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, 2010





or





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


EXCHANGE
ACT OF 1934





For
the transition period from ____________________ to
____________________





Commission
file number: 000-30141




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, 3RDFLOOR
                  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  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
4, 2010, there were 50,882,136 shares of the issuer’s common stock
outstanding.





LIVEPERSON,
INC.


MARCH
31, 2010


FORM
10-Q


INDEX




PAGEPART
      I.
                                    FINANCIAL
      INFORMATION
                                    4ITEM
      1.
                                    FINANCIAL
      STATEMENTS
                                    4CONDENSED
      CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010 (UNAUDITED) AND DECEMBER
      31, 2009
                                    4UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
      MARCH 31, 2010 AND 2009
                                    5UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
      MARCH 31, 2010 AND 2009
                                    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
                                    27PART
      II.
                                    OTHER
      INFORMATION
                                    28ITEM
      1.
                                    LEGAL
      PROCEEDINGS
                                    28ITEM
      1A.
                                    RISK
      FACTORS
                                    28ITEM
      2.
                                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                    29ITEM
      6.
                                    EXHIBITS
                                    30


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 YEAR OR
EACH QUARTER IN THE 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.
OUR COMPANY POLICY IS GENERALLY TO PROVIDE OUR EXPECTATIONS ONLY ONCE PER
QUARTER, AND NOT TO UPDATE THAT INFORMATION UNTIL THE NEXT QUARTER. 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. FINANCIAL
STATEMENTS





LIVEPERSON,
INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)




March 31, 2010
                        
                        
                        December 31, 2009(Unaudited)
                        
                        
                        (Note
      1(B))ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        50,835
                        
                        
                        $
                        45,572Accounts
      receivable, net of allowance for doubtful accounts of $395 as of March 31,
      2010 and December 31, 2009, respectively
                        
                        
                        12,615
                        
                        
                        
                        10,265Prepaid
      expenses and other current assets
                        
                        
                        3,189
                        
                        
                        
                        3,661Deferred
      tax assets, net
                        
                        
                        1,252
                        
                        
                        
                        1,460Total
      current assets
                        
                        
                        67,891
                        
                        
                        
                        60,958Property
      and equipment, net
                        
                        
                        10,132
                        
                        
                        
                        9,551Intangibles,
      net
                        
                        
                        2,432
                        
                        
                        
                        2,821Goodwill
                        
                        
                        23,920
                        
                        
                        
                        23,920Deferred
      tax assets, net
                        
                        
                        4,992
                        
                        
                        
                        4,777Deferred
      implementation costs, net of current
                        
                        
                        135
                        
                        
                        
                        136Security
      deposits
                        
                        
                        491
                        
                        
                        
                        326Other
      assets
                        
                        
                        1,948
                        
                        
                        
                        1,792Total
      assets
                        
                        $
                        111,941
                        
                        
                        $
                        104,281LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        5,688
                        
                        
                        $
                        5,375Accrued
      expenses
                        
                        
                        7,914
                        
                        
                        
                        10,895Deferred
      revenue
                        
                        
                        5,360
                        
                        
                        
                        4,692Total
      current liabilities
                        
                        
                        18,962
                        
                        
                        
                        20,962Deferred
      revenue, net of current
                        
                        
                        533
                        
                        
                        
                        506Other
      liabilities
                        
                        
                        1,833
                        
                        
                        
                        1,676Total
      liabilities
                        
                        
                        21,328
                        
                        
                        
                        23,144Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.001 par value per share; 5,000,000 shares authorized, 0 shares
      issued and outstanding at March 31, 2010 and December 31,
    2009
                        
                        
                        —
                        
                        
                        
                        —Common
      stock, $.001 par value per share; 100,000,000 shares authorized,
      50,848,136 shares issued and outstanding at March 31, 2010 and 49,435,682
      shares issued and outstanding at December 31, 2009
                        
                        
                        51
                        
                        
                        
                        49Additional
      paid-in capital
                        
                        
                        198,056
                        
                        
                        
                        190,692Accumulated
      deficit
                        
                        
                        (107,296
                        )
                        
                        
                        (109,432
                        )Accumulated
      other comprehensive loss
                        
                        
                        (198
                        )
                        
                        
                        (172
                        )Total
      stockholders’ equity
                        
                        
                        90,613
                        
                        
                        
                        81,137Total
      liabilities and stockholders’ equity
                        
                        $
                        111,941
                        
                        
                        $
                        104,281





SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED


CONSOLIDATED
FINANCIAL STATEMENTS.


4


LIVEPERSON,
INC.





CONDENSED CONSOLIDATED STATEMENTS
OF INCOME


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


UNAUDITED




Three Months Ended
                            March 31,2010
                          
                          
                          2009Revenue
                          
                          $
                          25,308
                          
                          
                          $
                          19,919Operating
      expenses:Cost
      of revenue
                          
                          
                          6,632
                          
                          
                          
                          4,285Product
      development
                          
                          
                          3,606
                          
                          
                          
                          2,701Sales
      and marketing
                          
                          
                          7,690
                          
                          
                          
                          6,504General
      and administrative
                          
                          
                          3,792
                          
                          
                          
                          3,521Amortization
      of intangibles
                          
                          
                          83
                          
                          
                          
                          272Total
      operating expenses
                          
                          
                          21,803
                          
                          
                          
                          17,283Income
      from operations
                          
                          
                          3,505
                          
                          
                          
                          2,636Other
      (expense) income:Financial
      expense
                          
                          
                          (49
                          )
                          
                          
                          (119
                          )Interest
      income
                          
                          
                          23
                          
                          
                          
                          34Total
      other (expense) income, net
                          
                          
                          (26
                          )
                          
                          
                          (85
                          )Income
      before provision for income taxes
                          
                          
                          3,479
                          
                          
                          
                          2,551Provision
      for income taxes
                          
                          
                          1,343
                          
                          
                          
                          1,280Net
      income
                          
                          $
                          2,136
                          
                          
                          $
                          1,271Basic
      net income per common share
                          
                          $
                          0.04
                          
                          
                          $
                          0.03Diluted
      net income per common share
                          
                          $
                          0.04
                          
                          
                          $
                          0.03Weighted
      average shares outstanding used in basic net income per common share
      calculation
                          
                          
                          49,838,491
                          
                          
                          
                          47,468,781Weighted
      average shares outstanding used in diluted net income per common share
      calculation
                          
                          
                          52,193,862
                          
                          
                          
                          48,031,054





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 31,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  2,136
                  
                  
                  $
                  1,271Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Stock-based
      compensation expense
                  
                  
                  1,087
                  
                  
                  
                  1,161Depreciation
                  
                  
                  1,053
                  
                  
                  
                  801Amortization
      of intangibles
                  
                  
                  389
                  
                  
                  
                  579Deferred
      income taxes
                  
                  
                  (6
                  )
                  
                  
                  324CHANGES
      IN OPERATING ASSETS AND LIABILITIES:Accounts
      receivable
                  
                  
                  (2,350
                  )
                  
                  
                  (1,557
                  )Prepaid
      expenses and other current assets
                  
                  
                  466
                  
                  
                  
                  137Deferred
      implementation costs
                  
                  
                  —
                  
                  
                  
                  13Security
      deposits
                  
                  
                  (166
                  )
                  
                  
                  18Accounts
      payable
                  
                  
                  (740
                  )
                  
                  
                  497Accrued
      expenses
                  
                  
                  (2,969
                  )
                  
                  
                  (1,307
                  )Deferred
      revenue
                  
                  
                  695
                  
                  
                  
                  896Net
      cash (used in) provided by operating activities
                  
                  
                  (405
                  )
                  
                  
                  2,833CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment, including capitalized software
                  
                  
                  (578
                  )
                  
                  
                  (469
                  )Acquisition
      of Proficient
                  
                  
                  —
                  
                  
                  
                  (81
                  )Net
      cash used in investing activities
                  
                  
                  (578
                  )
                  
                  
                  (550
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repurchase
      of common stock
                  
                  
                  —
                  
                  
                  
                  (28
                  )Excess
      tax benefit from the exercise of employee stock options
                  
                  
                  3
                  
                  
                  
                  159Proceeds
      from issuance of common stock in connection with the exercise of
      options
                  
                  
                  6,275
                  
                  
                  
                  121Net
      cash provided by financing activities
                  
                  
                  6,278
                  
                  
                  
                  252Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                  
                  
                  (32
                  )
                  
                  
                  (26
                  )Net
      increase in cash and cash equivalents
                  
                  
                  5,263
                  
                  
                  
                  2,509Cash
      and cash equivalents at the beginning of the period
                  
                  
                  45,572
                  
                  
                  
                  25,500Cash
      and cash equivalents at the end of the period
                  
                  $
                  50,835
                  
                  
                  $
                  28,009





Supplemental
disclosure of non-cash investing activities:





Cash
flows from investing for the three months ended March 31, 2010 does not include
the purchase of approximately $1,315 of capitalized equipment related to the
Company’s collocation facility as the corresponding invoices are included in
accounts payable at March 31, 2010, and therefore did not have an impact on cash
flows for the period.





Cash
flows from investing for the three months ended March 31, 2009 does not include
the purchases of approximately $258 of capitalized equipment related to the
Company’s collocation facility as the corresponding invoices are included in
accounts payable at March 31, 2009, and therefore did not have an impact on cash
flows for the 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 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, 2010
and for the three months ended March 31, 2010 and 2009 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, 2010, and the consolidated results of operations and cash flows for
the interim periods ended March 31, 2010 and 2009. 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, 2009 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, 2009, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 11, 2010.





(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 Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 605-10-S99,  “Revenue Recognition” and ASC
605-25,  “Revenue Recognition with Multiple-Element Arrangements.” 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.


7


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.





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, the Company recognizes professional service fees
upon completion and customer acceptance because they have established objective
and reliable evidence of the fair value of the undelivered hosting services. 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 48 months, representing the Company’s current estimate of the term of
the client relationship.





For
revenue generated from online transactions between Experts and Users, the
Company recognizes revenue net of the expert fees in accordance with ASC 605-45,
“Principal Agent Considerations,” due to the fact that the Company performs as
an agent without 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





The
Company follows FASB ASC 718-10, “Stock Compensation,” 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. ASC 718-10
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.





ASC
718-10 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, 2010 and
2009 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 ASC 718-10 as well as compensation expense for
share-based awards granted subsequent to January 1, 2006 in accordance with ASC
718-10. The Company currently uses the Black-Scholes option pricing model to
determine grant date fair value.


8


The
following table summarizes stock-based compensation expense related to employee
stock options under ASC 718-10 included in Company’s Statement of Income for the
three months ended March 31, 2010 and 2009:





Three Months Ended
                            March 31,2010
                          
                          
                          2009Cost
      of revenue
                          
                          $
                          214
                          
                          
                          $
                          159Product
      development expense
                          
                          
                          335
                          
                          
                          
                          302Sales
      and marketing expense
                          
                          
                          280
                          
                          
                          
                          308General
      and administrative expense
                          
                          
                          258
                          
                          
                          
                          392Total
      stock based compensation included in operating expenses
                          
                          $
                          1,087
                          
                          
                          $
                          1,161





The per
share weighted average fair value of stock options granted and assumed during
the three months ended March 31, 2010 and 2009 was $3.33 and $1.05,
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 31,2010
                  
                  
                  2009Dividend
      yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Risk-free
      interest rate
                  
                  
                  3.61%
      - 3.80
                  %
                  
                  
                  2.8%
      - 3.1
                  %Expected
      life (in years)
                  
                  
                  5.0
                  
                  
                  
                  5.0Historical
      volatility
                  
                  
                  60.3%
      - 60.5
                  %
                  
                  
                  68.1%
      - 68.2
                  %





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 2000 Stock Incentive Plan (the “2000
Plan”) succeeded the 1998 Plan. Under the 2000 Plan, the options which had been
outstanding under the 1998 Plan were incorporated in the 2000 Plan increasing
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.





The
Company established the 2009 Stock Incentive Plan (the “2009 Plan”) as a
successor to the 2000 Plan. Under the 2009 Plan, the options which had been
outstanding under the 2000 Plan were incorporated into the 2009 Plan and the
Company increased the number of shares available for issuance under the plan by
6,000,000, thereby reserving for issuance 19,567,744 shares of common stock in
the aggregate. Options to acquire common stock granted thereunder have ten-year
terms. As of March 31, 2010, approximately 16,444,000 shares of common stock
were reserved for issuance under the 2009 Plan (taking into account all option
exercises through March 31, 2010). As of March 31, 2010, there was approximately
$8,119 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements. That cost, as of March 31, 2010, is expected to be
recognized over a weighted average period of approximately 2.0
years.


9


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





Options
                  
                  
                  Weighted
                    Average Exercise
                    PriceOptions outstanding at
      December 31, 2009
                  
                  
                  8,711,808
                  
                  
                  $
                  3.82Options
      granted
                  
                  
                  737,000
                  
                  
                  
                  6.10Options
      exercised
                  
                  
                  (1,389,954
                  )
                  
                  
                  4.54Options
      cancelled
                  
                  
                  (145,200
                  )
                  
                  
                  4.19Options
      outstanding at March 31, 2010
                  
                  
                  7,913,654
                  
                  
                  
                  3.90Options
      exercisable at March 31, 2010
                  
                  
                  3,829,318
                  
                  
                  $
                  3.83





The total
intrinsic value of stock options exercised during the period ended March 31,
2010 was approximately $4,202. The total intrinsic value of options exercisable
at March 31, 2010 was approximately $14,261. The total intrinsic value of
options expected to vest at March 31, 2010 is approximately
$15,142.





A summary
of the status of the Company’s nonvested shares as of December 31, 2009, and
changes during the three months ended March 31, 2010 is as follows:





Shares
                      
                      
                      Weighted
                        Average
                        Grant-Date
                        Fair ValueNonvested Shares
      at December 31, 2009
                      
                      
                      4,247,893
                      
                      
                      $
                      2.13Granted
                      
                      
                      737,000
                      
                      
                      
                      3.33Vested
                      
                      
                      (776,231
                      )
                      
                      
                      2.42Cancelled
                      
                      
                      (124,326
                      )
                      
                      
                      2.37Nonvested
      Shares at March 31, 2010
                      
                      
                      4,084,336
                      
                      
                      $
                      2.29





(E)   BASIC AND DILUTED NET INCOME PER
SHARE





The
Company calculates earnings per share (“EPS”) in accordance with the provisions
of ASC 260-10 and the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 98.
Under ASC 260-10, 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, 2010
includes the effect of options to purchase 6,372,395 shares of common stock with
a weighted average exercise price of $3.34. 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.


10


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





Three Months Ended March 31,2010
                                      
                                      
                                      2009Basic
                                      
                                      
                                      49,838,491
                                      
                                      
                                      
                                      47,468,781Effect
      of assumed exercised options
                                      
                                      
                                      2,355,371
                                      
                                      
                                      
                                      562,273Diluted
                                      
                                      
                                      52,193,862
                                      
                                      
                                      
                                      48,031,054





(F)   SEGMENT REPORTING





The
Company accounts for its segment information in accordance with the provisions
of ASC 280-10, “Segment Reporting.” ASC 280-10 establishes annual and interim
reporting standards for operating segments of a company. ASC 280-10 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  organized into two operating segments for purposes of making
operating decisions and assessing performance. 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  and
income taxes because management does not use this information to measure
performance of the operating segments. There are currently no intersegment
sales.





Summarized
financial information by segment for the quarter ended March 31, 2010, 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
                                        
                                        $
                                        20,913
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        20,913
                                        
                                        
                                        $
                                        —Hosted
      services — Consumer
                                        
                                        
                                        3,458
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        3,458Professional
      services
                                        
                                        
                                        937
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        937
                                        
                                        
                                        
                                        —Total
      revenue
                                        
                                        
                                        25,308
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        21,850
                                        
                                        
                                        
                                        3,458Cost
      of revenue
                                        
                                        
                                        6,632
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        5,684
                                        
                                        
                                        
                                        948Sales
      and marketing
                                        
                                        
                                        7,690
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        6,028
                                        
                                        
                                        
                                        1,662Amortization
      of intangibles
                                        
                                        
                                        83
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        72Unallocated
      corporate expenses
                                        
                                        
                                        7,398
                                        
                                        
                                        
                                        7,398
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Operating
      income (loss)
                                        
                                        $
                                        3,505
                                        
                                        
                                        $
                                        (7,398
                                        )
                                        
                                        $
                                        10,127
                                        
                                        
                                        $
                                        776


11


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
                                
                                
                                272
                                
                                
                                
                                —
                                
                                
                                
                                200
                                
                                
                                
                                72Unallocated
      corporate expenses
                                
                                
                                6,222
                                
                                
                                
                                6,222
                                
                                
                                
                                —
                                
                                
                                
                                —Operating
      income (loss)
                                
                                $
                                2,636
                                
                                
                                $
                                (6,222
                                )
                                
                                $
                                8,861
                                
                                
                                $
                                (3
                                )





Revenues
attributable to domestic and foreign operations follows:





March 31,2010
                      
                      
                      2009United
      States
                      
                      $
                      19,305
                      
                      
                      $
                      14,937United
      Kingdom
                      
                      
                      3,318
                      
                      
                      
                      2,073Other
      countries
                      
                      
                      2,685
                      
                      
                      
                      2,909Total
      revenue
                      
                      $
                      25,308
                      
                      
                      $
                      19,919





Long-lived
assets by geographic region follows:





March 31, 2010
                      
                      
                      December 31, 2009United
      States
                      
                      $
                      30,464
                      
                      
                      $
                      29,508Israel
                      
                      
                      13,586
                      
                      
                      
                      13,815Total
      long-lived assets
                      
                      $
                      44,050
                      
                      
                      $
                      43,323





(G)   GOODWILL AND INTANGIBLE
ASSETS





The
changes in the carrying amount of goodwill for the quarter ended March 31, 2010
are as follows:





Total
                
                
                Business
                
                
                ConsumerBalance
      as of December 31, 2009
                
                $
                23,920
                
                
                $
                15,896
                
                
                $
                8,024Adjustments
      to goodwill:Contingent
      earnout payments
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      as of March 31, 2010
                
                $
                23,920
                
                
                $
                15,896
                
                
                $
                8,024


12


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





Total
                
                
                Business
                
                
                ConsumerBalance
      as of December 31, 2008
                
                $
                24,388
                
                
                $
                15,798
                
                
                $
                8,590Adjustments
      to goodwill:Contingent
      earnout payments
                
                
                98
                
                
                
                98
                
                
                
                —Settlement
      of pre-acquisition contingency
                
                
                (566
                )
                
                
                —
                
                
                
                (566
                )Balance
      as of December 31, 2009
                
                $
                23,920
                
                
                $
                15,896
                
                
                $
                8,024





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





Acquired
Intangible Assets





As of March 31, 2010Gross
                  Carrying
                  Amount
                
                Weighted
                  Average
                  Amortization
                  Period
                
                Accumulated
                  AmortizationAmortizing intangible
      assets:Technology
                
                $
                5,410
                
                3.8
      years
                
                $
                3,569Customer
      contracts
                
                
                2,400
                
                3.0
      years
                
                
                2,400Trade
      names
                
                
                630
                
                3.0
      years
                
                
                525Non-compete
      agreements
                
                
                410
                
                1.2
      years
                
                
                410Patents
                
                
                475
                
                11.0
      years
                
                
                29Other
                
                
                235
                
                3.0
      years
                
                
                195Total
                
                $
                9,560
                
                
                
                $
                7,128





As of December 31, 2009Gross
                  Carrying
                  Amount
                
                Weighted
                  Average
                  Amortization
                  Period
                
                Accumulated
                  AmortizationAmortizing intangible
      assets:Technology
                
                $
                5,410
                
                3.8
      years
                
                $
                3,262Customer
      contracts
                
                
                2,400
                
                3.0
      years
                
                
                2,400Trade
      names
                
                
                630
                
                3.0
      years
                
                
                473Non-compete
      agreements
                
                
                410
                
                1.2
      years
                
                
                410Patents
                
                
                475
                
                11.0
      years
                
                
                18Other
                
                
                235
                
                3.0
      years
                
                
                176Total
                
                $
                9,560
                
                
                
                $
                6,739





Amortization
expense is calculated on a straight-line basis over the estimated useful life of
the asset. Aggregate amortization expense for intangible assets was $389 and
$579 for the three months ended March 31, 2010 and 2009, respectively. For the
three months ended March 31, 2010 and 2009 , a portion of this amortization is
included in cost of revenue. Estimated amortization expense for the next five
years is: $1,098 in 2010, $964 in 2011, $43 in 2012, $43 in 2013, $43 in 2014
and $241 thereafter.


13


(H)   RECENTLY ISSUED FASB ACCOUNTING
STANDARDS UPDATES





In
January 2010, the FASB published FASB Accounting Standards Update 2010-06, Fair
Value Measurements and Disclosures (Topic 820) — Improving Disclosures
about Fair Value Measurements. This update requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement as
set forth in Codification Subtopic 820-10. The FASB’s objective is to improve
these disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
(a) a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and (b) in the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures: for purposes of reporting fair value measurement
for each class of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. As ASU
2010-06 relates specifically to disclosures, it will not have an impact on the
Company’s consolidated financial statements.




In
October 2009, FASB Accounting Standards Update 2009-13 addressed the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this update amends the criteria in Subtopic 605-25, Revenue
Recognition-Multiple-Element Arrangements, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. FASB Accounting Standards
Update 2009-13 is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. The Company is currently assessing the impact of
this update on its consolidated financial statements.


(2)   BALANCE SHEET
COMPONENTS





Property
and Equipment





Property
and equipment is summarized as follows:





March 31, 2010
                
                
                December 31, 2009Computer
      equipment and software
                
                $
                18,653
                
                
                $
                17,045Furniture,
      equipment and building improvements
                
                
                837
                
                
                
                81119,490
                
                
                
                17,856Less
      accumulated depreciation
                
                
                9,358
                
                
                
                8,305Total
                
                $
                10,132
                
                
                $
                9,551




Accrued
Expenses





Accrued
expenses consist of the following:





March 31, 2010
                
                
                December 31, 2009Payroll
      and other employee related costs
                
                $
                4,410
                
                
                $
                7,557Professional
      services, consulting and other vendor fees
                
                
                2,390
                
                
                
                2,370Sales
      commissions
                
                
                461
                
                
                
                608Other
                
                
                653
                
                
                
                360Total
                
                $
                7,914
                
                
                $
                10,895





(3)   ASSET
ACQUISITIONS





Proficient
Systems


14





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.. During the twelve months
ended December 31, 2009, the Company incurred additional costs related to the
earn-out litigation in the amount of $98, resulting in an increase in
goodwill.




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.


15




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. During the twelve
months ended December 31, 2009, the Company settled a pre-acquisition
contingency resulting in a $566 decrease in goodwill.




(4)   FAIR VALUE
MEASUREMENTS





Effective
January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurements, for
financial assets and liabilities. This ASC defines fair value, establishes a
framework for measuring fair value and expands the related disclosure
requirements. The ASC indicates, among other things, that a fair value
measurement assumes a transaction to sell an asset or transfer a liability
occurs in the principal market for the asset or liability or, in the absence of
a principal market, the most advantageous market for the asset or liability. The
Company adopted the provisions of ASC 820-10 with respect to its non-financial
assets and liabilities during the first quarter of fiscal 2009. In order to
increase consistency and comparability in fair value measurements, ASC 820-10
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.


16





·
            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.





On a
nonrecurring basis, the Company uses fair value measures when analyzing asset
impairment. Long-lived tangible 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 combination of
discounted cash flows, prior transactions and quoted price methods to
determine the fair market value of the reporting unit. This measurement is
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, 2010 and 2009 was approximately
$1,428 and $1,041, respectively.




Employee
Benefit Plans





The
Company has a 401(k) defined contribution plan covering all eligible employees.
The Company provides for employer matching contributions equal to 50% of
employee contributions, up to the lesser of 5% of eligible compensation or
$6,000. Matching contributions are deposited in to the employees 401(k) account
and are subject to 5 year graded vesting. Salaries and related expenses include
$139 and $108 of employer matching contributions for the three months ended
March 31, 2010 and 2009, 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 May
15, 2009, the Company filed a complaint in the United States District Court for
the Southern District of New York against InstantService, Inc.
(“InstantService”) asserting claims that InstantService infringes the U.S.
Patent Nos. 6,519,628 and 7,526,439 owned by the Company. The Company is seeking
damages for infringement and an injunction against future infringement of its
patents. On June 2, 2009, the Company filed a first amended complaint seeking a
declaratory judgment that a patent purportedly owned by InstantService, U.S.
Patent No. 6,915,336, is invalid and not infringed by the Company’s
products.  On July 10, 2009, InstantService filed a motion to dismiss one
of four causes of action.  A hearing on the motion was held on March 22,
2010 at which the Court denied InstantService’s motion to dismiss. 
InstantService filed an answer to the Company’s first amended complaint on April
5, 2010, and asserted counterclaims against the Company.  On April 29,
2010, the Company filed its reply to InstantService’s counterclaims.  This
case is in the early stages and discovery is ongoing.  The
Company intends to vigorously pursue its claims and to vigorously
defend against InstantService's counterclaims.




17




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.


(7)
                SUBSEQUENT
      EVENT
 
 On April 13, 2010, the Company acquired
all of the outstanding shares of NuConomy Ltd., an Israeli-based,development-stage company focused on web
analytics, in exchange for aggregate consideration of $800
cash.


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 in November 1998.





We are 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.





In order
to sustain growth in these segments, our strategy is to expand our position as
the leading provider of online engagement solutions that facilitate real-time
assistance and expert advice. To accomplish this, we are focused on the
following current initiatives:





·
            Upgrading our
      technology. We are increasing the level of automation used to
      deploy our services within the business segment enabling faster, more
      efficient deployment and expansion. We are also investing in data
      reporting tools that will enable our customers to analyze their online
      businesses at a more detailed level and with greater reporting
      flexibility. We are implementing a new billing platform for the consumer
      segment that will allow greater fee structure flexibility in how we charge
      consumers.




·
            Expanding our international
      presence. We are increasing our investment in large international
      markets primarily in Western Europe where we can leverage our brand
      recognition and potentially expand our client
  base.




18




·
            Reorganizing and expanding our
      sales organization to improve operating efficiencies. We recently
      restructured our sales force with a single head of sales to leverage
      symmetries between our direct sales force and the sales force for small
      and mid-sized businesses (“SMB”). In addition, we created a middle-market
      sales team to target companies that have growing contact centers and
      moderate website traffic. With a targeted product offering and dedicated
      sales team, we can more effectively serve this area of the
      market.




FIRST
QUARTER 2010




Highlights
of the first quarter 2010 compared to the first quarter 2009 are as
follows:




·
            Revenue
      increased 27% to $25.3 million from $19.9
  million.




·
            Gross
      profit margin decreased to 74% from
78%.




·
            Operating
      expenses increased to $21.8 million from $17.3
  million.




·
            Net
      income increased 68% to $2.1 million from $1.3
  million.




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:





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 ASC
605-10-S99, “Revenue Recognition” and 605-25, “Revenue Recognition with
Multiple-Element Arrangements.” 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 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, we recognize
professional service fees upon completion and customer acceptance because we
have established objective and reliable evidence of the fair value of the
undelivered hosting services. 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 48 months, representing our current estimate of
the term of the client relationship.





For
revenue generated from online transactions between Experts and Users, we
recognize revenue net of expert fees in accordance with ASC 605-45, “Principal
Agent Considerations,” due to the fact that we perform as an agent
without 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.


19


STOCK-BASED
COMPENSATION





We follow
ASC 718-10, “Stock Compensation,” 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. ASC 718-10 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. ASC 718-10 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 ASC 718-10 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, 2009, 2008, 2007 and 2006 reflect the impact of
ASC 718-10. 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 ASC 718-10.





ASC
718-10 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
Income. Stock-based compensation recognized in our Consolidated Statement of
Income for the periods ended March 31, 2010 and 2009 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
ASC 718-10 as well as compensation expense for share-based awards granted
subsequent to January 1, 2006 in accordance with ASC 718-10. We currently use
the Black-Scholes option pricing model to determine grant date fair
value.





As of
March 31, 2010, there was approximately $8.1 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 2.0 years.





ACCOUNTS
RECEIVABLE





Our
customers are located primarily 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 our large number of customers. No single customer accounted for
or exceeded 10% of our total revenue in the three months ended March 31, 2010
and 2009. One customer accounted for approximately 19% of accounts receivable as
of March 31, 2010. One customer accounted for approximately 12% of accounts
receivable at December 31, 2009. There was no change in our allowance for
doubtful accounts in the three months ended March 31, 2010.





GOODWILL





In
accordance with ASC 350-10, “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.


20





IMPAIRMENT
OF LONG-LIVED ASSETS





In
accordance with ASC 360-10, “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 FASB ACCOUNTING STANDARDS UPDATES




In
January 2010, the FASB published FASB Accounting Standards Update 2010-06, Fair
Value Measurements and Disclosures (Topic 820) — Improving Disclosures
about Fair Value Measurements. This update requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement as
set forth in Codification Subtopic 820-10. The FASB’s objective is to improve
these disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
(a) a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and (b) in the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures: for purposes of reporting fair value measurement
for each class of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. As ASU
2010-06 relates specifically to disclosures, it will not have an impact on our
consolidated financial statements.




In
October 2009, FASB Accounting Standards Update 2009-13 addressed the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this update amends the criteria in Subtopic 605-25, Revenue
Recognition-Multiple-Element Arrangements, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method. In
addition, this guidance significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. FASB Accounting Standards
Update 2009-13 is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. We are currently assessing the impact of this
update on our consolidated financial statements.




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.


21


Revenue
from our Business segment accounted for 86% and 87% of total revenue for the
three months ended March 31, 2010 and 2009, respectively. Revenue attributable
to our monthly hosted Business services accounted for 96% of total Business
revenue for the three months ended March 31, 2010 and 2009. 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.





Revenue
from our Consumer segment is generated from online transactions between Experts
and Users and is recognized net of expert fees and accounted for approximately
14% and 13% of total revenue for the three months ended March 31, 2010 and 2009,
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;





·
            compensation costs relating to
      our network support staff;





·
            depreciation of certain hardware
      and software;





·
            allocated occupancy costs and
      related overhead;





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




·
            the credit card fees and related
      payment processing costs associated with the consumer and SMB services;
      and





·
            amortization
      of certain intangibles.





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.





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.


22


During
the three months ended March 31, 2010, we did not increase our allowance
for doubtful accounts. During 2009, we increased our allowance for doubtful
accounts by $68,000 to approximately $408,000, 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 $13,000 of previously
reserved accounts, leaving a net allowance for doubtful accounts of $395,000. 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, 2010 and
2009 consist of:





Three Months Ended
                    March 31,2010
                  
                  
                  2009Stock-based
      compensation expense related to ASC 718-10
                  
                  $
                  1,087
                  
                  
                  $
                  1,161Total
                  
                  $
                  1,087
                  
                  
                  $
                  1,161





RESULTS
OF OPERATIONS





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 users.





COMPARISON
OF THREE MONTHS ENDED MARCH 31, 2010 AND 2009





Revenue -
Business.   Revenue increased by 26% to $21.8 million in the
three months ended March 31, 2010, from $17.4 million in the comparable period
in 2009. This increase is primarily attributable to increased revenue from
existing clients in the amount of approximately $2.4 million and, to a lesser
extent, to revenue from new clients in the amount of approximately $1.7 million,
net of cancellations and to professional services revenue of approximately
$262,000. 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
increased by 37% to $3.5 million in the three months ended March 31, 2010, from
$2.5 million in the comparable period in 2009. The increase is primarily
attributable to an increase in gross revenue as a result of higher rates charged
by 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 increased by 66%
to $5.7 million in the three months ended March 31, 2010, from $3.4 million in
the comparable period in 2009. This increase is primarily attributable to costs
related to additional account management and network operations personnel and to
increased compensation costs for existing personnel as a result of the U.S.
dollar depreciating against the New Israeli Shekel, in the amount of
approximately $1.3 million and to increased expenses for primary and backup
server facilities and allocated overhead related to costs of supporting our
server and network infrastructure of approximately $933,000 as a result of
increased revenue.





Cost of Revenue - Consumer.
Cost of revenue consists of compensation costs relating to employees who provide
customer service to Experts and Users, compensation costs relating to our
network support staff, the cost of supporting our server and network
infrastructure, credit card and transaction processing fees and related costs,
and allocated occupancy costs and related overhead. Cost of revenue increased by
10% to $948,000 in the three months ended March 31, 2010, from $859,000 in the
comparable period in 2009. The increase is primarily attributable to an increase
in credit card and transaction processing fees of approximately $45,000, an
increase in costs related to additional customer service and network support
personnel of approximately $26,000 and costs of supporting our server and
network infrastructure in the amount of approximately $16,000.


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 increased by 34% to $3.6 million
in the three months ended March 31, 2010, from $2.7 million in the comparable
period in 2009.  This increase is primarily attributable to an
increase in compensation costs related to product development personnel in the
amount of approximately $756,000 and allocated occupancy costs and related
overhead in the amount of approximately $103,000.





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 23% to
$6.0 million in the three months ended March 31, 2010, from $4.9 million in the
comparable period in 2009. This increase is primarily attributable to an
increase in costs related to additional sales and marketing personnel of
approximately $1.1 million. This increase relates 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 marketing personnel,
as well as online promotion, public relations and trade show exhibit expenses.
Sales and marketing expenses increased by 4% to $1.7 million in the three months
ended March 31, 2010, from $1.6 million in the comparable period in 2009. This
increase is due primarily to an increase in spending related to online promotion
of approximately $125,000, partially offset by a decrease in compensation and
related expenses for sales and marketing personnel of approximately $58,000.
This increase relates to our continued efforts to enhance our brand recognition
and increase sales lead activity.





General and Administrative.
Our general and administrative expenses consist primarily of compensation and
related expenses for executive, accounting, legal, human resources and
administrative personnel. General and administrative expenses increased by 8% to
$3.8 million in the three months ended March 31, 2010, from $3.5 million in the
comparable period in 2009.  This increase is primarily attributable to
increases in recruiting and other professional fees of approximately
$276,000.





Amortization of Intangibles.
Amortization expense was $83,000 and $272,000 in the three months ended
March 31, 2010 and 2009, respectively and relates primarily to acquisition
costs recorded as a result of our acquisition of Kasamba in October 2007 and
Proficient in July 2006. This decrease is attributable to the fact that the
intangible assets related to the Proficient acquisition were fully amortized in
2009. Additional amortization expense in the amount of $306 and $307 is included
in cost of revenue for the three months ended March 31, 2010 and 2009,
respectively. Amortization expense is expected to be approximately $1.5 million
in the year ended December 31, 2010.





Other (Expense) Income. Financial expense was
$49,000 and $119,000 in the three months ended March 31, 2010 and 2009,
respectively, and relates to unfavorable currency rate movements related to our
Israeli operations. Interest income was $23,000 and $34,000 in the three months
ended March 31, 2010 and 2009, 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. Our
effective tax rate was 39% and 50% for the three months ended March 31, 2010 and
2009, respectively, resulting in a provision for income taxes of $1.3 million
for the three months ended March 31, 2010 and 2009.




Net Income. We had net income
of $2.1 million and $1.3 million in the three months ended March 31, 2010 and
2009, respectively. Revenue increased by $5.4 million, while operating expenses
increased by $4.5 million, contributing to a net increase in income from
operations of approximately $868,000.


24




LIQUIDITY
AND CAPITAL RESOURCES





As of
March 31, 2010, we had approximately $50.8 million in cash and cash equivalents,
an increase of approximately $5.2 million from December 31, 2009.




Net cash
used in operating activities was $405,000 for the three months ended March 31,
2010 and consisted primarily of net income and non-cash expenses offset by an
increase in accounts receivable and a decrease in accounts payable and accrued
expenses. Net cash provided by operating activities was $2.8 million for the
three months ended March 31, 2009 and consisted primarily of a net income and
non-cash expenses partially offset by an increase in accounts receivable and a
decrease in accrued expenses.





Net cash
used in investing activities was $578,000 and $550,000 in the three months ended
March 31, 2010 and 2009, respectively, and was due primarily to the purchase of
fixed assets.




Net cash
provided by financing activities was $6.3 million for the three months ended
March 31, 2010 and consisted primarily of the proceeds from the issuance of
common stock in connection with the exercise of stock options by employees. 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.




We have
incurred significant expenses 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, 2010, we had an accumulated deficit of
approximately $107.3 million. These losses were 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.


25


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.





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, 2010 and 2009 was approximately $1.4 million and $1.0
million, respectively.





As of
March 31, 2010, our principal commitments were approximately $17.7 million under
various operating leases, of which approximately $4.4 million is due in 2010. We
do not currently expect that our principal commitments for the year ending
December 31, 2010 will exceed $7.0 million in the aggregate. Our capital
expenditures are not currently expected to exceed $7.0 million in
2010.




Our
contractual obligations at March 31, 2010 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
                
                $
                17,738
                
                
                $
                4,375
                
                
                $
                7,074
                
                
                $
                3,718
                
                
                $
                2,571Total
                
                $
                17,738
                
                
                $
                4,375
                
                
                $
                7,074
                
                
                $
                3,718
                
                
                $
                2,571





ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





Currency
Rate Fluctuations





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 three months ended March 31, 2010, the U.S. dollar depreciated against the
NIS which had a negative impact on our results of operations and financial
condition when compared to the same period in 2009. During
the three month period ended March 31, 2010, expenses generated by our Israeli
operations totaled $8.9 million. We do not currently hedge our foreign currency
risk exposure. We actively monitor the movement of the U.S. dollar against the
NIS and U.K. pound and have considered the use of financial instruments,
including but not limited to derivative financial instruments, which could
mitigate such risk. If we determine that our risk of exposure materially exceeds
the potential cost of derivative financial instruments, we may in the future
enter in to these types of investments. 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 U.K. pound.





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, 2010. During 2009, we
increased our allowance for doubtful accounts by $68,000 to approximately
$408,000, 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 $13,000 of previously reserved accounts, leaving a net
allowance for doubtful accounts of $395,000.




26




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, 2010. 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, 2010
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.





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2010 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 only provide 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, have been detected.


27


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 May
15, 2009, we filed a complaint in the United States District Court for the
Southern District of New York against InstantService, Inc. (“InstantService”)
asserting claims that InstantService infringes the U.S. Patent Nos. 6,519,628
and 7,526,439 owned by us. We are seeking damages for infringement and an
injunction against future infringement of our patents. On June 2, 2009, we filed
a first amended complaint seeking a declaratory judgment that a patent
purportedly owned by InstantService, U.S. Patent No. 6,915,336, is invalid and
not infringed by our products.  On July 10, 2009, InstantService filed a
motion to dismiss one of four causes of action.  A hearing on the motion
was held on March 22, 2010 at which the Court denied InstantService’s motion to
dismiss.  InstantService filed an answer to our first amended complaint on
April 5, 2010, and asserted counterclaims against us.  On April 29, 2010,
we filed our reply to InstantService’s counterclaims.  This case is in the
early stages and discovery is ongoing.  We intend to vigorously pursue
our claims and to vigorously defend against InstantService's
counterclaims.




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.





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; the adverse effect that the global recession may have on our business;
competition in the real-time sales, marketing, customer service and online
engagement solutions market; risks related to the operational integration of
acquisitions; risks related to new regulatory or other legal requirements that
could materially impact our business; risks related to our international
operations, particularly our operations in Israel, and the civil and political
unrest in that region; impairments to goodwill that result in significant
charges to earnings; volatility of the value of certain currencies in relation
to the U.S. dollar, particularly the New Israeli Shekel, U.K. pound and Euro;
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
defects that could disrupt the LivePerson services; privacy concerns relating to
the Internet that could result in new legislation or negative public perception;
risks related to the regulation or possible misappropriation of personal
information; legal liability and/or negative publicity for the services provided
to consumers via our technology platforms; and risks related to protecting our
intellectual property rights or potential infringement of the intellectual
property rights of third parties. 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 11, 2010.





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


28




ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS





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 were 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, 2010, $3.9 million
remained available for purchases under the program. Our Board of Directors did
not extend the program beyond March 31, 2010.





The
following table summarizes repurchases of our common stock under our stock
repurchase program during the quarter ended March 31, 2010:




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
                              Programs1/1/2010 –
      1/31/2010
                            
                            
                            —
                            
                            
                            $
                            —
                            
                            
                            
                            —
                            
                            
                            $
                            3,946,0002/1/2010
      – 2/28/2010
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,946,0003/1/2010
      – 3/31/2010
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,946,000Total
                            
                            
                            —
                            
                            
                            $
                            —
                            
                            
                            
                            —
                            
                            
                            $
                            3,946,000


29


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


30


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 10, 2010
              By:
              /s/ ROBERT P. LOCASCIOName:
              Robert
      P. LoCascioTitle:
              Chief
      Executive Officer (duly authorized officer)Date:
      May 10, 2010
              By:
              /s/ TIMOTHY E. BIXBYName:
              Timothy
      E. BixbyTitle:
              President
      and Chief Financial Officer (principal
                financial
      and accounting officer)


31


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


32