##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-Q
   (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    June 30, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .    Commission file number:
    000-50463
  Callidus Software
    Inc.
 (Exact name of registrant as
    specified in its charter)
   Delaware

77-0438629(State or Other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    Identification Number)   Callidus Software Inc.
 160 West Santa Clara Street, Suite 1500
 San Jose, CA 95113
 (Address of principal executive
    offices, including zip code)
  (408) 808-6400
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




---



##### 



TABLE OF
    CONTENTS
  PART I.
    FINANCIAL INFORMATIONItem 1.

Financial
    Statements


3Item 2.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


17Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


29Item 4.

Controls and
    Procedures


30PART II. OTHER
    INFORMATIONItem 1.

Legal
    Proceedings


30Item 1A.

Risk
    Factors


31Item 4.

Submission of
    Matters to a Vote of Security Holders


43Item 6.

Exhibits


43Signatures


44Exhibit
    Index


45EXHIBIT 10.24EXHIBIT 31.1EXHIBIT 32.1    ® ® tm ® ® ® tm ® Form 10-Q.
 2




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##### Table of Contents



PART I.
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  CALLIDUS
    SOFTWARE INC.
  CONDENSED
    CONSOLIDATED BALANCE SHEETS
  June 30,


December 31,2007


2006(Unaudited)(In thousands, exceptper share amount)ASSETSCurrent assets:Cash and cash equivalents

$
12,190


$
12,082Short-term investments


41,352



40,857Accounts receivable, net


24,462



23,064Prepaids and other current assets


4,144



3,939Total current assets


82,148



79,942Property and equipment, net


3,996



4,086Deposits and other assets


1,488



1,166Total assets

$
87,632


$
85,194LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,342


$
899Accrued payroll and related
    expenses


7,095



6,647Accrued expenses


6,491



3,721Deferred revenue


12,572



13,726Total current liabilities


29,500



24,993Long-term deferred revenue


1,087



1,578Other liabilities


1,331



1,243Total liabilities


31,918



27,814Stockholders equity:Common stock, $0.001 par
    value; 100,000 shares authorized; 28,971 and
    28,354 shares issued and outstanding at June 30, 2007
    and December 31, 2006, respectively


29



28Additional paid-in capital


198,201



193,499Accumulated other comprehensive
    income


402



408Accumulated deficit


(142,918
)


(136,555
)Total stockholders equity


55,714



57,380Total liabilities and
    stockholders equity

$
87,632


$
85,194    3




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006(Unaudited)(In thousands, except per share data)Revenues:License revenues

$
7,311


$
5,935


$
15,669


$
12,893Maintenance, service and on-demand
    revenues


19,230



11,729



35,713



21,728Total revenues


26,541



17,664



51,382



34,621Cost of revenues:License revenues


234



148



455



284Maintenance, service and on-demand
    revenues


14,856



8,585



27,236



16,365Total cost of revenues


15,090



8,733



27,691



16,649Gross profit


11,451



8,931



23,691



17,972Operating expenses:Sales and marketing


7,608



6,169



15,863



12,359Research and development


3,895



3,650



8,093



7,220General and administrative


3,519



2,992



7,421



6,079Total operating expenses


15,022



12,811



31,377



25,658Operating loss


(3,571
)


(3,880
)


(7,686
)


(7,686
)Interest and other income


813



675



1,582



1,243Loss before provision for income
    taxes


(2,758
)


(3,205
)


(6,104
)


(6,443
)Provision for income taxes


87







108



Loss before cumulative effect of a
    change in accounting principle


(2,845
)


(3,205
)


(6,212
)


(6,443
)Cumulative effect of a change in
    accounting principle














128Net loss

$
(2,845
)

$
(3,205
)

$
(6,212
)

$
(6,315
)Net loss per share 
    basic and dilutedLoss per share before cumulative
    effect of a change in accounting principle

$
(0.10
)

$
(0.12
)

$
(0.22
)

$
(0.24
)Cumulative effect of a change in
    accounting principle














0.01Net loss per share

$
(0.10
)

$
(0.12
)

$
(0.22
)

$
(0.23
)Shares used in basic per share
    computation


28,909



27,486



28,762



27,304Shares used in diluted per share
    computation


28,909



27,486



28,762



27,304    4




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months Ended June 30,2007


2006(Unaudited)(In thousands)Cash flows from operating
    activities:Net loss

$
(6,212
)

$
(6,315
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and other amortization


946



872Provision for doubtful accounts
    and sales returns


38



44Stock-based compensation


2,744



2,599Loss on disposal of property


2



7Net (accretion) amortization on
    investments


(321
)


25Cumulative effect of a change in
    accounting principle






(128
)Changes in operating assets and
    liabilities:Accounts receivable


(1,353
)


(4,226
)Prepaids and other current assets


(203
)


(222
)Other assets


(321
)


103Accounts payable


2,433



(142
)Accrued payroll and related
    expenses


436



(399
)Accrued expenses


3,205



966Deferred revenue


(1,667
)


(576
)Net cash used in operating
    activities


(273
)


(7,392
)Cash flows from investing
    activities:Purchases of investments


(24,097
)


(31,761
)Proceeds from maturities and sale
    of investments


23,929



30,550Purchases of property and equipment


(1,364
)


(1,222
)Change in restricted cash






15Net cash used in investing
    activities


(1,532
)


(2,418
)Cash flows from financing
    activities:Proceeds from issuance of common
    stock


1,958



1,527Net cash provided by financing
    activities


1,958



1,527Effect of exchange rates on cash
    and cash equivalents


(45
)


71Net increase (decrease) in cash
    and cash equivalents


108



(8,212
)Cash and cash equivalents at
    beginning of period


12,082



23,705Cash and cash equivalents at end
    of period

$
12,190


$
15,493    5




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  1.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
  Form 10-K Form 10-K
    Principles
    of Consolidation
    Use of
    Estimates
    Valuation
    Accounts
   6




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Balance at

Provision,



Balance atBeginning

Net of



End ofof Period

Recoveries

Write-Offs

PeriodAllowance for doubtful
    accountsThree months ended June 30,
    2007

$
483


$



$



$
483Three months ended June 30,
    2006


555



(2
)






553Six months ended June 30, 2007


463



20







483Six months ended June 30, 2006


480



78



(5
)


553   Balance at



Remediation

Balance atBeginning



Service

End ofof Period

Provision

Claims

PeriodSales return reserveThree months ended June 30,
    2007

$
160


$
582


$
(483
)

$
259Three months ended June 30,
    2006


257



78



(54
)


281Six months ended June 30, 2007


241



713



(695
)


259Six months ended June 30, 2006


310



498



(527
)


281   Restricted
    Cash
    Revenue
    Recognition
      Evidence of an Arrangement.
  Delivery.
  Fixed or Determinable Fee.
 7




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Collection is Deemed Probable.
  Perpetual Licensing.
    Residual Method. 97-2, Software Revenue Recognition, SOP 98-9, Software Revenue Recognition with Respect to Certain
    Transactions.
    Contract Accounting Method. SOP 81-1, Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts (SOP 81-1).
 8




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    SOP 81-1.
  Maintenance Revenue.
  Professional Service Revenue. time-and-materials
  On-Demand Revenue. time-and-materials set-up
  No. 00-3 (EITF 00-3), Application of AICPA Statement of Position
    97-2 to
    Arrangements That Include the Right to Use Software Stored on
    Another Entitys Hardware, SOP 97-2. Revenue
    Recognition No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple
    Deliverables. time-and-materials EITF 00-21,
 9




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    time-and-materials
      Net
    Loss Per Share
      Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Stock options


8,370



6,806



6,586



6,744Restricted stock


13



19



9



23Warrants






85



1



98ESPP


121



214



128



181Totals


8,504



7,124



6,724



7,046    10




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Recent
    Accounting Pronouncements
  Fair Value
    Measurements
  The Fair Value Option for Financial Assets and
    Financial Liabilities  Including an amendment of FASB
    Statement No. 115
  2.
    Investments    Unrealized


UnrealizedJune 30, 2007

Carrying Value


Gains


Losses


Fair ValueAuction-rate securities and
    preferred stock

$
12,100


$



$



$
12,100Corporate notes and obligations


27,713







(27
)


27,686US government and agency
    obligations


4,000







(5
)


3,995Investments in debt and equity
    securities

$
43,813


$



$
(32
)

$
43,781   11




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Unrealized


UnrealizedDecember 31, 2006

Carrying Value


Gains


Losses


Fair ValueAuction-rate securities and
    preferred stock

$
13,750


$



$



$
13,750Corporate notes and obligations


29,129







(37
)


29,092US government and agency
    obligations


500







(2
)


498Investments in debt and equity
    securities

$
43,379


$



$
(39
)

$
43,340   June 30,


December 31,2007


2006Recorded as:Cash equivalents

$
2,429


$
2,483Short-term investments


41,352



40,857$
43,781


$
43,340       3.
    Commitments
    and Contingencies    Accounting for
    Contingencies
  Other
    Contingencies
    Guarantors
    Accounting and Disclosure Requirements for Guarantees, Including
    Indirect Guarantees of Indebtedness of Others.
 12




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    Segment,
    Geographic and Customer Information  Disclosures about Segments of
    an Enterprise and Related Information
    Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006United States

$
21,433


$
14,417


$
42,275


$
28,215Europe


4,653



1,926



8,038



2,313Asia Pacific


455



1,321



1,069



4,093$
26,541


$
17,664


$
51,382


$
34,621       Three Months Ended June 30,

Six Months Ended June 30,2007

2006

2007

2006Customer 1


7%



14%



9%



15%Customer 2


*%



11%



2%



5%Customer 3


5%



5%



3%



10%       5.
    Comprehensive
    Loss   13




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006Net loss

$
(2,845
)

$
(3,205
)

$
(6,212
)

$
(6,315
)Other comprehensive income (loss):Change in unrealized loss on
    investments, net


(9
)


5



7



60Change in cumulative translation
    adjustments


(32
)


73



(13
)


83Comprehensive loss

$
(2,886
)

$
(3,127
)

$
(6,218
)

$
(6,172
)   6.
    Stock-based
    Compensation  Expense
    Summary
  Share-Based Payment
      Three


Three





PercentageMonths


Months





of DollarEnded


Ended


Year to Year


ChangeJune 30,


June 30,


Increase


Year Over2007


2006


(Decrease)


YearStock-based
    compensation:Cost of maintenance, service and
    on-demand revenues

$
260


$
246


$
14



6
%Sales and marketing


274



264



10



4
%Research and development


207



218



(11
)


(5
)%General and administrative


775



662



113



17
%Total stock-based compensation

$
1,516


$
1,390


$
126



9
%   14




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Six


Six





PercentageMonths


Months





of DollarEnded


Ended





ChangeJune 30,


June 30,


Year to Year


Year Over2007


2006


Increase


YearStock-based
    compensation:Cost of maintenance, service and
    on-demand revenues

$
521


$
510


$
11



2%Sales and marketing


541



530



11



2%Research and development


532



465



67



14%General and administrative


1,150



1,094



56



5%Total stock-based compensation

$
2,744


$
2,599


$
145



6%   Determination
    of Fair Value
    Three Months Ended June 30,

Six Months Ended June 30,2007

2006

2007

2006Stock Option PlansExpected life (in years)


2.50 to 3.50



2.50 to 3.50



2.50 to 3.50



2.50 to 6.00Risk-free interest rate


4.60% to 5.00
%


4.89% to 5.11
%


4.50% to 5.00
%


4.36% to 5.11
%Volatility


39% to 53
%


55% to 60
%


39% to 54
%


55% to 60
%Dividend Yield














Employee Stock Purchase
    PlanExpected life (in years)


0.49 to 1.00



0.49 to 1.00



0.49 to 1.00



0.49 to 1.00Risk-free interest rate


5.05% to 5.16
%


4.68% to 4.69
%


5.05% to 5.16
%


4.68% to 4.69
%Volatility


33% to 37
%


36% to 43
%


33% to 37
%


36% to 43
%Dividend Yield














   7.
    Income
    Taxes  Accounting for Uncertainty in Income
    Taxes
 15




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##### Table of Contents



CALLIDUS
    SOFTWARE INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        8.
    Related-Party
    Transactions   16




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion of financial condition and results
    of operations should be read in conjunction with
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations and the Consolidated Financial
    Statements and the notes thereto included in our Annual Report
    on
    Form 10-K
    for the year ended December 31, 2006 and with the unaudited
    condensed consolidated financial statements and the related
    notes thereto contained elsewhere in this Quarterly Report on
    Form 10-Q
    . This section of the Quarterly Report on
    Form 10-Q
    contains forward-looking statements within the meaning of
    Section 27A of the Securities Act of 1933 and
    Section 21E of the Securities Exchange Act of 1934. These
    statements relate to our future plans, objectives, expectations,
    prospects, intentions and financial performance and the
    assumptions that underlie these statements. Generally, the words
    believe, expect, intend,
    estimate, anticipate,
    project, will, and similar expressions
    and the negatives thereof identify forward-looking statements,
    which generally are not historical in nature. These
    forward-looking statements include, but are not limited to,
    statements concerning the following: changes in and expectations
    with respect to license revenues and gross margins, future
    operating expense levels, the impact of quarterly fluctuations
    of revenue and operating results, levels of recurring revenues,
    staffing and expense levels, the impact of foreign exchange rate
    fluctuations and the adequacy of our capital resources to fund
    operations and growth. As and when made, management believes
    that these forward-looking statements are reasonable. However,
    caution should be taken not to place undue reliance on any such
    forward-looking statements because such statements speak only as
    of the date when made and may be based on assumptions that do
    not prove to be accurate. Our Company undertakes no obligation
    to publicly update or revise any forward-looking statements,
    whether as a result of new information, future events, or
    otherwise. In addition, forward-looking statements are subject
    to certain risks and uncertainties that could cause actual
    results to differ materially from our Companys historical
    experience and our present expectations or projections. Many of
    these trends and uncertainties are described in Risk
    Factors set forth elsewhere in this Quarterly Report on
    Form 10-Q.
    We undertake no obligation to update forward-looking statements
    to reflect events or circumstances occurring after the date of
    this Quarterly Report on
    Form 10-Q.
  Overview
    of the Results for the Three and Six Months Ended June 30,
    2007
    time-and-materials
 17




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##### Table of Contents



Strong
    Revenue Growth
      Increased
    Expenses to Support Growth
      Growth
    Strategy Continues but Expense Growth Should be
    Slower
    Challenges
    and Risks
      Application
    of Critical Accounting Policies and Use of Estimates
   18




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##### Table of Contents



Revenue
    Recognition
      Evidence of an Arrangement.
  Delivery.
  Fixed or Determinable Fee.
    Collection is Deemed Probable.
  Perpetual Licensing. time-and-materials
   19




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##### Table of Contents



Residual Method. 97-2, Software Revenue Recognition, SOP 98-9, Software Revenue Recognition with Respect to Certain
    Transactions.
    Contract Accounting Method. SOP 81-1, Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts (SOP 81-1).
  SOP 81-1.
  Maintenance Revenue.
  Professional Service Revenue. time-and-materials
  On-Demand Revenue.
 20




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##### Table of Contents



time-and-materials set-up
  No. 00-3 (EITF 00-3), Application of AICPA Statement of Position
    97-2 to
    Arrangements That Include the Right to Use Software Stored on
    Another Entitys Hardware, SOP 97-2. Revenue Recognition No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. time-and-materials EITF 00-21,
  time-and-materials
      Allowance
    for Doubtful Accounts and Sales Return Reserve
   21




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##### Table of Contents



Revenue Recognition When Right of Return
    Exists,
  Stock-Based
    Compensation
  Share-Based Payment
  Income
    Taxes
    Recent
    Accounting Pronouncements
  Fair Value
    Measurements
 22




---



##### Table of Contents



The Fair Value Option for Financial Assets and
    Financial Liabilities  Including an amendment of FASB
    Statement No. 115
  Results
    of Operations
  Comparison
    of the Three and Six Months Ended June 30, 2007 and
    2006
  Revenues,
    cost of revenues and gross profit
    Three





Three








PercentageMonths





Months








of DollarEnded


Percentage


Ended


Percentage





ChangeJune 30,


of Total


June 30,


of Total


Year to Year


Year Over2007


Revenues


2006


Revenues


Increase


YearRevenues:License

$
7,311



28%


$
5,935



34%


$
1,376



23%Maintenance, service and on-demand


19,230



72%



11,729



66%



7,501



64%Total revenues

$
26,541



100%


$
17,664



100%


$
8,877



50%   Three





Three








PercentageMonths





Months








of DollarEnded


Percentage


Ended


Percentage





ChangeJune 30,


of Related


June 30,


of Related


Year to Year


Year Over2007


Revenues


2006


Revenues


Increase


YearCost of revenues:License

$
234



3%


$
148



2%


$
86



58%Maintenance, service and on-demand


14,856



77%



8,585



73%



6,271



73%Total cost of revenues

$
15,090






$
8,733






$
6,357Gross profit

$
11,451



43%


$
8,931



51%


$
2,520



28%   Six





Six








PercentageMonths





Months








of DollarEnded


Percentage


Ended


Percentage





ChangeJune 30,


of Total


June 30,


of Total


Year to Year


Year Over2007


Revenues


2006


Revenues


Increase


YearRevenues:License

$
15,669



30
%

$
12,893



37
%

$
2,776



22
%Maintenance, service and on-demand


35,713



70
%


21,728



63
%


13,985



64
%Total revenues

$
51,382



100
%

$
34,621



100
%

$
16,761



48
%   23




---



##### Table of Contents



Six





Six








PercentageMonths





Months








of DollarEnded


Percentage


Ended


Percentage





ChangeJune 30,


of Related


June 30,


of Related


Year to Year


Year Over2007


Revenues


2006


Revenues


Increase


YearCost of revenues:License

$
455



3
%

$
284



2
%

$
171



60
%Maintenance, service and on-demand


27,236



76
%


16,365



75
%


10,871



66
%Total cost of revenues

$
27,691






$
16,649






$
11,042Gross profit

$
23,691



46
%

$
17,972



52
%

$
5,719



32
%   Revenues
  License Revenues.
  Maintenance, Service and On-demand
    Revenues.
  Cost of
    Revenues and Gross Margin
  Cost of License Revenues.
  Cost of Maintenance, Service, and On-demand
    Revenues.
 24




---



##### Table of Contents



Gross Margin.
  Operating
    Expenses
    Three





Three








PercentageMonths





Months








of DollarEnded


Percentage


Ended


Percentage





ChangeJune 30,


of Total


June 30,


of Total


Year to Year


Year Over2007


Revenues


2006


Revenues


Increase


YearOperating expenses:Sales and marketing

$
7,608



29
%

$
6,169



35
%

$
1,439



23
%Research and development


3,895



15
%


3,650



21
%


245



7
%General and administrative


3,519



13
%


2,992



17
%


527



18
%Total operating expenses

$
15,022



57
%

$
12,811



73
%

$
2,211



17
%   Six





Six








PercentageMonths





Months








of DollarEnded


Percentage


Ended


Percentage





ChangeJune 30,


of Total


June 30,


of Total


Year to Year


Year Over2007


Revenues


2006


Revenues


Increase


YearOperating expenses:Sales and marketing

$
15,863



31
%

$
12,359



36
%

$
3,504



28
%Research and development


8,093



16
%


7,220



21
%


873



12
%General and administrative


7,421



14
%


6,079



18
%


1,342



22
%Total operating expenses

$
31,377



61
%

$
25,658



74
%

$
5,719



22
%   Sales and Marketing.
   25




---



##### Table of Contents



Research and Development.
    General and Administrative.
    Stock-Based
    Compensation
    Three


Three





PercentageMonths


Months





of DollarEnded


Ended


Year to Year


ChangeJune 30,


June 30,


Increase


Year Over2007


2006


(Decrease)


YearStock-based
    compensation:Cost of maintenance, service and
    on-demand revenues

$
260


$
246


$
14



6
%Sales and marketing


274



264



10



4
%Research and development


207



218



(11
)


(5
)%General and administrative


775



662



113



17
%Total stock-based compensation

$
1,516


$
1,390


$
126



9
%   26




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##### Table of Contents



Six


Six





PercentageMonths


Months





of DollarEnded


Ended





ChangeJune 30,


June 30,


Year to Year


Year Over2007


2006


Increase


YearStock-based
    compensation:Cost of maintenance, service and
    on-demand revenues

$
521


$
510


$
11



2
%Sales and marketing


541



530



11



2
%Research and development


532



465



67



14
%General and administrative


1,150



1,094



56



5
%Total stock-based compensation

$
2,744


$
2,599


$
145



6
%     Other
    Items
    Three


Three





PercentageMonths


Months





of DollarEnded


Ended





ChangeJune 30,


June 30,


Year to Year


Year Over2007


2006


Increase


YearInterest and other
    income

$
813


$
675


$
138



20
%Provision for income
    taxes

$
87


$



$
87



100
%Cumulative effect of a change
    in accounting principle

$



$



$




0
%   Six


Six





PercentageMonths


Months





of DollarEnded


Ended


Year to Year


ChangeJune 30,


June 30,


Increase


Year Over2007


2006


(Decrease)


YearInterest and other
    income

$
1,582


$
1,243


$
339



27
%Provision for income
    taxes

$
108


$



$
108



100
%Cumulative effect of a change
    in accounting principle

$



$
128


$
(128
)


(100
)%   Interest
    and Other Income
   27




---



##### Table of Contents



Provision
    for Income Taxes
    Liquidity
    and Capital Resources
    Net Cash Used in Operating Activities.
  Six Months Ended June 30,2007


2006Cash collections

$
49,376


$
30,070Payroll-related costs


(31,988
)


(26,679
)Professional services costs


(8,526
)


(3,628
)Employee expense reports


(3,659
)


(3,327
)Facilities-related costs


(1,993
)


(1,722
)Third-party royalty payments


(458
)


(268
)Other


(3,025
)


(1,838
)Net cash used in operating
    activities

$
(273
)

$
(7,392
)     Net Cash Used in Investing Activities.
  Net Cash Provided by Financing Activities.
 28




---



##### Table of Contents



Contractual
    Obligations and Commitments
    Payments due by PeriodRemaining









2012Contractual Obligations

Total

2007

2008

2009

2010

2011

and BeyondOperating lease commitments

$
8,944


$
1,281


$
2,662


$
2,499


$
1,825


$
677


$
Unconditional purchase commitments

$
4,639


$
922


$
1,961


$
1,062


$
494


$
100


$
100         Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest Rate Risk.
    Expected Maturity

Total

Total1 Year

More Than

Principal

Fairor Less

1 Year

Amount

ValueAvailable-for-sale securities

$
39,907


$
3,906


$
43,813


$
43,781Weighted average interest rate


5.36
%


5.22
%  29




---



##### Table of Contents



Foreign Currency Exchange Risk.
          As of June 30, 2007AverageNotional

Contract

EstimatedAmount

Rate

Fair Value(In thousands except contract rates)Foreign currency forward contracts:British pounds

$
444



1.9710


$
11   Item 4.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)) Rules 13a-15 15d-15.
   PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings   30




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##### Table of Contents



Item 1A.
    Risk
    Factors  Factors
    That Could Affect Future Results
  We operate in a dynamic and rapidly changing environment that
    involves numerous risks and uncertainties that could cause
    actual results to differ materially from the results
    contemplated by the forward-looking statements contained in this
    Quarterly Report on
    Form 10-Q.
    Because of the following factors, as well as other variables
    affecting our operating results, past financial performance
    should not be considered a reliable indicator of future
    performance, and investors should not use historical trends to
    anticipate results or trends in future periods.
  RISKS
    RELATED TO OUR BUSINESS
  We
    have a history of losses, and we cannot assure you that we will
    achieve or sustain profitability.
    Our
    quarterly license revenues remain largely dependent on a
    relatively small number of license transactions involving sales
    of our products to new customers, and any delay or failure in
    closing one or more of these transactions could adversely affect
    our results of operations.
    Our
    success depends upon our ability to develop new products and
    enhance our existing products. Failure to successfully introduce
    new or enhanced products may adversely affect our operating
    results.
    
    Rapid technological advances in hardware and software
    development;
    evolving standards in computer hardware, software technology and
    communications infrastructure;
    changing customer needs; and
    frequent new product introductions and enhancements.   31




---



##### Table of Contents



The
    market for sales performance management software is new and
    rapidly evolving and may not develop as we expect.
    Our
    quarterly revenues and operating results are unpredictable and
    are likely to continue to fluctuate substantially, which may
    harm our results of operations.
        
    The discretionary nature of our customers purchase and
    budget cycles and changes in their budgets for software and
    related purchases;
    the priority our customers place on the purchase of our products
    as compared to other information technology and capital
    acquisitions;
    competitive conditions in our industry, including new products,
    product announcements and discounted pricing or special payment
    terms offered by our competitors;
    customers selection of our on-demand solution, under which
    we recognize revenue as part of maintenance, service and
    on-demand over the term of the agreement, in lieu of traditional
    perpetual license revenue, which is typically recognized in the
    quarter in which the transaction closes or as the products are
    implemented;
    our ability to hire, train and retain appropriate sales and
    professional services staff;
    varying size, timing and contractual terms of orders for our
    products, which may delay the recognition of revenues;
    indeterminate and often lengthy sales cycles;
    changes in the mix of revenues attributable to higher-margin
    product license revenues as opposed to substantially
    lower-margin maintenance, service and on-demand revenues; 32




---



##### Table of Contents




    strategic decisions by us or our competitors, such as
    acquisitions, divestitures, spin-offs, joint ventures, strategic
    investments or changes in business strategy;
    merger and acquisition activities among our customers, which may
    alter their buying patterns;
    our ability to timely complete our service obligations related
    to product sales;
    the utilization rate of our professional services personnel and
    the degree to which we use third-party consulting services;
    changes in the average selling prices of our products;
    the rates the market will bear for our professional services and
    our ability to efficiently and profitably perform such services
    based on those market rates;
    timing of product development and new product initiatives;
    increased operating expenses associated with channel sales,
    increased product development efforts and Sarbanes-Oxley
    compliance; and
    customer concerns regarding the impact of implementing large,
    enterprise-wide deployments of products, including our products,
    and compliance with the internal control requirements of
    Sarbanes-Oxley.  We
    might not be able to manage our future growth efficiently or
    profitably.
    If our
    hosted on-demand offerings fail to achieve broad market
    acceptance, or if we are unable to offer these services on a
    profitable basis, our operating results could be adversely
    affected.
   33




---



##### Table of Contents



Our
    maintenance, service and on-demand revenues produce
    substantially lower gross margins than our license revenues, and
    decreases in license revenues relative to maintenance, service
    and on-demand revenues have harmed, and may continue to harm,
    our overall gross margins.
      
    Competitive pricing pressure on the rates that we can charge for
    our professional services;
    the complexity of the customers information technology
    environment;
    the resources directed by customers to their implementation
    projects; and
    the extent to which outside consulting organizations provide
    services directly to customers.        Our
    products have long sales cycles, which makes it difficult to
    plan our expenses and forecast our results.
    
    The complex nature of our products and services;
    the need to educate potential customers about the uses and
    benefits of our products and services;
    the requirement that a potential customer invest significant
    financial and other resources in connection with the purchase
    and implementation of our products and services; 34




---



##### Table of Contents




    budget cycles of our potential customers that affect the timing
    of purchases;
    customer requirements for competitive evaluation and internal
    approval before purchasing our products and services;
    potential delays of purchases due to announcements or planned
    introductions of new products and services by us or our
    competitors; and
    the lengthy approval processes of our potential customers, many
    of which are large organizations.      Professional
    services comprise a substantial portion of our revenues and, to
    the extent our customers choose to use other services providers,
    our revenues and operating results may decline.
    If we
    are unable to hire and retain qualified employees, including
    sales, professional services, and engineering personnel, our
    growth may be impaired.
    Our
    latest product features and functionality may require existing
    customers to migrate to more recent versions of our software.
    Moreover, we may choose to or be compelled to discontinue
    maintenance support for older versions of our software products,
    forcing customers to upgrade their software in order to continue
    receiving maintenance support. If existing customers fail to
    migrate or delay migration to newer versions of our software,
    our revenues may be harmed.
   35




---



##### Table of Contents



If we
    do not compete effectively, our revenues may not grow and could
    decline.
        Managing
    large-scale deployments of our products requires substantial
    technical implementation and support by us or third-party
    service providers. Failure to meet these requirements could
    cause a decline or delay in recognition of our revenues and an
    increase in our expenses.
       36




---



##### Table of Contents



A
    substantial majority of our revenues are derived from our
    TrueComp software application and related products and services,
    and a decline in sales of these products and services could
    adversely affect our operating results and financial
    condition.
    If we
    reduce prices or alter our payment terms to compete
    successfully, our margins and operating results may be adversely
    affected.
  and/or
  Our
    products depend on the technology of third parties licensed to
    us that are necessary for our applications to operate and the
    loss or inability to maintain these licenses, errors in such
    software, or discontinuation or updates to such software could
    result in increased costs or delayed sales of our
    products.
    and/or
 37




---



##### Table of Contents



Errors
    in our products could be costly to correct, adversely affect our
    reputation and impair our ability to sell our
    products.
      
    Lost or delayed market acceptance and sales of our products;
    product liability suits against us;
    diversion of development resources; and
    substantially greater service and warranty costs.  Our
    revenues might be harmed by resistance to adoption of our
    software by information technology departments.
    The
    loss of key personnel or the inability of replacements to
    quickly and successfully perform in their new roles could
    adversely affect our business.
    We may
    lose sales opportunities and our business may be harmed if we do
    not successfully develop and maintain strategic relationships to
    implement and sell our products.
  and/or
 38




---



##### Table of Contents



Breaches
    of security or failure to safeguard customer data could create
    the perception that our services are not secure, causing
    customers to discontinue or reject the use of our services and
    potentially subject us to significant liability. Implementing,
    monitoring and maintaining adequate security safeguards may be
    costly.
      If we
    fail to adequately protect our proprietary rights and
    intellectual property, we may lose valuable assets, experience
    reduced revenues and incur costly litigation to protect our
    rights.
  and/or
   39




---



##### Table of Contents



Our
    results of operations may be adversely affected if we are
    subject to a protracted infringement claim or one that results
    in a significant damage award.
    
    Require costly litigation to resolve;
    absorb significant management time;
    cause us to enter into unfavorable royalty or license agreements;
    require us to discontinue the sale of all or a portion of our
    products;
    require us to indemnify our customers or third-party systems
    integrators; or
    require us to expend additional development resources to
    redesign our products.  Our
    inclusion of open source software in our products may expose us
    to liability or require release of our source
    code.
    If we
    do not adequately manage and evolve our financial reporting and
    managerial systems and processes, our ability to manage and grow
    our business may be harmed.
   40




---



##### Table of Contents



We
    expect to expand our international operations but we do not have
    substantial experience in international markets, and may not
    achieve the expected results.
    
    Unexpected changes in regulatory requirements, taxes, trade laws
    and tariffs;
    differing abilities to protect our intellectual property rights;
    differing labor regulations;
    greater difficulty in supporting and localizing our products;
    greater difficulty in establishing, staffing and managing
    foreign operations;
    possible political and economic instability; and
    fluctuating exchange rates.    Acquisitions
    and investments present many risks, and we may not realize the
    anticipated financial and strategic goals for any such
    transactions.
    
    As was the case with our acquisition of an assembled workforce
    and source code license from Cezanne Software in 2004, we may
    find that the acquired business or assets do not further our
    business strategy, or that we overpaid for the business or
    assets, or that economic conditions change, all of which may
    generate a future impairment charge;
    we may have difficulty integrating the operations and personnel
    of the acquired business, and may have difficulty retaining the
    key personnel of the acquired business;
    we may have difficulty integrating the acquired technologies or
    products with our existing product lines;
    there may be customer confusion where our products overlap with
    those of the acquired business;
    we may have product liability associated with the sale of the
    acquired business products;
    our ongoing business and managements attention may be
    disrupted or diverted by transition or integration issues and
    the complexity of managing geographically and culturally diverse
    locations;
    we may have difficulty maintaining uniform standards, controls,
    procedures and policies across locations;
    the acquisition may result in litigation from terminated
    employees or third-parties; and
    we may experience significant problems or liabilities associated
    with product quality, technology and legal contingencies.     41




---



##### Table of Contents



RISKS
    RELATED TO OUR STOCK
  Our
    stock price is likely to remain volatile.
    
    Our operating performance and the performance of other similar
    companies;
    announcements by us or our competitors of significant contracts,
    results of operations, projections, new technologies,
    acquisitions, commercial relationships, joint ventures or
    capital commitments;
    changes in our management team;
    publication of research reports about us or our industry by
    securities analysts; and
    developments with respect to intellectual property rights.    Future
    sales of substantial amounts of our common stock by us or our
    existing stockholders could cause our stock price to
    fall.
    Provisions
    in our charter documents, our stockholder rights plan and
    Delaware law may delay or prevent an acquisition of our
    company.
   42




---



##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders    Proposal 1.
    Nominees of the Board of Directors

For


WithheldGeorge B. James


24,225,888



163,329David B. Pratt


24,218,232



170,985Robert H. Youngjohns


24,230,569



158,648     Proposal 2.
  For

Against

Abstain24,356,318

10,879

22,019   Item 6.
    Exhibits  (a)
    Exhibits  ExhibitNumber

Description10
.24

Restricted Stock Agreement with
    Michael Graves31
.1

302 Certifications32
.1

906 Certification   Availability
    of this Report
  Form 10-Q Form 10-Q,
 43




---



##### Table of Contents



SIGNATURES      RONALD
    J. FIOR
  Ronald J. Fior
 Chief Financial Officer,
 Senior Vice President, Finance and Operations
 44




---



##### Table of Contents



EXHIBIT INDEX
    TO
    CALLIDUS SOFTWARE, INC.
    QUARTERLY REPORT ON
    FORM 10-Q
    FOR THE QUARTER ENDED JUNE 30, 2007  ExhibitNumber

Description10
.24

Restricted Stock Agreement with
    Michael Graves31
.1

302 Certifications32
.1

906 Certification