Plan, the options which had been outstanding
under the 1998 Plan were incorporated into the 2000 Plan and the Company
increased the number of shares available for issuance under the plan by
approximately 4,150,000, thereby reserving for issuance 10,000,000 shares of
common stock in the aggregate. Options to acquire common stock granted
thereunder have ten-year terms. Pursuant to the provisions of the 2000 Plan, the
number of shares of common stock available for issuance thereunder automatically
increases on the first trading day in each calendar year by an amount equal to
three percent (3%) of the total number of shares of the Company’s common stock
outstanding on the last trading day of the immediately preceding calendar year,
but in no event shall such annual increase exceed 1,500,000 shares. As of March
31, 2009, approximately 3,230,843 shares of common stock were reserved for
issuance under the 2000 Plan (taking into account all option exercises through
March 31, 2009). As of March 31, 2009, there was $10,268 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements.
That cost, as of March 31, 2009 is expected to be recognized over a weighted
average period of approximately 2.3 years.





A summary
of the Company’s stock option activity and weighted average exercise prices is
as follows:




Options
                            
                            
                            Weighted
                              Average Exercise
                              PriceOptions outstanding at
      December 31, 2008
                            
                            
                            9,939,045
                            
                            
                            $
                            3.67Options
      granted
                            
                            
                            1,291,000
                            
                            
                            
                            1.80Options
      exercised
                            
                            
                            (231,619
                            )
                            
                            
                            0.43Options
      cancelled
                            
                            
                            (191,076
                            )
                            
                            
                            3.71Options
      outstanding at March 31, 2009
                            
                            
                            10,807,350
                            
                            
                            
                            3.50Options
      exercisable at March 31, 2009
                            
                            
                            5,943,922
                            
                            
                            $
                            3.44


9




The total
intrinsic value of stock options exercised during the period ended March 31,
2009 was approximately $342. The total intrinsic value of options exercisable at
March 31, 2009 was approximately $1,680. The total intrinsic value of options
expected to vest is approximately $692





A summary
of the status of the Company’s nonvested shares as of December 31, 2008, and
changes during the three months ended March 31, 2009 is as follows:




Shares
                                
                                
                                Weighted
                                  Average Grant-Date Fair ValueNonvested Shares
      at December 31, 2008
                                
                                
                                4,471,251
                                
                                
                                $
                                2.59Granted
                                
                                
                                1,291,000
                                
                                
                                
                                1.05Vested
                                
                                
                                (751,074
                                )
                                
                                
                                2.94Cancelled
                                
                                
                                (147,749
                                )
                                
                                
                                2.10Nonvested
      Shares at March 31, 2009
                                
                                
                                4,863,428
                                
                                
                                $
                                2.14





(E)   BASIC AND DILUTED NET INCOME PER
SHARE




The
Company calculates earnings per share in accordance with the provisions of SFAS
No. 128, “Earnings Per Share (“EPS”),” and the guidance of the Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 98. Under SFAS
No. 128, basic EPS excludes dilution for common stock equivalents and is
computed by dividing net income or loss attributable to common shareholders by
the weighted average number of common shares outstanding for the period. All
options, warrants or other potentially dilutive instruments issued for nominal
consideration are required to be included in the calculation of basic and
diluted net income attributable to common stockholders. Diluted EPS is
calculated using the treasury stock method and reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock and resulted in the issuance of common
stock.





Diluted
net income per common share for the three months ended March 31, 2009
includes the effect of options to purchase 911,138 shares of common stock with a
weighted average exercise price of $1.12. Diluted net income per common share
for the three months ended March 31, 2008 does not include the effect of
assumed exercised options or warrants because the company reported a net loss
from continuing operations and, therefore, all common stock equivalents are
anti- dilutive. Diluted net income per common share for the three months ended
March 31, 2008 does not include the effect of options to purchase 4,929,554
shares of common stock.





A
reconciliation of shares used in calculating basic and diluted earnings per
share follows:




Three Months Ended March 31,2009
                                  
                                  
                                  2008Basic
                                  
                                  
                                  47,468,781
                                  
                                  
                                  
                                  47,892,703Effect
      of assumed exercised options and warrants
                                  
                                  
                                  562,273
                                  
                                  
                                  
                                  —Diluted
                                  
                                  
                                  48,031,054
                                  
                                  
                                  
                                  47,892,703


10


(F)   SEGMENT REPORTING





The
Company accounts for its segment information in accordance with the provisions
of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related
Information.” (“SFAS No. 131”) SFAS No. 131 establishes annual and interim
reporting standards for operating segments of a company. SFAS No. 131
requires disclosures of selected segment-related financial information about
products, major customers, and geographic areas based on the Company’s internal
accounting methods. Due to the acquisition of Kasamba Inc. in October 2007, the
Company is now organized into two operating segments for purposes of making
operating decisions and assessing performance. The Company may reorganize its
operations in the future when the integration of its products and services are
complete. The Business segment supports and manages real-time online
interactions - chat, voice/click-to-call, email and self-service/knowledgebase
and sells its products and services to global corporations of all sizes. The
Consumer segment facilitates online transactions between experts and users and
sells its services to consumers. Both segments currently generate their revenue
primarily in the U.S. The chief operating decision-makers evaluate performance,
make operating decisions, and allocate resources based on the operating income
of each segment. The reporting segments follow the same accounting polices used
in the preparation of the Company’s consolidated financial statements and are
described in the summary of significant accounting policies. The Company
allocates cost of revenue, sales and marketing and amortization of purchased
intangibles to the segments, but it does not allocate product development,
general and administrative, non cash-compensation expenses and income taxes
because management does not use this information to measure performance of the
operating segments. There are currently no inter-segment sales.





Summarized
financial information by segment for the quarter ended March 31, 2009, based on
the Company’s internal financial reporting system utilized by the Company’s
chief operating decision makers, follows:




Consolidated
                            
                            Corporate
                            
                            Business
                            
                            ConsumerRevenue:Hosted
      services — Business
                            
                            $
                            16,716
                            
                            
                            $
                            —
                            
                            
                            $
                            16,716
                            
                            
                            $
                            —Hosted
      services — Consumer
                            
                            
                            2,528
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,528Professional
      services
                            
                            
                            675
                            
                            
                            
                            —
                            
                            
                            
                            675
                            
                            
                            
                            —Total
      revenue
                            
                            
                            19,919
                            
                            
                            
                            —
                            
                            
                            
                            17,391
                            
                            
                            
                            2,528Cost
      of revenue
                            
                            
                            4,285
                            
                            
                            
                            —
                            
                            
                            
                            3,426
                            
                            
                            
                            859Sales
      and marketing
                            
                            
                            6,504
                            
                            
                            
                            —
                            
                            
                            
                            4,904
                            
                            
                            
                            1,600Amortization
      of intangibles
                            
                            
                            579
                            
                            
                            
                            —
                            
                            
                            
                            507
                            
                            
                            
                            72Unallocated
      corporate expenses
                            
                            
                            6,000
                            
                            
                            
                            6,000
                            
                            
                            
                            —
                            
                            
                            
                            —Operating
      income (loss)
                            
                            $
                            2,551
                            
                            
                            $
                            (6,000
                            )
                            
                            $
                            8,554
                            
                            
                            $
                            (3
                            )




Summarized
financial information by segment for the quarter ended March 31, 2008, based on
the Company’s internal financial reporting system utilized by the Company’s
chief operating decision makers, follows:





Consolidated
                            
                            Corporate
                            
                            Business
                            
                            ConsumerRevenue:Hosted
      services — Business
                            
                            $
                            13,710
                            
                            
                            $
                            —
                            
                            
                            $
                            13,710
                            
                            
                            $
                            —Hosted
      services — Consumer
                            
                            
                            2,684
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,684Professional
      services
                            
                            
                            691
                            
                            
                            
                            —
                            
                            
                            
                            691
                            
                            
                            
                            —Total
      revenue
                            
                            
                            17,085
                            
                            
                            
                            —
                            
                            
                            
                            14,401
                            
                            
                            
                            2,684Cost
      of revenue
                            
                            
                            4,886
                            
                            
                            
                            —
                            
                            
                            
                            3,994
                            
                            
                            
                            892Sales
      and marketing
                            
                            
                            5,798
                            
                            
                            
                            —
                            
                            
                            
                            4,083
                            
                            
                            
                            1,715Amortization
      of intangibles
                            
                            
                            391
                            
                            
                            
                            —
                            
                            
                            
                            242
                            
                            
                            
                            149Unallocated
      corporate expenses
                            
                            
                            6,254
                            
                            
                            
                            6,254
                            
                            
                            
                            —
                            
                            
                            
                            —Operating
      (loss) income
                            
                            $
                            (244
                            )
                            
                            $
                            (6,254
                            )
                            
                            $
                            6,082
                            
                            
                            $
                            (72
                            )





Revenues
attributable to domestic and foreign operations follows:





March
      31,2009
                        
                        2008United
      States
                        
                        $
                        14,937
                        
                        
                        $
                        13,332United
      Kingdom
                        
                        
                        2,073
                        
                        
                        
                        1,773Other
      countries
                        
                        
                        2,909
                        
                        
                        
                        1,980Total
      revenue
                        
                        $
                        19,919
                        
                        
                        $
                        17,085





Long-lived
assets by geographic region follows:




March 31, 2009
                      
                      December 31, 2008United
      States
                      
                      $
                      29,503
                      
                      
                      $
                      29,517Israel
                      
                      
                      15,051
                      
                      
                      
                      15,732Total
      long-lived assets
                      
                      $
                      44,554
                      
                      
                      $
                      45,249


11


(G)   GOODWILL AND INTANGIBLE
ASSETS





The
changes in the carrying amount of goodwill for the quarter ended March 31, 2009
are as follows:




Total
                      
                      
                      Business
                      
                      
                      ConsumerBalance
      as of December 31, 2008
                      
                      $
                      24,388
                      
                      
                      $
                      15,798
                      
                      
                      $
                      8,590Adjustments
      to goodwill:Contingent
      earnout payments
                      
                      
                      81
                      
                      
                      
                      81
                      
                      
                      
                      —Balance
      as of March 31, 2009
                      
                      $
                      24,469
                      
                      
                      $
                      15,879
                      
                      
                      $
                      8,590





The
changes in the carrying amount of goodwill for the year ended December 31, 2008
are as follows:




Total
                      
                      
                      Business
                      
                      
                      ConsumerBalance
      as of December 31, 2007
                      
                      $
                      51,684
                      
                      
                      $
                      18,744
                      
                      
                      $
                      32,940Adjustments
      to goodwill:Impairment
                      
                      
                      (23,501
                      )
                      
                      
                      —
                      
                      
                      
                      (23,501
                      )Release
      of valuation reserve on deferred tax asset
                      
                      
                      (3,867
                      )
                      
                      
                      (3,025
                      )
                      
                      
                      (842
                      )Other
                      
                      
                      72
                      
                      
                      
                      79
                      
                      
                      
                      (7
                      )Balance
      as of December 31, 2008
                      
                      $
                      24,388
                      
                      
                      $
                      15,798
                      
                      
                      $
                      8,590





Intangible
assets are summarized as follows (see Note 3):





Acquired
Intangible Assets





As of March 31, 2009Gross
                              Carrying
                              Amount
                            
                            Weighted
                              Average
                              Amortization
                              Period
                            
                            Accumulated
                              AmortizationAmortizing intangible
      assets:Technology
                            
                            $
                            5,410
                            
                            3.8
      years
                            
                            
                            2,341Customer
      contracts
                            
                            
                            2,400
                            
                            3.0
      years
                            
                            
                            2,161Trade
      names
                            
                            
                            630
                            
                            3.0
      years
                            
                            
                            315Non-compete
      agreements
                            
                            
                            410
                            
                            1.2
      years
                            
                            
                            410Other
                            
                            
                            235
                            
                            3.0
      years
                            
                            
                            118Total
                            
                            $
                            9,085
                            
                            
                            
                            
                            5,345





As of December 31, 2008Gross
                              Carrying
                              Amount
                            
                            Weighted
                              Average
                              Amortization
                              Period
                            
                            Accumulated
                              AmortizationAmortizing intangible
      assets:Technology
                            
                            $
                            5,410
                            
                            3.8
      years
                            
                            $
                            2,034Customer
      contracts
                            
                            
                            2,400
                            
                            3.0
      years
                            
                            
                            1,961Trade
      names
                            
                            
                            630
                            
                            3.0
      years
                            
                            
                            263Non-compete
      agreements
                            
                            
                            410
                            
                            1.2
      years
                            
                            
                            410Other
                            
                            
                            235
                            
                            3.0
      years
                            
                            
                            98Total
                            
                            $
                            9,085
                            
                            
                            
                            $
                            4,766





Amortization
expense is calculated on a straight-line basis over the estimated useful life of
the asset. Aggregate amortization expense for intangible assets was $579 and
$2,634 for the three months ended March 31, 2009 and the year ended
December 31, 2008, respectively. Estimated amortization expense for the
next five years is: $1,954 in 2009, $1,444 in 2010, $921 in 2011 and $0 in 2012
and 2013.


12


(H)   RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS




In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of this FSP did not have a material impact on the Company’s
consolidated financial statements.





In
March 2008, the FASB issued Statement No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures
regarding derivatives and hedging activities, including: (a) the manner in
which an entity uses derivative instruments; (b) the manner in which
derivative instruments and related hedged items are accounted for under
Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities”; and (c) the effect of derivative
instruments and related hedged items on an entity’s financial position,
financial performance, and cash flows. SFAS No.161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. As SFAS No. 161 relates specifically to disclosures, it
currently has no impact on the Company’s consolidated financial
statements.





In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“ SFAS No. 141(R) ”). SFAS No. 141(R) established principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill acquired. SFAS No.
141(R) also established disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008.  SFAS
No. 141(R) will have an impact on its accounting for any future acquisitions and
its consolidated financial statements.





value
measurements. SFAS No. 157 applies to other accounting pronouncements that
require or permit fair value measurements, but does not require any new fair
value measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years, with the exception of all non-financial assets and
liabilities which will be effective for years beginning after November 15, 2008.
The Company adopted the required provisions of SFAS No. 157 that became
effective in its first quarter of 2008. The adoption of these provisions did not
have a material impact on the Company’s consolidated financial statements. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective
date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,
except for certain items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). In October 2008,
the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active.” (“FSP
157-3”). FSP 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
SFAS No. 157. This FSP clarifies the application of SFAS No. 157 in determining
the fair values of assets or liabilities in a market that is not active. There
were no non-financial assets and non-financial liabilities requiring initial
measurement or subsequent remeasurement during the first quarter of
2009.


13


(2)   BALANCE SHEET
COMPONENTS





Property
and equipment is summarized as follows:




March 31, 2009
                        
                        
                        December 31, 2008Computer
      equipment and software
                        
                        $
                        12,113
                        
                        
                        $
                        11,690Furniture,
      equipment and building improvements
                        
                        
                        769
                        
                        
                        
                        74112,882
                        
                        
                        
                        12,431Less
      accumulated depreciation
                        
                        
                        5,759
                        
                        
                        
                        4,958Total
                        
                        $
                        7,123
                        
                        
                        $
                        7,473





Accrued
expenses consist of the following:




March 31, 2009
                      
                      
                      December 31, 2008Payroll
      and other employee related costs
                      
                      $
                      3,961
                      
                      
                      $
                      5,536Professional
      services, consulting and other vendor fees
                      
                      
                      2,500
                      
                      
                      
                      2,879Sales
      commissions
                      
                      
                      227
                      
                      
                      
                      256Other
                      
                      
                      1,090
                      
                      
                      
                      417Total
                      
                      $
                      7,778
                      
                      
                      $
                      9,088





(3)   ASSET
ACQUISITIONS





Proficient
Systems




On July
18, 2006, the Company acquired Proficient Systems, Inc. (“Proficient”), a
provider of hosted proactive chat solutions that help companies generate revenue
on their web sites. This transaction was accounted for under the purchase method
of accounting and, accordingly, the operating results of Proficient were
included in the Company’s consolidated results of operations from the date of
acquisition. The acquisition added several U.K. based financial services clients
and provided an innovative product marketing team. The Company incurred
additional costs related to an earn-out dispute in the amount of $79, net and
reduced the valuation reserve on acquired net operating losses in the amount of
$3,025, resulting in a net decrease in goodwill in the amount of $2,946 in the
twelve months ended December 31, 2008. The Company incurred additional costs
related to the earn-out litigation in the amount of $81, resulting in an
increase in goodwill in the three months ended March 31, 2009.




Based on
the achievement of certain revenue targets as of March 31, 2007, LivePerson was
contingently required to issue up to an additional 2,050,000 shares of common
stock. Based on these targets, the Company issued 1,127,985 shares of common
stock valued at $8,894, based on the quoted market price of the Company’s common
stock on the date the contingency was resolved, and made a cash payment of $20
related to this contingency. At March 31, 2007, the value of these shares has
been allocated to goodwill with a corresponding increase in equity. All
1,127,985 shares are included in the weighted average shares outstanding used in
basic and diluted net income per common share as of March 31, 2007. In
accordance with the purchase agreement, the earn-out consideration is subject to
review by Proficient’s Shareholders’ Representative. On July 31, 2007, the
Company was served with a complaint filed in the United States District Court
for the Southern District of New York by the Shareholders’ Representative of
Proficient. The complaint filed by the Shareholders’ Representative sought
certain documentation relating to calculation of the earn-out consideration, and
demands payment of damages on the grounds that substantially all of the
remaining contingently issuable earn-out shares should have been paid. The
Company believes the claims are without merit, intends to vigorously defend
against this lawsuit, and does not currently expect that the calculation of the
total shares issued will differ significantly from the amount issued to
date.


14


The
components of the intangible assets are as follows:




Weighted
                                  Average Useful
                                  Life (months)
                                
                                
                                AmountCustomer relationships
                                
                                
                                36
                                
                                
                                $
                                2,400Technology
                                
                                
                                18
                                
                                
                                
                                500Non-compete
      agreements
                                
                                
                                24
                                
                                
                                
                                100$
                                3,000


15


The net
intangible assets of $239 and $439 are included in “Assets - Intangibles, net”
on the Company’s March 31, 2009 and December 31, 2008 balance sheets,
respectively.





Kasamba
Inc.




On
October 3, 2007, the Company acquired Kasamba Inc. (“Kasamba”), an online
provider of live expert advice delivered to consumers via real-time chat. This
transaction was accounted for under the purchase method of accounting and,
accordingly, the operating results of Kasamba were included in the Company’s
consolidated results of operations from October 3, 2007. The acquisition
represents the Company’s initial expansion beyond its historical
business-to-business focus into the business-to-consumer market, and is also
expected to extend the value the Company delivers to its growing base of
business customers through a community that connects consumers with experts
in a range of categories. During the twelve months ended December 31, 2008, the
Company reduced accrued acquisitions costs in the amount of $7, reduced the
valuation reserve on acquired net operating losses in the amount of $842 and
recorded an impairment charge in the amount of $23,501, resulting in a decrease
in goodwill in the amount of $24,350.





The
components of the intangible assets are as follows:




Weighted
                                  Average Useful
                                  Life (months)
                                
                                
                                AmountTechnology
                                
                                
                                48
                                
                                
                                $
                                4,910Trade
      name
                                
                                
                                36
                                
                                
                                
                                630Expert
      network
                                
                                
                                36
                                
                                
                                
                                235Non-compete
      agreements
                                
                                
                                12
                                
                                
                                
                                310$
                                6,085





The net
intangible assets of $3,501 and $3,880 are included in “Assets - Intangibles,
net” on the Company’s March 31, 2009 and December 31, 2008 balance sheets,
respectively.





(4)   FAIR VALUE
MEASUREMENTS










In order to increase consistency and
comparability in fair value measurements, SFAS No. 157 establishes a hierarchy
for observable and unobservable inputs used to measure fair value into three
broad levels, which are described below:





·
            Level
      1: Quoted prices (unadjusted) in active markets that are accessible at the
      measurement date for assets or liabilities. The fair value hierarchy gives
      the highest priority to Level 1
inputs.





·
            Level
      2:  Observable prices that are based on inputs not quoted on
      active markets, but corroborated by market
data.





·
            Level
      3:  Unobservable inputs are used when little or no market data
      is available. The fair value hierarchy gives the lowest priority to Level
      3 inputs.





In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as considers counterparty credit risk in its assessment
of fair value.


16


On a nonrecurring basis, the Company
uses fair value measures when analyzing asset impairment. Long-lived tangible
and intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined such indicators are present and the review
indicates that the assets will not be fully recoverable, based on undiscounted
estimated cash flows over the remaining amortization periods, their carrying
values are reduced to estimated fair value. The Company uses an Income approach
and inputs that constitute level 3.  During the third quarter of each
year, the Company evaluates goodwill and indefinite-lived intangibles for
impairment at the reporting unit level. The Company uses a discounted cash flow
analysis to determine the fair market value of the reporting unit. This
measurement would be classified based on level 3 input.





(5)   COMMITMENTS AND
CONTINGENCIES





The
Company leases facilities and certain equipment under agreements accounted for
as operating leases. These leases generally require the Company to pay all
executory costs such as maintenance and insurance. Rental expense for operating
leases for the three months ended March 31, 2009 and 2008 was approximately
$1,041 and $559, respectively.





(6)   LEGAL MATTERS




On July
31, 2007, the Company was served with a complaint filed in the United States
District Court for the Southern District of New York by the Shareholders’
Representative of Proficient Systems, Inc. In connection with the July 2006
acquisition of Proficient, the Company was contingently required to issue up to
2,050,000 shares of common stock based on the terms of an earn-out provision in
the merger agreement. In accordance with the terms of the earn-out provision,
the Company issued 1,127,985 shares of LivePerson common stock in the second
quarter of 2007 to the former shareholders of Proficient. The complaint filed by
the Shareholders’ Representative sought certain documentation relating to
calculation of the earn-out consideration, and demands payment of damages on the
grounds that substantially all of the remaining contingently issuable earn-out
shares should have been paid. The Company believes the claims are without merit,
intends to vigorously defend against this lawsuit, and does not currently expect
that the calculation of the total shares issued will differ significantly from
the amount issued to date.




On
January 29, 2008, the Company filed a complaint in the United States District
Court for the District of Delaware against NextCard, LLC and Marshall Credit
Strategies, LLC, seeking a declaratory judgment that a patent purportedly owned
by the defendants is invalid and not infringed by the Company’s products. On
April 30, 2008, NextCard, LLC filed a complaint in the United States District
Court for the Eastern District of Texas, concerning the same subject matter as
the Delaware case, asserting patent infringement by the Company, and seeking
monetary damages and an injunction.  The matter is now proceeding in
Texas, as the Delaware court dismissed the case from the forum of Delaware
on March 20, 2009 based on lack of personal jurisdiction over defendants. The
Company believes the claims are without merit, and intends to vigorously defend
against this lawsuit. Trial in the Texas proceeding is set for December 5, 2011.
The Company is presently unable to estimate the likely costs of the litigation
of these legal proceedings. The Company expects its operations to continue
without interruption during the period of litigation.





The
Company is not currently party to any other legal proceedings. From time to
time, the Company may be subject to various claims and legal actions arising in
the ordinary course of business.


17


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





GENERAL




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which are prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments and
assumptions that management believes are reasonable based upon the information
available. We base these estimates on our historical experience, future
expectations and various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for our judgments
that may not be readily apparent from other sources. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting periods. These estimates and assumptions relate to estimates of the
carrying amount of goodwill, intangibles, stock based-compensation, valuation
allowances for deferred income taxes, accounts receivable, the expected term of
a client relationship, accruals and other factors. We evaluate these estimates
on an ongoing basis. Actual results could differ from those estimates under
different assumptions or conditions, and any differences could be
material.





Overview




LivePerson
provides online engagement solutions that facilitate real-time assistance and
expert advice. Connecting businesses and independent experts with individual
consumers seeking help on the Web, our hosted software platform creates more
relevant, compelling and personalized online experiences. We were incorporated
in the State of Delaware in November 1995 and the LivePerson service was
introduced initially in November 1998.




The
Company is organized into two operating segments. The Business segment
facilitates real-time online interactions — chat, voice/click-to-call,
email and self-service/knowledgebase for global corporations of all sizes. The
Consumer segment facilitates online transactions between independent experts and
individual consumers.





On July
18, 2006, we acquired Proficient Systems, Inc., (“Proficient”) a provider of
hosted proactive chat solutions that help companies generate revenue on their
websites. The acquisition added several U.K. based financial services clients
and provided an innovative product marketing team. Under the terms of the
agreement, we acquired all of the outstanding capital stock of Proficient in
exchange for 2.0 million shares of our common stock, valued at $9.9 million,
paid at closing, and up to an additional 2.05 million shares based on the
achievement of certain revenue targets as of March 31, 2007. Based on these
targets, we issued approximately 1.1 million additional shares valued at $8.9
million. At March 31, 2007, the value of these shares has been allocated to
goodwill and we have included these shares in the weighted average shares
outstanding used in basic and diluted net income per share. The net intangibles
of $0.2 and $0.4 million are included in “Assets - Intangibles, net” on our
March 31, 2009 and December 31, 2008 balance sheets, respectively.





On
October 3, 2007, we acquired Kasamba Inc., (“Kasamba”) a facilitator of online
transactions between service experts who provide online advice to consumers for
total consideration of approximately $35.9 million. The acquisition accelerated
our expansion into the business-to-consumer market, and is expected to extend
the value we deliver to our growing base of business customers through a
community that will connect consumers with experts in a range of categories.
Under the terms of the agreement, we acquired all of the outstanding capital
stock of Kasamba in exchange for 4,130,776 shares of our common stock, $9.0
million in cash and the assumption of 623,824 Kasamba options. The net
intangibles of $3.5 and $3.9 million are included in “Assets - Intangibles, net”
on our March 31, 2009 and December 31, 2008 balance sheets,
respectively.





The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating the reported consolidated financial results
include the following:


18


REVENUE
RECOGNITION




The
majority of our revenue is generated from monthly service revenues and related
professional services from the sale of the LivePerson services. Because we
provide our application as a service, we follow the provisions of SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition” and Emerging Issues Task
Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. We
charge a monthly fee, which varies by service and client usage. The majority of
our larger clients also pay a professional services fee related to
implementation. We defer these implementation fees and associated direct costs
and recognize them ratably over the expected term of the client relationship
upon commencement of the hosting services. We may also charge professional
service fees related to additional training, business consulting and analysis in
support of the LivePerson services.




We also
sell certain of the LivePerson services directly via Internet download. These
services are marketed as LivePerson Pro and LivePerson Contact Center for small
and mid-sized businesses (“SMBs”), and are paid for almost exclusively by credit
card. Credit card payments accelerate cash flow and reduce our collection risk,
subject to the merchant bank’s right to hold back cash pending settlement of the
transactions. Sales of LivePerson Pro and LivePerson Contact Center may occur
with or without the assistance of an online sales representative, rather than
through face-to-face or telephone contact that is typically required for
traditional direct sales.




We
recognize monthly service revenue based upon the fee charged for the LivePerson
services, provided that there is persuasive evidence of an arrangement, no
significant Company obligations remain, collection of the resulting receivable
is probable and the amount of fees to be paid is fixed or determinable. Our
service agreements typically have twelve month terms and, in some cases, are
terminable or may terminate upon 30 to 90 days’ notice without penalty. When
professional service fees provide added value to the customer on a standalone
basis and there is objective and reliable evidence of the fair value of each
deliverable, we recognize professional service fees upon completion and customer
acceptance. If a professional services arrangement does not qualify for separate
accounting, we recognize the fees, and the related labor costs, ratably over a
period of 36 months, representing our current estimate of the term of the client
relationship.




For
revenue generated from online transactions between experts and consumers, we
recognize revenue net of expert fees in accordance with Emerging Issues Task
Force (“EITF”) 99-19, “Reporting Revenue Gross as a Principle versus Net as an
Agent” due to the fact that we perform as an agent without any risk of loss for
collection. We collect a fee from the consumer and retain a portion of the fee,
and then remit the balance to the expert. Revenue from these transactions is
recognized when there is persuasive evidence of an arrangement, no significant
Company obligations remain, collection of the resulting receivable is probable
and the amount of fees to be paid is fixed or determinable.





STOCK-BASED
COMPENSATION




On
January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123 (R) (revised 2004), “Share-Based Payment,” which addresses the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, with a primary focus on transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R)
is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and its related implementation guidance. SFAS No.
123(R) requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). Incremental compensation costs arising
from subsequent modifications of awards after the grant date must be
recognized.




We
adopted SFAS No. 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the
first day of our fiscal year. Our Consolidated Financial Statements as of and
for the years ended December 31, 2008, 2007 and 2006 reflect the impact of SFAS
No. 123(R). In accordance with the modified prospective transition method, our
Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS No. 123(R).




SFAS No.
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our Consolidated Statements of
Operations. Stock-based compensation recognized in our Consolidated Statement of
Operations for the years December 31, 2008, 2007 and 2006 includes compensation
expense for share-based awards granted prior to, but not fully vested as of
January 1, 2006 based on the grant date fair value estimated in accordance with
SFAS No. 123 as well as compensation expense for share-based awards granted
subsequent to January 1, 2006 in accordance with SFAS No. 123(R). We currently
use the Black-Scholes option pricing model to determine grant date fair
value.





As of
March 31, 2009, there was approximately $10.3 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements.
That cost is expected to be recognized over a weighted average period of
approximately 2.3 years.





ACCOUNTS
RECEIVABLE





Our
customers are primarily concentrated in the United States. We perform ongoing
credit evaluations of our customers’ financial condition (except for customers
who purchase the LivePerson services by credit card via Internet download) and
have established an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information that we believe to be reasonable, although they may change in the
future. If there is a deterioration of a customer’s credit worthiness or actual
write-offs are higher than our historical experience, our estimates of
recoverability for these receivables could be adversely affected. Our
concentration of credit risk is limited due to the large number of customers. No
single customer accounted for or exceeded 10% of our total revenue in the three
months ended March 31, 2009 and 2008. Two customers accounted for approximately
21% of accounts receivable as of March 31, 2009. No single customer accounted
for or exceeded 10% of accounts receivable at December 31, 2008. There was
no change in our allowance for doubtful accounts in the three months ended March
31, 2009.


19


GOODWILL




In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
and indefinite-lived intangible assets are not amortized, but reviewed for
impairment upon the occurrence of events or changes in circumstances that would
reduce the fair value below its carrying amount. Goodwill is required to be
tested for impairment at least annually. Determining the fair value of a
reporting unit under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities of a reporting
unit (including unrecognized intangible assets) under the second step of the
goodwill impairment test is judgmental in nature and often involves the use of
significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. These estimates
and assumptions could have a significant impact on whether or not an impairment
charge is recognized and also the magnitude of any such charge. To assist in the
process of determining goodwill impairment, we will obtain appraisals from an
independent valuation firm. In addition to the use of an independent valuation
firm, we will perform internal valuation analyses and consider other market
information that is publicly available. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons. These approaches
use significant estimates and assumptions including projected future cash flows
(including timing), discount rates reflecting the risk inherent in future cash
flows, perpetual growth rates, determination of appropriate market comparables
and the determination of whether a premium or discount should be applied to
comparables.





IMPAIRMENT
OF LONG-LIVED ASSETS





In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets,” long-lived assets, such as property, plant and equipment and
purchased intangibles subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying value of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying value of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying value of the
asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the
carrying value or the fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.





USE
OF ESTIMATES





The
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the U.S. requires our management to
make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the period. Significant items subject to such
estimates and assumptions include the carrying amount of goodwill, intangibles,
stock-based compensation, valuation allowances for deferred income tax assets,
accounts receivable, the expected term of a client relationship, accruals and
other factors. Actual results could differ from those estimates.





RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS




In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of this FSP did not have a material impact on our
consolidated financial statements.





In
March 2008, the FASB issued Statement No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” 
(“SFAS No. 161”). This Standard requires enhanced disclosures regarding
derivatives and hedging activities, including: (a) the manner in which an
entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”; and (c) the effect of derivative
instruments and related hedged items on an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. As SFAS No. 161 relates specifically to disclosures, it
currently has no impact on our consolidated financial
statements.


20




In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) established principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill acquired. SFAS No.
141(R) also established disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. SFAS No. 141(R)
will have an impact on our accounting for any future acquisitions and on our
consolidated financial statements.







21


REVENUE




The
majority of our revenue is generated from monthly service revenues and related
professional services from the sale of the LivePerson services. We charge a
monthly fee, which varies by service and client usage. The majority of our
larger clients also pay a professional services fee related to implementation. A
large proportion of our revenue from new clients comes from large
corporations. These companies typically have more significant implementation
requirements and more stringent data security standards. Such clients also have
more sophisticated data analysis and performance reporting requirements, and
are likely to engage our professional services organization to provide such
analysis and reporting on a recurring basis.




Revenue
attributable to our monthly hosted Business services accounted for 96% and
95% of total Business revenue for the three months ended March 31, 2009 and
2008, respectively. Our service agreements typically have twelve month terms
and, in some cases, are terminable or may terminate upon 30 to 90 days’ notice
without penalty. Given the time required to schedule training for our clients’
operators and our clients’ resource constraints, we have historically
experienced a lag between signing a client contract and recognizing revenue from
that client. This lag has recently ranged from 30 to 90 days.




respectively.





We also
have entered into contractual arrangements that complement our direct sales
force and online sales efforts. These are primarily with Web hosting and call
center service companies, pursuant to which LivePerson is paid a commission
based on revenue generated by these service companies from our referrals. To
date, revenue from such commissions has not been material.





OPERATING
EXPENSES





Our cost
of revenue consists of:




·
              compensation costs relating to
      employees who provide customer support and implementation services to our
      clients;·
              depreciation
      of certain hardware and software;


·
              compensation costs relating to
      our network support
staff;


·
              allocated occupancy costs and
      related overhead;


·
              the cost of supporting our
      infrastructure, including expenses related to server leases,
      infrastructure support costs and Internet connectivity;
      and


·
              the credit card fees and related
      processing costs associated with the Consumer and SMB
      services.





Our
product development expenses consist primarily of compensation and related
expenses for product development personnel, allocated occupancy costs and
related overhead, outsourced labor and expenses for testing new versions of our
software. Product development expenses are charged to operations as
incurred.


22


Our sales
and marketing expenses consist of compensation and related expenses for sales
personnel and marketing personnel, online marketing, allocated occupancy costs
and related overhead, advertising, sales commissions, public relations,
promotional materials, travel expenses and trade show exhibit
expenses.





Our
general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, legal and human resources
personnel, allocated occupancy costs and related overhead, professional fees,
provision for doubtful accounts and other general corporate
expenses.





During
the three months ended March 31, 2009, we did not increase our allowance
for doubtful accounts. During 2008, we increased our allowance for doubtful
accounts by $148,000 to approximately $356,000, principally due to an increase
in accounts receivable as a result of increased sales. We base our allowance for
doubtful accounts on specifically identified credit risks of customers,
historical trends and other information that we believe to be reasonable. We
adjust our allowance for doubtful accounts when accounts previously reserved
have been collected.





NON-CASH
COMPENSATION EXPENSE





The net
non-cash compensation amounts for the three months ended March 31, 2009 and
2008 consist of:




Three Months Ended
                              March 31,2009
                            
                            
                            2008Stock-based
      compensation expense related to SFAS No. 123(R)
                            
                            $
                            1,161
                            
                            
                            $
                            959Total
                            
                            $
                            1,161
                            
                            
                            $
                            959





RESULTS
OF OPERATIONS




Due to
our acquisition of Kasamba in October 2007, Proficient in July 2006, and our
limited operating history, we believe that comparisons of our operating results
for the three months ended March 31, 2009 and 2008 with each other, or with
those of prior periods, are not meaningful and that our historical operating
results should not be relied upon as indicative of future
performance.




The
Company is organized into two operating segments. The Business segment
facilitates real-time online interactions — chat, voice/click-to-call,
email and self-service/knowledgebase for global corporations of all sizes. The
Consumer segment facilitates online transactions between independent experts and
individual consumers.





COMPARISON
OF THREE MONTHS ENDED MARCH 31, 2009 AND 2008





Revenue -
Business.  Revenue increased by 21% to $17.4 million in the
three months ended March 31, 2009, from $14.4 million in the comparable period
in 2008. This increase is primarily attributable to increased revenue from
existing clients in the amount of approximately $2.6 million, and, to a lesser
extent, to revenue from new clients in the amount of approximately $460,000, net
of cancellations. Our revenue growth has traditionally been driven by a mix of
revenue from both newly added clients and expansion from existing
clients.





Revenue - Consumer. Revenue
decreased by 6% to $2.5 million in the three months ended March 31, 2009, from
$2.7 million in the comparable period in 2008. This decrease is primarily
attributable to fewer paid transactions between consumers and
experts.





Cost of Revenue - Business.
Cost of revenue consists of compensation costs relating to employees who provide
customer service to our clients, compensation costs relating to our network
support staff, the cost of supporting our server and network infrastructure, and
allocated occupancy costs and related overhead. Cost of revenue decreased by 15%
to $3.4 million in the three months ended March 31, 2009, from $4.0 million in
the comparable period in 2008. This decrease is primarily attributable to lower
total compensation costs related to account management and network operations
personnel in the amount of approximately $439,000 and to decreased expenses for
primary and backup server facilities of approximately $200,000.





Cost of Revenue - Consumer.
Cost of revenue consists of compensation costs relating to employees who provide
customer service to our clients, compensation costs relating to our network
support staff, the cost of supporting our server and network infrastructure,
credit card fees and related processing costs, and allocated occupancy costs and
related overhead. Cost of revenue decreased by 4% to $859,000 in the three
months ended March 31, 2009, from $892,000 in the comparable period in
2008.


23


Product Development. Our
product development expenses consist primarily of compensation and related
expenses for product development personnel as well as allocated occupancy costs
and related overhead. Product development costs decreased by 12% to $2.7 million
in the three months ended March 31, 2009, from $3.1 million in the comparable
period in 2008.  This decrease is primarily attributable to lower
total compensation costs related to product development personnel in the amount
of approximately $252,000.





Sales and Marketing –
Business.
Our sales and marketing expenses consist of compensation and related expenses
for sales and marketing personnel, as well as advertising, public relations and
trade show exhibit expenses. Sales and marketing expenses increased by 20% to
$4.9 million in the three months ended March 31, 2009, from $4.1 million in the
comparable period in 2008. This increase is primarily attributable to an
increase in costs related to additional sales and marketing personnel of
approximately $822,000 related to our continued efforts to enhance our brand
recognition and increase sales lead activity.





Sales and
Marketing — Consumer.   Our sales and marketing
expenses consist of compensation and related expenses for sales and marketing
personnel, as well as online promotion, public relations and trade show exhibit
expenses. Sales and marketing expenses decreased by 7% to $1.6 million in the
three months ended March 31, 2009, from $1.7 million in the comparable period in
2008. This decrease is due primarily to a decrease in spending related to online
promotion.





General and Administrative.
Our general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, human resources and administrative
personnel. General and administrative expenses increased by 11% to $3.5 million
in the three months ended March 31, 2009, from $3.2 million in the comparable
period in 2008.  This increase is primarily attributable to increases
in compensation and related expenses in the amount of approximately
$286,000.





Amortization of Intangibles.
Amortization expense was $272,000 and $391,000 in the three months ended
March 31, 2009 and 2008, respectively and relates primarily to acquisition
costs recorded as a result of our acquisition of Kasamba in October 2007 and
Proficient in July 2006. Amortization expense is expected to be approximately
$2.0 million in the year ended December 31, 2009.





Other (Expense) Income. Financial expense was
$119,000 and $40,000 in the three months ended March 31, 2009 and 2008,
respectively, and relates to unfavorable currency rate movements related to our
Israeli operations. Interest income was $34,000 and $121,000 in the three months
ended March 31, 2009 and 2008, respectively, and consists of interest earned on
cash and cash equivalents generated by the receipt of proceeds from our initial
public offering in 2000 and preferred stock issuances in 2000 and 1999 and, to a
lesser extent, cash provided by operating activities. This decrease is primarily
attributable to decreases in short-term interest rates.





Provision for Income
Taxes. Income tax
expense was $1.3 million and $49,000 in the three months ended March 31, 2009
and 2008, respectively. In the three months ended March 31, 2008, we recorded a
benefit from income taxes in the amount of $95,000 which was offset by foreign
income tax expenses in the amount of $144,000.


24


Net Income (Loss). We had net
income of $1.3 million in the three months ended March 31, 2009 compared to a
net loss of $212,000 for the comparable period in 2008. Revenue increased by
$2.8 million, while operating expenses decreased by $46,000, contributing to a
net increase in income from operations of approximately $2.9
million.





LIQUIDITY
AND CAPITAL RESOURCES





As of
March 31, 2009, we had approximately $28.0 million in cash and cash equivalents,
an increase of approximately $2.5 million from December 31, 2008.




Net cash
provided by operating activities was $2.8 million for the three months ended
March 31, 2009 and consisted primarily of net income and non-cash expenses
offset by an increase in accounts receivable and a decrease in accrued expenses.
Net cash used in operating activities was $327,000 for the three months ended
March 31, 2008 and consisted primarily of a net loss, a decrease in accrued
expenses, and an increase in accounts receivable partially offset by non-cash
expenses related to SFAS No. 123(R), to the amortization of intangibles, and to
increases in accounts payable and deferred revenue.





Net cash
used in investing activities was $550,000 and $2.6 million in the three months
ended March 31, 2009 and 2008, respectively, and was due primarily to the
purchase of fixed assets. The purchase of fixed assets in the three months ended
March 31, 2008 was primarily related to the build-out of our collocation
facility.





Net cash
provided by financing activities was $252,000 for the three months ended March
31, 2009 and consisted primarily of the proceeds from the issuance of common
stock in connection with the exercise of stock options by employees and the
excess tax benefit from the exercise of employee stock options partially offset
by the repurchase of common stock. Net cash used in financing activities was
$1.8 million for the three months ended March 31, 2008 and consisted primarily
of the repurchase of common stock partially offset by the proceeds from the
issuance of common stock in connection with the exercise of stock options by
employees





We have
incurred significant costs to develop our technology and services, to hire
employees in our customer service, sales, marketing and administration
departments, and for the amortization of intangible assets, as well as non-cash
compensation costs. Historically, we incurred significant quarterly net losses
from inception through June 30, 2003, significant negative cash flows from
operations in our quarterly periods from inception through December 31, 2002 and
negative cash flows from operations of $124,000 in the three month period ended
March 31, 2004. As of March 31, 2009, we had an accumulated deficit of
approximately $116.0 million. These losses have been funded primarily through
the issuance of common stock in our initial public offering and, prior to the
initial public offering, the issuance of convertible preferred
stock.





We
anticipate that our current cash and cash equivalents will be sufficient to
satisfy our working capital and capital requirements for at least the next 12
months. However, we cannot assure you that we will not require additional funds
prior to such time, and we would then seek to sell additional equity or debt
securities through public financings, or seek alternative sources of financing.
We cannot assure you that additional funding will be available on favorable
terms, when needed, if at all. If we are unable to obtain any necessary
additional financing, we may be required to further reduce the scope of our
planned sales and marketing and product development efforts, which could
materially adversely affect our business, financial condition and operating
results. In addition, we may require additional funds in order to fund more
rapid expansion, to develop new or enhanced services or products or to invest in
complementary businesses, technologies, services or products.





CONTRACTUAL
OBLIGATIONS AND COMMITMENTS





We do not
have any special purposes entities, and other than operating leases, which are
described below, we do not engage in off-balance sheet financing
arrangements.


25


We lease
facilities and certain equipment under agreements accounted for as operating
leases. These leases generally require us to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases for the three
months ended March 31, 2009 and 2008 was approximately $1.0 million and
$559,000, respectively.





As of
March 31, 2009, our principal commitments were approximately $6.7 million under
various operating leases, of which approximately $3.0 million is due in 2009. We
do not currently expect that our principal commitments for the year ending
December 31, 2009 will exceed $5.0 million in the aggregate. Our capital
expenditures are not currently expected to exceed $9.0 million in 2009. Our
contractual obligations at March 31, 2009 are summarized as
follows:




Payments
      due by period(in
      thousands)Contractual
      Obligations
                        
                        Total
                        
                        
                        Less than 1
                          year
                        
                        
                        1-3 years
                        
                        
                        3-5 years
                        
                        
                        More than 5
                          yearsOperating
      leases
                        
                        $
                        6,658
                        
                        
                        $
                        2,957
                        
                        
                        
                        3,701
                        
                        
                        
                        —
                        
                        
                        $
                        —Total
                        
                        $
                        6,658
                        
                        
                        $
                        2,957
                        
                        
                        
                        3,701
                        
                        
                        
                        —
                        
                        
                        $
                        —





ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Currency
Rate Fluctuations




The
functional currency of our wholly-owned Israeli subsidiaries, LivePerson Ltd.
(formerly HumanClick Ltd.) and Kasamba Ltd., is the U.S. dollar and the
functional currency of our operations in the United Kingdom is the British
pound.




As a
result of the expanded scope of our Israeli operations, our currency rate
fluctuation risk associated with the exchange rate movement of the U.S. dollar
against the New Israeli Shekel (“NIS”) has increased. During the year ended
December 31, 2008, the depreciation of the U.S. dollar against the NIS had an
increased adverse impact on our results of operations and financial condition
compared to earlier periods. During the three month period ended March 31, 2009,
the U.S dollar appreciated against the NIS to levels more consistent with the
recent historical average which had a positive impact on our results of
operations and financial condition when compared to 2008.  During the
three month period ended March 31, 2009, expenses generated by our Israeli
operations totaled $6.3 million.




We
evaluate appropriate hedging strategies to mitigate currency rate fluctuation
risks on an ongoing basis. We have not used derivative financial instruments to
limit our foreign currency risk exposure.




Collection
Risk





Our
accounts receivable are subject, in the normal course of business, to collection
risks. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of collection risks.
We did not increase our allowance for doubtful accounts in the three months
ended March 31, 2009. During 2008, we increased our allowance for doubtful
accounts by $148,000 to approximately $356,000, principally due to an increase
in accounts receivable as a result of increased sales and to the fact that a
larger proportion of receivables are due from larger corporate clients that
typically have longer payment cycles and we wrote off approximately $16,000 of
previously reserved accounts, leaving a net allowance for doubtful accounts of
$340,000 at December 31, 2008.





Interest
Rate Risk





Our
investments consist of cash and cash equivalents. Therefore, changes in the
market’s interest rates do not affect in any material respect the value of the
investments as recorded by us.





ITEM
4. CONTROLS
AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Our
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our “disclosure controls and procedures,” as that
term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as of March 31, 2009. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of March 31, 2009
to ensure that the information we are required to disclose in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and to ensure that such information is accumulated
and communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.


26


Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2009 identified in connection with the evaluation
thereof by our management, including the Chief Executive Officer and Chief
Financial Officer, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





Limitations
of the Effectiveness of Internal Control





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the internal control system are
met. Because of the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.





PART
II. OTHER INFORMATION





ITEM
1. LEGAL
PROCEEDINGS




On July
31, 2007, we were served with a complaint filed in the United States District
Court for the Southern District of New York by the Shareholders’ Representative
of Proficient Systems, Inc. In connection with the July 2006 acquisition of
Proficient, we were contingently required to issue up to 2,050,000 shares of
common stock based on the terms of an earn-out provision in the merger
agreement. In accordance with the terms of the earn-out provision, we issued
1,127,985 shares of LivePerson common stock in the second quarter of 2007 to the
former shareholders of Proficient. The complaint filed by the Shareholders’
Representative sought certain documentation relating to calculation of the
earn-out consideration, and demands payment of damages on the grounds that
substantially all of the remaining contingently issuable earn-out shares should
have been paid. We believe the claims are without merit, intend to vigorously
defend against this lawsuit, and do not currently expect that the calculation of
the total shares issued will differ significantly from the amount issued to
date.




On
January 29, 2008, we filed a complaint in the United States District Court for
the District of Delaware against NextCard, LLC and Marshall Credit Strategies,
LLC, seeking a declaratory judgment that a patent purportedly owned by the
defendants is invalid and not infringed by our products. On April 30, 2008,
NextCard, LLC filed a complaint in the United States District Court for the
Eastern District of Texas, concerning the same subject matter as the Delaware
case, asserting patent infringement by us, and seeking monetary damages and an
injunction.  The matter is now proceeding in Texas, as the Delaware
court dismissed the case from the forum of Delaware on March 20, 2009 based
on lack of personal jurisdiction over defendants. We believe the claims are
without merit, and intend to vigorously defend against this lawsuit. Trial in
the Texas proceeding is set for December 5, 2011. We are presently unable to
estimate the likely costs of the litigation of these legal proceedings. We
expect our operations to continue without interruption during the period of
litigation.





We are
not currently party to any other legal proceedings. From time to time, we may be
subject to various claims and legal actions arising in the ordinary course of
business.


27


ITEM
1A. RISK
FACTORS





Risks
that could have a material and adverse impact on our business, results of
operations and financial condition include the following: potential fluctuations
in our quarterly and annual results; competition in the real-time sales,
marketing and customer service solutions market; risks related to adverse
business conditions experienced by our clients; risks related to the operational
integration of acquisitions; additional regulatory requirements, tax
liabilities, or currency exchange rate fluctuations could impact our business;
potential goodwill impairments; continued use by our clients of the LivePerson
services and their purchase of additional services; responding to rapid
technological change and changing client preferences; technology systems beyond
our control and technology-related issues or defects that could disrupt or
compromise the LivePerson services; the services provided to consumers via our
technology platforms could result in legal liability and/or negative publicity;
payment-related risks from credit and debit cards; risks related to the
regulation or possible misappropriation of personal information; risks related
to protecting our intellectual property rights or potential infringement of the
intellectual property rights of third parties; our history of losses; our
ability to license necessary third party software for use in our products and
services or successfully integrate third party software; our dependence on key
employees; competition for qualified personnel; the impact of new accounting
rules; the possible unavailability of financing as and if needed; risks related
to our international operations, particularly our operations in Israel, and the
civil and political unrest in that region; and our dependence on the continued
use of the Internet as a medium for commerce and the viability of the
infrastructure of the Internet. This list is intended to identify only certain
of the principal factors that could have a material and adverse impact on our
business, results of operations and financial condition. A more detailed
description of each of these and other important risk factors can be found under
the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed
on March 13, 2009.





There are
no material changes to the risk factors described in the Form 10-K.





ITEM
2. PURCHASES
OF EQUITY SECURITIES BY THE ISSUER





On March
5, 2009, our Board of Directors approved an extension of our existing stock
repurchase program through March 31, 2010. The program, originally announced in
February 2007 and first extended on March 10, 2008, was due to expire March 31,
2009.





Under the
stock repurchase program, we are authorized to repurchase shares of our common
stock, in the open market or privately negotiated transactions, at times and
prices considered appropriate by our Board of Directors depending upon
prevailing market conditions and other corporate considerations, up to an
aggregate purchase price of $8.0 million. As of March 31, 2009, $3.9 million
remained available for purchases under the program. Our Board of Directors may
discontinue the program at any time.





The
following table summarizes repurchases of our common stock under our stock
repurchase program during the quarter ended March 31, 2009:




Period
                                  
                                  Total Number of
                                    Shares Purchased
                                  
                                  Average Price Paid per
                                    Share
                                  
                                  Total Number of
                                    Shares Purchased
                                    as Part of Publicly
                                    Announced Plans or
                                    Programs
                                  
                                  Approximate Dollar
                                    Value of Shares that
                                    May Yet Be
                                    Purchased Under
                                    the Plans or
                                    Programs1/1/2009 –
      1/31/2009
                                  
                                  —
                                  
                                  $
                                  —
                                  
                                  —
                                  
                                  $
                                  3,974,0002/1/2009
      – 2/28/2009
                                  
                                  16,223
                                  
                                  $
                                  1.70
                                  
                                  16,223
                                  
                                  $
                                  3,946,0003/1/2009
      – 3/31/2009
                                  
                                  —
                                  
                                  $
                                  —
                                  
                                  —
                                  
                                  $
                                  3,946,000


28


ITEM
6. EXHIBITS





The
following exhibits are filed as part of this Quarterly Report on Form
10-Q:




31.1
              Certification by Chief Executive
      Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
  2002
 31.2
                Certification by Chief Financial
      Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
  2002
 32.1
                Certification by Chief Executive
      Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002
 32.2
                Certification by Chief Financial
      Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002


29


SIGNATURES





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




LIVEPERSON,
      INC.(Registrant)Date:
      May 11, 2009
                  By:
                  /s/
      ROBERT P. LOCASCIOName:
                  Robert
      P. LoCascioTitle:
                  Chief
      Executive Officer (duly authorized officer)Date:
      May 11, 2009
                  By:
                  /s/
      TIMOTHY E. BIXBYName:
                  Timothy
      E. BixbyTitle:
                  President
      and Chief Financial Officer (principal financial and accounting
      officer)





EXHIBIT
INDEX




EXHIBIT31.1
              
              Certification
      by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              
              Certification
      by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
              
              Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002