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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark  One)**                                                                                                                                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                          |   |
| **x**                                                                                                                                                                                                               | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|                                                                                                                                                                                                                | ** ** |
| **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008**                                                                                                                                                                     |
| ** **                                                                                                                                                                                                          |
| **OR**                                                                                                                                                                                                              |
| ** **                                                                                                                                                                                                          |
| **o**                                                                                                                                                                                                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                          | ** ** |
| **FOR THE TRANSITION PERIOD  FROM             TO                ** |

 

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**COMMISSION FILE NUMBER 000-31321**

 

**RIGHTNOW TECHNOLOGIES, INC.**

(Exactname of registrant as specified in its charter)

 
| **DELAWARE**  (State or other jurisdiction of  incorporation or organization) | **81-0503640**  (I.R.S. Employer  Identification No.) |
|-------------------------------------------------------------------------------|-------------------------------------------------------|

 

**136 ENTERPRISE BLVD, BOZEMAN, MONTANA 59718**(Address of principal executive offices) (Zip code)

 

**(406) 522-4200**(Registrant’s telephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class:**           | ** ** | **Name of each exchange on which  registered:** |
|------------------------------------|------------|-------------------------------------------------|
| **COMMON STOCK, PAR VALUE $0.001** | ** ** | **THE NASDAQ STOCK MARKET LLC**            |

 

Securitiesregistered pursuant to Section 12(g) of the Act:**NONE**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x     No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

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

 

                The aggregate market value of common stockheld by non-affiliates of the registrant as of June 30, 2008, the lastbusiness day of the registrant’s most recently completed second fiscal quarter,was approximately $459,242,474, based on the closing sales price of theregistrant’s common stock on that date as reported by the Nasdaq Global Market.For the purposes of the foregoing calculation only, all of the registrant’sdirectors, executive officers and persons known to the registrant to hold tenpercent or greater of the registrant’s outstanding common stock have beenexcluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not a determination for other purposes.

 

Thenumber of shares outstanding of the registrant’s common stock as of February 21,2009 was 31,860,050.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

Informationrequired by Items 10 through 14 of Part III of this Form 10-K,to the extent not set forth herein, is incorporated herein by reference toportions of the registrant’s definitive proxy statement for the registrant’s2009 Annual Meeting of Stockholders, which will be filed with the Securitiesand Exchange Commission not later than 120 days after the end of thefiscal year ended December 31, 2008. Except with respect to the information specifically incorporated byreference in this Form 10-K, the registrant’s definitive proxy statementis not deemed to be filed as a part of this Form 10-K.

 

 

 

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**RightNow Technologies, Inc.**

 

**Annual Report on Form 10-K**

 

**For The Fiscal Year Ended December 31, 2008**

 

**Table of Contents**

 
| PART I   |                                                                                                                |
|---------------|---------------------------------------------------------------------------------------------------------------------|
| Item 1.  | Business                                                                                                            |
| Item 1A. | Risk Factors                                                                                                        |
| Item 1B. | Unresolved  Staff Comments                                                                                          |
| Item 2.  | Properties                                                                                                          |
| Item 3.  | Legal Proceedings                                                                                                   |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                                                |
|          |                                                                                                                |
| PART II  |                                                                                                                |
| Item 5.  | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |
| Item 6.  | Selected  Financial Data                                                                                            |
| Item 7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |
| Item 7A. | Quantitative  and Qualitative Disclosures about Market Risk                                                         |
| Item 8.  | Financial  Statements and Supplementary Data                                                                        |
| Item 9.  | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |
| Item 9A. | Controls and Procedures                                                                                             |
| Item 9B. | Other Information                                                                                                   |
|          |                                                                                                                |
| PART III |                                                                                                                |
| Item 10. | Directors,  Executive Officers and Corporate Governance                                                             |
| Item 11. | Executive  Compensation                                                                                             |
| Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |
| Item 13. | Certain  Relationships and Related Transactions, and Director Independence                                          |
| Item 14. | Principal  Accountant Fees and Services                                                                             |
|          |                                                                                                                |
| PART IV  |                                                                                                                |
| Item 15. | Exhibits and  Financial Statement Schedules                                                                         |
|          | Signatures                                                                                                          |

 

 

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**CAUTIONARY STATEMENT**

 

*In this report, the terms “RightNow Technologies,” “RightNow,”“Company,” “we,” “us” and “our” refer to RightNow Technologies, Inc. andits subsidiaries.*

 

*All statements included or incorporated by reference in thisreport, other than statements or characterizations of historical fact, areforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements are based onour current expectations, estimates and projections about our industry, management’sbeliefs, and certain assumptions made by us, all of which are subject tochange. Forward-looking statements can often be identified by words such as “anticipates,”“expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,”“will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similarexpressions, and variations or negatives of these words, and include, but arenot limited to, statements regarding projected results of operations,management’s future strategic plans, market acceptance and performance of ourproducts, our ability to retain and hire key executives, sales and technicalpersonnel and other employees in the numbers, with the capabilities, and at thecompensation levels needed to implement our business and product plans, thecompetitive nature of and anticipated growth in our markets, our accountingestimates, and assumptions and judgments. These forward-looking statements arenot guarantees of future results and are subject to risks, uncertainties andassumptions that are difficult to predict and that could cause our actualresults to differ materially and adversely from those expressed in anyforward-looking statement. The risks and uncertainties referred to aboveinclude, but are not limited to, general economic conditions; fluctuations inforeign currency exchange; our business model; our ability to develop oracquire, introduce, market and gain market acceptance for new products andenhancements to existing products in a cost-effective and timely manner;the  gain or loss of key customers;competitive pressures and other similar factors such as the availability andpricing of competing products and technologies and the resulting effects onsales and pricing of our products; our ability to expand or contractoperations; the rate at which our present and future customers adopt ourexisting and future products and services; possible fluctuations in ouroperating results including our revenue mix and our rate of growth;interruptions or delays in our hosting operations; breaches of our securitymeasures; the credit markets and potential impact on the recoverability of ourportfolio of auction rate securities; any unanticipated ambiguities in fairvalue accounting standards; fluctuations in our operating results from theimpact of stock-based compensation expense; our ability to manage and expandour partner relationships; the amount and timing of any stock repurchases underour stock repurchase program; our ability to hire, retain and motivate our employeesand manage our growth; the impact of potential acquisitions, if any; andvarious other factors, some of which are described under the section belowentitled “Risk Factors,” in Item 1A of this report. These forward-lookingstatements speak only as of the date of this report. We undertake no obligationto revise or update publicly any forward-looking statement for any reason,except as otherwise required by law.*

 

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**Part I**

 

**Item 1.          Business**

 

**OVERVIEW**

 

RightNow Technologies (“we”,“us”, “our”, the “Company” or “RightNow”) provides on demand customerrelationship management (“CRM”) software and services that help consumer-centricorganizations improve customer experiences, while reducing costs. In today’scompetitive business environment, we believe providing superior customerexperiences can be a powerful way for companies to drive sustainabledifferentiation. RightNow’s technology enables an organization’s service,marketing and sales personnel to leverage a common application platform todeliver service, to market and to sell through phone, email, web and chat.Additionally, through our on demand delivery approach, or software-as-a-service(“SaaS”), we are able to eliminate much of the complexity associated withtraditional on premise solutions, to implement rapidly, and to price oursolutions at a level that results in a lower cost of ownership compared to onpremise solutions. Our value-added services, including business processoptimization and lifetime product tune-ups, are directed toward improving ourcustomers’ efficiency, increasing user adoption and assisting our customers tomaximize the return on their investment. Approximately 1,900 corporations andgovernment agencies worldwide depend on RightNow to achieve their strategicobjectives and better meet the needs of those they serve.

 

RightNow was incorporated inMontana in September 1997 and reincorporated in Delaware in August 2000.Our principal executive offices are located at 136 Enterprise Boulevard,Bozeman, Montana 59718-9300, and our telephone number is (406) 522-4200.We have regional field offices in Boston, Massachusetts; Chicago, Illinois;Dallas, Texas; San Mateo, California; Orange County, California; New York, NewYork; Fairport, New York; Herndon, Virginia; and Toronto, Canada. We also haveoffices in Maidenhead, England; Munich, Germany; Sydney, Australia; Tokyo,Japan; and Utrecht, Netherlands. Our internet address is **http://www.rightnow.com**. Our annual reportson Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,amendments to those reports and other Securities and Exchange Commission, orSEC, filings are available free of charge through our website as soon asreasonably practicable after such reports are electronically filed with, orfurnished to, the SEC. Our common stock trades on the Nasdaq Global Marketunder the symbol RNOW. The inclusion of our internet address in this reportdoes not include or incorporate by reference into this report any informationcontained on, or accessible through, our website.

 

**PRODUCTSAND SERVICES**

 

Our solutions are providedthrough an application platform that is designed to be easy to implement, useand maintain, and to support improved customer experiences across multiplecustomer interaction points. Our solutions integrate with traditionalenterprise and/or back office applications and are available in 33 languagesand dialects.

 

With the release of RightNow8 in 2007, we have been able to provide enhanced functionality, tools andbroader application extensibility. That release initiated a quarterly releasecycle which allows us to deliver product capabilities to customers morerapidly.

 

**During 2008, we rolledout functionalities, such as customer portal, contextual workspaces, agentscripting, co-browse, proactive chat, topic monitoring for feedback, and afully integrated multi-channel customer feedback capability. These help meetour objectives of consistently providing our customers with the most currentand advanced customer experience solutions, as well as providing frequentinnovation for expanding throughout large enterprises.**

** **

**In the November 2008release, we improved contact center agent efficiencies through new modules foragent scripting, guided assistance, and a new agent desktop integrationframework.  These capabilities pushrelevant customer information from existing legacy systems out to the contactcenter agent desktops in real-time to facilitate a more valuable customerinteraction, all while improving agent productivity and reducing costs.**

** **

**RightNowService** TM

 

First released in 1997,RightNow Service is the flagship offering in our portfolio of customerrelationship management (“CRM”) solutions and generates approximately 80% to90% of our software, hosting and support revenue. Built upon a self-learningknowledge foundation, RightNow Service provides an integrated multi-channelcustomer service that captures customer interactions across traditional andonline channels. Our knowledge foundation automatically learns from eachcustomer interaction to deliver relevant content, thereby improving thecustomer experience.

 

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**Features ofRightNow Service**

 

*Seamlessmulti-channel contact center***—** blends traditional andonline channels so customer service agents have a single view of the customeracross all channels and can provide consistent information through phone,email, web and chat.

 

*Web andvoice self-service***—** enables customers to access theinformation they need 24/7 on the web and over the phone, and also reducescontact center workloads.

 

*Patentedself-learning knowledge base***—** dynamically capturesand presents complete, relevant and up-to-date information to customers,contact center staff, outsourcers and other business partners.

 

*Emailresponse management***—** leverages knowledge base content toimprove response times and provides customers with accurate answers; alsodetects potential customer issues for immediate attention and resolution.

 

*Chat***—**facilitates real-time, online chat sessions between agents and customers. Chatagents provide consistent answers, by tapping into RightNow’s embeddedknowledge base. Chat sessions are saved in the customer’s record, soorganizations have a complete customer view for the next interaction.Supervisors can monitor and join an agent’s chat session to assist in resolvingissues.

 

*Customanalytics and reporting*—pre-built reports and a custom reporting engine enable real-time performancetracking. Reports can be automatically scheduled to run on specific timetablesallowing customers to head off service and product issues with exception-basednotification.

 

*Integrationwith enterprise resource planning, return merchandise authorization, and otherback-office systems*—provides access to operational systems so agents can resolve customer issueswithout leaving the RightNow desktop.

 

**RightNowMarketingTM**

 

RightNow Marketing isdesigned to deliver the functionality needed to manage multi-channel,multi-stage campaigns. RightNow Marketing automates standard campaignactivities, optimizes resources and leverages the information captured in salesand service interactions. In addition, with RightNow Marketing, customerservice organizations can preempt service inquiries by proactively targetingcustomers with relevant, personalized communications.

 

**Features ofRightNow Marketing**

 

*Multi-stage,multi-channel campaign management*—users can design, execute and manage campaigns from one centrallocation.

 

*Lead-generatingemail marketing*—enablesthe creation of personalized email marketing campaigns to boost leadgeneration, increase conversion and retention rates and improve the relevancyof marketing communications.

 

*Event-triggeredmessages*—automatesthe delivery of personalized messages triggered from any type of customeraction—from a website request to an in-store retail purchase.

 

*Comprehensiveresponse and lead routing*—tracks all aspects of campaign performance and provides automated leadrouting based on geography, product or other attributes.

 

*Effectivelist management and deliverability* —provides appropriate opt-in/opt-out controls, manages deletion ofobsolete addresses, and maintains compliance with relevant industry standards.

 

*Customanalytics and reporting*—real-time,pre-built and customizable reports provided out-of-the-box to track and measurethe success of marketing campaigns.

 

**RightNowSalesTM**

 

RightNow Sales is designedto simplify the sales process so that sales organizations can more easilymanage accounts, track leads, organize contacts and create sellingopportunities while leveraging the customer information in the common platform.Traditional sales processes such as contact management, forecasting, quotegeneration and opportunity status are fully integrated, saving salesrepresentatives’ time and shortening sales cycles. RightNow Sales is designedto improve the accuracy of sales forecasting and reporting with real-timevisibility into sales pipeline data.  Additionally, RightNow Sales allows contact centers the ability toleverage customer information for up-sell and cross-sell opportunities.

 

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**Features ofRightNow Sales**

 

*Opportunityand pipeline management*—allowsthe user to see the entire sales pipeline and individual opportunity details onone screen.

 

*Contact,account and task management*—users can enter, update and track all relevant contact and dealinformation in one place.

 

*Leadmanagement*—optimizeslead flow across marketing and sales organizations.

 

*Forecasting*—opportunity level forecasting providesvisibility into performance of sales representatives across pipelines andcommitted revenue.

 

*Customanalytics and reporting*—providesanalysis of the total forecast overview with details by region, salesrepresentative and opportunity, and provides for the creation of custom reportsto support unique business processes.

 

*MicrosoftOutlook integration**—***users may synchronize emails, contacts, andtasks between Microsoft Outlook and RightNow Sales for increased productivity.

 

*Automaticcontract, quote and proposal generation*—provides accurate, customer-ready contracts,quotes and proposals.

 

*Territoryand quota management—*fullycustomizable quota-setting and real-time performance monitoring tools trackstaff and management performance.

 

*Salesmethodology implementation—*replicates and enforces conformance to proven sales methodologies.

 

**RightNowFeedback** TM

 

RightNow Feedback isdesigned to enable organizations to capture and measure customer feedbackacross touch-points in real time and take immediate action on that feedback.Companies can also use packaged templates to gather, monitor and act oncustomer satisfaction and service issues or collect insights from their ownemployees.

 

**Features ofRightNow Feedback**

 

*Multiplefeedback capture techniques—*captures input from customers through email, phone or the web.

 

*Collaborativesurvey design—*allowsteams to create and test surveys with various response types and questionbranching.

 

*Audiencemanagement—*enablessurvey audience segmentation and analysis of outbound communications to ensurerelevant surveying of customers.

 

*Customerrecord integration—*feedbackresponses are captured in customer records so that all employees interactingwith customers are informed of preferences and potential issues.

 

*Robustreporting and analysis—*graphicalreporting and dashboard functionality allow the tracking and measurement ofcustomer satisfaction and loyalty.

 

**RightNowVoice** TM

 

RightNow Voice providesvoice automation options for interacting with customers and prospects.Customers can use self-service options to access information, and, if needed,calls are automatically routed to appropriate staff for quick resolution.

 

**Features ofRightNow Voice**

 

*Dynamicvoice routing***—**providesrelevant content to callers and directs calls—along with customer-specificinformation—to the appropriate department.

 

*Voiceself-service—*enablescustomers to find answers overthe phone 24 hours a day without contacting the call center staff.

 

*Inboundand outbound survey tools***—**enablespolling of customers to monitor satisfaction levels, gauge interest in newproducts or services and gain other market intelligence.

 

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**RightNowAnalyticsTM**

 

RightNow Analytics providesvisibility into customer behavior across service, sales, marketing and feedbacktouch points, enabling organizations to capture, synthesize, distribute andmanage customer intelligence.

 

**Features ofRightNow Analytics**

 

*Service analytics—*measures the post-sales service experience, enabling organizations totrack customer behaviors, identify and act on potential issues and determinehow to optimize resource allocation.

 

*Salesanalytics—*providesvisibility into the sales pipeline for more accurate forecasting and historicaltrending tools to pinpoint effective sales tactics for replication.

 

*Marketinganalytics—*enables evaluationof historical marketing data for visibility into effective campaigns andoffers.

 

*Feedback analytics—*consolidate, evaluate and distribute customer feedback to track andmeasure the effect of customer interactions.

 

**ProfessionalServices**

 

Our Professional Servicesorganization combines project management with technical and business-focusedconsulting services to our clients. Using proven methods and customer-centricbest practices, our Professional Services group is experienced in implementingand integrating RightNow products across many industries, drawing on in-depthknowledge and practical expertise gained from thousands of deployments.Professional services helps customers determine strategic business objectives,align business processes, define success metrics, help with rapid systemconfiguration and deployment, and adjust business solutions to support fulluser adoption. We also provide tune-up services to our clients, auditing theirsolution against our library of best practices.

 

During 2008, we continued toexpand our professional service organization with new investments in bothpartner relationships and additional employees. These investments are expectedto allow us to engage in more complex deployments, add scalability to ourbusiness and help drive our growth.

 

**Sales andMarketing**

 

RightNow products andservices are sold predominantly through our direct sales organization and to alesser extent through partner channels. The sales team is organized aroundgeographic territory, prospect company size and vertical industry, calling onpotential new clients as well as focusing on managing and further expandingthose existing client relationships.

 

A prospective client maydeploy a portion or all of our solutions on a pilot basis to ensure thatRightNow solutions meet its needs, prior to committing to any subscriptionfees. A pilot program may last up to 180 days. The prospective client’sobjectives are quantified and results measured during the pilot period. As aresult of this program, we believe we have experienced shorter sales cycles,higher sale closure rates and larger deal sizes.

 

During2008, we continued to see growth in our indirect channel revenue and worldwidepartner contribution.  As of December 31,2008 we had 66 partners enrolled in our worldwide partner program.  In 2008 we continued to develop and grow ourManaged Service Provider (MSP) partner channel.   Managed Services Providers deliver increasedvalue to clients through RightNow enabled managed services.  These partners represent many of the world’slargest customer care outsourcers, including *Teleperformace,West Corporation, Convergys, ICT Group, Harte-Hanks* and *TELUS.*

 

Inaddition, we continued to develop an ecosystem of business and technologyalliance partners.  These relationshipswith leading independent software companies, systems integrators, and contactcenter infrastructure providers has opened up new opportunities for our directsales organization and has created a host of complimentary solutions for ourcustomers.

 

During2008, we launched new strategic partnerships with:

 

·            *Deloitte,and TATA,* leading globalconsulting services and systems integrators;

 

·            *Pivotal Veracity*, a leading provider of email deliverabilitysolutions;

 

·            *Success Metrics,*a leading**provider ofBirst, a business intelligence and analytical on-demand software solution;

 

·            *Boomi*, a leading provider of on-demand integrationsolutions;

 

·            *Open Methods*, a software development company specializingin computer telephony integration.

 

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We believe thesepartnerships have enabled our direct sales organization to expand its contactbase in key accounts, enhance and differentiate the RightNow solution, andultimately develop larger and more profitable enterprise sales opportunities.

 

We continue to work closelywith technology partners such as *Genesys*, *Informatica*, *Cast Iron*, *Lithium*and *Sterling Commerce*,to expand our capabilities to address the needs of the large enterprise.

 

In those internationalmarkets where we do not have a direct selling presence, we rely on systemintegrators and resellers to sell our solutions. This strategy is primarilyemployed in Europe, New Zealand and Asia. In 2008, we continued to broaden our distribution to these marketsthrough resellers.

 

Our marketing departmentcoordinates future product and service direction, manages generation of clientleads, and oversees public and industry analyst relations. To expand our clientbase, we have also developed and expect to continue to increase innovativemarketing initiatives.

 

**Clients**

 

As of December 31,2008, we had approximately 1,900 active clients in various industries,including approximately 23% from technology, 14% from retail/consumer packagedgoods, 13% from telecommunications, 13% from public sector, 11% from travel andhospitality, 7% from financial and insurance, 2% from manufacturing, and 17% from various other industries. For theyear ended December 31, 2008, approximately 47% of our revenue wasgenerated from entities with over $1 billion in annual revenue, 39% of ourrevenue was generated from entities with less than $1 billion in annualrevenue and 14% of our revenue was generated from government/educationalinstitutions. No single client accounted for more than 10% of our revenue in2006, 2007, and 2008. One customer represented 12% of term receivables at December 31,2007, and one customer represented 22% of term receivables at December 31,2008.  No individual customer accountedfor more than 10% of the Company’s accounts receivable at December 31,2007 and 2008.

 

**Product Development and Technology**

 

Our product developmentefforts are focused on improving and enhancing our existing solutions andservice offerings as well as developing new proprietary technology. Our productroadmap incorporates our long-term strategic view of our market andincorporates customer feedback to improve and enhance our products. Wecurrently are developing products and solutions to broaden and deepen ourofferings within the CRM market. We have an applied research group, RightNowLabs, which focuses on knowledgebase, artificial intelligence, informationretrieval and novel applications of current research for use within oursolutions. We allow our clients to run different versions of our software andprovide customers the ability to adequately plan, schedule and implementupgrades of new releases. Our support and development efforts are focused onlyon the current and future releases of our products. We provide support for oursoftware versions for 24 months, which can be extended for a fee. Ourresearch and development expenses totaled approximately $14.5 million in2006, $17.1 million in 2007, and $18.3 million in 2008.

 

We believe we havesignificant technology expertise in developing and deploying highly scalableand reliable on demand CRM applications. All of our products have been designedusing industry standards for the Internet and are designed to meet thefollowing goals: cost efficient deployment, highly configurable, scalable,easily integrated, multi-tenant and capable of being internationalized. Thearchitectural components described below form the foundation for the deliveryof a variety of features within our solution.

 

*IntuitiveKnowledge Foundation.*  Artificialintelligence, self-learning, knowledgebase technologies and innovativeinformation retrieval technologies form the foundation of our solution. Thesetechnologies are combined within our customer service solution to provideself-service and automatic email response to users and as an automatedassistant for our clients’ customer service representatives. Core technologiesin the area of the knowledge foundation include automatic learning and decay ofthe relevancy and relatedness of information, natural language processing,word-stemming algorithms, information clustering and classification algorithms,and information retrieval technologies.

 

*Integrationwith Other Enterprise Applications.*  Our hosted and non-hosted clients are able to integrate oursolution with their other mission-critical enterprise applications throughseveral techniques, including: web services, application level triggers; userinterface extensibility that allows the integration of other applications intoour solution; and “pass through” authentication that allows our solution toinherit user credentials from other applications to identify and enforce accessto our clients’ web sites. The Developer portion of our Customer Communityportal allows our customers an on-line forum that provides information onintegration topics such as up-to-date documentation and sample integrations aswell as on-line discussion forums that are moderated by RightNow experts.

 

*HighlyCustomizable and Usable User Interface.*  The web portal interface portionof our product, which allows our clients to serve their customers through theweb, is browser based and provides support for all current browsers andversions, and complies with web accessibility standards. The web portalinterface is designed to be easily integrated into our client’s web sites andsimple for inexperienced internet users to understand. Our back-end interfaceutilizes Microsoft Corporation’s Smart Client technology. The back-endinterface is used by administrators, agents, sales representatives andmarketing users. The Microsoft Smart Client user interface (or “UI”)communicates with our server through web services. This UI combines the speedand power of traditional client/server applications with the flexibility andreduced total cost of ownership associated with browser-based applications.With the Microsoft Smart Client UI, a richer user experience is possible thancould be provided through a browser. Because the Microsoft Smart Client isautomatically network installed and updated, the desktop 

 

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maintenance headache generallyassociated with client/server applications is eliminated. Our back-endinterface can be easily customized without programming to support differentworkflows and can be extended to incorporate data from other applications.

 

*SoftwareArchitecture.*  Oursolution has been developed using a logical three-tier Internet architectureconsisting of presentation, application logic and data management layers.Because of the tiered separation, our solution is designed to be highlyscalable, allowing expansion at each tier. We deploy our solution in highlyavailable, highly scalable, load-balanced web server and clustered databaseserver configurations.

 

**Intellectual Property**

 

Our success depends to asignificant degree upon the development and protection of our intellectualproperty rights. We believe we have a rich repository of intellectual property.As of December 31, 2008, our intellectual property assets included eightissued U.S. patents, sixteen pending U.S. patents, one pending European patent,five U.S. trademark registrations, and multiple foreign trademarkregistrations. The majority of our patents and patent applications concern ourknowledgebase technology, including processes relating to the relativeusefulness ranking and the order of display of retrieved information in theknowledgebase; the ability of the knowledgebase to suggest related informationto a user accessing the knowledgebase; and the ability of the knowledgebase toproduce a relational map of help information items based on the historical usagepatterns of customers accessing the knowledgebase. Our patent portfolio alsoincludes patents and patent applications that relate to our voice technology,and our marketing and sales solutions.

 

The following is a summaryof our issued U.S. patents:

 

*ImplicitRating of Retrieved Information in an Information Search System.*  This process relates to aninformation search and retrieval system through a network, such as theInternet, in which the relative usefulness ranking and the order of display ofthe retrieved information in the knowledgebase is adjusted based on actionstaken by a user. This patent continues until April 2020.

 

*TemporalUpdates of Relevancy Rating of Retrieved Information in an Information SearchSystem.*  Thisprocess relates to an information search and retrieval system through anetwork, such as the Internet, in which the relative usefulness ranking and theorder of display of the retrieved information in the knowledgebase is adjustedbased on the amount of time elapsed since the particular information was lastaccessed. This patent continues until April 2020.

 

*UsageBased Strength between Related Information in an Information Retrieval System.*  This patent describes aninformation retrieval system in which information is displayed based onnavigation behavior of previous users. This patent continues until April 2020.

 

*System andMethod for Generating a Dynamic Interface through a Communications Network.*  This patent describes a systemfor dynamically adapting selections in an automatic phone support system. Thisinvention enables the provision of information from a dynamic knowledgebasethrough a telephone channel. This patent continues until June 2020.

 

*UsageBased Strength between Related Help Topics and Context Based Mapping Thereof ina Help Information retrieval System.*  This process allows the knowledgebase to suggest relatedinformation to a person based on the keyword search and navigation patterns ofthat person. This patent continues until April 2020.

 

*DisplayScreen for a Computer.*  This is a design patent relating to the user interface to oursoftware. This patent continues until March 2016.

 

*Method forRouting Electronic Correspondence Based on the Level and Type of EmotionContained Therein.* This process relates to determining the emotional content of anelectronic correspondence to route or prioritize the information, to set theexpectations of a customer support worker, to flag those workers who are usinginappropriate language with the customer, or determine another best course tosend the correspondence. In a preferred embodiment, a customer sends anelectronic correspondence to a company by email. Emotionally charged words orsymbols in each sentence are detected. The message is then given an emotionalranking, which is used to determine what future action is most appropriate forthe correspondence. This patent continues until October 2022.

 

*Method of Clustering Automation and ClassificationTechniques. *This inventioncovers a method for automaticallyclassifying and summarizing related information in a hierarchical manner. Thesystem comprises the steps and means for the presentation and analysis ofcollected data through the application of four distinct processes, namely,feature selection, clustering, classification and summarization. This patentcontinues until August 2021.

 

Our six registeredtrademarks in the United States are RIGHTNOW ®, RIGHT NOW ®, RIGHTNOWTECHNOLOGIES ® (stylized), SMARTASSISTANT ®, SALESNET AND LOCATOR ®. We use our“RightNow” mark as a descriptor of all of our products. These marks continueindefinitely, subject to continuous use and payment of registration fees at thestatutorily required intervals. We also use the following common law marks “RightNowAnalyticsTM,” “RightNow MarketingTM,” “RightNow FeedbackTM,” RightNow SalesTM,” “RightNowServiceTM,” “SmartSenseTM,” “RightNow VoiceTM,” “RightNow ChatTM,” “RightNow OfferAdvisorTM,” “RightNow ConnectTM,” and “RightStartTM.” Other trademarks, tradenames or service marks appearing in this report are the property of theirrespective holders.

 

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We also incorporate a numberof third party software products into our software pursuant to relevantlicenses covering such software and related underlying patents, the duration ofwhich range from term licenses to perpetual licenses. Some of the software isproprietary and some is open source. These functions are peripheral in nature,we are not substantially dependent upon these third party software licenses andwe believe the licensed software is generally replaceable, by either licensingor purchasing similar software from another vendor or building the softwarefunction ourselves.

 

**Competition**

 

The CRM software marketconsists of three major market segments: customer service, sales forceautomation and marketing automation. Within this segmentation, vendors areoffering solutions through either on demand or traditional on premise deliverymethods. We compete in all segments of the CRM software market and believe thatwe are the leader in on demand customer service.

 

The market for CRM solutionsis highly competitive and fragmented and is subject to rapidly changingtechnology, shifting client requirements, frequent introductions of newproducts and services, and increased marketing activities of other industryparticipants.

 

We face competition fromother companies currently providing customer service solutions, some of whichoffer hosted services, including BMC Software Corporation, Inc., eGainCommunications Corporation, Kana Software, Inc., Inquira Software, Inc.,Microsoft Corporation, Netsuite, Oracle Corporation, Parature, SAP AG,salesforce.com, and Talisma Corporation. In interactive voice responsetechnology, competing vendors include Microsoft, TuVox, and Voxify.

 

We expect to compete withthese and additional companies as we further expand into the CRM market, and asmore companies expand into the customer service segment. In addition, oursolutions compete with CRM systems that are developed and maintained internallyby businesses, as well as CRM products or services that are developed, orbundled with other products or services, and installed on a client’s premisesby software vendors. We also face competition from outsourced contact centerproviders who bundle solutions and agent labor in their service offerings. Tothe extent our competitors have an existing relationship with a potentialclient, that client may be unwilling to switch vendors due to the time andfinancial commitments already made with our competitors.

 

Many of our current andpotential competitors have longer operating histories and larger presence inthe general CRM market, greater name recognition, access to larger customerbases and substantially greater financial, technical,sales and marketing, management, service, support and other resources than wehave. As a result, such competitors may be able to respond more quickly than wecan to new or changing opportunities, technologies, standards or clientrequirements or devote greater resources to the promotion and sale of theirproducts than we can. In addition, many of our current and potentialcompetitors have established or may establish business, financial or strategicrelationships among themselves or with existing or potential clients, alliancepartners or other third parties, or may combine and consolidate to become moreformidable competitors with better resources.

 

New companies are enteringthe CRM software market, the on demand applications market and the on demandCRM market, or expanding from any one of these markets to the others. We expectthat new competitors, such as enterprise software vendors and online serviceproviders that have traditionally focused on enterprise resource planning orback office applications, will continue to enter the on demand CRM market withcompeting products as the on demand CRM market develops and matures. It ispossible that these new competitors could rapidly acquire significant marketshare.

 

We believe the principalfactors that generally determine a company’s competitive advantage in the ondemand customer service and broader CRM markets include the following:

 

·    Low total cost of ownership and easilydemonstrable cost-effective benefits for clients;

 

·                  Effectivenessin improving the quality of clients’ interactions with their customers acrosscustomer service, sales and marketing departments;

 

·                  Broadproduct functionality to meet complex client process requirements;

 

·                  Abilityto leverage information from customer interactions to more accurately targetmarketing efforts and enhance revenue opportunities;

 

·                  Speedand ease of implementation;

 

·                  Easeof use and associated high rates of utilization;

 

·                  Systemperformance, security, scalability, flexibility and reliability;

 

·                  Easeof integration with existing applications and data;

 

·                  Availabilityand quality of implementation, consulting and education services;

 

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·                  Qualityof client care;

 

·                  Competitivesales and marketing capabilities; and

 

·                  Financialstability and reputation of the vendor.

 

We cannot assure you that wewill be successful in all or any of these areas that we believe contribute tocompetitive advantage, or that we will be able to compete successfully againstcurrent or potential competitors, or that competition will not have a materialadverse effect on our business, financial condition and results of operations.

 

**Employees**

 

As of December 31,2008, we had 737 full-time employees. Of the total employees, we had 250 insales and marketing, 146 in software development, 173 in professional services,91 in technical support and hosting, and 77 in finance and administration. Noneof our employees are represented by a labor union. We believe that ourrelationship with our employees is good.

 

**Item 1A.    Risk Factors**

 

*Beforedeciding to purchase, hold or sell our common stock, you should carefullyconsider the risks described below, in addition to the other cautionarystatements and risks described elsewhere and the other information contained inthis report and in our other filings with the SEC, including our reports onForms 10-Q and 8-K. The risks and uncertainties described below are notthe only ones we face. Additional risks and uncertainties not presently knownto us or that we currently deem immaterial may also affect our business. If anyof these known or unknown risks or uncertainties actually occurs with materialadverse effects on RightNow, our business, financial condition and results ofoperations could be seriously harmed. In that event, the market price for ourcommon stock could decline and you may lose all or part of your investment.*

 

***General economic conditions could adversely affect our clients’ abilityor willingness to purchase our products, which could materially and adverselyaffect our results of operations.***

 

Our clients consist of largeand small companies in nearly all industry sectors and geographies. Potentialnew clients or existing clients could defer purchases of our products becauseof unfavorable macroeconomic conditions, such as rising interest rates,fluctuations in currency exchange rates, industry or national economicdownturns, industry purchasing patterns, and other factors. Our ability to growrevenues may be adversely affected by unfavorable economic conditions.

 

Inrecent months, there has been deterioration in global economic conditions dueto many factors, including the credit market crisis, reduced creditavailability, bank failures, slower economic activity, significant expensereductions, bankruptcies, concerns about inflation, current recession, andgeneral adverse business conditions. These conditions could lead to fewer salesof our products, longer sales cycles, customers requesting longer paymentterms, customers failing to pay amounts due, and slower collections of accountsreceivable. All of these factors could adversely impact our results ofoperations, cash flow from operations, and our financial position. In addition,we may be forced to respond to an economic downturn by contracting operations,which we may have difficulties managing in a timely fashion.

 

***We have significant international sales and are subject to risksassociated with operating in international markets including the risk offoreign currency exchange rate fluctuations.***

 

International salescomprised 29% and 31% of our revenue for the years ended December 31, 2007and 2008, respectively. We intend to continue to pursue and expand ourinternational business activities. Adverse political and economic conditionscould make it difficult for us to increase our international sales or tooperate abroad. International operations are subject to many inherent risks,including:

 

·            fluctuations in foreign currency exchangerates;

 

·            political, social and economic instability,including conflicts in the Middle East and elsewhere abroad, terrorist attacksand security concerns in general;

 

·            adverse changes in tariffs and otherprotectionist laws and business practices that favor local competitors;

 

·            longer collection periods and difficulties incollecting receivables from foreign entities;

 

·            exposure to different legal standards andburdens of complying with a variety of foreign laws, including employment, tax,privacy and data protection laws and regulations;

 

·            reduced protection for our intellectualproperty in some countries;

 

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·            expenses associated with localizing productsfor foreign countries, including translation into foreign languages; and

 

·            import and export license requirements andrestrictions of the United States and each other country in which we operate.

 

We believe thatinternational sales will continue to represent a significant portion of ourrevenue for the foreseeable future, and that continued growth will requirefurther expansion of our international operations. A substantial percentage ofour international sales are denominated in the local currency. As a result, anincrease in the relative value of the dollar could make our products moreexpensive and potentially less price competitive in international markets.

 

Marginson sales of our products and services in foreign countries, and on sales ofproducts and services that include costs from foreign based employees orforeign suppliers, could be materially adversely affected by foreign currencyexchange rate fluctuations.  During the year ended December 31, 2008,the U.S. dollar fluctuated significantly compared to the British pound, Euro,and Australian dollar.  Foreign currency fluctuations during 2008 decreasedrevenue by approximately $700,000 on a constant currency basis as compared tothe weighted average exchange rates during the year ended December 31,2007.   Additionally, deferred revenuedecreased by approximately $6.9 million on a constant currency basis ascompared to the period end rates as of December 31, 2007.  Expensesassociated with international revenue are generally paid in local currency,which generally provides a natural hedge to offset the revenue impact.  These expenses in 2008 decreased $1.5 millionon a constant currency basis as compared to the weighted average exchange ratesduring the year ended December 31, 2007. The Company’s primary exposure to movements in foreign currency exchangerates relate to non-U.S. dollar denominated sales in EMEA, and Asia-Pacific andnon-U.S. dollar denominated operating expenses incurred in these respectiveregions.   These foreign currency exposures may make it difficult tocompare our financial statements for the current period with financial statementsfrom earlier periods.

 

***We may not be able to achieve, sustain orincrease profitability in the future.***

 

We incurred a net loss ofmore than $7 million for the period ending December 31, 2008, and asof December 31, 2008, we had an accumulated deficit of $64.2 million.We expect to continue to incur significant professional services, sales andmarketing, research and development and general and administrative expenses aswe expand our operations and, as a result, we will need to generate significantrevenue to achieve profitability. In 2007, we changed our business model tosubstantially eliminate sales of perpetual licenses, which materially andadversely affected our operating margin. We may not be able to continue toimprove our operating results at the rate that has occurred in the past. Evenif we achieve profitability, we may not be able to sustain or increaseprofitability on a quarterly or annual basis in the future, which may cause theprice of our stock to decline.

 

***We face intense competition, and our failure to compete successfullycould make it difficult for us to add and retain clients and could reduce orimpede the growth of our business.***

 

The market for CRM solutionsis highly competitive and fragmented, and is subject to rapidly changingtechnology, shifting client requirements, frequent introductions of newproducts and services, and increased marketing activities of other industryparticipants.  Increased competition could result in commoditization,pricing pressure, reduced sales, lower margins or the failure of our solutionsto achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us toadd and retain clients, and our business, financial condition and results ofoperations will be seriously harmed.

 

We face competition from:

 

·            Companies currently providing customerservice solutions, some of whom offer hosted services, including BMC SoftwareCorporation, Inc., eGain Communications Corporation, Inquira Software, Inc.,Kana Software, Inc., Microsoft Corporation, Netsuite, Oracle Corporation,Parature, SAP AG, salesforce.com, and Talisma;

 

·            CRM systems that are developed and maintainedinternally by businesses;

 

·            CRM products or services that are developed,or bundled with other products or services, and installed on a client’s premisesby software vendors;

 

·            Outsourced contact center providers thatbundle solutions and agent labor in their service offerings;

 

·            New companies entering the CRM softwaremarket, the on demand applications market and the on demand CRM market, or expandingfrom any one of these markets to the others; and

 

·            Voice system integrators and voice-enabledIVR technology providers, such as Microsoft, TuVox, and Voxify.

 

Many of our current andpotential competitors have longer operating histories and larger presence inthe general CRM market, greater name recognition, access to larger customerbases and substantially greater financial, technical, sales and marketing,management, service, support and other resources than we have. As a result,such competitors may be able to respond more quickly than we can to new orchanging opportunities, technologies, standards or client requirements ordevote greater resources to the promotion and sale of their products and

 

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services than we can. To theextent our competitors have an existing relationship with a potential client,that client may be unwilling to switch vendors due to the time and financialcommitments already made with our competitors.

 

In addition, many of ourcurrent and potential competitors have established or may establish business,financial or strategic relationships among themselves or with existing orpotential clients, alliance partners or other third parties, or may combine andconsolidate to become more formidable competitors with better resources. For example, in January 2006, Oracle Corporation completed its acquisitionof Siebel Systems, Inc.  We also expect that new competitors, such asenterprise software vendors and online service providers that havetraditionally focused on enterprise resource planning or back officeapplications, will continue to enter the on demand CRM market with competingproducts as the on demand CRM market develops and matures.

 

***Our quarterly results of operations mayfluctuate in the future.***

 

Our quarterly revenue andresults of operations may fluctuate as a result of a variety of factors, manyof which are outside of our control. If our quarterly revenue or results ofoperations fall below the expectations of investors or securities analysts, theprice of our common stock could decline substantially. Fluctuations in ourresults of operations may be due to a number of factors, including, but notlimited to, those listed below and identified throughout this “Risk Factors”section:

 

·                      our ability to retain and increase sales toexisting clients, attract new clients and satisfy our clients’ requirements;

 

·                      general economic, industry and marketconditions;

 

·                      the mix of revenue between licensearrangements, professional services and subscription arrangements as salescommissions are generally expensed ratably over the term of an agreement forsubscription services, and expensed when invoiced for license arrangements andprofessional services;

 

·                      changes in the mix of revenue betweenprofessional services and software, hosting and support, because the grossmargin on professional services is typically lower than the gross margin onsoftware, hosting and support;

 

·                      changes in the mix of voice self serviceapplications sold and/or usage volume, because the gross margin on voice selfservice applications is typically lower than the gross margin on our sales,marketing, feedback and service applications;

 

·                      the timing and success of new productintroductions or upgrades by us or our competitors;

 

·                      the timing of professional service sales andour ability to appropriately staff and train professional service resourceswithout negatively impacting professional service margins;

 

·                      changes in our pricing policies or those ofour competitors;

 

·                      the amount and timing of expenditures relatedto expanding our operations;

 

 ·                   changes in our assumptions of stock pricevolatility, employee exercise behaviors, and option forfeiture rates, orchanges in the number of  stock optionsgranted and vesting requirements in any particular period, which effects theamount of stock-based compensation expense;

 

·                      changes in the payment terms for our productsand services, including changes in the mix of payment options chosen by ourcustomers;

 

·                      the purchasing and budgeting cycles of ourclients;

 

·                      changes in the mix of subscription andperpetual licenses sold in a particular quarter, because perpetual license revenueis recorded into revenue upon delivery whereas subscriptions are recorded intorevenue ratably over the contractual period; and

 

·                      changes in credit market conditionsassociated with auction rate securities, which could permanently impair therecoverability of these investments.

 

Because the sales cycle forthe evaluation and implementation of our solutions typically ranges from 60 to180 days, we may also experience a delay between increasing operatingexpenses and the generation of corresponding revenue, if any. Moreover, becausemost of the revenue from new sales agreements is recognized over time,downturns or upturns in sales may not be immediately reflected in our operatingresults. Additionally, our professional service margins may be negatively impactedby training requirements for new professional service resources and/or customerscheduling issues.  Most of our expenses, such as salaries and third-partyhosting co-location costs, are relatively fixed in the short-term, and ourexpense levels are based in part on our expectations regarding future revenuelevels. As a result, if revenue for a particular quarter is below ourexpectations, we may not be able to proportionally reduce operating expensesfor that quarter, causing a disproportionate effect on our expected results ofoperations for that quarter.

 

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Due to the foregoingfactors, and the other risks discussed in this report, you should not rely onquarter-to-quarter comparisons of our results of operations as an indication ofour future performance.

 

***Failure to effectively develop and expand our sales and marketingcapabilities could harm our ability to increase our client base and achievebroader market acceptance of our solutions.***

 

Increasing our client baseand achieving broader market acceptance of our solutions may depend to asignificant extent on the effectiveness of our sales and marketingprograms/operations.   Our businesswill be seriously harmed if our efforts do not maximize revenue per sales andmarketing headcount.  We also may notachieve anticipated revenue growth from our third-party channel partners if weare unable to attract and retain additional motivated channel partners, if anyexisting or future channel partners fail to successfully market, resell,implement or support our solutions for their customers, or if they representmultiple providers and devote greater resources to market, resell, implementand support competing products and services.

 

***The majority of our solutions are sold pursuant to time-basedagreements, and if our existing clients elect not to renew or to renew on termsless favorable to us, our business, financial condition and results ofoperations will be adversely affected.***

 

Our solutions are generallysold pursuant to time-based agreements that are typically subject to renewalevery two years or less and our clients have no obligation to renew. Becauseour clients may elect not to renew, we may not be able to consistently andaccurately predict future renewal rates. Our clients’ renewal rates may declineor fluctuate as a result of a number of factors, including their level ofsatisfaction with our solutions, their ability to continue their operations orinvest in customer service, their acceptance of a change from term licenseagreements to subscription service agreements, or the availability and pricingof competing products. If large numbers of existing clients do not renew, orrenew on terms less favorable to us, and if we cannotreplace or supplement those non-renewals with new agreements generating thesame or greater level of revenue, our business, financial condition and resultsof operations will be adversely affected.

 

***We have experienced growth in recent periods. If we fail to manage ourgrowth effectively, we may be unable to execute our business plan, maintainhigh levels of service or adequately address competitive challenges.***

 

To achieve our businessobjectives, we will need to continue to expand our business at an appropriatepace. This expansion has placed, and is expected to continue to place, a significantstrain on our managerial, administrative, operational, financial and otherresources. We anticipate that this expansion will require substantialmanagement effort and significant additional investment in our infrastructure.If we are unable to successfully manage our growth, our business, financialcondition and results of operations will be adversely affected.

 

Part of the challengethat we expect to face in the course of our expansion is to maintain the highlevel of customer service to which our clients have become accustomed. To date,we have focused on providing personalized account management and customerservice on a frequent basis to ensure our clients are effectively leveragingthe capabilities of our solution. We believe that much of our success to datehas been the result of high client satisfaction, attributable in part to thisfocus on client service. To the extent our client base grows, we will need toexpand our account management, client service and other personnel, andthird-party channel partners, in order to enable us to continue to maintainhigh levels of client service and satisfaction. If we are not able to continueto provide high levels of client service, our reputation, as well as ourbusiness, financial condition and results of operations, could be harmed.

 

***If there are interruptions or delays in our hosting services throughthird-party error, our own error or the occurrence of unforeseeable events,delivery of our solutions could become impaired, which could harm our relationshipswith clients and subject us to liability.***

 

As of December 31,2008, approximately 90% of our clients were using our hosting services fordeployment of our software applications. We generally provide our hostingservices for our applications through computer hardware that we own and that iscurrently located in third-party web hosting co-location facilities maintainedand operated in California, Illinois, Massachusetts, New Jersey and London,England. Our voice applications for several international customers are hostedby third parties who also own and operate the hardware on which ourapplications reside.  We do not maintain long-term supply contracts withany of our hosting providers, and providers do not guarantee that our clients’access to hosted solutions will be uninterrupted, error-free or secure. Ouroperations depend on our providers’ ability to protect their and our systems intheir facilities against damage or interruption from natural disasters, poweror telecommunications failures, criminal acts and similar events. Our back-upcomputer hardware and systems have not been tested under actual disasterconditions and may not have sufficient capacity to recover all data andservices in the event of an outage occurring simultaneously at all hostingfacilities. In the event that our hosting facility arrangements wereterminated, or there was a lapse of service or accidental or willful damage tosuch facilities, we could experience lengthy interruptions in our hostingservice as well as delays and/or additional expense in arranging new facilitiesand services. Any or all of these events could cause our clients to lose accessto their important data. In addition, the failure by our third-party hostingfacilities to meet our capacity requirements could result in interruptions inour service or impede our ability to scale our operations.

 

Design and mechanicalerrors, spikes in usage volume and failure to follow system protocols andprocedures could cause our systems to fail, resulting in interruptions in ourclients’ service to their customers. Any interruptions or delays in our hostingservices, whether as a result of third-party error, our own error, naturaldisasters or security breaches, whether accidental or willful, could harm ourrelationships with clients and our reputation. This in turn could reduce ourrevenue, subject us to liability, cause us to issue credits or pay penalties orcause clients to fail to renew their licenses, any of which could adverselyaffect our business, financial condition and results of operations. In theevent of damage or interruption, our insurance policies may not adequatelycompensate us for any losses that we may incur.

 

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***If the security of our clients’ confidential information contained inour systems or stored by use of our software is breached or otherwise subjectedto unauthorized access, our hosting service or our software may be perceived asnot being secure and clients may curtail or stop using our hosting service andour solutions.***

 

Our hosting systems and oursoftware store and transmit proprietary information and critical data belongingto our clients and their customers. Any accidental or willful security breachesor other unauthorized access could expose us to a risk of information loss,litigation and other possible liabilities. If security measures are breachedbecause of third-party action, employee error, malfeasance or otherwise, or ifdesign flaws in our software are exposed and exploited, and, as a result, athird party obtains unauthorized access to any of our clients’ data, ourrelationships with clients and our reputation will be damaged, our business maysuffer and we could incur significant liability. Because techniques used toobtain unauthorized access or to sabotage systems change frequently andgenerally are not recognized until launched against a target, we and ourthird-party hosting co-location facilities may be unable to anticipate thesetechniques or to implement adequate preventative measures.

 

***If we fail to respond effectively to rapidly changing technology andevolving industry standards, particularly in the on demand CRM industry, oursolutions may become less competitive or obsolete.***

 

The CRM industry ischaracterized by rapid technological advances, changes in client requirements,frequent new product and service introductions and enhancements, changes inprotocols and evolving industry standards. Our hosted business model and the ondemand CRM market are relatively new and may evolve even more rapidly than therest of the CRM market. Competing products and services based on newtechnologies or new industry standards may perform better or cost less than oursolutions and could render our solutions less competitive or obsolete. Inaddition, because our solutions are designed to operate on a variety of networkhardware and software platforms using a standard Internet web browser, we willneed to continuously modify and enhance our solutions to keep pace with changesin Internet-related hardware, software, communication, browser and databasetechnologies and to integrate with our clients’ systems as they change andevolve. Furthermore, uncertainties about the timing and nature of new networkplatforms or technologies, or modifications to existing platforms ortechnologies, could increase our research and development expenses.

 

Our software incorporatesuse of Microsoft’s .NET Framework, and its Smart Client methodology. The .NETFramework is core functionality that Microsoft incorporates into operatingsystems, while the Smart Client methodology enables development and deploymentof software applications using the .NET Framework. We believe that the .NETFramework and Smart Client enable us to provide users with a richer experienceand better functionality than would be possible using a pure Web-basedapplication. However, the .NET Framework has not been universally adopted. Ifsoftware users do not adopt the .NET Framework or if the .NET Framework issuperseded, the potential market for our solutions will be reduced and we mayneed to develop an alternative architecture.

 

If we are unable tosuccessfully develop and market new and enhanced solutions that respond in atimely manner to changing technology and evolving industry standards, and if weare unable to satisfy the diverse and evolving technology needs of our clients,our business, financial condition and results of operations will suffer.

 

***Our failure to attract and retain qualified or key personnel mayprevent us from effectively developing, marketing, selling, integrating andsupporting our products.***

 

Our success and futuregrowth depends to a significant degree upon the skills, experience, performanceand continued service of our senior management, engineering, sales, marketing,service, support and other key personnel. Specifically, we believe that ourfuture success is highly dependent on Greg Gianforte, our founder, Chairman andChief Executive Officer. In addition, we do not have employment agreements withany of our senior management or key personnel that require them to remain ouremployees and, therefore, they could terminate their employment with us at anytime without penalty. If we lose the services of Mr. Gianforte or any ofour other key personnel, our business will be severely disrupted and we may beunable to operate effectively. We do not maintain “key person” life insurancepolicies on any of our key employees except Mr. Gianforte. This lifeinsurance policy would not be sufficient to compensate us for the loss of hisservices. Our future success also depends in large part upon our ability toattract, train, integrate, motivate and retain highly skilled employees,particularly sales, marketing and professional services personnel, softwareengineers, product trainers, and senior personnel.

 

***Our failure to attract, manage, support and retain qualified partnersmay prevent us from effectively deploying product and professional services.***

 

Our success and futuregrowth depends in part upon the skills, experience, performance and continuedservice of our partners. We engage with partners in a number of ways, includingassisting us to identify prospective customers, to distribute our solutions, todevelop complementary solutions, and to help us to fulfill professionalservices engagements. We believe that our future success depends in part uponour ability to develop strategic, long term and profitable partnerships. If wedo not acquire and retain the right partners, our products might becomeuncompetitive, we may be unable to take full advantage of the potential demandfor our solutions, or our ability to rapidly deliver our solutions may be impaired.The use of partners to fulfill customer requirements may impact our normalmargins, and affect the profitability of customer transactions.

 

***If our solutions fail to perform properly or if they contain technicaldefects, our reputation will be harmed, our market share would decline and wecould be subject to product liability claims.***

 

Our software products maycontain undetected errors or defects that may result in product failures, slowresponse times, or otherwise cause our products to fail to perform inaccordance with client expectations. Because our clients use our products forimportant aspects of their business, any errors or defects in, or otherperformance problems with, our products could hurt our reputation and maydamage our clients’ 

 

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businesses. If that occurs,we could lose future sales, or our existing clients could elect to not renew orto delay or withhold payment to us, which could result in an increase in ourprovision for doubtful accounts and an increase in collection cycles foraccounts receivable. Clients also may make warranty or other claims against us,which could result in the expense and risk of litigation. Product performanceproblems could result in loss of market share, failure to achieve marketacceptance and the diversion of development resources. If one or more of ourproducts fails to perform or contains a technical defect, a client may assert aclaim against us for substantial damages, whether or not we are responsible forthe product failure or defect. We do not currently maintain any warrantyreserves.

 

Product liability claimscould require us to spend significant time and money in litigation or to paysignificant settlements or damages. Although we maintain general liabilityinsurance, including coverage for errors and omissions, this coverage may notbe sufficient to cover liabilities resulting from such product liability claims.Also, our insurer may disclaim coverage. Our liability insurance also may notcontinue to be available to us on reasonable terms, in sufficient amounts, orat all. Any product liability claims successfully brought against us wouldcause our business to suffer.

 

***If we are unable to protect our intellectual property rights, ourcompetitive position could be harmed or we could be required to incursignificant expenses to enforce our rights.***

 

Our success depends to asignificant degree upon the protection of our software and other proprietarytechnology rights. We rely on trade secret, copyright and trademark laws,patents and confidentiality agreements with employees and third parties, all ofwhich offer only limited protection. The steps we have taken to protect ourintellectual property may not prevent misappropriation of our proprietaryrights or the reverse engineering of our solutions. We may not be able toobtain any further patents or trademarks, and our pending applications may notresult in the issuance of patents or trademarks. Any of our issued patents maynot be broad enough to protect our proprietary rights or could be successfullychallenged by one or more third parties, which could result in our loss of theright to prevent others from exploiting the inventions claimed in thosepatents. Furthermore, legal standards relating to the validity, enforceabilityand scope of protection of intellectual property rights in other countries areuncertain and may afford little or no effective protection of our proprietarytechnology. Consequently, we may be unable to prevent our proprietarytechnology from being exploited abroad, which could diminish internationalsales or require costly efforts to protect our technology. Policing the unauthorizeduse of our products, trademarks and other proprietary rights is expensive,difficult and, in some cases, impossible. Litigation may be necessary in thefuture to enforce or defend our intellectual property rights, to protect ourtrade secrets or to determine the validity and scope of the proprietary rightsof others. Such litigation could result in substantial costs and diversion ofmanagement resources, either of which could harm our business. Accordingly,despite our efforts, we may not be able to prevent third parties frominfringing upon or misappropriating our intellectual property.

 

***Our product development efforts may be constrained by the intellectualproperty of others, and we may become subject to claims of intellectualproperty infringement, which could be costly and time-consuming.***

 

The software and Internetindustries are characterized by the existence of a large number of patents,trademarks and copyrights, and by frequent litigation based upon allegations ofinfringement or other violations of intellectual property rights. As we seek toextend our CRM product and service offerings, we may be constrained by theintellectual property rights of others. We have in the past been named as adefendant in a lawsuit alleging intellectual property infringement, and we mayagain in the future have to defend against intellectual property lawsuits. Wemay not prevail in any future intellectual property infringement litigationgiven the complex technical issues and inherent uncertainties in litigation.Any claims, regardless of their merit, could be time-consuming and distractingto management, result in costly litigation or settlement, cause productdevelopment delays, or require us to enter into royalty or licensingagreements. If any of our products violate third-party proprietary rights, wemay be required to re-engineer our products or seek to obtain licenses fromthird parties, which may not be available on reasonable terms or at all.Because our sales agreements typically require us to indemnify our clients fromany claim or finding of intellectual property infringement, any such litigationor successful infringement claims could adversely affect our business,financial condition and results of operations. Any efforts to re-engineer ourproducts, obtain licenses from third parties on favorable terms or license asubstitute technology may not be successful and, in any case, may substantiallyincrease our costs and harm our business, financial condition and results ofoperations.

 

Further, our softwareproducts contain open source software components that are licensed to us undervarious public domain licenses. While we believe we have complied with ourobligations under the various applicable licenses for open source software thatwe use, there is little or no legal precedent governing the interpretation ofmany of the terms of certain of these licenses and therefore the potentialimpact of such terms on our business is somewhat unknown. Use of open sourcestandards also may make us more vulnerable to competition because the publicavailability of open source software could make it easier for new marketentrants and existing competitors to introduce similar competing productsquickly and cheaply.

 

***The market for our on demand application services is at a relativelyearly stage of development, and if it does not develop or develops more slowlythan we expect, our business will be harmed.***

 

The market for on demandapplication services is at a relatively early stage of development, and it isuncertain whether these application services will achieve and sustain highlevels of demand and market acceptance. Our success will depend to asubstantial extent on the willingness of companies to increase their use of ondemand application services in general and for on demand customer relationshipmanagement applications in particular. The willingness of companies to increasetheir use of any on demand application services is in part dependent on theactual and perceived reliability of hosted solutions. In addition, manycompanies have invested substantial personnel and financial resources tointegrate traditional enterprise software into their businesses, and thereforemay be reluctant or unwilling to migrate to on 

 

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demand application services.While we have supported traditional on site deployment of our softwareapplications, widespread market acceptance of our on demand software solutions iscritical to the success of our business. Other factors that may affect themarket acceptance of our solutions include:

 

·            on demand security capabilities andreliability;

 

·            concerns with entrusting a third party tostore and manage critical customer data;

 

·                  ourability to meet the needs of broader segments of the CRM market or other ondemand markets;

 

·                  thelevel of customization we offer;

 

·                  ourability to continue to achieve and maintain high levels of client satisfaction;

 

·                  concernswith purchasing critical CRM solutions from a company with a history ofoperating losses;

 

·                  customeracceptance of our subscription sales arrangements; and

 

·                  theprice, performance and availability of competing products and services.

 

If businesses do notperceive the benefits of on demand solutions in general, or our on demandsolutions in particular, then the market for these solutions may not developfurther, or it may develop more slowly than we expect, either of which wouldadversely affect our business, financial condition and results of operations.

 

***If our efforts to enhance existing solutions, introduce new solutionsor expand the applications for our products and solutions to broader CRMmarkets do not succeed, our ability to grow our business will be adverselyaffected.***

 

Approximately 85% of ourrevenue is derived from RightNow Service, a suite of solutions used to optimizecustomer service operations. If we are unable to successfully develop and sellnew and enhanced versions of RightNow Service, or introduce new products andsolutions for the customer service market, our financial performance willsuffer. Although to date the majority of business has been focused on providingsolutions for customer service operations, we provide sales, marketing,feedback and voice-enabled applications to expand our solution offerings.Additionally, we have focused on eService solutions to call centers.  Our efforts to expand beyond the customerservice market may not be successful in part because certain of our competitorshave far greater experience and brand recognition in the broader segments ofthe CRM market. In addition, our efforts to expand our on demand softwaresolutions beyond the customer service market may divert management resourcesfrom our existing operations and require us to commit significant financialresources to a market where we are less proven, which may harm our business, financialcondition and results of operations.

 

***Future acquisitions could disrupt ourbusiness and harm our financial condition and results of operations.***

 

In order to expand ouraddressable market, we may decide to acquire additional businesses, products andtechnologies. In May 2005, we acquired the assets of Convergent Voice andin May 2006, we acquired Salesnet, Inc. Acquisitions could requiresignificant capital infusions and could involve many risks, including, but notlimited to, the following:

 

·            an acquisition may negatively impact ourresults of operations because it may require incurring large one-time charges,substantial debt or liabilities; it may require the amortization or write downof amounts related to deferred compensation, goodwill and other intangibleassets; or it may cause adverse tax consequences, substantial depreciation ordeferred compensation charges;

 

·            we may encounter difficulties in assimilatingand integrating the business, technologies, products, personnel or operations ofcompanies that we acquire, particularly if key personnel of the acquiredcompany decide not to work for us;

 

·            our existing and potential clients and thecustomers of the acquired company may delay purchases due to uncertaintyrelated to an acquisition;

 

·            an acquisition may disrupt our ongoingbusiness, divert resources, increase our expenses and distract our management;

 

·            the acquired businesses, products ortechnologies may not generate sufficient revenue to offset acquisition costsand could result in material asset impairment charges;

 

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·            we may have to issue equity securities tocomplete an acquisition, which would dilute our stockholders and couldadversely affect the market price of our common stock; and

 

·            acquisitions may involve the entry into ageographic or business market in which we have little or no prior experience.

 

We cannot assure you that wewill be able to identify or consummate any future acquisitions on favorableterms, or at all. If we do pursue any future acquisitions, it is possible thatwe may not realize the anticipated benefits from the acquisitions or that thefinancial markets or investors will negatively view the acquisitions. Even ifwe successfully complete an acquisition, it could adversely affect ourbusiness, financial condition and results of operations.

 

***Changes to financial accounting standardsmay affect our results of operations and financial condition.***

 

Generally acceptedaccounting principles and accompanying accounting pronouncements,implementation guidelines and interpretations for many aspects of our business,such as software revenue recognition, accounting for stock-based compensation,unanticipated ambiguities in fair value accounting standards  and incometax uncertainties, are complex and involve subjective judgments by management.Changes to generally accepted accounting principles, their interpretation, orchanges in our products or business could significantly change our reportedearnings and financial condition and could add significant volatility to thosemeasures.

 

***The required adoption of SFAS 123R makes stock options a lessattractive form of employee compensation, and our use of alternative forms ofemployee compensation in response to SFAS 123R could adversely affect ourability to attract and retain personnel.***

 

We have historically usedstock options as a key component of our employee compensation because webelieve it aligns employees’ interests with our stockholders’ interest,encourages employee retention, and provides a competitive component of ouroverall compensation program. Due to the required adoption of SFAS 123R, andthe recording of stock option expense on our operating statements, we maydetermine that it is in our best interest to reduce the number or size of ourstock-based awards, or change the type of awards granted. In doing so, we maynot be able to attract, retain and motivate our employees.

 

***With the recent volatility in the capital markets, there is a risk thatwe could suffer a loss of principal in our cash and cash equivalents and shortterm investments and suffer a reduction in our interest income or in our returnon investments. Additionally funds associated with auction rate securities maybe inaccessible in excess of 12 months, which may result in market valuedeclines, which could have a material impact on our operating results in theperiod it is recognized.***

 

We invest our cash and cashequivalents and short-term investments pursuant to our investment policy incash, money market funds, commercial paper, corporate bonds and governmentagency securities, which are of investment grade quality. Prior to March 3,2008 our investment policy allowed us to invest cash in auction-rate securities(“ARS”). At December 31, 2008 we held approximately $5.0 million par valueARS that are subject to general credit, liquidity, market, and interest raterisks, which may be exacerbated by U.S. sub-prime mortgage defaults that haveaffected various sectors of the financial markets and caused credit andliquidity issues. During the fourth quarter of 2008 we executed a settlementagreement to redeem the ARS held by us at par with our broker commencing June 2010through July 2012. By accepting the terms of the settlement, we (1)received the non-transferable right (“put option”) to sell our ARS at par valueto the broker commencing June 2010 through July 2012, and (2) gave the brokerthe right to purchase the ARS from us at any time after the executed settlementagreement date as long as we receive par value. We expect to sell the ARS underthe put option. Redemption of these investments may be subject to brokeragehouse default.  As a result of thissettlement, we reclassified the $4.2 million ARS from available for salesecurities to trading securities.  Inconnection with the reclassification into trading securities, we recognized another-than-temporary impairment loss of $775,000 due to decline in fair value,which was included in other expense, net. Partially, offsetting this loss within other expense, net was a $738,000gain related to the put option we obtained pursuant to the settlementagreement.  Our inability to dispose ofour ARS prior to June 2010 could negatively impact our liquidity and cashon hand, which, in turn, could cause us to forego potentially beneficialoperational and strategic transactions or to incur additionalindebtedness.  Additionally, we could beadversely impacted if the broker is unable to meet its obligations under therepurchase agreement.

 

***We may not be able to secure additionalfinancing on favorable terms, or at all, to meet our future capital needs.***

 

We may require additionalcapital to respond to business challenges, including the need to develop newsolutions or enhance our existing solutions, enhance our operatinginfrastructure, fund expansion, respond to competitive pressures and acquirecomplementary businesses, products and technologies. Absent sufficient cash flowfrom operations, we may need to engage in equity or debt financings to secureadditional funds to meet our operating and capital needs. In addition, eventhough we may not need additional funds, we may still elect to sell additionalequity or debt securities or obtain credit facilities for other reasons. We maynot be able to secure additional debt or equity financing onfavorable terms, or at all, at the time when we need such funding. If we raiseadditional funds through further issuances of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution intheir percentage ownership of our company, and any new equity securities weissue could have rights, preferences and privileges senior to those of holdersof our common stock. Any debt financing secured by us in the future couldinvolve restrictive covenants relating to our capital raising activities andother financial and operational matters, which may make it more difficult forus to obtain additional capital, to pay dividends and to pursue businessopportunities, including potential acquisitions. In addition, if we decide toraise funds through debt or convertible debt financings, we may be unable tomeet our interest or principal payments.

 

***We cannot assure our stockholders that our stock repurchase programwill enhance long-term stockholder value and stock repurchases could increasethe volatility of the price of our common stock and will diminish our cashreserves.***

 

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On October 20, 2008, weannounced that our Board of Directors approved a stock repurchaseprogram.  Under the program, we are authorized to repurchase up to $15million of our outstanding shares of common stock from time to time atprevailing prices in the open market or otherwise over the next twoyears.  The timing and actual number of shares repurchased depend on avariety of factors including the timing of open trading windows, price,corporate and regulatory requirements, and other market conditions. The programmay be suspended or discontinued at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect our stock priceand increase its volatility. The existence of a stock repurchase program couldalso cause our stock price to be higher than it would be in the absence of sucha program and could potentially reduce the market liquidity for ourstock.  Additionally, our stock repurchase program will diminish our cashreserves, which could impact our ability to pursue possible future strategicopportunities and acquisitions and could result in lower overall returns on ourcash balances.  There can be no assurance that any stock repurchases willenhance stockholder value because the market price of our common stock maydecline below the levels at which we repurchased shares of stock.  Although our stock repurchase program isintended to enhance long-term stockholder value, short-term stock pricefluctuations could reduce the program’s effectiveness.  As of December 31, 2008, we repurchasedfor $13.2 million approximately 1.9 million of our outstanding common sharesunder the stock repurchase program.

 

***The success of our products and our hosted business depends on thecontinued growth and acceptance of the Internet as a business andcommunications tool, and the related expansion of the Internet infrastructure.***

 

The future success of ourproducts and our hosted business depends upon the continued and widespreadadoption of the Internet as a primary medium for commerce, communication andbusiness applications. Our business growth would be impeded if the performanceor perception of the Internet, or companies providing hosted solutions, washarmed by security problems such as “viruses,” “worms” and other maliciousprograms, reliability issues arising from outages and damage to Internetinfrastructure, delays in development or adoption of new standards andprotocols to handle increased demands of Internet activity, increased costs,decreased accessibility and quality of service, or increased governmentregulation and taxation of Internet activity.

 

Federal, state or foreigngovernment bodies or agencies have in the past adopted, and may in the futureadopt, laws or regulations affecting data privacy, the solicitation,collection, processing or use of personal or consumer information, the use ofthe Internet as a commercial medium and the use of email for marketing or otherconsumer communications. In addition, government agencies or privateorganizations may begin to impose taxes, fees or other charges for accessingthe Internet or for sending commercial email. These laws or charges could limitthe growth of Internet-related commerce or communications generally, result ina decline in the use of the Internet and the viability of Internet-basedservices such as ours and reduce the demand for our products, particularly ourRightNow Marketing solution.

 

The Internet hasexperienced, and is expected to continue to experience, significant user andtraffic growth, which has, at times, caused user frustration with slow accessand download times. If Internet activity grows faster than Internetinfrastructure or if the Internet infrastructure is otherwise unable to supportthe demands placed on it, or if hosting capacity becomes scarce, our businessgrowth may be adversely affected.

 

***Privacy concerns and laws or other domesticor foreign regulations may adversely affect our business or reduce sales of oursolutions.***

 

Businesses using oursolutions collect personal information regarding their customers when thosecustomers contact them with customer service inquiries. A valuable component ofour solutions is their ability to allow our clients to use and analyze theircustomers’ information to increase sales, marketing and up-sell or cross-sellopportunities. Federal, state and foreign government bodies and agencies,however, have adopted and are considering adopting laws and regulationsregarding the collection, use and disclosure of personal information obtainedfrom consumers. The costs of compliance with, and other burdens imposed by,such laws and regulations that are applicable to the businesses of our clientsmay limit the use and adoption of this component of our solutions and reduceoverall demand for our solutions. Furthermore, even where a client desires tomake full use of these features in our solutions, privacy concerns may causeour clients’ customers to resist providing the personal data necessary to allowour clients to use our solutions most effectively. Even the perception ofprivacy concerns, whether or not valid, may inhibit market acceptance of ourproducts.

 

European Union members haveimposed restrictions on the collection and use of personal data that are farmore stringent, and impose more significant burdens on subject businesses, thancurrent privacy standards in the United States. All of these domestic andinternational legislative and regulatory initiatives may adversely affect ourclients’ ability to collect and/or use demographic and personal informationfrom their customers, which could reduce demand for our solutions.

 

In addition to governmentactivity, privacy advocacy groups and the technology and direct marketing industriesare considering various new, additional or different self-regulatory standardsthat may place additional burdens on us. If the gathering of profilinginformation were to be curtailed in this manner, customer service CRM solutionswould be less effective, which would reduce demand for our solutions and harmour business.

 

***Non-solicitation concerns, laws or regulations may adversely affect ourclients’ ability to perform outbound marketing and other email communications,which could reduce sales of our solutions.***

 

In January 2004, thefederal Controlling the Assault of Non-Solicited Pornography and Marketing Actof 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Act regulates thetransmission and content of commercial emails and, among other things,obligates the sender of such emails to provide recipients with the ability toopt-out of receiving future emails from the sender, and establishes penaltiesfor the transmission of email messages which are intended to deceive therecipient as to source or content. Many state legislatures also have adoptedlaws that impact the delivery of commercial email, and laws that regulatecommercial email practices have been enacted in many of 

 

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the internationaljurisdictions in which we do business, including Europe, Australia, Japan, andCanada. In addition, Internet service providers and licensors of softwareproducts have introduced a variety of systems and products to filter outcertain types of commercial email, without any common protocol to determinewhether the recipient desired to receive the email being blocked. As a result,it is difficult for us to determine in advance whether or not emails generatedby our clients using our solutions will be permitted by spam filters to reachthe intended recipients.

 

Our RightNow Marketingsolution specifically serves the market for mass distribution marketing andother email communications. The increasing regulation of email delivery, bothdomestically and internationally, and the spam filtering practices of Internetservice providers and email users generally, will place significant additionalburdens on our clients who have outbound communication programs, and may causethose clients to substantially change their outbound communications programs orabandon them altogether. These factors may lead to a reduction in sales of ourRightNow Marketing solution, may make it necessary to redesign our RightNowMarketing solution to make it easier for our clients to conform to therequirements of such laws and standards, which would increase our expenses, ormay make it necessary for us to redefine the market for and use of our RightNowMarketing solution, which could reduce our revenue.

 

***The significant influence over stockholder voting matters and ouroffice leases that may be exercised by our founder and Chief Executive Officerwill limit your ability to influence corporate actions and may require us tofind alternative office space to lease or buy in the future.***

 

At December 31, 2008,Greg Gianforte, our founder and Chief Executive Officer, and his spouse, SusanGianforte, have voting power over approximately 25.1% of our outstanding commonstock and, together with other officers and directors, have voting power overapproximately 30.0% of our outstanding common stock. In addition, none of theshares of common stock over which Mr. Gianforte and Mrs. Gianfortehave voting power are subject to vesting restrictions. As a result, Mr. Gianforteand Mrs. Gianforte, acting together with some of our other officers anddirectors, may be able to influence matters requiring stockholder approval,including the election of directors, management changes and approval ofsignificant corporate transactions. This concentration of voting power may havethe effect of delaying, preventing or deterring a change in control ofRightNow, could deprive our stockholders of an opportunity to receive a premiumfor their common stock as part of a sale of RightNow and might reduce themarket price of our common stock.

 

In addition, Mr. Gianfortebeneficially owns, directly or indirectly, a 50% membership interest in GenesisPartners, LLC, our landlord from whom we lease our principal offices inBozeman, Montana. Consequently, Mr. Gianforte has significant influenceover any decisions by Genesis Partners regarding renewal, modification ortermination of our Bozeman, Montana leases. In the event that our currentleases with Genesis Partners were terminated or otherwise could not be renewed,or came up for renewal on commercially unreasonable terms, we would be requiredto find alternative office space to lease or buy.

 

***Anti-takeover provisions in our charter documents and Delaware lawcould discourage, delay or prevent a change in control of our company and mayaffect the trading price of our common stock.***

 

Provisions of ourcertificate of incorporation and bylaws and Delaware law may discourage, delayor prevent a merger or acquisition that a stockholder may consider favorableand may limit the market price of our common stock. These provisions includethe following:

 

·            establishing a classified board in which onlya portion of the total board members will be elected at each annual meeting;

 

·            authorizing the board to issue preferredstock;

 

·            providing the board with sole authority toset the number of authorized directors and to fill vacancies on the board;

 

·            limiting the persons who may call specialmeetings of stockholders;

 

·            prohibiting certain transactions undercertain circumstances with interested stockholders;

 

·            requiring supermajority approval to amendcertain provisions of the certificate of incorporation; and

 

·            prohibiting stockholder action by writtenconsent.

 

It is possible that theprovisions contained in our certificate of incorporation and bylaws, the votingrights held by insiders and the ability of our board of directors to issuepreferred stock without stockholder action may have the effect of delaying,deferring or preventing a change in control of our Company without furtheraction by the stockholders, may discourage bids for our common stock at a premiumover the market price of our common stock and may adversely affect the marketprice of our common stock and the voting and other rights of the holders of ourcommon stock.

 

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**Item 1B.       UnresolvedStaff Comments**

 

None.

 

**Item 2.          Properties**

 

Our corporate headquarters,including our principal administrative, marketing, technical support andresearch and development facilities, are located in Bozeman, Montana, where welease approximately 30,000 square feet with a term that expires in March 2011,and approximately 22,000 square feet under two leases with terms that expire inMarch and June 2010. Additionally, we have a lease agreement for anadditional 29,000 square feet in Bozeman with a term that expires in February 2017.We also currently occupy a number of sales and service offices in California,Illinois, Massachusetts, New York, Texas, Virginia, Canada, Australia, Germany,Holland, Japan and the United Kingdom, where we lease or license the use of anaggregate of approximately 80,000 square feet under multiple agreements, whichhave terms that expire between March 2009 and December 2013. Weexpect to renew in normal course the lease that expires in March 2009. Webelieve that our current facilities are suitable and adequate to meet ourcurrent needs, and that suitable additional or substitute space will beavailable as needed to accommodate expansion of our operations. SeeNote 10(a) to the Consolidated Financial Statements and “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Contractual Obligations and Commitments” for information regardingour lease obligations.

 

**Item 3.          LegalProceedings**

 

From time to time, we areinvolved in legal proceedings arising in the ordinary course of business. Webelieve that the resolution of these matters will not have a material effect onour consolidated financial position, results of operations or liquidity.

 

**Item 4.          Submissionof Matters to a Vote of Security Holders**

 

No matters were submitted toa vote of security holders during the fourth quarter of 2008.

 

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**Part II**

 

**Item 5.          Marketfor Registrant’s Common Equity, Related Stockholder Matters, and IssuerPurchases of Securities**

 

The graph depicted belowshows a comparison of cumulative total stockholder returns for our commonstock, the NASDAQ Global Market Index and the Standard Industrial Code Indexfor Prepackaged Software for the period from August 5, 2004, our initialpublic offering date, to December 28, 2008, the last trading day of 2008.

 

 

The graph above assumes that$100 was invested in the common stock of RightNow at its closing price and ineach index, on August 5, 2004, and that all dividends were reinvested.RightNow has not paid or declared any cash dividends on its common stock. TheStandard Industrial Code (“SIC”) used is 7372—Prepackaged Software.

 

Notwithstanding anything tothe contrary set forth in any of our previous filings made under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended,that might incorporate future filings made by us under those statutes, neitherthe preceding Stock Performance Graph, nor the information relating to it, is “solicitingmaterial” or is “filed” or is to be incorporated by reference into any suchprior filings, nor shall such graph or information be incorporated by referenceinto any future filings made by us under those statutes.

 

**MarketInformation for Common Stock**

 

Our common stock is tradedon the Nasdaq Global Market under the symbol RNOW. The table below reflects thequarterly high and low per share sales prices of our common stock for theperiod January 1, 2007 through December 31, 2008, as reported by theNasdaq Global Market. These prices represent prices among dealers, do notinclude retail markups, markdowns or commissions, and may not represent actualtransactions.

 
| **Quarter Ended**            | ** ** | **Mar 31** | ** ** | **June 30** | ** ** | **Sept 30** | ** ** | **Dec 31** | ** ** |
|-----------------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|-----------------|------------|
| Year ended December 31, 2007 |       |            |       |             |       |             |       |            |       |
| Common stock price per share:     |       |            |       |             |       |             |       |            |       |
| High                              |       | $               | 17.49      |             | $          | 18.37            |       | $               | 16.50      |   | $ | 20.24 |   |
| Low                               |       | 14.38           |       | 14.74            |       | 12.49            |       | 14.90           |       |
| Year ended December 31, 2008 |       |            |       |             |       |             |       |            |       |
| Common stock price per share:     |       |            |       |             |       |             |       |            |       |
| High                              |       | $               | 15.06      |             | $          | 14.98            |       | $               | 17.26      |   | $ | 12.12 |   |
| Low                               |       | 9.93            |       | 10.47            |       | 11.07            |       | 5.80            |       |

 

**Holders**

 

On February 21, 2009,there were approximately 79 holders of record of our common stock.

 

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**Dividends**

 

We have never declared orpaid cash dividends on our capital stock since converting from an S corporationto a C corporation at the end of 1999. We currently intend to retain futureearnings, if any, to finance the growth and development of our business, andtherefore do not anticipate paying any cash dividends in the foreseeablefuture.

 

**UnregisteredSales of Equity Securities**

 

None.

 

**Use ofProceeds from Sales of Registered Securities**

 

On August 5, 2004, theSecurities and Exchange Commission declared effective our RegistrationStatement on Form S-1 (Reg. File No. 333-115331) under the SecuritiesAct of 1933, as amended, in connections with the initial public offering of ourcommon stock, par value $.001 per share. We sold 6.4 million shares,including shares sold upon exercise of the underwriters’ over-allotment option,for an aggregate offering price of $44.9 million, and 321,945 shares,including shares sold upon exercise of the underwriters’ over-allotment option,were sold by a selling stockholder for an aggregate offering price of$2.3 million. After deducting $3.3 million in underwriting discountsand commissions and $1.8 million in other offering costs, we received netproceeds from the offering of approximately $40 million. None of theexpenses and none of our net proceeds from the offering were paid directly orindirectly to any director, officer, general partner of RightNow or theirassociates, persons owning 10% or more of any class of equity securities ofRightNow, or an affiliate of RightNow.

 

In May 2005, we spent$1 million of the offering proceeds to acquire the assets of ConvergentVoice. In May 2006, we spent $8.7 million of the offering proceeds toacquire Salesnet, Inc. We currently intend to use the remaining proceedsfor general corporate purposes as described in the prospectus for the offering.Pending these uses, the remaining net proceeds from the offering are investedin short-term, interest-bearing, investment-grade securities.

 

**Purchasesof Equity Securities by the Issuer or Affiliated Purchasers**

 

On October 20, 2008, weannounced a share repurchase program under which the board of directorsauthorized the repurchase of up to $15.0 million of our common stock over thenext two years.  The shares may bepurchased from time to time at prevailing prices in the open market, in blocktransactions, in privately negotiated transactions, and/or in accelerated sharerepurchase programs, in accordance with Rule 10b-18 of the Securities andExchange Commission.  As of December 31,2008, we repurchased 1,881,877 shares of common stock under this program at atotal price of $13.2 million.  During thefirst quarter of 2009, we repurchased 231,115 shares of common stock under thisprogram at a total price of $1.8 million. There can be no further repurchases made under this program as theauthorized $15.0 million was fully utilized during the first quarter of 2009.

 

Additionally, GregGianforte, our founder and Chief Executive Officer, purchased 180,000 commonshares during the fourth quarter of 2008 at a total price of $1.1 million.

 

The table below summarizesthe current year repurchase history under the board approved share repurchaseprogram:

 
| ** **                  | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                                | ** ** | **Approximate dollar**             | ** ** |
|-----------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | ** **                    | ** ** | ** **                    | ** ** | **Total number of shares** | ** ** | **value of shares that** | ** ** |
| ** **                  | ** ** | ** **                    | ** ** | ** **                    | ** ** | **purchased as part of**   | ** ** | **may yet be purchased** | ** ** |
| ** **                  | ** ** | **Total number of** | ** ** | **Avg. price paid** | ** ** | **authorized repurchase**            | ** ** | **under the repurchase**      | ** ** |
| **Fiscal Year 2008**        | ** ** | **shares purchased**     | ** ** | **per share**            | ** ** | **program**                               | ** ** | **program**                             | ** ** |
| Oct. 28-30             |       | 180,000                       |       | $                             | 6.20       |                                      | 180,000    |                                    | $          | 13,883,190 |   |
| Nov. 3-25              |       | 1,601,108                     |       | 7.11                          |       | 1,601,108                                 |       | 2,503,212                               |       |
| Dec. 1-5               |       | 100,769                       |       | 7.01                          |       | 100,769                                   |       | 1,797,287                               |       |
| **Total  Fiscal Year 2008** |       | 1,881,877                     |       | $                             | 7.02       |                                      | 1,881,877  |                                    | $          | 1,797,287 |   |

 
| **Fiscal Year 2009**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Feb. 25-27             |       | 107,490    |       | $          | 7.86       |       | 107,490    |       | $          | 952,486 |   |
| Mar. 2-4               |       | 123,625    |       | 7.70       |       | 123,625    |       | 117        |       |
| **Total  Fiscal Year 2009** |       | 231,115    |       | $          | 7.75       |       | 231,115    |       | $          | 117 |   |

 

The table belowsummarizes the current year common share purchase history of Greg Gianforte, our founder and ChiefExecutive Officer:

 
| **Fiscal year 2008**        |   | **Total number of  shares purchased** |   | **Avg. price paid  per share** |   |   |   |   |   |
|-----------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|--------|--------|--------|--------|
| Oct. 28-31                  |   | 180,000                               |   | $                                   | 6.18   |   |   |   |   |   |
| **Total  Fiscal Year 2008** |   | 180,000                               |   | $                                   | 6.18   |   |   |   |   |   |

 

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**Item 6.          SelectedConsolidated Financial Data**

 

The following selectedconsolidated financial data should be read in conjunction with the ConsolidatedFinancial Statements and Notes thereto and with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and other financialdata included elsewhere in this report. The consolidated statement ofoperations data for the years ended December 31, 2008, 2007 and 2006, andthe consolidated balance sheet data at December 31, 2008 and 2007, arederived from audited consolidated financial statements included elsewhere inthis report. The consolidated statement of operations data for the years ended December 31,2005 and 2004, and the consolidated balance sheet data at December 31,2006, 2005 and 2004, are derived from audited consolidated financial statementsnot included in this report. The historical results are not necessarilyindicative of results to be expected in any future period.

 
| ** **                                      | ** ** | **Year Ended December 31,**                         | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Consolidated Statements of Operations Data:** |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue:                                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Software, hosting and support                   |       | $                                                                  | 49,764     |   | $ | 67,944 |   | $ | 86,257 |   | $ | 86,983 |   | $ | 102,576 |   |
| Professional services                           |       | 12,000                                                             |       | 19,204 |   | 24,131 |   | 25,094 |   | 37,859 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total revenue                                   |       | 61,764                                                             |       | 87,148 |   | 110,388 |   | 112,077 |   | 140,435 |   |
| Cost of revenue:                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Software, hosting and support                   |       | 6,741                                                              |       | 9,111 |   | 13,260 |   | 18,411 |   | 20,397 |   |
| Professional services                           |       | 7,206                                                              |       | 11,956 |   | 19,110 |   | 22,012 |   | 30,440 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total cost of revenue                           |       | 13,947                                                             |       | 21,067 |   | 32,370 |   | 40,423 |   | 50,837 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Gross profit                                    |       | 47,817                                                             |       | 66,081 |   | 78,018 |   | 71,654 |   | 89,598 |   |
| Operating expenses:                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales and marketing                             |       | 31,986                                                             |       | 42,683 |   | 61,504 |   | 65,118 |   | 67,628 |   |
| Research and development                        |       | 7,807                                                              |       | 10,428 |   | 14,478 |   | 17,084 |   | 18,292 |   |
| General and administrative                      |       | 4,621                                                              |       | 6,445 |   | 9,578 |   | 11,500 |   | 13,615 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total operating expenses                        |       | 44,414                                                             |       | 59,556 |   | 85,560 |   | 93,702 |   | 99,535 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations                   |       | 3,403                                                              |       | 6,525 |   | (7,542 | ) | (22,048 | ) | (9,937 | ) |
| Interest and other income (expense), net        |       | 146                                                                |       | 1,646 |   | 3,064 |   | 3,683 |   | 2,696 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes               |       | 3,549                                                              |       | 8,171 |   | (4,478 | ) | (18,365 | ) | (7,241 | ) |
| Provision for income taxes                      |       | (100                                                               | )          | (478 | ) | (530 | ) | (276 | ) | (42 | ) |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                               |       | 3,449                                                              |       | 7,693 |   | (5,008 | ) | (18,641 | ) | (7,283 | ) |
| Preferred stock accretion                       |       | (8                                                                 | )          | — |   | — |   | — |   | — |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss) allocated to common stock     |       | $                                                                  | 3,441      |   | $ | 7,693 |   | $ | (5,008 | ) | $ | (18,641 | ) | $ | (7,283 | ) |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss) per share(1):                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                                                  | 0.17       |   | $ | 0.25 |   | $ | (0.16 | ) | $ | (0.56 | ) | $ | (0.22 | ) |
| Diluted                                         |       | 0.12                                                               |       | 0.23 |   | (0.16 | ) | (0.56 | ) | (0.22 | ) |
| Shares used in the computation(1):              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 20,738                                                             |       | 30,631 |   | 32,241 |   | 33,078 |   | 33,362 |   |
| Diluted                                         |       | 29,177                                                             |       | 33,695 |   | 32,241 |   | 33,078 |   | 33,362 |   |

 

----

(1)  See Note 1 ofNotes to Consolidated Financial Statements for an explanation of thecalculation of basic and diluted income (loss) per share and for an explanationof the determination of the number of weighted average shares used for suchcalculations.

 

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| ** **                           | ** ** | **December 31,**   | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **2004**                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                           | ** ** | **(In thousands)** | ** ** |
| ** **                           |       |                    |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:** |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents            |       | $                       | 18,944     |   | $ | 40,874 |   | $ | 39,208 |   | $ | 43,681 |   | $ | 51,405 |   |
| Short-term investments               |       | 31,188                  |       | 23,314 |   | 39,127 |   | 52,644 |   | 34,412 |   |
| Long-term investments                |       | —                  |       | — |   | — |   | — |   | 4,963 |   |
| Working capital                      |       | 32,732                  |       | 45,156 |   | 50,374 |   | 45,063 |   | 34,075 |   |
| Total assets                         |       | 88,309                  |       | 123,676 |   | 178,242 |   | 173,786 |   | 162,337 |   |
| Deferred revenue                     |       | 49,125                  |       | 67,923 |   | 114,578 |   | 114,660 |   | 113,198 |   |
| Long-term debt, less current portion |       | —                  |       | 117 |   | 85 |   | 68 |   | 22 |   |
| Total stockholders’ equity      |       | 31,101                  |       | 44,655 |   | 47,474 |   | 38,181 |   | 27,183 |   |
|                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.          Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

*** ***

***Cautionary Statement***

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the financial statements andrelated notes in this report. This discussion contains forward-lookingstatements that involve risks and uncertainties. These forward-lookingstatements are based on our current expectations, estimates and projectionsabout our industry, management’s beliefs, and certain assumptions made by us,all of which are subject to change. Forward-looking statements can often beidentified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,”“believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,”“continue,” “ongoing,” similar expressions, and variations or negatives ofthese words and include, but are not limited to, statements regarding projectedresults of operations and management’s future strategic plans. Our actualresults could differ significantly from those projected in the forward-lookingstatements as a result of factors, including those discussed under “RiskFactors” and elsewhere in this report. We assume no obligation to update theforward-looking statements or such risk factors.*

 

***Overview***

 

RightNow Technologiesprovides on demand customer relationship management software and services thathelp consumer-centric organizations improve customer experiences, whilereducing costs. In today’s competitive business environment, we believeproviding superior customer experiences can be a powerful way for companies todrive sustainable differentiation. RightNow’s technology enables an organization’s service, marketing andsales personnel to leverage a common application platform to deliver service,to market and to sell via the phone, email, web and chat. Additionally, throughour on demand delivery approach, or software-as-a-service (“SaaS”), we are ableto eliminate much of the complexity associated with traditional on premisesolutions, implement rapidly, and price our solutions at a level that resultsin a lower cost of ownership compared to on premise solutions. Our value-addedservices, including business process optimization and lifetime producttune-ups, are directed toward improving our customers’ efficiency, increasinguser adoption and assisting our customers to maximize the return on theirinvestment. Approximately 1,900 corporations and government agencies worldwidedepend on RightNow to achieve their strategic objectives and better meet theneeds of those they serve.

 

We released our initialversion of RightNow Service TM in 1997.  This product addressed the newcustomer service needs resulting from the increasing use of the Internet as acustomer service channel.  Since then, we have significantly enhancedproduct features and functionality to address customer service needs acrossmultiple communication channels, including web, interactive voice, email, chat,telephone and proactive outbound email communications. We have also addedseveral products that are complementary to our RightNow Service solution,including RightNow Marketing TM, RightNow Sales TM and RightNow Feedback TM whichautomate aspects of marketing campaigns, sales operations, and customermonitoring.  In February 2007, we released RightNow 8, our newestenterprise-class solution for service, sales and marketing.  To date,approximately 80% to 90% of our software, hosting and support revenue has beengenerated by the RightNow Service suite.

 

***2007 Business Model Changes***

 

To better align withindustry practice; beginning in 2007 we changed our product offerings fromsoftware license arrangements to subscription service arrangements (e.g. “subscriptions”).As the industry and business models for “software as a service” or “on demand”have evolved, the standard form of sales arrangements are service agreementsrather than licenses of software that can be hosted. We believe providingofferings in this manner will assist with our market penetration.

 

Accordingly, our terms ofsale have been revised to provide a hosting service where the customer accessesthe software and data through the Internet. Our previous terms of sale providedthe customer a software license, and for no additional fee the customer couldchoose to have the software hosted by us, by themselves or by someone else.Revenue recognition for service arrangements is not materially different fromour previous term license arrangements, as revenue under either type ofcontract is generally recognized ratably over the period of the agreement. As aresult of this change, the amount of deferred revenue on the balance sheetunder subscription arrangements decreased since only 

 

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the amount currently due fromthe customer is recorded to accounts receivable and deferred revenue.Conversely, under software license arrangements, the full customer commitmentis recorded to receivables and deferred revenue.

 

As part of this businessmodel change, we essentially discontinued sales of perpetual software licenseswhich represented 21% of our revenue in 2006 as compared to approximately 2% in2007, and less than 1% in 2008.  Althoughwe expect to ultimately increase the lifetime value of our customerarrangements through sales of subscriptions, the substantive elimination ofperpetual license sales materially and adversely impacted our operating resultsfor 2007 and 2008 when compared to prior years, as perpetual revenue hasgenerally been recognized in full upon delivery of the license.

 

Lastly, our policy forsubscription contract acquisition costs, such as sales commissions, is torecognize them in proportion to the revenue recognized under the subscriptionarrangement. Since the majority of new business was subscriptions in 2007 and2008, we believe this policy had a material and beneficial impact on ouroperating results, respectively. Sales incentives paid on license sales andprofessional services continue to be expensed when earned, which is typicallyat the time the related sale is invoiced.

 

***Sources of Revenue***

 

Our revenue is comprised offees for software, hosting and support, and fees for professionalservices.  “Recurring revenue,” referredto in this report, includes software, hosting and support revenue from termlicense and subscription agreements.

 

Software, hosting andsupport revenue includes fees earned under subscriptions and software licensearrangements. Subscription arrangements include a bundled fee to access thesoftware and data through our hosting services, and support services.Subscription revenue is recorded ratably over the length of the agreement. Ourhosting services provide remote management and maintenance of our software andcustomers’ data which is physically located in third party facilities.Customers access “hosted” software and data through a secure Internetconnection. Support services include technical assistance for our softwareproducts and unspecified product upgrades and enhancements on a when and ifavailable basis.

 

License arrangements can beover time (a “term” license) or perpetual. For term licenses, software, hostingand support revenue is recognized ratably over the length of the agreement.Perpetual license revenue is generally recorded in full upon delivery of thelicense, and the hosting and support elements are recognized ratably over thecontractual period. Perpetual license revenue ranged from 21% to 25% of ourtotal revenue from 2004 through 2006. Due to the change in our business modelnoted above, perpetual license revenue decreased from $22.8 million, or 21%of revenue in the year ending December 31, 2006 to $2.1 million, or2% of revenue in the year ending December 31, 2007, to $312,000, or lessthan 1% of revenue in the year ending December 31, 2008.

 

Our sales arrangementsgenerally provide customers with the right to use our software up to a maximumnumber of users or transactions. A number of our arrangements provide foradditional fees for usage above the maximum, which are billed and recognizedinto revenue when determinable and earned.

 

Professional servicesrevenue is comprised of revenue from consulting, education, developmentservices, and reimbursement of related travel costs. Consulting and educationservices include implementation and best practices consulting. Developmentservices include customizations and integrations for a client’s specificbusiness application. Professional services revenue was approximately 22% oftotal revenue during 2006 and 2007, and increased to 27% in 2008.

 

Professional services aretypically sold with initial sales arrangements and at times over the clientengagement. Our typical education courses are billed on a per person, per classbasis.

 

Depending on the size andcomplexity of the client project, our consulting or development servicescontracts are either fixed price/fixed scope or, more frequently, billed on atime and materials basis. We have determined that the professional serviceselement of our software and subscription arrangements is not essential to thefunctionality of the software.

 

***Cost of Revenue and Operating Expenses***

 

*Cost ofRevenue.*  Costof revenue consists primarily of salaries and related expenses (such asemployee benefits, stock based compensation and payroll taxes) for our hosting,support and professional services organizations, third-party costs andequipment depreciation relating to our hosting services, third-party costs forvoice enabled CRM applications, travel expenses related to providingprofessional services to our clients, amortization of acquired intangibleassets and allocated overhead. We allocate most overhead expenses, such asoffice supplies, computer supplies, utilities, rent, depreciation for furnitureand equipment, payroll taxes and employee benefits, based on headcount. As aresult, these common overhead expenses are reflected in each cost of revenueand operating expense category.

 

*Sales andMarketing Expenses.* Sales and marketing expenses consist primarily of salaries and relatedexpenses for employees in sales and marketing, including commissions andbonuses, advertising, marketing events, corporate communications, productmanagement expenses, travel costs and allocated overhead. For subscriptionarrangements, we expense the related sales commission in proportion to therevenue recognized. We expense our sales commissions on license arrangementswhen earned, which is typically at the time the related sale is invoiced to theclient. Since the majority of our historical revenue has been from licensearrangements recognized over time, we have experienced a delay between increasingsales and marketing expenses and the recognition of corresponding revenue.   We expect to increase our sales, and toaccomplish this we plan to appropriately segment our sales and marketing teams,and potentially hire additional sales and marketing personnel and increase thelevel of marketing activities.

 

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*Researchand Development Expenses.*   Research and development expenses consist primarily ofsalary and related expenses for development personnel and costs related to thedevelopment of new products, enhancement of existing products, translationfees, quality assurance, testing and allocated overhead. To date, we have notcapitalized internal software development costs because the timing of thecommercial releases of our products has substantially coincided with theattainment of technological feasibility. We intend to continue to expand andenhance our product offerings. To accomplish this, we plan to efficientlyutilize existing personnel, hire additional personnel and, from time to time,contract with third parties. We expect that research and development expenseswill increase in absolute dollars as we seek to expand our technology andproduct offerings.

 

*General and Administrative Expenses.*   General and administrativeexpenses consist primarily of salary and related expenses for management,finance and accounting, legal, information systems and human resourcespersonnel, professional fees, other corporate expenses and allocated overhead.We anticipate that we will incur additional employee salaries and relatedexpenses, professional service fees and insurance costs related to the growthof our business and operations.

 

***Critical Accounting Policies and Estimates***

 

Our financial statements andaccompanying notes are prepared in accordance with accounting principlesgenerally accepted in the United States. Preparing financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses and disclosures ofcontingent assets and liabilities. Management evaluates these estimates on an on-going basis usinghistorical experience and other factors, including the current economicenvironment, and management believes these estimates to be reasonable under thecircumstances.  Estimates and assumptionsare adjusted when facts and circumstances dictate.  Illiquid credit markets, volatile equity, foreigncurrency, and declines in consumer spending have combined to increase theuncertainty inherent in such estimates and assumptions.  These assumptions are affected by management’sapplication of accounting policies. Our critical accounting policies includerevenue recognition, valuation of receivables and deferred tax assets, andaccounting for share-based compensation. Significant items subject to suchestimates and assumptions include: elements comprising our software, hostingand support sales arrangements and whether the elements have stand-alone and/orfair value; whether the fees charged for our products and services are fixed ordeterminable, the carrying amount of property and equipment and intangibleassets; estimates regarding the recoverability and respective fair value ofauction-rate securities and all other investments; valuation allowances forreceivables and deferred income tax assets; and estimates of expected term andvolatility in determining stock-based compensation expense.   As future events and their effects cannot bedetermined with precision, actual results could differ significantly from thoseestimates.

 

***Revenue Recognition***

 

Beginning in 2007, wechanged the nature of our sales arrangements from license arrangements tosubscription arrangements (“subscriptions”). For a bundled fee, subscriptionsprovide the customer with access to the software and data over the Internet, oron demand, and provide technical support services and software upgrades whenand if available. Under subscriptions, customers do not have the right to takepossession of the software and, in accordance with EITF 00-03 sucharrangements are considered service contracts which are outside the scope ofSOP 97-2. Accordingly, we account for sales of subscriptions under SAB 104and EITF 00-21. We recognize subscription revenue ratably over the lengthof the agreement and professional services are recognized as incurred based ontheir relative fair values, in accordance with EITF 00-21.

 

Prior to 2007, we sold themajority of products under software license arrangements (“licenses”) andaccounted for them in accordance with SOP 97-2 and SOP 98-9. Licensesgenerally include multiple elements that are delivered up front or over time.For example, under a term license, we deliver the software up front and providehosting and support services over time. Fair value for each element in alicense does not exist since none are sold separately, and consequently, thebundled revenue is recognized ratably over the length of the agreement. Under aperpetual license, vendor specific objective evidence of fair value of thehosting and support elements is based on the price charged at renewal when soldseparately, and therefore the license element is recognized immediately intorevenue upon delivery using the residual method, and the hosting and supportelements are recognized ratably over the contractual term.

 

The application of these rules requiresjudgment, including the identification of individual elements in multipleelement arrangements, whether there is objective and reliable evidence of fairvalue, including vendor specific objective evidence (“VSOE”) of fair value, forsome or all elements. Changes to the elements in our sales arrangements, or ourability to establish VSOE or fair value for those elements may result in amaterial change to the amount of revenue recorded in a given period.

 

Fees charged forprofessional services are recognized when delivered. We believe the fees forprofessional services qualify for separate accounting because: a) theservices have value to the customer on a stand-alone basis; b) objectiveand reliable evidence of fair value exists for these services; andc) performance of the services is considered probable and does not involveunique customer acceptance criteria.

 

Our standard payment termsare net 30, although payment within 90 days is considered normal. Weperiodically provide extended payment terms and we consider any fees due beyond90 days to not be fixed or determinable. In such cases, judgment is required in determining the appropriatetiming of revenue recognition. Changes to our practice of providing extendedpayment terms or providing concessions following a sale, may result in amaterial change to the amount of revenue recorded in a given period.

 

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***Allowance for doubtful accounts***

 

We regularly assess thecollectability of outstanding customer invoices and, in so doing, we maintainan allowance for estimated losses resulting from the non-collection of customerreceivables. In estimating this allowance, we consider factors such as:historical collection experience; a customer’s current creditworthiness;customer concentration; age of the receivable balance; and general economicconditions that may affect a customer’s ability to pay. Actual customercollections could differ from our estimates and exceed our related lossallowance.

 

***Income Taxes***

 

We record income taxes underthe asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect of a change in tax rates on deferred tax assets and liabilities isrecognized in income in the period that includes the enactment date. Whenapplicable, a valuation allowance is established to reduce any deferred taxasset when it is determined that it is more likely than not that some portionof the deferred tax asset will not be realized.

 

We have established avaluation allowance equal to our net deferred tax assets due to uncertaintiesregarding the realization of our net operating loss carry forwards, taxcredits, and deductible timing differences. The uncertainty of realizing thesebenefits is based primarily on our lack of taxable earnings.

 

Effective January 1,2007, the Company adopted Financial Accounting Standards Board (FASB)Interpretation No. 48, *Accounting forUncertainties in Income Taxes, an Interpretation of FASB Statement No. 109*(FIN 48) and it did not have a significant impact on our financialposition or results of operations. FIN 48 requires judgment whenevaluating tax positions. Our judgment includes, but is not limited to, anevaluation of our material positions taken on tax return filings. The ultimateresolution of tax issues may result in a significant change to our recorded taxassets and liabilities.

 

***Share-Based Compensation***

 

We record share-basedpayment arrangements in accordance with Statement of Financial AccountingStandards No. 123(R), *Share BasedPayment*, (“SFAS 123R”). SFAS 123R requires the cost of share-based payment arrangements to berecorded in the statement of operations. Prior to 2006, the estimated cost ofshare-based payment arrangements was disclosed in a footnote to the financialstatements. Share-based compensation amounts are affected by our stock price aswell as our assumptions regarding the expected volatility of our stock, ouremployee stock option exercise behaviors, forfeitures, and the related incometax effects. Our assumptions are based primarily on our historical information,some of which was developed when we were a private company.

 

***Recently Issued Accounting Standards***

 

SFAS 157, *Fair Value Measurements*, defines fairvalue, establishes a framework for measuring fair value in GAAP, and enhancesdisclosures about fair value measurements. This statement applies when otheraccounting pronouncements require fair value measurements; it does not requirenew fair value measurements. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those years. On February 12, 2008, FSPFAS 157-2 was issued delaying the effective date of SFAS No. 157until fiscal years beginning after November 15, 2008 for nonfinancialassets and liabilities that are not recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually). The adoptionof SFAS 157 has not had a material effect on our financialstatements.  We do not believe adoptionof SFAS 157-2 will have a material effect on our financial statements.

 

The guidance in FASBStatement No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities* , is effectiveas of the beginning of an entity’s first fiscal year that begins after November 15,2007. This statement provides companies with an option to report selectedassets and liabilities (principally financial assets and financial liabilities)at fair value. The objective of SFAS 159 is to reduce both the complexityin accounting for financial instruments and the volatility in earnings causedby measuring related assets and liabilities differently. SFAS 159 alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities, and does not eliminate disclosurerequirements included in other accounting standards. The adoption ofSFAS 159 has not had a material effect on our financial statements.

 

In December 2007, theFinancial Accounting Standards Board issued Statement No. 141 (revised2007), *Business Combinations*(SFAS 141R). SFAS 141R requires the use of “full fair value” torecord all the identifiable assets, liabilities, noncontrolling interests andgoodwill acquired in a business combination. SFAS 141R is effective forfiscal years beginning on or after December 15, 2008. The requirements areeffective for the Company beginning in the first quarter of fiscal 2009. Theadoption of SFAS 141R may have a material effect on our financialstatements to the extent the Company pursues future business combinations.

 

In December 2007, theFinancial Accounting Standards Board issued Statement No. 160, *Noncontrolling Interests in Consolidated FinancialStatements* (SFAS 160). SFAS 160 requires thenoncontrolling interests (minority interests) to be recorded at fair value andreported as a component of equity. SFAS 160 is effective for fiscal yearsbeginning on or after December 15, 2008. The requirements are effectivefor the Company beginning in the first quarter of fiscal 2009. We do notbelieve adoption of SFAS 160 will have a material effect on our financialstatements.

 

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**Results ofOperations**

 

The following table setsforth certain consolidated statements of operations data for each of theperiods indicated, expressed as a percentage of total revenue:

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue:                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software, hosting and support            |       | 78                                         | %          | 78 | % | 73 | % |
| Professional services                    |       | 22                                         |       | 22 |   | 27 |   |
|                                     |       |                                       |       |   |   |   |   |
| Total revenue                            |       | 100                                        |       | 100 |   | 100 |   |
|                                     |       |                                       |       |   |   |   |   |
| Cost of revenue:                         |       |                                       |       |   |   |   |   |
| Software, hosting and support            |       | 12                                         |       | 16 |   | 14 |   |
| Professional services                    |       | 17                                         |       | 20 |   | 22 |   |
|                                     |       |                                       |       |   |   |   |   |
| Total cost of revenue                    |       | 29                                         |       | 36 |   | 36 |   |
|                                     |       |                                       |       |   |   |   |   |
| Gross profit                             |       | 71                                         |       | 64 |   | 64 |   |
| Operating expenses:                      |       |                                       |       |   |   |   |   |
| Sales and marketing                      |       | 56                                         |       | 58 |   | 48 |   |
| Research and development                 |       | 13                                         |       | 15 |   | 13 |   |
| General and administrative               |       | 9                                          |       | 10 |   | 10 |   |
|                                     |       |                                       |       |   |   |   |   |
| Total operating expenses                 |       | 78                                         |       | 83 |   | 71 |   |
|                                     |       |                                       |       |   |   |   |   |
| Income (loss) from operations            |       | (7                                         | )          | (19 | ) | (7 | ) |
| Interest and other income (expense), net |       | 3                                          |       | 3 |   | 2 |   |
|                                     |       |                                       |       |   |   |   |   |
| Income (loss) before income taxes        |       | (4                                         | )          | (16 | ) | (5 | ) |
| Provision for income taxes               |       | (1                                         | )          | (1 | ) | 0 |   |
|                                     |       |                                       |       |   |   |   |   |
| Net income (loss)                        |       | (5                                         | )%         | (17 | )% | (5 | )% |

 

The following table setsforth our on demand customer interactions and our revenue by type and geographyexpressed as a percentage of total revenue for each of the periods indicated.

 

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Customer interactions (in millions)             |       | 1,050                                      |       | 1,466 |   | 2,099 |   |
| Revenue by type:                                               |       |                                       |       |   |   |   |   |
| Recurring (subscriptions, term licenses,  hosting and support) |       | 57                                         | %          | 76 | % | 73 | % |
| Perpetual licenses                                             |       | 21                                         |       | 2 |   | 0 |   |
| Professional services                                          |       | 22                                         |       | 22 |   | 27 |   |
| Revenue by geography in:                                       |       |                                       |       |   |   |   |   |
| United States                                                  |       | 74                                         | %          | 71 | % | 69 | % |
| Europe                                                         |       | 19                                         |       | 21 |   | 23 |   |
| Asia Pacific                                                   |       | 7                                          |       | 8 |   | 8 |   |

 

***Overview of 2008***

 

Total revenue for the fullyear 2008 was $140.4 million, compared to full year 2007 revenue of$112.1 million. Within software, hosting and support, recurring revenueincreased 20% in 2008 over 2007, which was offset by a decrease of $1.8 millionto $312,000, in perpetual license revenue. The decline in perpetual licenserevenue resulted from our business model change during 2007 in which weessentially eliminated sales of new perpetual licenses. Recurring revenueincreased in 2008 due to growth in average revenue per customer.

 

Revenue per customerincreased primarily due to higher average selling price per customer and growthin the number of customers.  Sales tocustomers with annual revenues greater than $1 billion and the publicsector made up approximately 60% of total revenue in 2008, compared toapproximately 59% of total revenue in 2007 and 56% in 2006.

 

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During 2008 we continued toinvest in our operations by adding professional services personnel and partnersto support our solution offerings, sales and marketing personnel to focus onnew customer acquisition, added capacity to support our hostingoperations,  research and developmentpersonnel to focus on solution development, administrative personnel to supportoperations.

 

These investments causedtotal expenses to increase in absolute dollars, but decreased 12% as apercentage of revenue during 2008. Total revenue growth combined with improvedleverage in our business model and the increased focus on operating expensesresulted in an operating loss improvement from a loss as a percentage ofrevenue of 19% in 2007 to a loss as a percentage of revenue of 7% in 2008.

 

We were impacted by thestrength of the U.S. dollar predominantly in the third and fourth quarters of2008 relative to the British pound, Euro, and Australian dollar. Although wereport our actual results in U.S. Dollars, we conduct a significant numberof transactions in currencies other than U.S. Dollars. Therefore, wediscuss constant currency information to provide a framework for assessing howour underlying business performed excluding the effect of foreign currency ratefluctuations.   Constant currencydiscussions herein are based on comparison to currency exchange rates duringthe prior year.  For example, totalrevenue in 2008 increased by $28.4 million, or 25% over total revenue reportedin 2007.  If currency exchange rates in2008 had remained constant with 2007 rates, revenue in 2008 would haveincreased approximately by an additional $700,000, or a further 1%. In otherwords, the change in exchange rates between 2007 and 2008 had a negative impactto revenue of  approximately $700,000 or 1%. Using the same methodology, the changein exchange rates between 2007 and 2008 had a negative impact on deferredrevenue of $6.9 million or 3%.  Expenses associated with internationalrevenue are generally paid in local currency, which generally provides anatural hedge to offset the revenue impact. These expenses in 2008 decreased $1.5 million on a constant currencybasis as compared to the respective weighted average exchange rates during theyear ended December 31, 2007.

 

Total revenuein 2007 increased by $1.7 million, or 1.5% over total revenue reported in 2006.The change in exchange rates between 2006 and 2007 had a positive impact torevenue of $2.4 million, or 2%. The expenses associated with 2007 internationalrevenue increased $1.9 million on a constant currency basis as compared to therespective weighted average exchange rates during the year ended December 31,2006.

 

For the year ended December 31,2008, we generated $14.7 million of cash from operations compared to$21.0 million of cash in 2007.  Ourcash and investments balances decreased to $90.8 million at December 31,2008 from $96.3 million one year earlier, which was primarily due to theuse of $13.2 million to repurchase shares of our common stock under our October 2008,board approved stock repurchase program.

 

As of December 31, 2008we had an accumulated deficit of $64.2 million. This deficit and ourhistorical operating losses were primarily the result of costs incurred in thedevelopment, sales and marketing of our products and for general andadministrative purposes.

 

***Years Ended December 31, 2006, 2007 and 2008***

 

***Revenue***

 
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **Percent  Change** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| ** **                     | ** ** | **(Amounts in thousands)**       | ** ** |
| Software, hosting and support: |       |                                       |       |   |   |   |   |   |   |   |   |
| Recurring                      |       | $                                          | 63,448     |   | $ | 84,920 |   | 34 | % | $ | 102,264 |   | 20 | % |
| Perpetual                      |       | 22,809                                     |       | 2,063 |   | (91 | ) | 312 |   | (85 | ) |
| Professional services          |       | 24,131                                     |       | 25,094 |   | 4 |   | 37,859 |   | 51 |   |
| Total revenue                  |       | $                                          | 110,388    |   | $ | 112,077 |   | 2 | % | $ | 140,435 |   | 25 | % |

 

Total revenue for 2008 was$140.4 million, an increase of $28.3 million, or 25%, over totalrevenue of $112.1 million for 2007.

 

Software, hosting andsupport revenue, consisting of recurring revenue and perpetual license revenue,increased $15.6 million in 2008, or 18%, over software, hosting and supportrevenue of $87.0 million for 2007. Recurring revenue comprised ofsubscriptions, term licenses, hosting and support, increased 20% over 2007primarily due to expansion sales within our existing customer base, and newcustomer acquisitions over the comparable period. Total active customersincreased to 1,900 as of December 31, 2008 from approximately 1,800 as of December 31,2007.  Average recurring revenue per customerincreased as a result of capacity additions, contract renewals and sales of newproducts. Customer interactions, a measure of unique customer sessions hostedin our data centers, were approximately 2.1 billion in 2008, a 40%increase over 2007. Our client retention rate was approximately 90% in 2008.

 

Perpetual license revenuedecreased $1.8 million to $312,000, or 85%, in 2008 over 2007, anddecreased as a percentage of total revenue to less than 1% in 2008 from 2% in2007. Beginning in 2007, we changed the nature of our sales arrangements fromsoftware licenses to subscriptions, which largely eliminated sales of perpetuallicenses. The mix of perpetual license revenue affects our profitability in anygiven period since it is recorded in full into revenue upon delivery instead ofbeing recorded ratably into revenue over time, as is the case withsubscriptions and term licenses.

 

Professional servicesrevenue increased $12.8 million, or 51%, in 2008 over 2007. We believe the growthin professional services revenue is primarily due to larger projectimplementations, as a result of the release of RightNow 8.0, which has createdexpanded opportunities within the 

 

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contact center space. Customersgenerally purchase professional services with initial license or subscriptionarrangements, and from time to time over the life of the contract. We increasedour capacity to deliver professional services by growing headcount in thatorganization to 173 at December 31, 2008 from 142 at December 31,2007.

 

The mix of professionalservices revenue affects our profitability from period-to-period due to thelower gross profit earned on professional services as compared to the grossprofit earned on software, hosting and support revenue. Professional servicesrevenue represented 27% of total revenue in 2008 compared to 22% of totalrevenue in 2007 and 2006.

 

Total revenue for 2007 was$112.1 million, an increase of $1.7 million, or 2%, over total revenue of$110.4 million for 2006.

 

Software, hosting andsupport revenue, consisting of recurring revenue and perpetual license revenue,increased $726,000 in 2007, or 1%, over software, hosting and support revenueof $86.3 million for 2006. Recurring revenue increased 34% over 2006primarily due to a 22% increase in average recurring revenue per customer.Total active customers were constant at approximately 1,800 at December 31,2007 and December 31, 2006.  Average recurring revenue per customer increased as a result of customerpurchases of additional capacity and additional products. Customer interactionsexceeded 1.5 billion in 2007, a 40% increase over 2006. Our clientretention rate was approximately 90% in 2007 and 2006.

 

Perpetual license revenuedecreased $20.7 million, or 91%, in 2007 over 2006, and decreased as apercentage of total revenue to 2% in 2007 from 21% in 2006. This decreaseresulted from an accelerating customer adoption of on demand software and ourbusiness model change.

 

Professional servicesrevenue increased $963,000, or 4%, in 2007 over 2006.  The growth in professional services revenuewas primarily due to a higher volume of larger customer projects in 2007 as comparedto 2006.   We also increased our capacityto deliver professional services by growing headcount in that organization to142 at December 31, 2007 from 138 at December 31, 2006.

 

***Cost of Revenue***

 
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **Percent  Change** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| ** **                    | ** ** | **(Amounts in thousands)**       | ** ** |
| Software, hosting and support |       | $                                          | 13,260     |   | $ | 18,411 |   | 39 | % | $ | 20,397 |   | 11 | % |
| Professional services         |       | 19,110                                     |       | 22,012 |   | 15 |   | 30,440 |   | 38 |   |
|                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Total cost of revenue         |       | $                                          | 32,370     |   | $ | 40,423 |   | 25 | % | $ | 50,837 |   | 26 | % |

 

Total cost of revenue for2008 was $50.8 million, an increase of $10.4 million, or 26%, overtotal cost of revenue of $40.4 million in 2007.

 

Cost of software, hostingand support increased $2.0 million, or 11% in 2008 due primarily to capacityadditions to our hosting data centers, increased voice and non-voice hostingvolume and staff additions’. Capacity additions to our hosting data centers andgrowth in customer interactions increased third party hosting provider costs by$766,000 in 2008 over 2007, and capacity additions to our data centersincreased telecom maintenance and depreciation expense in 2008 by $487,000 over2007. Staff additions to our hosting and technical support organizationsincreased salaries and related expenses (i.e. salaries, bonuses,stock-based compensation) by $477,000 during 2008 over 2007.  Average employee count in our hosting andtechnical support operations was 91 in 2008 as compared to 80 in 2007. As apercent of the associated revenue, software, hosting and support costs were 20%in 2008 as compared to 21% in 2007 due to improved leverage in our businessmodel, combined with focused expense management and favorable currency impactin the third and fourth quarters of 2008 primarily in the strength of the USdollar relative to the British Pound, Euro, and Australian dollar.

 

Cost of professionalservices increased $8.4 million, or 38%, in 2008 due primarily to employeestaff additions, increased third-party resource usage, and increased travelrelated expenses. Average employee count in our professional servicesorganization grew to 178 in 2008 from 142 in 2007, which increased salaries andrelated expenses by $4 million, and increased common expenses, which areallocated based upon headcount (i.e. payroll taxes, benefits, office rent,supplies and other overhead expenses) by $893,000. Increased utilization ofthird-party providers used to assist in the deployment of professional servicesincreased by $2.6 million during 2008 over 2007.  Travel related expenses associated withprofessional service deployments increased by $521,000 during 2008.  As a percent of the associated revenue,professional services costs decreased to 80% in 2008 from 88% in 2007 due tofocused expense management and favorable currency impact in the third andfourth quarters of 2008 primarily in the strength of the US dollar relative tothe British Pound, Euro, and Australian dollar. Employee training, customerscheduling requirements, and use of third-party resources can cause the cost ofprofessional services to fluctuate as a percentage of revenue from period toperiod.

 

Total cost of revenue for2007 was $40.4 million, an increase of $8.0 million, or 25%, overtotal cost of revenue of $32.4 million in 2006.

 

Cost of software, hosting andsupport increased $5.2 million, or 39%, in 2007 due primarily to capacityadditions to our hosting data centers, including a new data center in Chicago,Illinois, the full year effect of a data center in London, England, which wasadded in mid-2006, increased voice and non-voice hosting volume and staffadditions. The addition of these data centers and growth in customerinteractions increased third party hosting provider costs by $2.3 millionin 2007 over 2006, and capacity additions to our data centers increaseddepreciation 

 

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expense in 2007 by $738,000over 2006. Staff additions to our hosting and technical support organizationsincreased salaries and related expenses (i.e. salaries, bonuses,stock-based compensation) by $1.3 million during 2007 over 2006, andincreased common expense allocation (i.e. payroll taxes, benefits, officerent, supplies and other overhead expenses) by $700,000. Common expensesincreased during 2007 primarily due to capacity additions which increasedoffice rent, payroll taxes, and depreciation expense pertaining to computerequipment and office furniture. Average employee count in our hosting andtechnical support operations was 80 in 2007 as compared to 68 in 2006. As apercent of the associated revenue, software, hosting and support costs were 21%in 2007 as compared to 15% in 2006 due to the lower revenue contribution fromperpetual licenses combined with the capacity increases noted above.

 

Cost of professionalservices increased $2.9 million, or 15%, in 2007 due to employee staffadditions partly offset by lower travel related expenses. Average employeecount in our professional services organization grew to 142 in 2007 from 124 in2006, which increased salaries and related expenses by $2.9 million, andincreased common expense allocation by $1.2 million. As a percent of theassociated revenue, professional services costs increased to 88% in 2007 from79% in 2006.

 

***Operating Expenses***

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **Percent  Change** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| ** **                 | ** ** | **(Amounts in thousands)**       | ** ** |
| Sales and marketing        |       | $                                          | 61,504     |   | $ | 65,118 |   | 6 | % | $ | 67,628 |   | 4 | % |
| Research and development   |       | 14,478                                     |       | 17,084 |   | 18 |   | 18,292 |   | 7 |   |
| General and administrative |       | 9,578                                      |       | 11,500 |   | 20 |   | 13,615 |   | 18 |   |
|                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Total operating expenses   |       | $                                          | 85,560     |   | $ | 93,702 |   | 10 | % | 99,535 |   | 6 | % |
|                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Sales andMarketing Expenses*

 

Sales and marketing expensesof $67.6 million in 2008 were 4%, or $2.5 million, greater than$65.1 million in 2007. Staff additions to our sales and marketingorganization increased salaries and common expense allocation by$2.9 million. Average employee count in our sales and marketingorganizations was relatively constant from 262 in 2008 from 263 in 2007,reflecting a decline in headcount at December 31, 2008 related to expensereduction efforts in the fourth quarter of 2008.  Commissions and bonus expense increased $2.1million due to increased sales over 2007. Offsetting the increased salaries and related expenses were loweradvertising costs of  $1.7 million, and$700,000 favorable currency impact primarily due to the strength of the USdollar relative to the British Pound, Euro, and Australian dollar in the thirdand fourth quarter of 2008. As noted above, we changed the primary nature ofour sales arrangements from licenses to subscriptions beginning in 2007. Underlicense arrangements, we expense sales commissions when earned, which is typicallyupon issuance of a customer invoice. Under subscription arrangements, we deferthe related sales commission costs and expense them in proportion to therevenue recognized. We deferred $8.2 million of sales commissions earnedon subscription sales as of December 31, 2008, as compared to $5 milliondeferred sales commissions as of December 31, 2007.

 

Sales and marketing expensesof $65.1 million in 2007 were 6%, or $3.6 million, greater than$61.5 million in 2006. Staff additions to our sales and marketingorganization increased common expense allocation by $1.8 million, andsalary and related expense increased $1.0 million primarily due toincreased headcount. Average employee count in our sales and marketingorganizations increased to 263 in 2007 from 251 in 2006. Additionally weincreased our investment in third-party marketing services by $800,000.Employee additions in 2007 were primarily for direct sales personnel, salesengineers, business development representatives, and marketing personnel. Offsettingthe increased salaries and related expenses were lower sales commissionexpenses caused by the deferral of sales commissions earned on subscriptionagreements. We deferred $5 million of sales commissions earned onsubscription sales as of December 31, 2007, as compared to $213,000deferred sales commissions as of December 31, 2006.

 

*Researchand Development Expenses*

 

Research and developmentexpenses increased $1.2 million to $18.3 million, or 7%, over 2007, primarilydue to increased salaries and related expenses and third party services. Salaryand related expense increased $1.0 million primarily due to staffadditions, and common expense allocation increased by $332,000. These costswere offset by a reduction in third-party research and development services,and other employee related expenses of $166,000.  Average employee count in our research anddevelopment organization increased to 146 in 2008 from 133 in 2007.

 

Research and developmentexpenses increased $2.6 million to $17.1 million, or 18%, more thanresearch and development expenses over 2006, primarily due to increasedsalaries and related expenses and third party services. Salary and relatedexpense increased $1.3 million primarily due to staff additions, andcommon expense allocation increased by $800,000. Average employee count in ourresearch and development organization increased to 133 in 2007 from 125 in2006. Higher outside service costs of $440,000 were incurred during 2007principally related to language translations for RightNow 8, and subsequentquarterly releases.

 

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*Generaland Administrative Expenses*

 

General and administrativeexpenses increased $2.1 million to $13.6 million, or 18%, in 2008 over2007 mostly due to staff additions, which increased salaries, related expensesand common expense allocation approximately $1.4 million. Average employees inour general and administrative organization were 79 in 2008 as compared to 68in 2007. Employee additions in 2008 were primarily for finance, accounting andinformation technology personnel. Additionally, donations increased $308,000 compared to the same periodin 2007 related to sponsorship programs including a computer science grant programat a university and the Special Olympics.

 

General and administrativeexpenses increased $1.9 million to $11.5 million, or 20%, in 2007 over2006 mostly due to staff additions, which increased common expense allocation.Average employees in our general and administrative organization were 68 in2007 as compared to 59 in 2006. Employee additions in 2007 were primarily forfinance, accounting and information technology personnel.

 

*Stock-BasedCompensation Expense*

 

Total stock-basedcompensation expense for 2008 was $6.0 million, a 10% increase as comparedto $5.5 million in 2007. The year-over-year increase in stock-basedcompensation expense results primarily due to lower forfeitures combined withincreased fair value per option share. Stock-based compensation expensefluctuates from period-to-period due to changes in the underlying market valueof our stock and changes in our valuation assumptions, such as the expectedvolatility of our stock, the expected time an option will be outstanding, andexpected option forfeiture rates.

 

***Interest and Other Income (Expense), Net***

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **Percent  Change** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                            |       | **(Amounts in thousands)**       |       |
| Interest income                                 |       | $                                          | 3,036      |   | $ | 3,898 |   | 28 | % | $ | 2,906 |   | (25 | )% |
| Interest expense                                |       | (17                                        | )          | (7 | ) | n/m |   | (12 | ) | n/m |   |
| Other income (expense)                          |       | 45                                         |       | (208 | ) | n/m |   | (198 | ) | n/m |   |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |
| Total interest and other income (expense),  net |       | $                                          | 3,064      |   | $ | 3,683 |   | 20 | % | $ | 2,696 |   | (27 | )% |

 

Interest income decreased25% in 2008 over 2007 due to declining investment yields driven by decreases inthe federal funds rate. Our investment portfolio consists primarily ofinvestment-grade government, corporate debt instruments, and auction-ratesecurities.

 

Other income (expense)consists primarily of losses on transactions denominated in foreign currencies,and an other than temporary impairment loss on auction-rate securities. Theselosses were primarily offset by a gain on a put option settlement rightassociated with the auction-rate securities. Refer to Note 3 for furtherdiscussion on ARS investments and put option.

 

Interest income increased28% in 2007 over 2006 primarily due to growth in our cash and short-terminvestment balances, and to a lesser extent increased average yields oninvested funds.

 

Interest expense for 2008,2007 and 2006 was comprised of the interest component under various capitallease obligations. Other income (expense) consisted primarily of foreigncurrency transaction gains or losses and gains or losses on asset sales.Currency transaction losses were offset by currency transaction gainspredominantly in the third and fourth quarter of 2008 over 2007.

 

***Provision for Income Taxes***

 

The provision for incometaxes of $42,000 in 2008, $276,000 in 2007, and $530,000 in 2006, consistsprimarily of the federal alternative minimum tax, foreign withholding taxes,and various state income taxes. Our effective tax rate differs from the federalstatutory rate primarily due to the utilization of net operating loss carryforwards, tax credits, federal alternative minimum taxes, foreign ratedifferentials, and non-deductible meal and entertainment expenses. Oureffective tax rate in 2009 will depend on a number of factors, such as theamount and mix of stock-based compensation expense to be recorded underSFAS 123R, the level of business in state and foreign tax jurisdictions,management’s expectation of the realization of deferred tax assets and theassociated valuation allowance, and other factors.

 

At December 31, 2008,we had approximately $23.9 million of net deferred tax assets that havebeen reserved in full by a valuation allowance. In the future, if availableevidence indicates that it is more likely than not that some or all of ourdeferred tax assets are realizable, an adjustment to decrease the valuationallowance would decrease income tax expense, in the period such determinationwas made. If and when that happens, our effective income tax rate will increaseto more closely approximate the federal statutory rate.

 

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**Liquidityand Capital Resources**

 
| ** **                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **Percent  Change** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| ** **                                         | ** ** | **(Amounts in thousands)**       | ** ** |
| Cash, cash equivalents and short-term  investments |       | $                                          | 78,335     |   | $ | 96,325 |   | 23 | % | $ | 85,817 |   | (11 | )% |
| Long-term investments                              |       | —                                     |       | — |   | — |   | 4,963 |   | 100 |   |
| Cash provided by operating activities              |       | 27,043                                     |       | 21,034 |   | (22 | )% | 14,724 |   | (30 | )% |
|                                                    |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

We have historically fundedour operations with cash from operations, equity financings and debtborrowings. At December 31, 2008, cash and cash equivalents, andshort-term investments, totaled $85.8 million. Long-term investmentstotaled approximately $5.0 million. In 2008, we used $13.2 million torepurchase shares of our common stock under our October 2008 boardapproved stock repurchase program.  Inaddition to our cash and short-term investments, other sources of liquidity at December 31,2008 included a $3 million bank line of credit facility, under which therewere no borrowings in 2007 or 2008.

 

Operating activitiesprovided $14.7 million of cash during the year ended December 31,2008 as compared to $21.0 million in 2007 and $27.0 million in 2006.The majority of our cash from operations in all three years was from net lossadjusted for non-cash charges, collection of receivables, partially offset bygrowth in deferred commissions. We typically bill customers on net 30-day termsat the beginning of the contract period, which is reflected in accounts receivableand deferred revenue. Cash flow from operations can vary significantly fromyear to year for many reasons, including the timing of business in a givenperiod, and customer payment preferences and patterns.  Slower cash collections and mix of billingterms were the primary drivers in the decline in cash provided by operatingactivities in 2008 as compared to 2007. During the third and fourth quarters of 2008, the percentage of businesssigned with monthly or periodic billing terms increased from historical ratesof 15-20% to approximately 25%.  Deferredrevenue is not recorded for subscriptions with monthly or periodic billingterms until the invoices are issued.  Achange in the billing practice resulting in delayed payment or billing termscould have a material adverse effect on cash provided from operating activitiesand growth in deferred revenue.

 

The allowance foruncollectible accounts receivable represented approximately 5% of currentaccounts and term receivables at December 31, 2008 and 2007, respectively.Accounts written off in 2008 were relatively constant as a percentage of newbillings from the previous year. We regularly assess the adequacy of theallowance for doubtful accounts. Actual write-offs could exceed our estimatesand adversely affect operating cash flows in the future.

 

We have approximately$7.9 million of payments due in 2009 under contractual obligations andpurchase commitments for operating and capital leases, hosting services andother items. Total purchase commitments at December 31, 2008 were$19.4 million to be paid per the schedule below. We believe we willgenerate sufficient cash from operations to satisfy these commitments in 2009.

 

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Investing activitiesgenerated $7.6 million in 2008, which included $13.4 million netproceeds from investments, offset by $5.8 million for capitalexpenditures. Cash used in investing activities in 2007 was $20.8 million,of which $13.5 million was due to net purchases of short-term investmentsand $7.3 million for capital expenditures.

 

Financing activities used$11.9 million in 2008, which was primarily due to a 1.9 million sharerepurchase for $13.2 million, offset by $1.4 million generated from commonstock issued under employee benefit plans. We generated $3.8 million in2007 and $3.1 million in 2006 from financing activities. Financing sourcesincluded the exercise of employee stock options under our equity incentive planand stock purchases under our employee stock purchase plan.

 

At December 31, 2008 weheld $5.0 million par value auction rate securities (“ARS”) that are subject togeneral credit, liquidity, market, and interest rate risks, which may beexacerbated by U.S. sub-prime mortgage defaults that have affected varioussectors of the financial markets and caused credit and liquidity issues. TheARS are comprised of federally insured student loan bonds.

 

During the fourth quarter of2008 we executed a settlement agreement to redeem the ARS held by us at par withour broker commencing June 2010 through July 2012. By accepting theterms of the settlement, we (1) received the non-transferable right (“putoption”) to sell our ARS at par value to the broker commencing June 2010through July 2012, and (2) gave the broker the right to purchase the ARS fromus at any time after the executed settlement agreement date as long as wereceive par value. We expect to sell the ARS under the put option. As such,these investments may also be subject to brokerage house default.  As a result of this settlement, wereclassified the $4.2 million ARS from available for sale securities to tradingsecurities.  Redemption of theseinvestments may be subject to brokerage house default.  As a result of this settlement, wereclassified the $4.2 million ARS from available for sale securities to tradingsecurities.  In connection with the reclassificationinto trading securities, we recognized an other-than-temporary impairment lossof $775,000 due to decline in fair value, which was included in other expense,net.  Partially offsetting this losswithin other expense, net was a $738,000 gain related to the put option weobtained pursuant to the settlement agreement. Our inability to dispose of our ARS prior to June 2010 couldnegatively impact our liquidity and cash on hand, which, in turn, could causeus to forego potentially beneficial operational and strategic transactions orto incur additional indebtedness. Additionally, we could be adversely impacted if the broker is unable tomeet its obligations under the repurchase agreement.We believe our existingcash and short-term investments, together with funds generated from operations,should be sufficient to fund operating and investment requirements for at leastthe next twelve months. Our future capital requirements will depend on manyfactors, including our rate of revenue growth and expansion of our sales andmarketing activities, the possible acquisition of complementary products orbusinesses, the timing and extent of spending required for research anddevelopment efforts, and the continuing market acceptance of our products. Tothe extent that available funds are insufficient to fund our future activities,we may need to raise additional funds through public or private equity or debtfinancings. Additional equity or debt financing may not be available on termsfavorable to us or at all.

 

**Off-BalanceSheet Arrangements**

 

Asof December 31, 2008, we did not have any significant off-balance-sheetarrangements, as defined in Item 303(a)(4)(ii) of Regulation S-Kpromulgated by the SEC.

 

**ContractualObligations and Commitments**

 

Thefollowing table summarizes our contractual payment obligations and commitmentsas of December 31, 2008:

 
| ** **                                 | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**           | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** ** |
| ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating lease obligations                |       | $                                         | 16,193     |   | $ | 5,281 |   | $ | 8,164 |   | $ | 2,284 |   | $ | 464 |   |
| Obligations under capital leases           |       | 114                                       |       | 46 |   | 68 |   | — |   | — |   |
| Purchase obligations—hosting services |       | 1,793                                     |       | 1,348 |   | 445 |   | — |   | — |   |
| Purchase obligations—other            |       | 1,275                                     |       | 1,197 |   | 78 |   | — |   | — |   |
|                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                      |       | $                                         | 19,375     |   | $ | 7,872 |   | $ | 8,755 |   | $ | 2,284 |   | $ | 464 |   |

 

We lease our officefacilities and certain office equipment under operating lease agreements thatexpire at various dates through 2017. Obligations under capital leases pertainto certain tenant improvements in our main office facility. Purchaseobligations consist of agreements with third parties to provide co-locationservices for hosting operations, and obligations for marketing and othermiscellaneous services.

 

**Item 7A.    Quantitative andQualitative Disclosures About Market Risk**

 

***Foreign Currency Exchange Risk***

 

Our results of operationsand cash flows are subject to fluctuation due to changes in foreign currencyexchange rates, particularly changes in the British pound, Euro, and Australiandollar, because our contracts are frequently denominated in local currency. Inthe future, we may utilize foreign currency forward and option contracts tomanage currency exposures. We do not currently have any such contracts inplace, nor did we enter into any such contracts during the years ended December 31,2008 or December 31, 2007.

 

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During the year ended December 31,2008, the U.S. dollar fluctuated significantly compared to the British pound,Euro, and Australian dollar.  Foreign currency fluctuations during 2008decreased revenue by approximately $700,000 on a constant currency basis ascompared to the weighted average exchange rates during the year ended December 31,2007.   Additionally, deferred revenue decreased byapproximately $6.9 million on a constant currency basis as compared to theperiod end rates as of December 31, 2007.  Expenses associated withinternational revenue are generally paid in local currency, which generallyprovides a natural hedge to offset the revenue impact.  These expenses in 2008 decreased $1.5 millionon a constant currency basis as compared to the weighted average exchange ratesduring the year ended December 31, 2007. If the dollar continues to strengthen in the future we may experiencefurther impact.

 

***Interest Rate Sensitivity***

 

Our investments consist ofshort and long-term, interest-bearing securities, which are subject to creditand interest rate risk. Our portfolio is investment-grade and diversified amongissuers and security types to reduce credit risk. We manage our interest raterisk by maintaining a large portion of our investment portfolio in instrumentswith short maturities or frequent interest rate resets. We also manage interestrate risk by maintaining sufficient cash and cash equivalents such that we areable to hold investments until maturity. If market interest rates were toincrease by 100 basis points from the level at December 31, 2008, the fairvalue of our portfolio would decline by approximately $293,000.

 

***Liquidation and Valuation Risk***

 

Our long-term investmentsconsist of approximately $5 million in par value auction rate securitieswith investment grades of AAA or AA, as of December 31, 2008. Despite thelong-term contractual maturities of the auction rate securities, all of thesesecurities are considered trading securities. Since February 2008,uncertainties in the credit markets caused all auctions of the Company’ssecurities to be unsuccessful. During the fourth quarter of 2008 we executed asettlement agreement to redeem the ARS held by us at par with our brokercommencing June 2010 through July 2012. By accepting the terms of thesettlement, we (1) received the non-transferable right (“put option”) to sellour ARS at par value to the broker commencing June 2010 through July 2012, and(2) gave the broker the right to purchase the ARS from us at any time after theexecuted settlement agreement date as long as we receive par value. We expectto sell the ARS under the put option. Redemption of these investments may besubject to brokerage house default.  As aresult of this settlement, we reclassified the $4.2 million ARS from availablefor sale securities to trading securities. In connection with the reclassification into trading securities, werecognized an other-than-temporary impairment loss of $775,000 due to declinein fair value, which was included in other expense, net.  Partially offsetting this loss within otherexpense, net was a $738,000 gain related to the put option we obtained pursuantto the settlement agreement.Our inability to dispose of our ARS prior to June 2010could negatively impact our liquidity and cash on hand, which, in turn, couldcause us to forego potentially beneficial operational and strategictransactions or to incur additional indebtedness.  Additionally, we could be adversely impactedif the broker is unable to meet its obligations under the repurchaseagreement.Based on the Company’s expected operating cash flows, and othersources and uses of cash, the Company does not anticipate that the lack ofliquidity on these investments will affect its ability to execute its currentbusiness plan. The Company will continue to monitor the state of the creditmarkets and its potential impact, if any, on the fair value and classificationof our portfolio of auction rate securities.

 

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**Item 8.          FinancialStatements and Supplementary Data**

 

Our consolidated financialstatements, together with our related notes and report of KPMG LLP, ourindependent registered public accounting firm, are set forth on the pages indicatedin Item 15.

 

**Item 9.          Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.       Controlsand Procedures**

 

*(a)   Evaluationof Disclosure Controls and Procedures*

 

Our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934). Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of December 31,2008 our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission and (ii) accumulated andcommunicated to our management, including our principal executive and principalaccounting officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

*(b)   Changesto Internal Control over Financial Reporting*

 

During the most recentcompleted fiscal quarter covered by this report, there has been no change inour internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Report ofManagement on Internal Control Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining a system of internal control overfinancial reporting as defined under the Exchange Act Rules 13a—15(f) and15d-15(f). Internal control over financial reporting is designed to providereasonable assurance regarding the reliability of our financial reporting andpreparation of financial statements for external purposes in accordance withU.S. generally accepted accounting principles. Internal control over financialreporting includes maintaining records that in reasonable detail accurately andfairly reflect our transactions; providing reasonable assurance thattransactions are recorded as necessary for preparation of our financialstatements in accordance with U. S. generally accepted accounting principles;providing reasonable assurance that our receipts and expenditures are made inaccordance with authorizations of our management and directors; and providingreasonable assurance that unauthorized acquisition, use or disposition of ourassets that could have a material effect on our financial statements would beprevented or detected on a timely basis. Because of its inherent limitations,internal control over financial reporting is not intended to provide absoluteassurance that a misstatement of our financial statements would be prevented ordetected.

 

Management conducted anassessment of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this assessment, managementconcluded that our internal control over financial reporting was effective asof December 31, 2008 to provide reasonable assurance regarding thereliability of financial reporting and preparation of financial statements forexternal reporting purposes in accordance with U.S. generally acceptedaccounting principles. Our independent registered public accounting firm,KPMG LLP has issued an audit report on the effectiveness of internalcontrol over financial reporting which is included in this Item 9A below.

 

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**Report ofIndependent Registered Public Accounting Firm**

 

The Board of Directors and StockholdersRightNow Technologies Inc.:

 

We have audited RightNowTechnologies, Inc.’s internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). RightNowTechnologies Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the Company’s internal controlover financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, RightNowTechnologies, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based oncriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of RightNow Technologies, Inc.and subsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveloss, and cash flows for each of the years in the three-year period ended December 31,2008, and our report dated March 6, 2009 expressed an unqualified opinionon those consolidated financial statements.

 

/s/ KPMG LLP

 

Portland, OregonMarch 6, 2009

 

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**Item 9B.       OtherInformation**

 

None.

 

**Part III**

 

**Item 10.       Directors,Executive Officers and Corporate Governance**

 

*(a)   Identificationof Directors.*

 

The information under thecaptions “Proposal One: Election of Directors” and “Corporate Governance, BoardComposition and Board Committees,” appearing in our proxy statement for our2009 annual meeting of stockholders, is hereby incorporated by reference.

 

*(b)   Identificationof Executive Officers and Certain Significant Employees.*

 

The information under thecaption “Executive Officers,” appearing in our proxy statement for our 2009annual meeting of stockholders, is hereby incorporated by reference.

 

*(c)   Compliancewith Section 16(a) of the Exchange Act.*

 

The information under thecaption “Section 16(a) Beneficial Ownership Reporting Compliance,”appearing in our proxy statement for our 2009 annual meeting of stockholders,is hereby incorporated by reference.

 

*(d)   Codeof Ethics.*

 

Our board of directors hasadopted a code of ethics and business conduct that applies to all of ouremployees, officers (including our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions) and directors. The full text of our code ofethics and business conduct is posted on our web site athttp://www.rightnow.com under the Investor Relations section. We intend todisclose future amendments to certain provisions of our code of ethics andbusiness conduct, or waivers of such provisions, applicable to our directorsand executive officers (including our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions), at the same location on our web site identifiedabove. The inclusion of our web site address in this report does not include orincorporate by reference the information on, or accessible through, our website into this report.

 

*(e)   CorporateGovernance.*

 

The information under thecaption “Corporate Governance, Board Composition and Board Committees”,appearing in our proxy statement for our 2009 annual meeting of stockholders,is hereby incorporated by reference.

 

**Item 11.       ExecutiveCompensation**

 

The information under thecaptions “Compensation Discussion and Analysis,” “Compensation CommitteeInterlocks and Insider Participation,” and “Compensation Committee Report,”appearing in our proxy statement for our 2009 annual meeting of stockholders,is hereby incorporated herein by reference.

 

**Item 12.       SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The information under thecaptions “Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters” and “Securities Authorized for Issuance UnderEquity Compensation Plans,” appearing in our proxy statement for our 2009annual meeting of stockholders, is hereby incorporated by reference.

 

**Item 13.       CertainRelationships and Related Transactions and Director Independence**

 

*(a)   Certain Relationships and RelatedTransactions.*

 

Theinformation under the caption “Certain Relationships and Related PersonTransactions” appearing in our proxy statement for our 2009 annual meeting ofstockholders, is hereby incorporated by reference.

 

*(b)   Director Independence.*

 

Theinformation under the captions “Proposal One: Election of Directors” and “CorporateGovernance, Board Composition and Board Committees,” appearing in our proxystatement for our 2009 annual meeting of stockholders, is hereby incorporatedby reference.

 

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**Item 14.       PrincipalAccountant Fees and Services**

 

Theinformation under the captions “Principal Accountant Fees and Services,” and “AuditCommittee Pre-Approval of Audit and Permissible Non-Audit Services ofIndependent Auditors,” appearing in our proxy statement for our 2009 annualmeeting of stockholders, is hereby incorporated by reference.

 

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**Part IV**

 

**Item 15.       Exhibitsand Financial Statement Schedules**

 

*(a)(1)  FinancialStatements*

 
| ** **                                                      | ** ** | **Page** |
|-----------------------------------------------------------------|------------|----------|
| Report  of Independent Registered Public Accounting Firm        |       | F-1      |
| Consolidated  Financial Statements:                             |       |     |
| Balance Sheets                                                  |       | F-2      |
| Statements of Operations                                        |       | F-3      |
| Statements of Stockholders’ Equity and Comprehensive  Loss |       | F-4      |
| Statements of Cash Flows                                        |       | F-5      |
| Notes                                                           |       | F-6      |

 

*(a)(2)  FinancialStatement Schedules*

 

None.

 

*(a)(3)  Exhibits*

 

The following is a list ofexhibits to this report.

 
| **Exhibit  Number** | ** ** | **Description of document**                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                           |
| 3.1                 |       | Amended and restated  certificate of incorporation of the registrant.(1)                                                                                             |
|                |       |                                                                                                                                                                 |
| 3.2                 |       | Amended and restated  bylaws of the registrant.(4)                                                                                                                   |
|                |       |                                                                                                                                                                 |
| 10.1                |       | Form of  indemnification agreement between the registrant and its officers and directors.(2)                                                                    |
|                |       |                                                                                                                                                                 |
| 10.2                |       | Amended and restated 1998  Long-Term Incentive and Stock Option Plan.(2)                                                                                             |
|                |       |                                                                                                                                                                 |
| 10.3                |       | 2004 Equity Incentive  Plan, as amended and restated.(10)                                                                                                            |
|                |       |                                                                                                                                                                 |
| 10.4                |       | 2004 Employee Stock  Purchase Plan.(2)                                                                                                                               |
|                |       |                                                                                                                                                                 |
| 10.5                |       | Lease agreement dated  July 10, 2000, between Genesis Partners, LLC and the registrant  (relating to property at 40 Enterprise Blvd, Bozeman, MT).(2) |
|                |       |                                                                                                                                                                 |
| 10.6                |       | Lease agreement dated  July 10, 2000, between Genesis Partners, LLC and the registrant  (relating to property at 77 Discovery Drive, Bozeman, MT).(2) |
|                |       |                                                                                                                                                                 |
| 10.8†          |       | Severance policy for  executive officers.(2)                                                                                                                         |
|                |       |                                                                                                                                                                 |
| 10.9†          |       | Form of executive  officer offer letter and schedule of omitted material details thereto.(2)                                                                    |
|                |       |                                                                                                                                                                 |
| 10.10†         |       | Form of executive  officer incentive stock option agreement and schedule of omitted material  details thereto.(2)                                               |
|                |       |                                                                                                                                                                 |
| 10.11†         |       | Form of executive  officer non-incentive stock option agreement and schedule of omitted material  details thereto.(2)                                           |
|                |       |                                                                                                                                                                 |
| 10.12               |       | Form of director  non-incentive stock option agreement and schedule of omitted material details  thereto.(2)                                                    |
|                |       |                                                                                                                                                                 |
| 10.13†         |       | Form of Notice of  Grant of Stock Options and Stock Option Agreements.(5)                                                                                       |

 

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| 10.14† |   | Form of Incentive  Stock Option Agreement.(6)                                                                                                                                                                        |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                      |
| 10.15† |   | Form of Non-Incentive  Stock Option Agreement.(6)                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                      |
| 10.16       |   | Lease agreement dated  March 28, 2005, between the registrant and Genesis Partners, LLC  for office space located at 110 Enterprise Boulevard, Bozeman,  Montana.(3)                                       |
|        |   |                                                                                                                                                                                                                      |
| 10.17       |   | Renewed lease agreement,  dated March 28, 2005, between the registrant and Genesis  Partners, LLC for office space located at 77 Discovery Drive,  Bozeman, Montana.(3)                                    |
|        |   |                                                                                                                                                                                                                      |
| 10.19† |   | Form of amended employment  offer letter for executive officers.(8)                                                                                                                                                  |
|        |   |                                                                                                                                                                                                                      |
| 10.22† |   | Material differences in  form of executive officer offer letter for Jay Rising.(7)                                                                                                                                        |
|        |   |                                                                                                                                                                                                                      |
| 10.23† |   | Letter from the registrant  to Peter Dunning, dated October 7, 2006, terminating Mr. Dunning’s  appointment as President of Field Operations.(7)                                                           |
|        |   |                                                                                                                                                                                                                      |
| 10.24† |   | Letter agreement between  the registrant and Peter Dunning, dated October 7, 2006, setting forth  the basis of Mr. Dunning’s continued employment with the registrant.(7)                                  |
|        |   |                                                                                                                                                                                                                      |
| 10.25       |   | Lease agreement, dated  November 1, 2005 and commencing March 23, 2007, between the  registrant and Genesis Partners, LLC for office space located at  136 Enterprise Boulevard, Bozeman, Montana.(9) |
|        |   |                                                                                                                                                                                                                      |
| 10.26† |   | Form of offer letter  for Jason Mittelstaedt, Joseph Brown, Steve Daines, and Michael Saracini, and  schedule of omitted material details thereto.(11)                                                               |
|        |   |                                                                                                                                                                                                                      |
| 10.27† |   | Form of executive  officer offer letter and schedule of material differences thereto for Jeff  Davison and Susan Carstensen.(12)                                                                                     |
|        |   |                                                                                                                                                                                                                      |
| 10.28† |   | Offer letter with Marcus  Bragg, VP and GM of the Americas.(13)                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                      |
| 10.29† |   | Terms of understanding  with Michael Saracini, Former VP and GM of Americas.(14)                                                                                                                                          |
|        |   |                                                                                                                                                                                                                      |
| 21.1        |   | Subsidiaries of the  registrant.                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                      |
| 23.1        |   | Consent of KPMG LLP,  Independent Registered Public Accounting Firm.                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                      |
| 31.1        |   | Certification of Chief  Executive Officer pursuant to Exchange Act Rule 13a-14(a) or  15d-14(a). as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                    |
|        |   |                                                                                                                                                                                                                      |
| 31.2        |   | Certification of Chief  Financial Officer pursuant to Exchange Act Rule 13a-14(a) or  15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                |
|        |   |                                                                                                                                                                                                                      |
| 32.1        |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (furnished herewith).         |

 

----

| (1)    | Incorporated by reference  to Exhibit 4.2 of the registrant’s registration statement on  Form S-8 (File No. 333-118515) filed with the Securities and  Exchange Commission on August 24, 2004.                                    |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                       |
| (2)    | Incorporated by reference  to the exhibit of the same number from the registrant’s registration  statement of Form S-1 (File No. 333-115331) initially filed with  the Securities and Exchange Commission on May 10, 2004, as amended. |
|   |                                                                                                                                                                                                                                                       |
| (3)    | Incorporated by reference  to the exhibit of the same number from the registrant’s current report on  Form 8-K (File No. 000-31321) filed with the Securities and  Exchange Commission on April 1, 2005.                               |

 

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| (4)    | Incorporated by reference  to Exhibit 3.1 of the registrant’s current report on Form 8-K filed  with the Securities and Exchange Commission on January 25, 2006.                             |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                             |
| (5)    | Incorporated by reference  to Exhibits 10.13, 10.14 and 10.15 of the registrant’s annual report on  Form 10-K filed with the Securities and Exchange Commission on filed on  March 31, 2005. |
|   |                                                                                                                                                                                                             |
| (6)    | Incorporated by reference  to Exhibits 10.20 and 10.21, respectively, of the registrant’s quarterly  report on Form 10-Q filed with the Securities and Exchange Commission on  May 10, 2006. |
|   |                                                                                                                                                                                                             |
| (7)    | Incorporated by reference  to the exhibits of the same number from the registrant’s current report on  Form 8-K filed with the Securities and Exchange Commission on  October 10, 2006.           |
|   |                                                                                                                                                                                                             |
| (8)    | Incorporated by reference  to the exhibit of the same number from the registrant’s annual report on  Form 10-K filed with the Securities and Exchange Commission on  March 14, 2007.              |
|   |                                                                                                                                                                                                             |
| (9)    | Incorporated by reference  to the exhibit of the same number from the registrant’s quarterly report on  Form 10-Q filed with the Securities and Exchange Commission on  May 8, 2007.              |
|   |                                                                                                                                                                                                             |
| (10)   | Incorporated by reference  to Exhibit 10.26 of the registrant’s current report on Form 8-K filed  with the Securities and Exchange Commission on June 13, 2007.                              |
|   |                                                                                                                                                                                                             |
| (11)   | Incorporated by reference  to Exhibit 10.30 of the registrant’s quarterly report on Form 10-Q  filed with the Securities and Exchange Commission on August 9, 2007.                          |
|   |                                                                                                                                                                                                             |
| (12)   | Incorporated by reference  to Exhibit 10.31 of the registrant’s current report on Form 8-K  filed with the Securities and Exchange Commission on January 30, 2008.                           |
|   |                                                                                                                                                                                                             |
| (13)   | Incorporated by reference  to Exhibit 10.1 of the registrant’s quarterly report on Form 10-Q  filed with the Securities and Exchange Commission on November 7, 2008.                         |
|   |                                                                                                                                                                                                             |
| (14)   | Incorporated by reference  to Exhibit 10.2 of the registrant’s quarterly report on Form 10-Q  filed with the Securities and Exchange Commission on November 7, 2008.                         |
|   |                                                                                                                                                                                                             |
| † | Denotes management  contract or compensatory plan or arrangement.                                                                                                                                                |

 

*(b)   Exhibits*

 

The exhibits files as partof this report are listed in Item 15(a)(3) of this report.

 

*(c)   FinancialStatement Schedules*

 

The financial statementschedules required by Regulation S-X and Item 8 of this report areincluded in the financial statements and notes thereto listed inItem 15(a)(2) of this report.

 

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**Signatures**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| RIGHTNOW TECHNOLOGIES, INC. |                                                                                                                      |
|----------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                             |                                                                                                                      |
| By:                              | /s/   JEFFREY C.  DAVISON                                                                                       |   |
|                             |                                                                                                                      |   |
|                             | Jeffrey C. Davison

Chief Financial Officer,  Vice President and Treasurer

(Principal Financial and  Accounting Officer) |
|                                  |                                                                                                                           |  |  |

 

March 6, 2009

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacitiesindicated on March 6, 2009.

 
| **Signature**                       | ** ** | **Title**                                              |
|-------------------------------------|------------|--------------------------------------------------------|
| ** **                          | ** ** | ** **                                             |
| /s/   GREG R.  GIANFORTE  |       | Chairman, Chief Executive  Officer and President       |
|                                |       | (Principal Executive  Officer)                         |
| Greg R. Gianforte                   |       |                                                   |
|                                |       |                                                   |
| /s/   JEFFREY C.  DAVISON |       | Chief Financial Officer,  Vice President and Treasurer |
|                                |       | (Principal Financial and  Accounting Officer)          |
| Jeffrey C. Davison                  |       |                                                   |
|                                |       |                                                   |
| /s/   GREGORY M.  AVIS    |       | Director                                               |
|                                |       |                                                   |
| Gregory M. Avis                     |       |                                                   |
|                                |       |                                                   |
| /s/   THOMAS W.  KENDRA   |       | Director                                               |
|                                |       |                                                   |
| Thomas W. Kendra                    |       |                                                   |
|                                |       |                                                   |
| /s/   WILLIAM J.  LANSING |       | Director                                               |
|                                |       |                                                   |
| William J. Lansing                  |       |                                                   |
|                                |       |                                                   |
| /s/   ALLEN E.  SNYDER    |       | Director                                               |
|                                |       |                                                   |
| Allen E. Snyder                     |       |                                                   |
|                                |       |                                                   |
| /s/   RICHARD E.  ALLEN   |       | Director                                               |
|                                |       |                                                   |
| Richard E. Allen                    |       |                                                   |

 

 

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**Report of Independent Registered Public AccountingFirm**

 

The Board of Directors and StockholdersRightNow Technologies, Inc.:

 

We have audited theaccompanying consolidated balance sheets of RightNow Technologies, Inc.and subsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveloss, and cash flows for each of the years in the three-year period ended December 31,2008. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of RightNow Technologies, Inc.and subsidiaries as of December 31, 2008 and 2007, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2008, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 1to the consolidated financial statements, the Company adopted FinancialAccounting Standards Board (FASB) Interpretation No. 48, *Accounting for Uncertainties in Income Taxes, anInterpretation of FASB Statement No. 109* , effective January 1,2007.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), RightNow Technologies, Inc.’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 6, 2009 expressed an unqualifiedopinion on the effectiveness of the Company’s internal control over financialreporting.

 

/s/ KPMG LLP

 

Portland, OregonMarch 6, 2009

 

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**RIGHTNOW TECHNOLOGIES, INC.Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2007**                | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                                               | ** ** | **(In thousands)** | ** ** |
| ** **                                                                                                                                                                                               |       |                    |       |   |   |
| **Assets**                                                                                                                                                                                               |       |                    |       |   |   |
| Current assets:                                                                                                                                                                                          |       |                    |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                |       | $                       | 43,681     |   | $ | 51,405 |   |
| Short-term investments                                                                                                                                                                                   |       | 52,644                  |       | 34,412 |   |
| Accounts receivable                                                                                                                                                                                      |       | 29,480                  |       | 36,770 |   |
| Term receivables, current                                                                                                                                                                                |       | 13,069                  |       | 5,752 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Total current receivables                                                                                                                                                                                |       | 42,549                  |       | 42,522 |   |
| Less allowance for doubtful accounts                                                                                                                                                                     |       | (1,918                  | )          | (2,277 | ) |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Total current receivables, net                                                                                                                                                                           |       | 40,631                  |       | 40,245 |   |
| Deferred commissions                                                                                                                                                                                     |       | 3,336                   |       | 5,381 |   |
| Prepaid and other current assets                                                                                                                                                                         |       | 2,643                   |       | 2,150 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Total current assets                                                                                                                                                                                     |       | 142,935                 |       | 133,593 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Long-term investments                                                                                                                                                                                    |       | —                  |       | 4,963 |   |
| Property and equipment, net                                                                                                                                                                              |       | 10,856                  |       | 10,141 |   |
| Term receivables, non-current                                                                                                                                                                            |       | 9,859                   |       | 3,547 |   |
| Intangible assets, net                                                                                                                                                                                   |       | 7,996                   |       | 6,399 |   |
| Deferred commissions, non-current                                                                                                                                                                        |       | 1,680                   |       | 2,840 |   |
| Other assets                                                                                                                                                                                             |       | 460                     |       | 854 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| **Total Assets**                                                                                                                                                                                         |       | $                       | 173,786    |   | $ | 162,337 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                            |       |                    |       |   |   |
| Current liabilities:                                                                                                                                                                                     |       |                    |       |   |   |
| Accounts payable                                                                                                                                                                                         |       | $                       | 4,386      |   | $ | 5,058 |   |
| Commissions and bonuses payable                                                                                                                                                                          |       | 5,044                   |       | 5,665 |   |
| Other accrued liabilities                                                                                                                                                                                |       | 11,404                  |       | 11,165 |   |
| Current portion of long-term debt                                                                                                                                                                        |       | 43                      |       | 46 |   |
| Current portion of deferred revenue                                                                                                                                                                      |       | 76,995                  |       | 77,584 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Total current liabilities                                                                                                                                                                                |       | 97,872                  |       | 99,518 |   |
| Long-term debt, less current portion                                                                                                                                                                     |       | 68                      |       | 22 |   |
| Deferred revenue, net of current portion                                                                                                                                                                 |       | 37,665                  |       | 35,614 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Total liabilities                                                                                                                                                                                        |       | 135,605                 |       | 135,154 |   |
| Commitments and contingencies  (Note 10)                                                                                                                                                            |       |                    |       |   |   |
| Stockholders’ equity:                                                                                                                                                                               |       |                    |       |   |   |
| Preferred stock, $0.001 par value.  Authorized and undesignated 15,000 shares at December 31, 2007, and  2008, respectively                                                                         |       | —                  |       | — |   |
| Common stock, $0.001 par value. Authorized  150,000 shares; issued and outstanding 33,453 shares at December 31, 2007;  issued and outstanding 33,712 and 31,830 respectively at December 31, 2008. |       | 33                      |       | 34 |   |
| Additional paid-in capital                                                                                                                                                                               |       | 95,377                  |       | 102,662 |   |
| Treasury Stock, at cost. Zero shares and  1,882 shares at December 31, 2007 and 2008, respectively                                                                                                  |       | —                  |       | (13,209 | ) |
| Accumulated other comprehensive income  (loss)                                                                                                                                                           |       | (292                    | )          | 1,916 |   |
| Accumulated deficit                                                                                                                                                                                      |       | (56,937                 | )          | (64,220 | ) |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| Total stockholders’ equity                                                                                                                                                                          |       | 38,181                  |       | 27,183 |   |
|                                                                                                                                                                                                     |       |                    |       |   |   |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                      |       | $                       | 173,786    |   | $ | 162,337 |   |

 

Seeaccompanying notes to consolidated financial statements

 

F-2

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Table of Contents

 

 **RIGHTNOWTECHNOLOGIES, INC.**

 

**Consolidated Statements of Operations**

 
| ** **                             | ** ** | **Year Ended December 31,**                         | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                           | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **(In thousands, except per share data)** | ** ** |
|                                   |       |                                                               |       |   |   |   |   |
| Revenue:                               |       |                                                               |       |   |   |   |   |
| Software, hosting and support          |       | $                                                                  | 86,257     |   | $ | 86,983 |   | $ | 102,576 |   |
| Professional services                  |       | 24,131                                                             |       | 25,094 |   | 37,859 |   |
|                                   |       |                                                               |       |   |   |   |   |
| Total revenue                          |       | 110,388                                                            |       | 112,077 |   | 140,435 |   |
| Costs of revenue:                      |       |                                                               |       |   |   |   |   |
| Software, hosting and support          |       | 13,260                                                             |       | 18,411 |   | 20,397 |   |
| Professional services                  |       | 19,110                                                             |       | 22,012 |   | 30,440 |   |
|                                   |       |                                                               |       |   |   |   |   |
| Total cost of revenue                  |       | 32,370                                                             |       | 40,423 |   | 50,837 |   |
|                                   |       |                                                               |       |   |   |   |   |
| Gross profit                           |       | 78,018                                                             |       | 71,654 |   | 89,598 |   |
| Operating expenses:                    |       |                                                               |       |   |   |   |   |
| Sales and marketing                    |       | 61,504                                                             |       | 65,118 |   | 67,628 |   |
| Research and development               |       | 14,478                                                             |       | 17,084 |   | 18,292 |   |
| General and administrative             |       | 9,578                                                              |       | 11,500 |   | 13,615 |   |
|                                   |       |                                                               |       |   |   |   |   |
| Total operating expenses               |       | 85,560                                                             |       | 93,702 |   | 99,535 |   |
|                                   |       |                                                               |       |   |   |   |   |
| Loss from operations                   |       | (7,542                                                             | )          | (22,048 | ) | (9,937 | ) |
| Interest and other income (expense):   |       |                                                               |       |   |   |   |   |
| Interest income                        |       | 3,036                                                              |       | 3,898 |   | 2,906 |   |
| Interest expense                       |       | (17                                                                | )          | (7 | ) | (12 | ) |
| Other                                  |       | 45                                                                 |       | (208 | ) | (198 | ) |
|                                   |       |                                                               |       |   |   |   |   |
| Total interest and other income, net   |       | 3,064                                                              |       | 3,683 |   | 2,696 |   |
|                                   |       |                                                               |       |   |   |   |   |
| Loss before provision for income taxes |       | (4,478                                                             | )          | (18,365 | ) | (7,241 | ) |
| Provision for income taxes             |       | (530                                                               | )          | (276 | ) | (42 | ) |
|                                   |       |                                                               |       |   |   |   |   |
| Net loss                               |       | $                                                                  | (5,008     | ) | (18,641 | ) | (7,283 | ) |
|                                   |       |                                                               |       |   |   |   |   |
| Net loss per share:                    |       |                                                               |       |   |   |   |   |
| Basic and diluted                      |       | $                                                                  | (0.16      | ) | $ | (0.56 | ) | $ | (0.22 | ) |
| Shares used in the computation:        |       |                                                               |       |   |   |   |   |
| Basic and diluted                      |       | 32,241                                                             |       | 33,078 |   | 33,362 |   |

 

Seeaccompanying notes to consolidated financial statements

 

F-3

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Consolidated Statements of Stockholders’ Equity andComprehensive Loss**

 
| ** **                                                          | ** ** | **Common Stock**               | ** ** | **Treasury Stock** | ** ** | **Additional  paid-in capital** | ** ** | **Accumulated other  comprehensive  income (loss)** | ** ** | **Accumulated  deficit** | ** ** | **Total  Stockholders'  equity** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **(Amount in thousands)** | ** ** |
| ** **                                                          | ** ** | **Shares**                          | ** ** | **Amount**              | ** ** | **Shares**                           | ** ** | **Amount**                                                    | ** ** | ** **               | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                                       |       | 31,872                              |       | 32                      |       | —                               |       | —                                                        |       | 78,312                   |       | (401                             | )          | (33,288 | ) | 44,655 |   |
| Issuance of  common stock:                                          |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Exercise of stock  options                                          |       | 904                                 |       | 1                       |       | —                               |       | —                                                        |       | 2,531                    |       | —                           |       | — |   | 2,532 |   |
| Employee stock  purchase plan                                       |       | 12                                  |       | —                  |       | —                               |       | —                                                        |       | 189                      |       | —                           |       | — |   | 189 |   |
| Stock-based  compensation expense                                   |       | —                              |       | —                  |       | —                               |       | —                                                        |       | 4,628                    |       | —                           |       | — |   | 4,628 |   |
| Tax benefit of  stock option exercises                              |       | —                              |       | —                  |       | —                               |       | —                                                        |       | 400                      |       | —                           |       | — |   | 400 |   |
| Fair value of  options granted to non-employees                     |       | —                              |       | —                  |       | —                               |       | —                                                        |       | 9                        |       | —                           |       | — |   | 9 |   |
| Comprehensive  loss:                                                |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Net loss                                                            |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | —                           |       | (5,008 | ) | (5,008 | ) |
| Unrealized loss  on available for sale investments net of tax of $0 |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | 60                               |       | — |   | 60 |   |
| Foreign currency  translation adjustment                            |       | —                              |       | —                  |       | —                               |       | —                                                        |       |                     |       | 9                                |       | — |   | 9 |   |
|                                                                |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Total  comprehensive loss                                           |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   | (4,939 | ) |
| Balance at  December 31, 2006                                       |       | 32,788                              |       | 33                      |       | —                               |       | —                                                        |       | 86,069                   |       | (332                             | )          | (38,296 | ) | 47,474 |   |
| Issuance of  common stock:                                          |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Exercise of stock  options                                          |       | 651                                 |       | —                  |       | —                               |       | —                                                        |       | 3,436                    |       | —                           |       | — |   | 3,436 |   |
| Employee stock  purchase plan                                       |       | 14                                  |       | —                  |       | —                               |       | —                                                        |       | 218                      |       | —                           |       | — |   | 218 |   |
| Stock-based  compensation expense                                   |       | —                              |       | —                  |       | —                               |       | —                                                        |       | 5,471                    |       | —                           |       | — |   | 5,471 |   |
| Tax benefit of  stock option exercises                              |       | —                              |       | —                  |       | —                               |       | —                                                        |       | 183                      |       | —                           |       | — |   | 183 |   |
| Fair value of  options granted to non-employees                     |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | —                           |       | — |   |   |   |
| Comprehensive  loss:                                                |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Net loss                                                            |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | —                           |       | (18,641 | ) | (18,641 | ) |
| Unrealized loss  on available for sale investments net of tax of $0 |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | 78                               |       | — |   | 78 |   |
| Foreign currency  translation adjustment                            |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | (38                              | )          | — |   | (38 | ) |
|                                                                |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   | (18,601 | ) |
| Total  comprehensive loss                                           |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
|                                                                |       | 33,453                              |       | 33                      |       | —                               |       | —                                                        |       | 95,377                   |       | (292                             | )          | (56,937 | ) | 38,181 |   |
| Balance at  December 31, 2007                                       |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Issuance of  common stock:                                          |       | 236                                 |       | 1                       |       | —                               |       | —                                                        |       | 1,176                    |       | —                           |       | — |   | 1,177 |   |
| Exercise of stock  options                                          |       | 23                                  |       | —                  |       | —                               |       | —                                                        |       | 219                      |       | —                           |       | — |   | 219 |   |
| Employee stock  purchase plan                                       |       | —                              |       | —                  |       | —                               |       | —                                                        |       | 6,025                    |       | —                           |       | — |   | 6,025 |   |
| Stock-based  compensation expense                                   |       | —                              |       | —                  |       | —                               |       | —                                                        |       | (135                     | )          | —                           |       | — |   | (135 | ) |
| Tax benefit of  stock option exercises                              |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | —                           |       | — |   | 0 |   |
| Fair value of  options granted to non-employees                     |       | —                              |       | —                  |       | —                               |       | —                                                        |       |                     |       | —                           |       | — |   | 0 |   |
| Treasury Stock,  at cost                                            |       |                                |       |                    |       | 1,882                                |       | (13,209                                                       | )          | —                   |       | —                           |       | — |   | (13,209 | ) |
| Comprehensive  loss:                                                |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Net loss                                                            |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | —                           |       | (7,283 | ) | (7,283 | ) |
| Unrealized gain  on available for sale investments net of tax of $0 |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | 242                              |       | — |   | 242 |   |
| Foreign currency  translation adjustment                            |       | —                              |       | —                  |       | —                               |       | —                                                        |       | —                   |       | 1,966                            |       | — |   | 1,966 |   |
|                                                                |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   |   |   |
| Total  comprehensive loss                                           |       |                                |       |                    |       |                                 |       |                                                          |       |                     |       |                             |       |   |   | (5,075 | ) |
|                                                                |       | 33,712                              |       | $                       | 34         |                                 | 1,882      |                                                          | $          | (13,209                  | )          | $                                | 102,662    |   | $ | 1,916 |   | $ | (64,220 | ) | $ | 27,183 |   |
|                                                                     |            |                                     |            |                         |            |                                      |            |                                                               |            |                          |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements

 

F-4

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Tableof Contents

 

 **RIGHTNOWTECHNOLOGIES, INC.**

 

**Consolidated Statements of Cash Flows**

 
| ** **                                                                       | ** ** | **2006**                    | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|----------|------------|----------|------------|
| ** **                                                                       | ** ** | **(Amounts  in thousands)** | ** ** |
|                                                                             |       |                        |       |     |       |     |       |
| Operating activities:                                                            |       |                        |       |     |       |     |       |
| Net loss                                                                         |       | $                           | (5,008     | )        | $          | (18,641  | )          | $ | (7,283 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                        |       |     |       |     |       |
| Depreciation and amortization                                                    |       | 5,681                       |       | 7,266    |       | 7,771    |       |
| Stock-based compensation                                                         |       | 4,628                       |       | 5,471    |       | 6,025    |       |
| Provision for losses on accounts receivable                                      |       | 306                         |       | 384      |       | 212      |       |
| Changes in operating assets and  liabilities:                                    |       |                        |       |     |       |     |       |
| Receivables                                                                      |       | (27,487                     | )          | 27,552   |       | 4,774    |       |
| Prepaid and other current assets                                                 |       | (213                        | )          | (226     | )          | (101     | )          |
| Deferred commissions                                                             |       | 22                          |       | (4,803   | )          | (3,623   | )          |
| Accounts payable                                                                 |       | 1,916                       |       | (45      | )          | 895      |       |
| Commissions and bonuses payable                                                  |       | 1,025                       |       | 957      |       | 930      |       |
| Other accrued liabilities                                                        |       | 1,541                       |       | 3,733    |       | 462      |       |
| Deferred revenue                                                                 |       | 44,782                      |       | (606     | )          | 4,169    |       |
| Other                                                                            |       | (150                        | )          | (8       | )          | 493      |       |
|                                                                             |       |                        |       |     |       |     |       |
| Net cash provided by operating activities                                        |       | 27,043                      |       | 21,034   |       | 14,724   |       |
| Investing activities:                                                            |       |                        |       |     |       |     |       |
| Purchases of short-term investments                                              |       | (53,276                     | )          | (57,512  | )          | (47,908  | )          |
| Sales or maturities of investments                                               |       | 37,464                      |       | 43,995   |       | 61,339   |       |
| Purchase of property and equipment                                               |       | (7,758                      | )          | (6,687   | )          | (5,738   | )          |
| Business acquisitions                                                            |       | (8,731                      | )          | —   |       | —   |       |
| Proceeds from sale of property and  equipment                                    |       | —                      |       | 55       |       | (21      | )          |
| Intangible asset additions                                                       |       | (13                         | )          | (610     | )          | (33      | )          |
|                                                                             |       |                        |       |     |       |     |       |
| Net cash provided by (used in) investing  activities                             |       | (32,314                     | )          | (20,759  | )          | 7,639    |       |
| Financing activities:                                                            |       |                        |       |     |       |     |       |
| Purchase of treasury stock                                                       |       | —                      |       | —   |       | (13,209  | )          |
| Proceeds from issuance of common stock:                                          |       |                        |       |     |       |     |       |
| Exercise of stock options and warrants                                           |       | 2,532                       |       | 3,436    |       | 1,177    |       |
| Employee stock purchase plan                                                     |       | 189                         |       | 218      |       | 219      |       |
| Excess (shortfall) tax benefit of stock  options exercised                       |       | 400                         |       | 183      |       | (135     | )          |
| Payments on long-term debt                                                       |       | (55                         | )          | (36      | )          | (43      | )          |
|                                                                             |       |                        |       |     |       |     |       |
| Net cash provided by (used in) financing  activities                             |       | 3,066                       |       | 3,801    |       | (11,991  | )          |
| Effect of foreign exchange rates on cash  and cash equivalents                   |       | 539                         |       | 397      |       | (2,648   | )          |
|                                                                             |       |                        |       |     |       |     |       |
| Net change in cash and cash equivalents                                          |       | (1,666                      | )          | 4,473    |       | 7,724    |       |
| Cash and cash equivalents at beginning of  period                                |       | 40,874                      |       | 39,208   |       | 43,681   |       |
|                                                                             |       |                        |       |     |       |     |       |
| Cash and cash equivalents at end of period                                       |       | $                           | 39,208     |     | $          | 43,681   |       | $ | 51,405 |   |

 

Seeaccompanying notes to consolidated financial statements

 

F-5

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)     Business Description and Summary ofSignificant Accounting Policies**

 

***(a)       Business Description***

 

RightNow Technologies, Inc. (the “Company” or “RightNow”)provides customer experience management software solutions for companies of allsizes. The Company’s on demand software is designed to help companies improvetheir customer experiences while reducing operating costs. RightNow’s solutionsgo beyond traditional customer relationship management (“CRM”) solutions tosupport a business’ external customer-facing channels as well as sales,marketing and customer service operations. Founded in 1997, RightNow isheadquartered in Bozeman, Montana, with additional offices in North America,Europe, Asia, and Australia. The Company operates in one segment, which is thecustomer experience management market.

 

***(b)       Basisof Consolidation***

 

The accompanyingconsolidated financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles, which include the accounts ofthe Company and its foreign subsidiaries. All intercompany accounts andtransactions have been eliminated in consolidation.

 

***(c)       CertainRisks and Concentrations***

 

The Company’s revenue isderived from the subscription, license, hosting and support of its softwareproducts and provision of related professional services. The markets in whichthe Company competes are highly competitive and rapidly changing. Significanttechnological changes, changes in customer requirements, or the emergence ofcompetitive products with new capabilities or technologies could adverselyaffect the Company’s operating results. The Company has historically derived amajority of its revenue from customer service software solutions. Theseproducts are expected to continue to account for a significant portion ofrevenue for the foreseeable future. As a result of this revenue concentration,the Company’s business could be harmed by a decline in demand for, or in theprices of, these products or as a result of, among other factors, any change inpricing model, a maturation in the markets for these products, increased pricecompetition or a failure by the Company to keep up with technological change.

 

Financial instrumentssubjecting the Company to concentrations of credit risk consist primarily ofcash and cash equivalents, short and long-term investments, and accounts andterm receivables. The Company maintains cash, cash equivalents, and short-terminvestments with various domestic and foreign financial institutions. TheCompany’s cash balances with its financial institutions may exceed depositinsurance limits. Short and long-term investments are investment grade,interest-earning securities, and are diversified by type and industry.  The entire balance of long-term investmentsconsists of auction rate securities (“ARS”) and a repurchase put optionassociated with the ARS as further described in Note 3.

 

The Company’s customers areworldwide with approximately 75% of sales in the United States during 2006, 71%in 2007 and approximately 69% of sales in the United States during 2008. Noindividual customer accounted for more than 10% of the Company’s revenue in2006, 2007 or 2008. One customer represented 12% of term receivables at December 31,2007, and the same one customer represented 22% of term receivables at December 31,2008. No individual customer accounted for more than 10% of the Company’saccounts receivables at December 31, 2007 and 2008.

 

Assets located outside NorthAmerica were 14% and 12% of total assets at December 31, 2007 and 2008,respectively. The loss from operations outside the United States totaled$8.1 million, $12.9 million, and $1.4 million for the years ended December 31,2006, 2007 and 2008, respectively.

 

F-6

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)     BusinessDescription and Summary of Significant Accounting Policies (Continued)**

 

Revenue by geographicalregion is as follows (in thousands):

 
| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| United States |       | $                                          | 82,522     |   | $ | 79,540 |   | $ | 97,640 |   |
| Europe        |       | 20,601                                     |       | 23,561 |   | 31,946 |   |
| Asia Pacific  |       | 7,265                                      |       | 8,976 |   | 10,849 |   |
|          |       |                                       |       |   |   |   |   |
|          |       | $                                          | 110,388    |   | $ | 112,077 |   | $ | 140,435 |   |

 

***(d)       Useof Estimates***

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement of the Company to make a number of estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, anddisclosures of contingent assets and liabilities.  Management evaluates these estimates on anon-going basis using historical experience and other factors, including thecurrent economic environment, and management believes these estimates to bereasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstancesdictate.  Illiquid credit markets,volatile equity, foreign currency, and declines in consumer spending havecombined to increase the uncertainty inherent in such estimates and assumptions.  Significant items subject to such estimatesand assumptions include: elements comprising our software, hosting and supportsales arrangements and whether the elements have stand-alone and/or fair value;whether the fees charged for our products and services are fixed ordeterminable, the carrying amount of property and equipment and intangibleassets; estimates regarding the recoverability and respective fair value ofauction-rate securities and all other investments; valuation allowances forreceivables and deferred income tax assets; and estimates of expected term andvolatility in determining stock-based compensation expense.   As future events and their effects cannot bedetermined with precision, actual results could differ significantly from thoseestimates.

 

***(e)       CashEquivalents***

 

TheCompany considers all highly liquid investments purchased with an originalmaturity date of three months or less to be cash equivalents. Cash equivalentsare recorded at cost, which approximates market value.

 

***(f)        Shortand Long-Term Investments***

 

Short-term investments indebt and equity securities are classified as available-for-sale and arerecorded at fair market value as determined by quotations from nationalexchanges. Realized gains and losses are included in income based on thespecific identification method. Unrealized gains and losses (excludingother-than-temporary impairments), net of tax, are recorded to OtherComprehensive Income (Loss), a component of stockholders’ equity.

 

Long-term investmentsconsist of ARS with investment grades of AAA or AA, as of December 31,2008. Additionally, long-term investments consist of a repurchase put optionassociated with the ARS.  Despite thelong-term contractual maturities of the auction rate securities, all of thesesecurities are considered trading securities and are recorded at fair marketvalue as determined by assumed risk premiums, and assumed work out periodsusing a discounted cash flow model.  Theput option associated with the ARS was recorded at fair value using adiscounted cash flow model as determined by assumed risk premiums, and assumedwork out periods.  The amounts derivedthrough the discounted cash flow model for the ARS were generally consistentwith the fair value indicated by the broker statement at December 31,2008.  The broker statement did notprovide a fair value assessment of the put option at December 31, 2008.Realized and unrealized gains and losses are included in income based on thechanges in fair market value as these instruments are marked to market atperiod end.  Refer to Note 3 for furtherdiscussion on ARS investments.

 

A decline in market value ofany available-for-sale security below cost, which is deemed to beother-than-temporary results in an impairment charge to reduce the carryingamount to fair value.  The impairment ischarged to earnings and a new cost basis for the security is established.  If the cost of an investment exceeds its fairvalue, we evaluate, among other factors, general market conditions, theduration and extent that cost is less than fair value, as well as our abilityand intent to hold the investment. We also consider specific adverse conditionsof the investee, including industry and sector performance, operational andcash flow factors, and rating agency actions. Once a decline in fair market valueis determined to be other-than-temporary, an impairment charge is recorded anda new cost basis for the investment is established.

 

F-7

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)     BusinessDescription and Summary of Significant Accounting Policies (Continued)**

 

***(g)       AccountsReceivable and Term Receivables***

 

Accounts receivablerepresents amounts currently due from customers for which revenue has beenrecognized or is being recognized ratably in future periods, and amountscurrently due under contract billings for which revenue has not beenrecognized. In license arrangements, term receivables include the remainingminimum committed amounts due from customers for which no revenue has beenrecognized. The Company performs credit evaluations when considered necessary,but generally does not require collateral to extend credit.

 

The allowance for doubtfulaccounts is the Company’s best estimate of the amount of probable credit lossesin the Company’s existing receivables. The Company determines the allowancebased on factors such as historical collection experience, customer’s currentcreditworthiness, customer concentration, age of accounts receivable balanceand general economic conditions that may affect a customer’s ability to pay.Actual customer collections could differ from estimates. Account balances arecharged to the allowance after all means of collection have been exhausted andthe potential for recovery is considered remote. The Company does not have anyoff-balance sheet credit exposure related to its customers.

 

Provisions to the allowancefor doubtful accounts are charged to expense and/or against deferred revenuefor accounts receivable and against deferred revenue for term receivables.Following is a summary of the activity in the allowance for doubtful accounts(in thousands):

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Balance, beginning of year                    |       | $                                          | 2,209      |   | $ | 2,621 |   | $ | 1,918 |   |
| Provision charged to expense                  |       | 306                                        |       | 384 |   | 212 |   |
| Provision charged against deferred revenue    |       | 1,407                                      |       | 1,785 |   | 1,515 |   |
| Write-downs charged against the allowance     |       | (1,442                                     | )          | (2,990 | ) | (1,399 | ) |
| Recoveries of amounts previously  charged-off |       | 141                                        |       | 118 |   | 31 |   |
|                                          |       |                                       |       |   |   |   |   |
| Balance, end of year                          |       | $                                          | 2,621      |   | $ | 1,918 |   | $ | 2,277 |   |

 

***(h)       Propertyand Equipment***

 

Property and equipment,including software purchased for internal use, are stated at cost lessaccumulated depreciation and amortization. Depreciation and amortization iscomputed using the straight-line method over the estimated useful lives of theassets, generally three to seven years. Repairs and maintenance are expensed asincurred.

 

***(i)        IntangibleAssets***

 

Intangible assets includepurchased technologies and goodwill. Purchased technologies are carried at costless accumulated amortization. The Company amortizes these assets on astraight-line basis over their estimated useful lives of three to five years.Goodwill is the excess of cost over the fair value of the net identifiableassets acquired in business acquisitions. Goodwill is not amortized, but isevaluated for impairment at least annually and more often if indicators ofpotential impairment exist.

 

F-8

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)     BusinessDescription and Summary of Significant Accounting Policies (Continued)**

 

***(j)        RevenueRecognition***

 

The Company earns itsrevenues from the delivery of software, hosting, and support services, and fromthe delivery of professional services. Software, hosting and support servicesare sold under subscription arrangements and license arrangements. In 2007, theCompany essentially discontinued sales of perpetual licenses. Hosting andsupport services involve the remote management of the software, technicalassistance, and unspecified product upgrades and enhancements on a when and ifavailable basis. Professional services include consulting, training anddevelopment services.

 

The Company recognizesrevenue for subscriptions and licenses when all of the following criteria aremet: a) the Company has entered into a legally binding agreement with thecustomer; b) the software has been made available or delivered to the customer;c) the Company’s fee for providing the software and services is fixed ordeterminable; and d) collection of the Company’s fee is probable.

 

Subscriptions include accessto the Company’s software through its hosting services, technical support, andproduct upgrades when and if available, all for a bundled fee. The Companyaccounts for subscriptions, in accordance with Emerging Issues Task Force IssueNo. 00-21, *Revenue Arrangements withMultiple Deliverables* (“EITF 00-21”). Under EITF 00-21,value is allocated to each deliverable of an arrangement using pricesestablished when the elements are sold stand-alone. Stand-alone sales ofsubscription agreements are evidenced by subscription renewals and stand-alonesales of professional services are evidenced by rates charged for consulting,education, and development services in stand-alone transactions. Thearrangement fee is then allocated to the individual elements based on theirrelative fair values. Revenue for subscriptions are recognized over the contractualperiod and professional services are recognized as incurred provided the abovecriteria have been met.

 

Under the Company’ssubscription contracts, the Company applies EITF 00-21 to itssubscriptions as opposed to Statement of Position 97-2, *Software Revenue Recognition* (“SOP 97-2”)as the customer does not have the right to take possession of the softwarewithout incurring a significant incremental penalty. In accordance withEmerging Issues Task Force Issue No. 00-03, *Application of AICPA Statement of Position 97-2, Software RevenueRecognition, to Arrangements That Include the Right to Use Software Stored onAnother Entity’s Hardware* (“EITF 00-03”), such arrangements areconsidered service contracts and are not within the scope of SOP 97-2.

 

Prior to 2007, the majorityof the Company’s revenues were earned under license arrangements. Revenue underthese arrangements is recognized pursuant to the requirements of Statement ofPosition (SOP) 97-2, *Software RevenueRecognition* , and SOP 98-9, Modification of SOP 97-2, *Software Revenue Recognition With Respect to CertainTransactions* , issued by the American Institute of Certified PublicAccountants. Licenses, generally include the same elements as subscriptions,plus the right to take possession of the software for no additional fee and aresold for a period of time (a “term” license) or perpetually. Term contracts arenon-cancelable, and generally cover a period of two years, but can range from aperiod of six months to five years. For term contracts, the Company treats thesoftware license, hosting and support services as single element for purposesof allocating revenue. The Company has established vendor specific objective evidenceof fair value for the term license bundle based on stand-alone sales of thebundled items. When sold with professional services, revenue is allocatedbetween the software license, hosting and support element and the professionalservices element using the relative fair value method. Revenue for the termlicense element is recognized ratably over the period of the arrangement andrevenue for professional services in these arrangements is recognized asperformed.

 

Sales of perpetual softwarelicenses include hosting and support services for a period of time, typicallyone year. The Company has established vendor specific objective evidence forthe combined element of hosting and support elements of perpetual licensesales, based on the prices charged when sold separately. Accordingly, revenuefor the perpetual software license element is determined using the residualmethod and is recognized upon delivery. Revenue for the hosting and supportelements is recognized ratably over the contractual time period.

 

The Company’s policy is torecord revenue net of any applicable sales, use or excise taxes.

 

If an arrangement includes aright of acceptance or a right to cancel, revenue is recognized when acceptanceis received or the right to cancel has expired. If the fee for the license hasany payment term that is due in excess of the Company’s normal payment terms(over 90 days), the fee is not considered fixed or determinable, and theamount of revenue recognized (a) for perpetual license arrangements islimited to the amount currently due from the customer, or (b) for termlicense or subscription arrangements is limited to the lesser of the amountcurrently due from the customer or a ratable portion of the total unallocatedarrangement fee.

 

F-9

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)****              ****Business Description and Summary of SignificantAccounting Policies (Continued)**

 

Certain customers havelicense agreements that provide for usage fees above fixed minimums. Usage ofthe Company’s software requires additional fees if used by more than aspecified number of users or for more than a specified number of interactions.Fixed minimums are recognized as revenue ratably over the term of thearrangement. Usage fees above fixed minimums are recognized as revenue whensuch amounts are known and billed.

 

Separate contracts with thesame customer that are entered into at or near the same time are generallypresumed to have been negotiated together and are combined and accounted for asa single arrangement.

 

Professional servicesrevenue is recognized as performed, based on hours incurred, unless sold inconjunction with a term license or subscription where objective and reliableevidence (including vendor specific objective evidence) for the term orsubscription element does not exist, in which case professional servicesrevenue is recognized ratably over the contractual period. The Company hasdetermined that the professional service elements of its software arrangementsare not essential to the functionality of the software. The Company has alsodetermined that its professional services (a) are available from othervendors, (b) do not involve a significant degree of risk or uniqueacceptance criteria, and (c) are not required for the customer to use thesoftware.

 

The following table setsforth revenue by product or service as a percentage of total revenue:

 

| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue by type:                                               |       |                                       |       |   |   |   |   |
| Recurring (subscriptions, term licenses,  support and hosting) |       | 57                                         | %          | 76 | % | 73 | % |
| Perpetual licenses                                             |       | 21                                         |       | 2 |   | 0 |   |
| Professional services                                          |       | 22                                         |       | 22 |   | 27 |   |
|                                                           |       |                                       |       |   |   |   |   |
|                                                           |       | 100                                        | %          | 100 | % | 100 | % |

 

 

F-10

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)****              ****Business Description and Summary of SignificantAccounting Policies (Continued)**

 

Deferred revenue representsamounts received or due from customers for which the revenue recognitioncriteria have not been met. The majority of deferred revenue results from theupfront billing of term and subscription contracts while revenue is recognizedratably over the contractual period. Deferred revenue is recognized intorevenue when the Company provides its products and services, assuming all otherrevenue recognition criteria noted above are met. Under subscriptions, theamount currently due and payable from the customer is reflected in accountsreceivable and deferred revenue. Under licenses, the full customer commitmentis reflected in accounts receivable for amounts currently due, or termreceivables for amounts due over the contractual term, and deferred revenue.The Company does not provide refunds for customer cancellations.

 

***(k)   SalesCommissions***

 

In conjunction with theCompany’s business model change, beginning in 2007 sales incentives paid forsubscriptions are deferred and charged to expense in proportion to the revenuerecognized. Sales incentives paid for licenses and professional services areexpensed when earned, which is typically at the time the related sale isinvoiced. Sales incentive expense was $15.4 million, $10.5 million,and $13.6 million for the years ended December 31, 2006, 2007 and2008, respectively. Deferred commissions at December 31, 2007 and December 31,2008 were $5.0 million and $8.2 million, respectively.

 

***(l)   Researchand Development***

 

Research and developmentexpenditures are expensed as incurred. Statement of Financial AccountingStandards (SFAS) No. 86, *Accounting forthe Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,*requires capitalization of certain software development costs subsequent to theestablishment of technological feasibility. Based on the Company’s productdevelopment process, technological feasibility is established upon completionof a working model. To date, the period between achieving technologicalfeasibility and general availability of such software has been short andsoftware development costs qualifying for capitalization have been immaterial.Accordingly, the Company has not capitalized any software development costs.

 

***(m) Income Taxes***

 

The Company records incometaxes under the asset and liability method as prescribed under Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes* . Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Whenapplicable, a valuation allowance is established to reduce any deferred taxasset when it is determined that it is more likely than not that some portion ofthe deferred tax asset will not be realized.

 

Effective January 1,2007, the Company adopted Financial Accounting Standards Board (FASB)Interpretation No. 48, *Accounting forUncertainties in Income Taxes, an Interpretation of FASB Statement No. 109*(FIN 48) and it did not have a significant impact on our financialposition or results of operations. FIN 48 prescribes a recognitionthreshold and measurement attribute for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. As of December 31,2008 and January 1, 2008, we had an insignificant amount of unrecognizedtax benefits, none of which would affect our effective tax rate if recognized.We do not anticipate that the amount of unrecognized tax benefits willsignificantly increase or decrease in the next 12 months. The Company’spolicy is to recognize interest and penalties on unrecognized tax benefits asinterest expense and other expense, respectively in the Consolidated Statementsof Operations. The amount of interest and penalties accrued for the year ended December 31,2008 was not significant. Tax years beginning in 2005 are subject toexamination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for atleast three years following the year in which the attributes are used. Thejurisdictions subject to examination include the U.S., Montana, California, NewJersey, Illinois, United Kingdom, Germany, Australia, Japan, Canada and theNetherlands.

 

F-11

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)****              ****Business Description and Summary of Significant AccountingPolicies (Continued)**

 

***(n) Impairmentof Long-Lived Assets***

 

Long-lived assets, includingintangible assets, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future undiscounted cash flowsexpected to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the estimated fair value of theassets. Fair value is determined based on discounted cash flow or appraisedvalue, depending on the nature of the asset. Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs to sell.Goodwill is tested for impairment at least annually, and more frequently ifindicators of potential impairment exist. No impairments of long-lived assetshave been identified in any of the periods presented.

 

***(o) NetIncome (Loss) Per Share***

 

A reconciliation of thedenominator used in the calculation of basic and diluted net loss per share isas follows (in thousands):

 

| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Weighted average common shares outstanding  for basic net loss per share |       | 32,241                                     |       | 33,078 |   | 33,362 |   |
| Weighted average shares outstanding for  dilutive net loss per share     |       | 32,241                                     |       | 33,078 |   | 33,362 |   |

 

 

F-12

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(1)****              ****Business Description and Summary of SignificantAccounting Policies (Continued)**

 

The following common stockequivalents were excluded from the computation of diluted earnings (loss) pershare because they had an anti-dilutive impact (in thousands):

 

| ** **             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Employee stock options |       | 3,913                                      |       | 3,874 |   | 4,428 |   |

 

***(p) Stock-BasedCompensation***

 

OnJanuary 1, 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 123(R), *Share BasedPayment,*(“SFAS 123R”), for its stock-based compensation plans.  Under SFAS 123R, stock-based compensationcosts are recognized based on the estimated fair value at the grant date forall stock-based awards. The Company estimates grant date fair values using theBlack-Scholes-Merton option pricing model, which requires assumptions of thelife of the award and the stock price volatility over the term of the award.The Company records compensation cost of stock-based awards using the straightline method, which is recorded into earnings over the vesting period of theaward.  Pursuant to the income taxprovisions included in SFAS 123R, the Company has elected the “short cut method”of computing its hypothetical pool of additional paid-in capital that isavailable to absorb future tax benefit shortfalls.

 

TheCompany has elected to use the modified prospective transition method aspermitted under SFAS 123R and therefore has not restated its financial resultsfor prior periods.  Under this transitionmethod, compensation cost recorded in the years ended December 31, 2006,2007 and 2008 includes the cost for all stock-based awards granted prior to,but not yet vested as of December 31, 2005, based on the grant-date fairvalue estimated in accordance with the original provisions of SFAS 123.Compensation expense for all stock-based awards granted after December 31,2005 was based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123R.

 

Fromtime to time the Company may grant stock options to consultants.  The Company accounts for consultant stockoptions in accordance with SFAS 123R and Emerging Issues Task Force ConsensusIssue No. 96-18 (“EITF 96-18”), *Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction With Selling, Goods or Services. *Compensation expense for the grant of stock options toconsultants is determined based on the estimated fair value of the stockoptions at the measurement date as defined in EITF 96-18 and is recognized overthe vesting period.  No awards weregranted to non-employees during the years ended December 31, 2006, 2007,and 2008.

 

***(q) ForeignCurrency Translation***

 

Fornon-U.S. operations, the functional currency is the local currency. Assets andliabilities of those operations are translated into U.S. dollars using year-endexchange rates; income and expenses are translated using the average exchangerates for the reporting period. Translation adjustments are deferred inaccumulated other comprehensive loss, a separate component of stockholders’ equity.Realized foreign currency transaction gains and losses are included in otherincome and expense.

 

***(r)  ComprehensiveIncome (Loss)***

 

Comprehensiveincome (loss) includes net income or loss, as well as other changes instockholders’ equity that result from transactions and economic events otherthan those with stockholders. Additional elements of other comprehensive incomeor loss are attributable to foreign currency translation adjustments andunrealized gains or losses on short-term investments.

 

***(s)  AdvertisingCosts***

 

TheCompany expenses advertising costs as incurred. Advertising costs were$4.5 million, $4.3 million and $2.9 million for the years ended December 31,2006, 2007 and 2008, respectively.

 

***(t)  Reclassifications***

 

Certainamounts in the consolidated financial statements and notes thereto have beenreclassified to conform to the current period presentation.

 

F-13

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(2)****              ****Supplemental Cash Flow Information**

 

Supplemental statement ofcash flow information follows (in thousands):

 

| ** **                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Supplemental disclosure of cash flow  information: |       |                                       |       |   |   |   |   |
| Cash paid during the period for:                   |       |                                       |       |   |   |   |   |
| Interest                                           |       | $                                          | 17         |   | $ | 7 |   | $ | 12 |   |
| Income taxes                                       |       | 280                                        |       | 140 |   | 28 |   |
| Non-cash financing activities:                     |       |                                       |       |   |   |   |   |
| Assets acquired under capital lease                |       | —                                     |       | 30 |   | — |   |
|                                                    |            |                                            |            |  |  |  |  |  |  |  |

 

 

F-14

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(3)****              ****Cash Equivalents, Short and Long-Term Investments, andFair Value**

 

Thecomponents of cash equivalents and shortand long term investments at December 31, 2007 and 2008 are as follows(in thousands):

 
| ** **                        | ** ** | ** ** | ** ** | **Unrealized** | ** ** | **Fair  Market** | ** ** | **Cash**   | ** ** | **Short-Term**  | ** ** |
|-----------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|-----------------|------------|
| **December 31, 2007**   | ** ** | **Cost**   | ** ** | **Gains**      | ** ** | **Losses**       | ** ** | **Value**  | ** ** | **Equivalents** | ** ** | **Investments** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** |
| Cash equivalents:                 |       |       |       |           |       |             |       |       |       |            |       |   |   |
| Money market funds                |       | $          | 29,775     |           | $          | —           |       | $          | —     |            | $          | 29,775 |   | $ | 29,775 |   | $ | — |   |
| Fixed maturity securities:        |       |       |       |           |       |             |       |       |       |            |       |   |   |
| Commercial paper                  |       | 4,432      |       | 2              |       | (1               | )          | 4,433      |       | 3,435           |       | 998 |   |
| Corporate notes and bonds         |       | 8,613      |       | 42             |       | (2               | )          | 8,653      |       | 250             |       | 8,403 |   |
| U.S. Government agency securities |       | 24,730     |       | 26             |       | (7               | )          | 24,749     |       | 10,220          |       | 14,529 |   |
| State and municipal securities    |       | 15,447     |       | 21             |       | (3               | )          | 15,465     |       | 1               |       | 15,464 |   |
|                              |       |       |       |           |       |             |       |       |       |            |       |   |   |
| Sub-total                         |       | 82,997     |       | 91             |       | (13              | )          | 83,075     |       | 43,681          |       | 39,394 |   |
|                              |       |       |       |           |       |             |       |       |       |            |       |   |   |
| Equity securities:                |       |       |       |           |       |             |       |       |       |            |       |   |   |
| Auction rate preferred stocks     |       | 13,250     |       | —         |       | —           |       | 13,250     |       | —          |       | 13,250 |   |
|                              |       |       |       |           |       |             |       |       |       |            |       |   |   |
| Totals at December 31, 2007  |       | $          | 96,247     |           | $          | 91               |       | $          | (13        | )               | $          | 96,325 |   | $ | 43,681 |   | $ | 52,644 |   |

 
| ** **                                  | ** ** | ** ** | ** ** | **Unrealized** | ** ** | **Fair  Market** | ** ** | **Cash**   | ** ** | **Short and Long-** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|---------------------|------------|
| **December 31, 2008**             | ** ** | **Cost**   | ** ** | **Gains**      | ** ** | **Losses**       | ** ** | **Value**  | ** ** | **Equivalents**     | ** ** | **Term Investments** | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** |
| Cash equivalents:                           |       |       |       |           |       |             |       |       |       |                |       |   |   |
| Money market funds                          |       | $          | 28,527     |           | $          | —           |       | $          | —     |                | $          | 28,527 |   | $ | 28,527 |   | $ | — |   |
| Fixed maturity securities:                  |       |       |       |           |       |             |       |       |       |                |       |   |   |
| Corporate notes and bonds                   |       | 3,034      |       | —         |       | (16              | )          | 3,018      |       | —              |       | 3,018 |   |
| U.S. Government agency securities           |       | 27,754     |       | 251            |       | (1               | )          | 28,004     |       | —              |       | 28,004 |   |
| State and municipal securities              |       | 3,383      |       | 7              |       | —           |       | 3,390      |       | —              |       | 3,390 |   |
| Auction rate state and municipal securities |       | 5,000      |       | —         |       | (775             | )          | 4,225      |       | —              |       | 4,225 |   |
| Auction rate settlement agreement:          |       |       |       |           |       |             |       |       |       |                |       |   |   |
| Repurchase put option                       |       | —     |       | 738            |       | —           |       | 738        |       | —              |       | 738 |   |
|                                        |       |       |       |           |       |             |       |       |       |                |       |   |   |
| Totals at December 31, 2008            |       | $          | 67,698     |           | 996        |             | (792       | )          | $          | 67,902              |       | $ | 28,527 |   | $ | 39,375 |   |
|                                             |            |            |            |                |            |                  |            |            |            |                     |            |  |  |  |  |  |  |  |  |

 

Auction rate state andmunicipal securities and the repurchase put option were classified as long-termas of December 31, 2008.  Theunrealized gains at December 31, 2008 of $996,000 include $258,000 related toinvestment-grade, fixed income securities, and are primarily attributable tochanges in interest rate and $738,000 recorded as other income associated withthe repurchase put option. Unrealized losses at December 31, 2008 of $792,000include $17,000 related to securities held more than one year and an other-thantemporary impairment of $775,000 associated with auction rate state andmunicipal securities recorded as other expense. Realized gains and losses from sales of available-for-sale securities in2006, 2007 and 2008 were insignificant.

 

F-15

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(3)****              ****Cash Equivalents, Short and Long-Term Investments, andFair Value (Continued)**

 

Effective January 1,2008, the Company adopted the provisions of Statement of Financial AccountingStandards No. 157, *Fair ValueMeasurements* (“SFAS 157”). In February 2008, the FinancialAccounting Standards Board (FASB) issued Staff Position No. SFAS 157-2, “EffectiveDate of FASB Statement No. 157,” which provides a one year deferral of theeffective date of SFAS 157 for non-financial assets and non-financialliabilities, except those that are recognized or disclosed in the financialstatements at fair value at least annually. Therefore, the Company has adoptedthe provisions of SFAS 157 with respect to its financial assets and liabilitiesonly. SFAS 157 defines fair value , establishes a framework for measuring fairvalue in GAAP, and enhances disclosures about fair value measurements. Fairvalue is defined under SFAS 157 as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. Valuationtechniques used to measure fair value under SFAS 157 must maximize the use ofobservable inputs and minimize the use of unobservable inputs. The standarddescribes a fair value hierarchy based on three levels of inputs, of which thefirst two are considered observable and the last unobservable, that may be usedto measure fair value, which are the following:

 

·            Level 1 — Quoted prices in active markets foridentical assets or liabilities.

 

·            Level 2 — Inputs other than Level 1 that areobservable, either directly or indirectly, such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

·            Level 3 — Unobservable inputs that aresupported by little or no market activity and that are significant to the fairvalue of the assets or liabilities.  As aresult of recent market conditions, the Company holds financial instruments forwhich limited or no observable market data is available.  These fair value measurements are based primarilyupon our own estimates and are often calculated based on current pricingpolicy, the current economic and competitive environment, the characteristicsof the instrument, credit, interest, and other such factors.  Therefore, the results cannot be determinedwith precision, cannot be substantiated by comparison to quoted prices inactive markets, and may not be realized in a current sale or immediatesettlement of the asset.  Additionally,there are inherent uncertainties in any fair value measurement technique, andchanges in the underlying assumptions used, including discount rates, liquidityrisks, and estimates of future cash flows, could significantly affect the fairvalue measurement amounts.

 

The adoption of thisstatement did not have a material impact on the Company’s consolidated resultsof operations and financial condition.

 

In accordance with SFAS 157,the following table represents the Company’s fair value hierarchy for itsfinancial assets (cash equivalents and investments) measured at fair value on arecurring basis as of December 31, 2008 (in thousands):

 
| ** **                                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market funds                          |       | $                | 28,527     |             | —     |             | —     |      | $          | 28,527 |   |
| Corporate notes and bonds                   |       | —           |       | 3,018            |       | —           |       | $         | 3,018      |   |
| U.S. Government agency securities           |       | —           |       | 28,004           |       | —           |       | $         | 28,004     |   |
| State and municipal securities              |       | —           |       | 3,390            |       | —           |       | $         | 3,390      |   |
| Auction rate state and municipal securities |       | —           |       | —           |       | 4,225            |       | $         | 4,225      |   |
| Repurchase put option                       |       | —           |       | —           |       | 738              |       | $         | 738        |   |
|                                        |       | $                | 28,527     |             | $          | 34,412           |       | $         | 4,963      |   | $ | 67,902 |   |
|                                             |            |                  |            |                  |            |                  |            |           |            |  |  |  |  |

 

Note: The Company has $22.9million of cash as of December 31, 2008, which was not classified as aLevel as prescribed within SFAS 157.

 

The following tableillustrates the activity of “level 3” assets from December 31, 2007 to December 31,2008 (in thousands):

 
| Fair value at December 31, 2007  |   | $       | 18,300 |   |
|---------------------------------------|--------|---------|--------|--------|
| Unrealized loss adjustment-ARS        |   | (775    | )      |
| Unrealized gain adjustment-put option |   | 738     |   |
| Redemptions                           |   | (13,300 | )      |
| Fair value at December 31, 2008  |   | $       | 4,963  |   |

 

F-16

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

As of December 31,2008, assets characterized as “level 3” for fair value purposes consist ofapproximately $5.0 million in par value auction rate state and municipalsecurities with investment grades of AAA or AA. The auction rate state andmunicipal securities are comprised of federally insured student loan bonds.

 

Auction rate securities (“ARS”)are long-term bonds or preferred stocks that act like short-term debt, whereinterest rates reset in Dutch auctions held daily, weekly, or monthly and havehistorically provided liquidity for these investments. Despite the long-termcontractual maturities of the underlying securities, all of these securitieswere considered available for sale and were available to fund the Company’scurrent operations as of December 31, 2007. Since February 2008,uncertainties in the credit markets caused substantially all auctions of thesesecurities held by the Company to be unsuccessful. An unsuccessful auction isan event when there are fewer securities bid for than are available for sale.Upon an unsuccessful auction, the interest rate is reset at a predeterminedrate. Given that substantially all of the auctions have been unsuccessful sinceFebruary 2008, the Company reclassified the investments from short-term tolong-term.

 

During the fourth quarter of2008, we executed a settlement agreement to redeem the ARS held by us at par withour broker commencing June 2010 through July 2012 (“redemption period”).  By accepting the terms of the settlement, we (1) receivedthe non-transferable right (“put option”) to sell our ARS at par value to thebroker commencing June 2010 through July 2012, and (2) gave thebroker the right to purchase the ARS from us at any time after the executedsettlement agreement date as long as we receive par value.  We expect to sell the ARS under the putoption.  However, if the put option isnot exercised during or before July 2012, it will expire and the brokerwill have no further rights or obligation to buy the ARS.  Furthermore, the broker’s obligations underthe put option are not secured by its assets and do not require the broker toobtain any financing to support its performance obligations under the putoption.  The broker has disclaimed anyassurance that it will have sufficient financial resources to satisfy itsobligations under the put option.The agreement covers $5.0 million par value(fair value of $4.2 million) of the ARS held by us as of December 31,2008.  We consider the put option to be afreestanding financial instrument and we have accounted for it separately fromthe ARS.  We believe the put option doesnot meet the definition of a derivative under SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities,”*as the put option is non-transferable and not considered by us to be readilyconvertible into cash.  We also believethat, since the put option does not qualify as a derivative, it is not withinthe scope of SFAS No. 115, *“Accounting for CertainInvestments in Debt and Equity Securities.” *We have elected the fair value option to account for the putoption pursuant to SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”*and have recorded theinstrument as an asset of $738,000 on our balance sheet in long-terminvestments as of December 31, 2008 with a corresponding gain recorded inother expense, net.

 

Simultaneously, we made anelection under SFAS No. 115 to transfer our ARS from available-for-sale totrading securities.  The transfer totrading securities reflects our intent to exercise the put option during theredemption period.  Prior to enteringinto the settlement agreement, our intent was to hold the ARS until the marketrecovered.  At the time of the transfer,the unrealized loss on the ARS for the first three quarters of 2008 of $390,000included in accumulated other comprehensive income (loss) was immediatelyrecognized in earnings, as a component of other income, net.  During the fourth quarter of 2008, werecognized an additional decline in fair value of $385,000, included in otherexpense, net for a total unrealized loss of $775,000 for the year ended December 31,2008.

 

We estimated the fair valueof our ARS and put option using a discounted cash flow model where weconsidered assumed risk premiums, assumed work out periods.  The amount derived through the discountedcash flow model was generally consistent with the ARS fair value indicated bythe broker statement at December 31, 2008. The broker statement did not provide a fair value assessment of the putoption at December 31, 2008.

 

Todate, the Company has collected all interest payments on all of the auctionrate securities when due.  If the auction rate securities continue toexperience unsuccessful auctions, if the credit rating of the auction ratesecurities deteriorates, or if the brokerage houses declare redemption default,the Company may not recover the par value of its investment.  While therecent auction failures will limit the Company’s ability to liquidate theremainder of these investments for some period of time, the Company does notbelieve the auction failures will materially impact its ability to fund itsworking capital needs, capital expenditures, or other business requirements.The Company will continue to monitor the state of the credit markets and itspotential impact, if any, on the fair value and classification of its portfolioof auction rate securities.

 

F-17

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Table of Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(4)****              ****Property and Equipment, Net**

 

Property and equipment, netare as follows (in thousands):

 

| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **2008** | ** ** |
| Computer equipment                  |       | $                     | 18,572     |   | $ | 18,922 |   |
| Software purchased for internal use |       | 5,877                 |       | 7,942 |   |
| Equipment                           |       | 861                   |       | 819 |   |
| Furniture and fixtures              |       | 1,382                 |       | 1,487 |   |
| Leasehold improvements              |       | 871                   |       | 1,057 |   |
| Total cost                          |       | 27,563                |       | 30,227 |   |
| Less accumulated depreciation       |       | (16,707               | )          | (20,086 | ) |
|                                |       |                  |       |   |   |
| Total property and equipment, net   |       | $                     | 10,856     |   | $ | 10,141 |   |

 

 

F-18

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(5)****              ****Intangible assets**

 

Thefollowing table sets forth information regarding intangible assets (inthousands):

 
| ** **                            | ** ** | **Goodwill** | ** ** | **Customer  Relationships** | ** ** | **Purchased  Technologies** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------|------------|-----------------------------|------------|-----------------------------|------------|-----------|------------|
| As of December 31, 2007:         |       |         |       |                        |       |                        |       |      |       |
| Gross carrying value                  |       | $            | 4,358      |                        | $          | 3,250                       |       | $         | 4,547      |   | $ | 12,155 |   |
| Accumulated amortization              |       | —       |       | (1,308                      | )          | (2,851                      | )          | (4,159    | )          |
|                                  |       |         |       |                        |       |                        |       |      |       |
| Net carrying value                    |       | $            | 4,358      |                        | $          | 1,942                       |       | $         | 1,696      |   | $ | 7,996 |   |
|                                  |       |         |       |                        |       |                        |       |      |       |
| As of December 31, 2008:         |       |         |       |                        |       |                        |       |      |       |
| Gross carrying value                  |       | $            | 4,358      |                        | $          | 3,250                       |       | $         | 4,547      |   | $ | 12,155 |   |
| Accumulated amortization              |       | —       |       | (2,121                      | )          | (3,635                      | )          | (5,756    | )          |
|                                  |       |         |       |                        |       |                        |       |      |       |
| Net carrying value                    |       | $            | 4,358      |                        | $          | 1,129                       |       | $         | 912        |   | $ | 6,399 |   |
|                                  |       |         |       |                        |       |                        |       |      |       |
| Weighted-average amortization period: |       |         |       |                        |       |                        |       |      |       |
| (in years)                            |       | n/a          |       | 4.0                         |       | 4.2                         |       | 4.1       |       |
| Aggregate amortization expense:       |       |         |       |                        |       |                        |       |      |       |
| 2006                                  |       | $            | —     |                        | $          | 496                         |       | $         | 655        |   | $ | 1,151 |   |
| 2007                                  |       | —       |       | 812                         |       | 661                         |       | 1,473     |       |
| 2008                                  |       | —       |       | 813                         |       | 784                         |       | 1,597     |       |
| Estimated amortization expense:       |       |         |       |                        |       |                        |       |      |       |
| 2009                                  |       | $            | —     |                        | $          | 812                         |       | $         | 619        |   | $ | 1,431 |   |
| 2010                                  |       | —       |       | 317                         |       | 289                         |       | 606       |       |
| 2011                                  |       | —       |       |                        |       | 4                           |       | 4         |       |

 

**(6)****              ****Long-Term Debt and CreditFacility**

 

Long-term debt consists ofthe following (in thousands):

 

| ** **                                                                                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                     | ** ** | **2007**              | ** ** | **2008** | ** ** |
| Obligations under capital leases for tenant  improvements to leased property and furniture, payable monthly in  installments of $3 and $1 through May 2010 and June 2010,  respectively at approximately 6% interest |       | $                     | 111        |   | $ | 68 |   |
| Less current portion                                                                                                                                                                                                           |       | 43                    |       | 46 |   |
|                                                                                                                                                                                                                           |       |                  |       |   |   |
| Long-term debt, excluding current portion                                                                                                                                                                                      |       | $                     | 68         |   | $ | 22 |   |

 

In 2005, the Company enteredinto an office lease agreement that included $162,000 of tenant improvements,which have been capitalized and will be repaid to the landlord over the initiallease term of five years. The improvements are being amortized over an expecteduseful life of seven years since the Company expects to renew the office leaseupon its initial term expiration in 2010. During 2007, the Company assumed$30,000 of capital lease obligations associated with furniture in itsWashington D.C. office space, which will be repaid over the initial lease termof three years.

 

During 2007 and 2008, theCompany had a $3.0 million working capital line of credit agreement with acommercial bank.  Advances under the linebear a variable rate of interest which approximates the prime lending rate, andare payable monthly. The working capital line of credit is secured bysubstantially all of the United States dollar-denominated accounts receivableof the Company. There were no advances under the line during 2007 or 2008.

 

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

** **

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(7)****    ****Redeemable Convertible PreferredStock**

 

The Company has authorized15 million shares of preferred stock, $.001 par value, which may be issuedfrom time to time by its board of directors without further action bystockholders. Shares of preferred stock may be issued with dividend, redemption,voting or other rights senior to existing common shares. There were nooutstanding shares of preferred stock at December 31, 2007 or 2008.

 

**(8)****    ****Treasury Stock**

 

The board of directors hasauthorized the repurchase of up to $15.0 million of our common stock through October 19,2010.  The shares may be purchased fromtime to time at prevailing prices in the open market, in block transactions, inprivately negotiated transactions, and/or in accelerated share repurchaseprograms, in accordance with Rule 10b-18 of the Securities and ExchangeCommission.    Under this program, theCompany repurchased approximately 1.9 million shares of its common stock at anaggregate cost of $13.2 million in the year ended December 31, 2008, atprevailing market prices.

 

The Company may makeadditional repurchases of shares under its stock repurchase program, dependingon prevailing market conditions, alternate uses of capital and other factors.Whether and when to initiate and/or complete any purchase of common stock andthe amount of common stock purchased will be determined in the Company’scomplete discretion. As of December 31, 2008, there were approximately 1.9million shares of the Company’s common stock held in treasury. Subsequent toDecember 31, 2008 the Company repurchased 231,115 of its common stock at anaggregate cost of $1.8 million at prevailing market prices in the first quarterof 2009. There can be no further repurchases under the program as theauthorized $15.0 million was fully utilized during the first quarter of 2009.

 

**(9)****    ****Stock-Based Compensation**

 

The Company’s 1998 Long-TermIncentive and Stock Option Plan, as amended, and the 2004 Equity Incentive Plan(the “equity plans”) provide for stock options to be granted to employees,consultants, independent contractors, officers and directors. The equity planshave been approved by stockholders. Except for automatic grants to directors,options are granted at the discretion of the Company’s board of directors, atan exercise price and term determined by the board. However, exercise pricesare not less than the fair market value at the date of grant, and the term ofthe options is not greater than ten years. Options generally vest over a periodof four years in eight equal increments. The Company also has an employee stockpurchase plan (“ESPP”) that allows employees to purchase shares of common stockat a discount to the fair market value at the date of purchase. Purchaseperiods under the ESPP are consecutive six-month periods ending on the last dayin June and December each year. Shares issued to satisfy stock optionexercises and ESPP are newly issued. At December 31, 2008, the Company hadapproximately 3.6 million shares available for future issuance under theequity plans and ESPP.

 

Compensation expense recognizedin the statement of operations for the year ended December 31, 2007 and2008 is based on awards ultimately expected to vest and reflects an estimate ofawards that will be forfeited. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

 

F-20

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(9)****    ****Stock-Based Compensation(Continued)**

 

The following tableillustrates the stock-based compensation expense resulting from stock-basedawards included in the consolidated statement of operations (amounts inthousands):

 
| ** **                                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Stock-based compensation expense:                      |       |     |       |     |       |     |       |
| Cost of software, hosting and support                  |       | $        | 193        |     | $          | 288      |       | $ | 323 |   |
| Cost of professional services                          |       | 471      |       | 647      |       | 638      |       |
| Sales and marketing                                    |       | 1,929    |       | 2,264    |       | 2,454    |       |
| Research and development                               |       | 834      |       | 887      |       | 969      |       |
| General and administrative                             |       | 1,201    |       | 1,385    |       | 1,641    |       |
|                                                   |       |     |       |     |       |     |       |
| Stock-based compensation expense before  income taxes  |       | 4,628    |       | 5,471    |       | 6,025    |       |
| Income tax provision (benefit)                         |       | —   |       | —   |       | —   |       |
|                                                   |       |     |       |     |       |     |       |
| Stock-based compensation expense, net of  income taxes |       | $        | 4,628      |     | $          | 5,471    |       | $ | 6,025 |   |

 

No stock-based compensationexpense was capitalized during the year ended December 31, 2006, 2007 and2008.

 

Unrecognized compensationexpense of outstanding stock options at December 31, 2008 wasapproximately $11.9 million, which is expected to be recognized over aweighted-average period of 2.6 years.

 

The estimatedweighted-average fair value per share of stock options granted in 2006, 2007and 2008 was $8.43, $7.33 and $5.54, respectively. For all shares purchasedunder the ESPP in 2006, 2007, and 2008 ending on the last day of June andDecember, no compensation cost was recognized in the accompanying statement ofoperations because the terms of the plan were deemed noncompensatory underSFAS 123R.  Assumptions used toobtain the estimated fair values were:

 
| ** **                      | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Employee stock options          |       |     |       |     |       |     |       |
| Weighted average risk free rate |       | 4.7      | %          | 4.5      | %          | 2.6      | %          |
| Weighted average expected term  |       | 4.4      |  yrs  | 4.2      |  yrs  | 4.5      |  yrs  |
| Weighted average volatility     |       | 57       | %          | 52       | %          | 55       | %          |
| Dividend yield                  |       | 0        | %          | 0        | %          | 0        | %          |

 

Key assumptions used toestimate the fair value of stock awards are as follows:

 

*Risk FreeRate:*  Therisk-free rate is determined by reference to U.S. Treasury yields at or nearthe time of grant for time periods similar to the expected term of the award.

 

*ExpectedTerm:*  Theexpected term represents the period that the Company’s stock-based awards areexpected to be outstanding and is estimated based on historical experience ofsimilar awards, giving consideration to the contractual term of the awards,vesting schedules and expectations of employee exercise behavior.

 

*Volatility:*  The Company’s estimate ofexpected volatility is based on a combination of the Company’s historicalvolatility and peer-company volatilities. The Company believes the inclusion ofpeer-company data points results in a more representative estimate of futurestock price trends than its historical volatility alone.

 

*DividendYield:*  Thedividend yield assumption is based on the Company’s history and expectation ofdividend payouts.

 

F-21

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(9)****    ****Stock-Based Compensation(Continued)**

 

Activityunder the Company’s stock option plans was as follows (option shares inthousands):

 
| ** **                                            | ** ** | **Shares  available  for grant** | ** ** | **Shares  Underlying  Outstanding  options** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Aggregate  intrinsic  value** | ** ** | **Weighted  average  remaining  contractual life** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------------|------------|
| ** **                                            | ** ** | ** **                       | ** ** | ** **                                   | ** ** | ** **                                        | ** ** | **(in thousands)**              | ** ** | **(in years)**                                     | ** ** |
| Balance at December 31, 2007                     |       | 3,404                            |       | 3,874                                        |       | $                                                 | 11.81      |                            |       |                                               |       |   |
| Annual reserve addition(1)                            |       | 1,000                            |       | —                                       |       | —                                            |       |                            |       |                                               |       |
| Granted                                               |       | (1,305                           | )          | 1,305                                        |       | 11.70                                             |       |                            |       |                                               |       |
| Exercised                                             |       | —                           |       | (236                                         | )          | 4.99                                              |       |                            |       |                                               |       |
| Forfeited, expired or exchanged(2)                    |       | 511                              |       | (515                                         | )          | 14.69                                             |       |                            |       |                                               |       |
|                                                  |       |                             |       |                                         |       |                                              |       |                            |       |                                               |       |
| Balance at December 31, 2008                     |       | 3,610                            |       | 4,428                                        |       | $                                                 | 11.81      |                            | $          | 3,978                                              |       | 6.8 |   |
|                                                  |       |                             |       |                                         |       |                                              |       |                            |       |                                               |       |
| Vested or expected to vest at  December 31, 2008 |       |                             |       | 4,184                                        |       | $                                                 | 11.73      |                            | $          | 3,968                                              |       | 6.7 |   |
|                                                  |       |                             |       |                                         |       |                                              |       |                            |       |                                               |       |
| Exercisable at December 31, 2008                 |       |                             |       | 2,574                                        |       | $                                                 | 10.58      |                            | $          | 3,924                                              |       | 5.5 |   |

 

----

(1)          The 2004 Equity Incentive Plan provides for an automatic, annualincrease on the first of each year in an amount equal to the lesser of;a) 1,000,000 shares, b) 4% of the number of outstanding common shareson the last day of the previous fiscal year, or c) such lesser amount asdetermined by the board of directors. The automatic annual increase has beenapproved by shareholders through December 31, 2014.

 

(2)          Shares forfeited, expired, exchanged orcanceled under the 1998 Long-Term Equity Incentive and Stock Option Plan is notavailable for re-grant under the 2004 Equity Incentive Plan.

 

The total intrinsic value ofoptions exercised in 2006, 2007 and 2008 was $12.4 million,$7.5 million and $1.8 million, respectively.

 

From time to time theCompany may grant stock options to consultants. The Company accounts forconsultant stock options in accordance with SFAS 123 and Emerging IssuesTask Force Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling, Goods orServices* . Compensation expense for the grant of stock options toconsultants is determined based on the estimated fair value of the stockoptions at the measurement date as defined in EITF 96-18 and is recognizedover the vesting period.

 

F-22

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(10)****  ****Commitments and Contingencies**

 

***(a) OperatingLeases***

 

The Company leases itsoffice facilities and certain office equipment under various non-cancelableoperating lease agreements with various expiration dates through 2017. Futureminimum payments for the next five years and thereafter as of December 31,2008, under these leases, are as follows (in thousands):

 
| 2009       |   | $     | 5,281  |   |
|------------|--------|-------|--------|--------|
| 2010       |   | 3,912 |   |
| 2011       |   | 2,778 |   |
| 2012       |   | 1,474 |   |
| 2013       |   | 1,356 |   |
| Thereafter |   | 1,392 |   |

 

 

F-23

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(10)****  ****Commitments and Contingencies (Continued)**

 

Rent expense was$2.8 million, $4.1 million and $4.2 million in 2006, 2007 and 2008,respectively. Rent expense is determined using the straight-line method of theminimum expected rent paid over the term of the agreement. The Company has nocontingent rent agreements.

 

The Company leases a portionof its office facilities from a development group, of which the Company’s chiefexecutive officer is a 50% member and the Company’s Vice President and GeneralManager of Asia-Pacific is a 25% member. During 2006, 2007 and 2008, theCompany paid $833,000, $1.2 million and $1.2 million, respectively, to thedevelopment group under these leases.

 

***(b) HostingServices***

 

TheCompany has agreements with third parties to provide co-location services forhosting operations. The agreements require payment of a minimum amount permonth for a fixed period of time in return for which the hosting serviceprovider provides certain guarantees of network availability.

 

Futureminimum payments as of December 31, 2008 under these arrangements were$1.3 million for 2009, $297,000 for 2010, and $148,000 in 2011.

 

***(c) Warrantiesand Indemnification***

 

TheCompany’s on demand application service is typically warranted to perform inaccordance with its user documentation.

 

TheCompany’s arrangements generally include certain provisions for indemnifyingcustomers against liabilities if its products or services infringe athird-party’s intellectual property rights. To date, the Company has notincurred any material costs as a result of such indemnifications and has notaccrued any liabilities related to such obligations in the accompanyingconsolidated financial statements.

 

TheCompany has entered into service level agreements with its customers warrantingcertain levels of uptime reliability and permitting those customers to receivecredits or terminate their license agreements in the event that the Companyfails to meet those levels. To date, the Company has not provided any materialcredits, or cancelled any agreements related to these service level agreements.

 

TheCompany has also agreed to indemnify its directors and executive officers forcosts associated with any fees, expenses, judgments, fines and settlementamounts incurred by any of these persons in any action or proceeding to whichany of those persons is, or is threatened to be, made a party by reason of theperson’s service as a director or officer, including any action by the Company,arising out of that person’s services as the Company’s director or officer orthat person’s services provided to any other company or enterprise at theCompany’s request.

 

***(d) Litigation***

 

Fromtime to time, the Company is involved in legal proceedings arising in theordinary course of business. The Company believes that the resolution of thesematters will not have a material effect on the Company’s consolidated financialposition, results of operations or liquidity. Legal fees are charged to expenseas incurred, unless we consider the potential loss from any dispute or legalmatter probable and the amount or range of the loss can be estimated, in whichcase we will accrue a liability for the estimated loss in accordance with SFAS 5.

 

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(11)****  ****Income Taxes**

 

The domestic and foreigncomponents of loss before provision for income taxes consist of the following(in thousands):

 
| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| United States                          |       | $                                          | 3,655      |   | $ | (5,437 | ) | $ | (5,856 | ) |
| Foreign                                |       | (8,133                                     | )          | (12,928 | ) | (1,385 | ) |
|                                   |       |                                       |       |   |   |   |   |
| Loss before provision for income taxes |       | $                                          | (4,478     | ) | $ | (18,365 | ) | $ | (7,241 | ) |

 

The components of the incometax provision are as follows (in thousands):

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Current:                   |       |                                       |       |   |   |   |   |
| Federal                    |       | $                                          | (120       | ) | $ | 120 |   | $ | — |   |
| Foreign                    |       | (80                                        | )          | (109 | ) | (134 | ) |
| State                      |       | (330                                       | )          | (287 | ) | 92 |   |
|                       |       |                                       |       |   |   |   |   |
| Total current              |       | (530                                       | )          | (276 | ) | $ | (42 | ) |
|                       |       |                                       |       |   |   |   |   |
| Deferred:                  |       |                                       |       |   |   |   |   |
| Federal                    |       | —                                     |       | — |   | — |   |
| Foreign                    |       | —                                     |       | — |   | — |   |
| State                      |       | —                                     |       | — |   | — |   |
|                       |       |                                       |       |   |   |   |   |
| Total deferred             |       | —                                     |       | — |   | — |   |
|                       |       |                                       |       |   |   |   |   |
| Provision for income taxes |       | $                                          | (530       | ) | $ | (276 | ) | $ | (42 | ) |

 

The reconciliation of incometax attributable to operations computed at the U.S. Federal statutory incometax rate of 34% to income tax expense is as follows:

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Statutory Federal tax rate                            |       | (34                                        | )%         | (34 | )% | (34 | )% |
| Net operating loss tax benefits not  realized         |       | 54                                         |       | 34 |   | 29 |   |
| Tax credits                                           |       | (37                                        | )          | (4 | ) | — |   |
| Stock-based compensation                              |       | 11                                         |       | 2 |   | 5 |   |
| U.S. Federal alternative minimum tax                  |       | 3                                          |       | — |   | — |   |
| State income taxes, net of federal benefit            |       | 5                                          |       | 1 |   | (2 | ) |
| Foreign taxes                                         |       | 2                                          |       | — |   | 2 |   |
| Foreign tax rate differential                         |       | 6                                          |       | 2 |   | (1 | ) |
| Nondeductible meals &  entertainment expense |       | 4                                          |       | 1 |   | 2 |   |
| Other                                                 |       | (2                                         | )          | — |   | — |   |
|                                                  |       |                                       |       |   |   |   |   |
| Income tax rate                                       |       | 12                                         | %          | 2 | % | 1 | % |

 

 

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(11)****  ****Income Taxes (Continued)**

 

Deferred tax components areas follows (in thousands):

 
| ** **                        | ** ** | **At December 31,** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2007**                      | ** ** | **2008** | ** ** |
| Deferred tax assets:              |       |                          |       |   |   |
| Net operating loss carry forwards |       | $                             | 13,436     |   | $ | 10,836 |   |
| Deferred revenue                  |       | 8,501                         |       | 8,401 |   |
| Stock compensation                |       | 1,647                         |       | 3,288 |   |
| Tax credits                       |       | 516                           |       | 957 |   |
| Fixed assets and intangibles      |       | —                        |       | 296 |   |
| Other                             |       | 3,033                         |       | 3,091 |   |
|                              |       |                          |       |   |   |
| Total deferred tax assets         |       | 27,133                        |       | 26,869 |   |
| Valuation allowance               |       | (24,446                       | )          | (23,873 | ) |
|                              |       |                          |       |   |   |
| Net deferred tax assets           |       | 2,687                         |       | 2,996 |   |
| Deferred tax liabilities:         |       |                          |       |   |   |
| Deferred Commissions              |       | (1,442                        | )          | (2,509 | ) |
| Fixed assets and intangibles      |       | (311                          | )          | — |   |
| Other                             |       | (934                          | )          | (487 | ) |
|                              |       |                          |       |   |   |
| Total deferred tax liabilities    |       | (2,687                        | )          | (2,996 | ) |
|                              |       |                          |       |   |   |
| Net deferred tax assets           |       | $                             | —     |   | $ | — |   |

 

The ultimate realization ofdeferred tax assets is dependent upon the existence, or generation, of taxableincome in the periods when those temporary differences and net operating losscarry forwards are deductible. Management considers the scheduled reversal ofdeferred tax liabilities, taxes paid in carry back years, projected futuretaxable income, available tax planning strategies, and other factors in makingthis assessment. Based on available evidence, management does not believe it ismore likely than not that any or all of the deferred tax assets will berealized. Accordingly, the Company has established a valuation allowance equalto the net deferred tax assets. The valuation allowance increased by$6.5 million and in 2007 and decreased by $573,000 in 2008.

 

At December 31, 2008,the Company had domestic Federal and State net operating loss carry forwards ofapproximately $37.8 million and $34.7 million, respectively. TheCompany also has approximately $30.6 million of foreign net operating losscarry forwards that are not subject to expiration. Federal net operating losscarry forwards expire at various dates between 2019 and 2027, while state netoperating loss carry forwards expire between 2010 and 2027. In addition, theCompany has federal and state research and development credits and foreign taxcredits available to reduce future domestic income taxes. The total amount ofthese credits is approximately $3.9 million. The federal and stateresearch and development credits expire between 2019 and 2027, and between 2014and 2022, respectively. The foreign tax credits expire between 2012 and 2018.

 

Under the Tax Reform Act of1986, as amended, the amounts of and benefits from net operating loss carryforwards and research and development credits may be impaired or limited incertain circumstances. Events which cause limitations in the amount of netoperating losses that the Company may utilize in any one year include, but arenot limited to, a cumulative ownership change of more than 50%, as defined,over a three year period. The Company’s acquisition of Salesnet, Inc. in May 2006constituted an ownership change to that entity, and therefore the availabilityof Salesnet, Inc.’s net operating loss carry forwards which approximate$7 million, will be limited in future years.

 

As part of the acquisitionof Salesnet, Inc. in May, 2006, the Company recognized deferred tax assetsand liabilities for the difference between the assigned book values and therespective tax bases for the acquired assets and liabilities. A full valuationallowance of $3.3 million was also recognized at the acquisition date dueto the uncertainty of realization of the net deferred tax assets. The potentialfuture realization of these deferred tax assets will be recorded within thestatement of operations as income tax expense, net in accordance with SFAS141R.

 

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(11)****  ****Income Taxes (Continued)**

 

The Company’s deferred taxassets as of December 31, 2007 and 2008 have been reduced in accordancewith Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment* , (“SFAS 123R”).As such, net operating loss carry forwards and other attributes created byexcess tax benefits from the exercise of stock options are not recorded asdeferred tax assets. Instead such amounts are recorded as an addition tostockholders’ equity if and when they are utilized. Deferred tax assets and therelated valuation allowance in the above presentation have been reduced by$18.4 million and $18.9 million, as of December 31, 2007 and2008, respectively, for the effect of excess tax deductions from stock options.

 

**(12)****  ****Fair Value of Financial Instruments**

 

Thecarrying amounts of cash and cash equivalents, accounts receivable and accountspayable approximated their fair values at December 31, 2007 and 2008. Thefair values of remaining financial instruments on the Company’s consolidatedbalance sheets were:

 
| ** **                       | ** ** | **2007**            | ** ** | **2008**        | ** ** |
|----------------------------------|------------|---------------------|------------|-----------------|------------|
| **In thousands**            | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** | **Carrying  Value** | ** ** | **Fair   Value** | ** ** |
| Term receivables—current    |       | $                   | 13,069     |            | $          | 13,069 |   | $ | 5,752 |   | $ | 5,752 |   |
| Term receivables—noncurrent |       | 9,859               |       | 8,444           |       | 3,547 |   | 3,416 |   |
| Debt                             |       | 111                 |       | 108             |       | 68 |   | 66 |   |
|                                  |            |                     |            |                 |            |  |  |  |  |  |  |  |  |

 

The values provided arerepresentative of fair values as of December 31, 2007 and 2008, and do notreflect subsequent changes in interest, tax or currency exchange rates, orother variables that may affect the determination of fair value. The followingmethods and assumptions were used to estimate fair values:

 

*Termreceivables—current:* The carrying amount approximated fair value at the respective dates dueto the relative short maturities of this item.

 

*Termreceivables—noncurrent:*  Fair value for term receivables due beyond one year from December 31,2007 and 2008, has been estimated by discounting the carrying amount by acurrent rate of interest for the period of time the items are expected to beoutstanding.

 

*Debt:* The fair value of long-term debt has beenestimated by discounting the carrying amount by a current rate of interest forthe period of time the debt is expected to be outstanding.

 

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(13)****  ****Employee Benefit Plans**

 

The Company has a voluntarydefined contribution retirement plan qualifying under Section 401(k) ofthe Internal Revenue Code of 1986. The plan covers substantially all full-timeemployees. Under the terms of the plan, participants may contribute up to thelower of 12% of their salary or the statutorily prescribed limit to the plan.Employees are eligible after 90 days of service. At its discretion, theCompany may make matching contributions. The Company made matchingcontributions during 2006, 2007 and 2008 of $936,000, $982,000 and $1.3million, respectively. The Company also has retirement benefit plans related toits foreign subsidiaries. Amounts expensed under these plans were $275,000,$370,000 and $414,000 during 2006, 2007 and 2008, respectively.

 

The Company has a medical,dental and vision benefit plan and a short-term disability program coveringfull-time employees of the Company and their dependents. The plan is apartially self-funded plan under which participant claims are obligations ofthe plan. The plan is funded through employer and employee contributions at alevel sufficient to pay for the benefits provided by the plan. The Companycontributions to the plan were $2.0 million during 2006 and 2007, and$3.0 million during 2008. During 2008 the plan maintained individual andaggregate stop loss insurance policies on the medical portion of the plan of$95,000 and $3.5 million (based on actual plan participants, adjustedmonthly), respectively, to mitigate losses.

 

In July 2004 theCompany adopted the 2004 Employee Stock Purchase Plan (“Plan”) which becameeffective in conjunction with the initial public offering of common stock. ThePlan is administered by the compensation committee of the board of directorsand is intended to qualify as an employee stock purchase plan within themeaning of Section 423 of the Internal Revenue Code. Under the terms ofthe plan, substantially all employees are eligible to purchase shares ofRightNow common stock through periodic after-tax payroll deductions at apurchase price established by the administrator. Payroll deductions are limitedto 15% of the employee’s regular compensation for each purchase period. Theadministrator may set the purchase price equal to or discounted from fairmarket value on the first or last day of each purchase period. Purchase periodsare consecutive six-month periods ending on the last day in June and December eachyear. For the purchase periods ended December 31, 2006 2007 and 2008, and June 30,2007 and 2008, the plan was deemed noncompensatory because the terms were nomore favorable than those available to all holders of our common stock.Activity under the plan for 2006, 2007 and 2008 was as follows:

 
| ** **               | ** ** | **Purchase Date**     | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **Dec 31, 2006** | ** ** | **June 30, 2007** | ** ** | **Dec 31, 2007** | ** ** | **June 30,  2008** | ** ** | **Dec 31,  2008** | ** ** |
| Purchase price per share |       | $                          | 16.36      |   | $ | 15.59 |   | $ | 15.06 |   | $ | 12.99 |   | $ | 7.34 |   |
| Shares purchased         |       | 4,957                      |       | 7,847 |   | 6,357 |   | 8,930 |   | 14,129 |   |
|                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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Tableof Contents

 

**RIGHTNOW TECHNOLOGIES, INC.**

 

**Notes to Consolidated Financial Statements (Continued)**

 

**Years ended December 31, 2006, 2007 and 2008**

 

**(14)****  ****Quarterly Results (Unaudited)**

 

Quarterly results ofoperations are as follows (in thousands, except per share amounts):

 
| ** **                | ** ** | **Year Ended December 31, 2007** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| Operating statement data: |       |                                                 |       |   |   |   |   |   |   |
| Total revenue             |       | $                                                    | 25,702     |   | $ | 26,465 |   | $ | 29,246 |   | $ | 30,664 |   |
| Gross profit              |       | 16,137                                               |       | 16,864 |   | 18,975 |   | 19,678 |   |
| Net loss                  |       | (6,002                                               | )          | (5,741 | ) | (3,584 | ) | (3,314 | ) |
| Net loss per share:       |       |                                                 |       |   |   |   |   |   |   |
| Basic and Diluted         |       | $                                                    | (0.18      | ) | $ | (0.17 | ) | $ | (0.11 | ) | $ | (0.10 | ) |

 
| ** **                   | ** ** | **Year Ended December 31, 2008** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| Operating statement data:    |       |                                                 |       |   |   |   |   |   |   |
| Total revenue                |       | $                                                    | 32,898     |   | $ | 35,221 |   | $ | 36,237 |   | $ | 36,079 |   |
| Gross profit                 |       | 20,578                                               |       | 22,368 |   | 22,799 |   | 23,853 |   |
| Net income (loss)            |       | (3,396                                               | )          | (3,132 | ) | (1,447 | ) | 692 |   |
| Net income (loss) per share: |       |                                                 |       |   |   |   |   |   |   |
| Basic and Diluted            |       | $                                                    | (0.10      | ) | $ | (0.09 | ) | $ | (0.04 | ) | 0.02 |   |
|                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

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