##### 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 1934
 For the quarterly period ended September 30, 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 .
 Commission file number: 000-50463
 Callidus Software Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or Other Jurisdiction of 
Incorporation or Organization)
    
    77-0438629(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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 4. Controls and Procedures
    
    
    43PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    43Item 1A. Risk Factors
    
    
    43Item 6. Exhibits
    
    
    59Signatures
    
    
    60Exhibit Index
    
    
    61EX-31.1EX-32.1
  ® ® ® ® ® ®
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1 Financial Statements
 CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    38,923
    
    
    $
    21,813Short-term investments
    
    
    2,454
    
    
    
    28,824Accounts receivable, net
    
    
    17,951
    
    
    
    23,575Deferred income taxes
    
    
    423
    
    
    
    423Prepaid and other current assets
    
    
    5,200
    
    
    
    4,038Total current assets
    
    
    64,951
    
    
    
    78,673Long-term investments
    
    
    4,314
    
    
    
    Property and equipment, net
    
    
    5,332
    
    
    
    4,438Goodwill
    
    
    3,716
    
    
    
    Intangible assets, net
    
    
    3,956
    
    
    
    2,333Deferred income taxes, noncurrent
    
    
    90
    
    
    
    90Deposits and other assets
    
    
    1,292
    
    
    
    1,913Total assets
    
    $
    83,651
    
    
    $
    87,447LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,471
    
    
    $
    2,901Accrued payroll and related expenses
    
    
    5,112
    
    
    
    7,326Accrued expenses
    
    
    4,471
    
    
    
    4,225Deferred revenue
    
    
    18,673
    
    
    
    15,831Total current liabilities
    
    
    30,727
    
    
    
    30,283Long-term deferred revenue
    
    
    1,571
    
    
    
    2,326Other liabilities
    
    
    1,660
    
    
    
    1,089Total liabilities
    
    
    33,958
    
    
    
    33,698Stockholders equity:Common stock, $0.001 par value; 100,000 shares authorized;
30,121 and 29,704 shares issued and outstanding at
September 30, 2008 and December 31, 2007, respectively
    
    
    30
    
    
    
    30Additional paid-in capital
    
    
    208,645
    
    
    
    203,110Accumulated other comprehensive income
    
    
    12
    
    
    
    456Accumulated deficit
    
    
    (158,994
    )
    
    
    (149,847
    )Total stockholders equity
    
    
    49,693
    
    
    
    53,749Total liabilities and stockholders equity
    
    $
    83,651
    
    
    $
    87,447
  3




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##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)Revenues:License
    
    $
    6,782
    
    
    $
    5,600
    
    
    $
    12,638
    
    
    $
    21,269Subscription and support
    
    
    10,874
    
    
    
    5,944
    
    
    
    29,208
    
    
    
    17,406Services and other
    
    
    10,597
    
    
    
    13,226
    
    
    
    37,992
    
    
    
    37,477Total revenues
    
    
    28,253
    
    
    
    24,770
    
    
    
    79,838
    
    
    
    76,152Cost of revenues:License
    
    
    355
    
    
    
    191
    
    
    
    705
    
    
    
    646Subscription and support
    
    
    4,147
    
    
    
    2,696
    
    
    
    11,095
    
    
    
    8,193Services and other
    
    
    10,217
    
    
    
    11,542
    
    
    
    34,093
    
    
    
    33,281Total cost of revenues
    
    
    14,719
    
    
    
    14,429
    
    
    
    45,893
    
    
    
    42,120Gross profit
    
    
    13,534
    
    
    
    10,341
    
    
    
    33,945
    
    
    
    34,032Operating expenses:Sales and marketing
    
    
    7,623
    
    
    
    7,293
    
    
    
    21,983
    
    
    
    23,156Research and development
    
    
    3,808
    
    
    
    3,688
    
    
    
    10,958
    
    
    
    11,781General and administrative
    
    
    3,529
    
    
    
    3,951
    
    
    
    10,261
    
    
    
    11,372Restructuring
    
    
    
    
    
    
    
    
    
    
    397
    
    
    
    Total operating expenses
    
    
    14,960
    
    
    
    14,932
    
    
    
    43,599
    
    
    
    46,309Operating loss
    
    
    (1,426
    )
    
    
    (4,591
    )
    
    
    (9,654
    )
    
    
    (12,277
    )Interest and other income, net
    
    
    103
    
    
    
    657
    
    
    
    914
    
    
    
    2,239Loss before provision for income taxes
    
    
    (1,323
    )
    
    
    (3,934
    )
    
    
    (8,740
    )
    
    
    (10,038
    )Provision for income taxes
    
    
    64
    
    
    
    36
    
    
    
    407
    
    
    
    144Net loss
    
    $
    (1,387
    )
    
    $
    (3,970
    )
    
    $
    (9,147
    )
    
    $
    (10,182
    )Net loss per share  basic and dilutedNet loss per share
    
    $
    (0.05
    )
    
    $
    (0.14
    )
    
    $
    (0.31
    )
    
    $
    (0.35
    )Shares used in basic per share
computation
    
    
    30,063
    
    
    
    29,175
    
    
    
    29,937
    
    
    
    28,901Shares used in diluted per share
computation
    
    
    30,063
    
    
    
    29,175
    
    
    
    29,937
    
    
    
    28,901
  4




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##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months Ended September 30,2008
    
    
    2007(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (9,147
    )
    
    $
    (10,182
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation expense
    
    
    1,782
    
    
    
    1,417Amortization of intangible assets
    
    
    2,138
    
    
    
    247Provision for doubtful accounts and sales returns
    
    
    1,250
    
    
    
    82Stock-based compensation
    
    
    5,890
    
    
    
    3,949Loss on disposal of property
    
    
    24
    
    
    
    2Net accretion on investments
    
    
    (159
    )
    
    
    (489
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    8,377
    
    
    
    (2,940
    )Prepaid and other current assets
    
    
    (910
    )
    
    
    1,175Other assets
    
    
    633
    
    
    
    (1,799
    )Accounts payable
    
    
    (1,031
    )
    
    
    1,801Accrued payroll and related expenses
    
    
    (2,172
    )
    
    
    (735
    )Accrued expenses
    
    
    (3,240
    )
    
    
    3,435Deferred revenue
    
    
    1,906
    
    
    
    (302
    )Net cash provided by (used in) operating activities
    
    
    5,341
    
    
    
    (4,339
    )Cash flows from investing activities:Purchases of investments
    
    
    (13,919
    )
    
    
    (33,572
    )Proceeds from maturities and sale of investments
    
    
    35,720
    
    
    
    38,005Purchases of property and equipment
    
    
    (1,927
    )
    
    
    (2,385
    )Purchases of intangible assets
    
    
    (280
    )
    
    
    (100
    )Acquisition, net of cash acquired
    
    
    (7,500
    )
    
    
    Change in restricted cash
    
    
    
    
    
    
    130Net cash provided by investing activities
    
    
    12,094
    
    
    
    2,078Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    4,785
    
    
    
    3,558Purchases of treasury stock
    
    
    (5,140
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (355
    )
    
    
    3,558Effect of exchange rates on cash and cash equivalents
    
    
    30
    
    
    
    (93
    )Net increase in cash and cash equivalents
    
    
    17,110
    
    
    
    1,204Cash and cash equivalents at beginning of period
    
    
    21,813
    
    
    
    12,082Cash and cash equivalents at end of period
    
    $
    38,923
    
    
    $
    13,286Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    8
    
    
    $
    Non-cash investing and financing activities:Purchases of property and equipment not paid as of quarter-end
    
    $
    533
    
    
    $
    Purchases of intangible assets not paid as of quarter-end
    
    $
    81
    
    
    $
    
  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
   Corrections of Errors
    December 31,2007As previouslyreported
    
    Adjustments
    
    As revisedBalance Sheet:Accrued expenses
    
    $
    4,137
    
    
    $
    88
    
    
    $
    4,225Deferred revenue
    
    
    15,231
    
    
    
    600
    
    
    
    15,831Total current liabilities
    
    
    29,595
    
    
    
    688
    
    
    
    30,283Total liabilities
    
    
    33,010
    
    
    
    688
    
    
    
    33,698Accumulated deficit
    
    
    (149,159
    )
    
    
    (688
    )
    
    
    (149,847
    )Total stockholders equity
    
    
    54,437
    
    
    
    (688
    )
    
    
    53,749
 6




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30, 2007
    
    September 30, 2007As previously
    
    
    
    
    
    
    
    
    
    As previouslyreported
    
    Adjustments
    
    As revised
    
    reported
    
    Adjustments
    
    As revisedStatements of
Operations:License revenues
    
    $
    6,200
    
    
    $
    (600
    )
    
    $
    5,600
    
    
    $
    21,869
    
    
    $
    (600
    )
    
    $
    21,269Total revenues
    
    
    25,370
    
    
    
    (600
    )
    
    
    24,770
    
    
    
    76,752
    
    
    
    (600
    )
    
    
    76,152Gross profit
    
    
    10,941
    
    
    
    (600
    )
    
    
    10,341
    
    
    
    34,632
    
    
    
    (600
    )
    
    
    34,032Operating loss
    
    
    (3,991
    )
    
    
    (600
    )
    
    
    (4,591
    )
    
    
    (11,677
    )
    
    
    (600
    )
    
    
    (12,277
    )Loss before
provision for income
taxes
    
    
    (3,334
    )
    
    
    (600
    )
    
    
    (3,934
    )
    
    
    (9,438
    )
    
    
    (600
    )
    
    
    (10,038
    )Net loss
    
    
    (3,370
    )
    
    
    (600
    )
    
    
    (3,970
    )
    
    
    (9,582
    )
    
    
    (600
    )
    
    
    (10,182
    )Net loss per share -
basic and diluted
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    (0.14
    )
    
    
    (0.33
    )
    
    
    (0.02
    )
    
    
    (0.35
    )
  Principles of Consolidation
  Use of Estimates
  Reserve Accounts
   7




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##### Table of Contents



Balance at
    
    Provision,
    
    
    
    
    
    Balance atBeginning
    
    Net of
    
    
    
    
    
    End ofof Period
    
    Recoveries
    
    Write-Offs
    
    PeriodAllowance for doubtful accountsThree months ended September 30,
2008
    
    $
    113
    
    
    $
    102
    
    
    $
    (34
    )
    
    $
    181Three months ended September 30,
2007
    
    
    483
    
    
    
    37
    
    
    
    
    
    
    
    520Nine months ended September 30, 2008
    
    
    154
    
    
    
    61
    
    
    
    (34
    )
    
    
    181Nine months ended September 30, 2007
    
    
    463
    
    
    
    57
    
    
    
    
    
    
    
    520
 Balance at
    
    
    
    
    
    Remediation
    
    Balance atBeginning
    
    
    
    
    
    Service
    
    End ofof Period
    
    Provision
    
    Claims
    
    PeriodSales return reserveThree months ended September 30,
2008
    
    $
    721
    
    
    $
    1,173
    
    
    $
    (480
    )
    
    $
    1,414Three months ended September 30,
2007
    
    
    259
    
    
    
    240
    
    
    
    (233
    )
    
    
    266Nine months ended September 30, 2008
    
    
    225
    
    
    
    2,182
    
    
    
    (993
    )
    
    
    1,414Nine months ended September 30, 2007
    
    
    241
    
    
    
    953
    
    
    
    (928
    )
    
    
    266
 Restricted Cash
  Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 8




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##### Table of Contents



Fixed or Determinable Fee.
  Collection is Deemed Probable.
 Perpetual Licensing.
  Residual Method. Software Revenue Recognition, Software Revenue Recognition with
Respect to Certain Transactions.
  9




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##### Table of Contents



Contract Accounting Method. Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
  On-Demand Revenue. Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use
Software Stored on Another Entitys Hardware, Revenue Recognition Revenue Arrangements with Multiple
Deliverables.
   10




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##### Table of Contents



Maintenance Revenue.
 Professional Service Revenue.
 Net Loss Per Share
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Restricted stock
    
    
    1,291
    
    
    
    118
    
    
    
    1,095
    
    
    
    46Stock options
    
    
    6,434
    
    
    
    8,277
    
    
    
    6,789
    
    
    
    8,215Warrants
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    1ESPP
    
    
    93
    
    
    
    48
    
    
    
    218
    
    
    
    204Totals
    
    
    7,818
    
    
    
    8,443
    
    
    
    8,102
    
    
    
    8,466
 
 *
    
    Less than 1.000
shares  11




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##### Table of Contents



Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115
 Business
Combinations
 Noncontrolling Interests in
Consolidated Financial Statements
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets
 12




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##### Table of Contents



2. Acquisition
  Business Combinations
  Net assets acquired
    
    $
    1,084Goodwill
    
    
    3,716Intangible assets (see Note 4)
    
    
    3,500Acquisition related transaction costs
    
    
    171Total Purchase Price
    
    $
    8,471
  13




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##### Table of Contents



Goodwill and Other Intangible Assets.
 EstimatedWeighted AverageUseful LivesPurchase Price
    
    
    in YearsCustomer Backlog
    
    $
    1,500
    
    
    
    1.00Customer Relationships
    
    
    2,000
    
    
    
    4.00Total
    
    $
    3,500
    
    
    
    2.71
  3. Restructuring
   Recognition of Liabilities in
Connection with a Purchase Business Combination,
 4. Intangible Assets
  December 31,
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    September 30,2007
    
    
    2007
    
    
    
    
    
    
    Amortization
    
    
    2008Cost
    
    
    Net
    
    
    Additions
    
    
    Expense
    
    
    NetPurchased technology
    
    $
    3,318
    
    
    $
    2,333
    
    
    $
    261
    
    
    $
    (722
    )
    
    $
    1,872Customer backlog
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    (1,062
    )
    
    
    438Customer
relationships
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    (354
    )
    
    
    1,646Total intangible
assets, net
    
    $
    3,318
    
    
    $
    2,333
    
    
    $
    3,761
    
    
    $
    (2,138
    )
    
    $
    3,956
 14




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##### Table of Contents



Purchased
    
    
    Customer
    
    
    CustomerTechnology
    
    
    Backlog
    
    
    RelationshipsYear Ending December 31:Remainder of 2008
    
    $
    249
    
    
    $
    375
    
    
    $
    1252009
    
    
    751
    
    
    
    63
    
    
    
    5002010
    
    
    305
    
    
    
    
    
    
    
    5002011
    
    
    389
    
    
    
    
    
    
    
    5002012
    
    
    178
    
    
    
    
    
    
    
    212013 and beyond
    
    
    
    
    
    
    
    
    
    
    Total expected future
amortization
    
    $
    1,872
    
    
    $
    438
    
    
    $
    1,646
 5. Investments
  15




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Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedSeptember 30, 2008
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    30,997
    
    
    $
    
    
    
    $
    
    
    
    $
    30,997Auction-rate securities
    
    
    4,700
    
    
    
    
    
    
    
    (386
    )
    
    
    4,314Corporate notes and obligations
    
    
    2,442
    
    
    
    14
    
    
    
    (2
    )
    
    
    2,454Investments in debt and equity
securities
    
    $
    38,139
    
    
    $
    14
    
    
    $
    (388
    )
    
    $
    37,765
 Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedDecember 31, 2007
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    5,823
    
    
    $
    
    
    
    $
    
    
    
    $
    5,823Auction-rate securities
    
    
    11,750
    
    
    
    
    
    
    
    
    
    
    
    11,750Corporate notes and obligations
    
    
    20,572
    
    
    
    49
    
    
    
    (9
    )
    
    
    20,612U.S. government and agency obligations
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    1,500Investments in debt and equity
securities
    
    $
    39,645
    
    
    $
    49
    
    
    $
    (9
    )
    
    $
    39,685
 September 30,
    
    
    December 31,2008
    
    
    2007Recorded as:Cash equivalents
    
    $
    30,997
    
    
    $
    10,861Short-term investments
    
    
    2,454
    
    
    
    28,824Long-term investments
    
    
    4,314
    
    
    
    $
    37,765
    
    
    $
    39,685
   16




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##### Table of Contents



Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    
    Significant
    
    
    SignificantActive Markets for
    
    
    Other Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Money market funds (1)
    
    $
    30,997
    
    
    $
    30,997
    
    
    $
    
    
    
    $
    Auction-rate securities (2)
    
    
    4,314
    
    
    
    
    
    
    
    
    
    
    
    4,314Corporate notes and obligations (3)
    
    
    2,454
    
    
    
    
    
    
    
    2,454
    
    
    
    Total
    
    $
    37,765
    
    
    $
    30,997
    
    
    $
    2,454
    
    
    $
    4,314
 
 (1)
    
    Included in cash and cash equivalents on the condensed consolidated balance
sheet(2)
    
    Included in long-term investments on the condensed consolidated balance sheet(3)
    
    Included in short-term investments on the condensed consolidated balance sheet  Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    Unrealized
    
    
    September 30,2007
    
    
    Sales
    
    
    Gains/Losses, net
    
    
    2008Auction-rate
securities
    
    $
    11,750
    
    
    $
    (7,050
    )
    
    $
    (386
    )
    
    $
    4,314Total
    
    $
    11,750
    
    
    $
    (7,050
    )
    
    $
    (386
    )
    
    $
    4,314
 6.
    
    Commitments and Contingencies
  Other Contingencies
  Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.
 17




---



##### Table of Contents



7. Segment, Geographic and Customer Information
 Disclosures about Segments of an Enterprise and Related Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    25,378
    
    
    $
    20,982
    
    
    $
    68,069
    
    
    $
    63,257Europe
    
    
    2,590
    
    
    
    3,564
    
    
    
    10,776
    
    
    
    11,603Asia Pacific
    
    
    285
    
    
    
    224
    
    
    
    993
    
    
    
    1,292$
    28,253
    
    
    $
    24,770
    
    
    $
    79,838
    
    
    $
    76,152
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    2007Customer 1
    
    
    10
    %
    
    
    
    %
    
    
    4
    %
    
    
    
    %
 8. Comprehensive Loss
   18




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,387
    )
    
    $
    (3,970
    )
    
    $
    (9,147
    )
    
    $
    (10,182
    )Other comprehensive loss:Change in unrealized loss on
investments, net
    
    
    (130
    )
    
    
    17
    
    
    
    (413
    )
    
    
    24Change in cumulative
translation
adjustments
    
    
    (3
    )
    
    
    3
    
    
    
    (31
    )
    
    
    (10
    )Comprehensive loss
    
    $
    (1,520
    )
    
    $
    (3,950
    )
    
    $
    (9,591
    )
    
    $
    (10,168
    )
 9. Stock-based Compensation
 Expense Summary
 Share-Based Payment
   19




---



##### Table of Contents



Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearStock-based compensation:Subscription and support
    
    $
    184
    
    
    $
    61
    
    
    $
    123
    
    
    
    202
    %Services and other
    
    
    320
    
    
    
    227
    
    
    
    93
    
    
    
    41
    %Sales and marketing
    
    
    401
    
    
    
    333
    
    
    
    68
    
    
    
    20
    %Research and development
    
    
    294
    
    
    
    205
    
    
    
    89
    
    
    
    43
    %General and administrative
    
    
    795
    
    
    
    379
    
    
    
    416
    
    
    
    110
    %Total stock-based
compensation
    
    $
    1,994
    
    
    $
    1,205
    
    
    $
    789
    
    
    
    65
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearStock-based compensation:Subscription and support
    
    $
    497
    
    
    $
    177
    
    
    $
    320
    
    
    
    181
    %Services and other
    
    
    970
    
    
    
    632
    
    
    
    338
    
    
    
    53
    %Sales and marketing
    
    
    1,487
    
    
    
    874
    
    
    
    613
    
    
    
    70
    %Research and development
    
    
    915
    
    
    
    737
    
    
    
    178
    
    
    
    24
    %General and administrative
    
    
    2,021
    
    
    
    1,529
    
    
    
    492
    
    
    
    32
    %Total stock-based
compensation
    
    $
    5,890
    
    
    $
    3,949
    
    
    $
    1,941
    
    
    
    49
    %
 20




---



##### Table of Contents



Determination of Fair Value
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Stock Option PlansExpected life (in years)
    
    
    *
    
    
    
    3.50
    
    
    
    2.50 to 3.50
    
    
    
    2.50 to 3.50Risk-free interest rate
    
    
    *
    
    
    
    4.83
    %
    
    
    2.48 to 2.58
    %
    
    4.50% to 5.00      %Volatility
    
    
    *
    
    
    
    46
    %
    
    42% to 44%%
    
    39% to 54          %Dividend Yield
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase
PlanExpected life (in years)
    
    
    0.50 to 1.00
    
    
    
    0.50 to 1.00
    
    
    
    0.50 to 1.00
    
    
    
    0.49 to 1.00Risk-free interest rate
    
    1.97% to 2.18%
    
    4.47% to 4.55%
    
    1.97% to 2.18%
    
    4.47% to 5.16      %Volatility
    
    58% to 59%
    
    30% to 32%
    
    48% to 61%%
    
    30% to 37%         %Dividend Yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    No stock options were issued during the three months ended September 30, 2008 10. Stockholders Equity
 Stock Repurchase Program 2007
  11. Related-Party Transactions
    21




---



##### Table of Contents



12. Subsequent Events
 Auction Rate Securities
  Stock Repurchase Program 2008
  Restructuring
  22




---



##### 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, 2007 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 Nine Months Ended September 30, 2008
   23




---



##### Table of Contents



Revenue Growth and Lower Net Loss
    Shift in Business Strategy to On-Demand
  Other Business Highlights
  24




---



##### Table of Contents



Challenges and Risks
    25




---



##### Table of Contents



Application of Critical Accounting Policies and Use of Estimates
   Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 Fixed or Determinable Fee.
 26




---



##### Table of Contents



Collection is Deemed Probable.
 Perpetual Licensing.
  Residual Method. Software Revenue Recognition, Software Revenue Recognition with
Respect to Certain Transactions.
  Contract Accounting Method. Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
 27




---



##### Table of Contents



On-Demand Revenue. Application of AICPA
Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entitys Hardware, Revenue Recognition Revenue Arrangements with Multiple Deliverables.
    Maintenance Revenue.
 28




---



##### Table of Contents



Professional Service Revenue.
 Allowance for Doubtful Accounts and Sales Return Reserve
   Stock-Based Compensation
 Share-Based Payment
 29




---



##### Table of Contents



Income Taxes
 Accounting for Uncertainty in Income Taxes.
 Goodwill and Intangible Assets
 Goodwill and
Other Intangible Assets,
 Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-Lived Assets.
 Investments
  30




---



##### Table of Contents



Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Business
Combinations
 31




---



##### Table of Contents



Noncontrolling Interests in
Consolidated Financial Statements
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets
 Results of Operations
 Comparison of the Three and Nine Months Ended September 30, 2008 and 2007
  32




---



##### Table of Contents



Revenues, cost of revenues and gross profit
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    6,782
    
    
    
    24
    %
    
    $
    5,600
    
    
    
    23
    %
    
    $
    1,182
    
    
    
    21
    %Subscription and support
    
    
    10,874
    
    
    
    38
    %
    
    
    5,944
    
    
    
    24
    %
    
    
    4,930
    
    
    
    83
    %Services and other
    
    
    10,597
    
    
    
    38
    %
    
    
    13,226
    
    
    
    53
    %
    
    
    (2,629
    )
    
    
    (20)
    %Total revenues
    
    $
    28,253
    
    
    
    100
    %
    
    $
    24,770
    
    
    
    100
    %
    
    $
    3,483
    
    
    
    14
    %
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Related
    
    
    September 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    355
    
    
    
    5
    %
    
    $
    191
    
    
    
    3
    %
    
    $
    164
    
    
    
    86
    %Subscription and support
    
    
    4,147
    
    
    
    38
    %
    
    
    2,696
    
    
    
    45
    %
    
    
    1,451
    
    
    
    54
    %Services and other
    
    
    10,217
    
    
    
    96
    %
    
    
    11,542
    
    
    
    87
    %
    
    
    (1,325
    )
    
    
    (11)
    %Total cost of revenues
    
    $
    14,719
    
    
    
    
    
    
    $
    14,429
    
    
    
    
    
    
    $
    290Gross profit:License
    
    $
    6,427
    
    
    
    95
    %
    
    $
    5,409
    
    
    
    97
    %
    
    $
    1,018
    
    
    
    19
    %Subscription and support
    
    
    6,727
    
    
    
    62
    %
    
    
    3,248
    
    
    
    55
    %
    
    
    3,479
    
    
    
    107
    %Services and other
    
    
    380
    
    
    
    4
    %
    
    
    1,684
    
    
    
    13
    %
    
    
    (1,304
    )
    
    
    (77)
    %Total gross profit
    
    $
    13,534
    
    
    
    48
    %
    
    $
    10,341
    
    
    
    42
    %
    
    $
    3,193
    
    
    
    31
    %
 33




---



##### Table of Contents



Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    12,638
    
    
    
    16
    %
    
    $
    21,269
    
    
    
    28
    %
    
    $
    (8,631
    )
    
    
    (41)
    %Subscription and support
    
    
    29,208
    
    
    
    37
    %
    
    
    17,406
    
    
    
    23
    %
    
    
    11,802
    
    
    
    68
    %Services and other
    
    
    37,992
    
    
    
    48
    %
    
    
    37,477
    
    
    
    49
    %
    
    
    515
    
    
    
    1
    %Total revenues
    
    $
    79,838
    
    
    
    100
    %
    
    $
    76,152
    
    
    
    100
    %
    
    $
    3,686
    
    
    
    5
    %
 Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Related
    
    
    September 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    705
    
    
    
    6
    %
    
    $
    646
    
    
    
    3
    %
    
    $
    59
    
    
    
    9
    %Subscription and support
    
    
    11,095
    
    
    
    38
    %
    
    
    8,193
    
    
    
    47
    %
    
    
    2,902
    
    
    
    35
    %Services and other
    
    
    34,093
    
    
    
    90
    %
    
    
    33,281
    
    
    
    89
    %
    
    
    812
    
    
    
    2
    %Total cost of revenues
    
    $
    45,893
    
    
    
    
    
    
    $
    42,120
    
    
    
    
    
    
    $
    3,773Gross profit:License
    
    $
    11,933
    
    
    
    94
    %
    
    $
    20,623
    
    
    
    97
    %
    
    $
    (8,690
    )
    
    
    (42)
    %Subscription and support
    
    
    18,113
    
    
    
    62
    %
    
    
    9,213
    
    
    
    53
    %
    
    
    8,900
    
    
    
    97
    %Services and other
    
    
    3,899
    
    
    
    10
    %
    
    
    4,196
    
    
    
    11
    %
    
    
    (297
    )
    
    
    (7)
    %Total gross profit
    
    $
    33,945
    
    
    
    43
    %
    
    $
    34,032
    
    
    
    45
    %
    
    $
    (87
    )
    
    
    *
    %
 
 *
    
    Less than 1% Revenues
 License Revenues.
 34




---



##### Table of Contents



Subscription and Support Revenues.
 Services and Other Revenues.
 Cost of Revenues and Gross Margin
 Cost of License Revenues.
 Cost of Subscription and Support Revenues.
 35




---



##### Table of Contents



Cost of Services and Other Revenues.
 Gross Margin.
 36




---



##### Table of Contents



Operating Expenses
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and
marketing
    
    $
    7,623
    
    
    
    27
    %
    
    $
    7,293
    
    
    
    29
    %
    
    $
    330
    
    
    
    5
    %Research and
development
    
    
    3,808
    
    
    
    13
    %
    
    
    3,688
    
    
    
    15
    %
    
    
    120
    
    
    
    3
    %General and
administrative
    
    
    3,529
    
    
    
    12
    %
    
    
    3,951
    
    
    
    16
    %
    
    
    (422
    )
    
    
    (11)
    %Restructuring
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Total operating
expenses
    
    $
    14,960
    
    
    
    53
    %
    
    $
    14,932
    
    
    
    60
    %
    
    $
    28
    
    
    
    *
    %
 Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and marketing
    
    $
    21,983
    
    
    
    28
    %
    
    $
    23,156
    
    
    
    30
    %
    
    $
    (1,173
    )
    
    
    (5)
    %Research and
development
    
    
    10,958
    
    
    
    14
    %
    
    
    11,781
    
    
    
    15
    %
    
    
    (823
    )
    
    
    (7)
    %General and
administrative
    
    
    10,261
    
    
    
    13
    %
    
    
    11,372
    
    
    
    15
    %
    
    
    (1,111
    )
    
    
    (10)
    %Restructuring
    
    
    397
    
    
    
    *
    %
    
    
    
    
    
    
    
    %
    
    
    397
    
    
    
    100
    %Total operating
expenses
    
    $
    43,599
    
    
    
    55
    %
    
    $
    46,309
    
    
    
    61
    %
    
    $
    (2,710
    )
    
    
    (6)
    %
 
 *
    
    Less than 1% Sales and Marketing.
  37




---



##### Table of Contents



Research and Development.
  General and Administrative.
  Stock-Based Compensation
  Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearStock-based compensation:Subscription and support
    
    $
    184
    
    
    $
    61
    
    
    $
    123
    
    
    
    202
    %Services and other
    
    
    320
    
    
    
    227
    
    
    
    93
    
    
    
    41
    %Sales and marketing
    
    
    401
    
    
    
    333
    
    
    
    68
    
    
    
    20
    %Research and development
    
    
    294
    
    
    
    205
    
    
    
    89
    
    
    
    43
    %General and administrative
    
    
    795
    
    
    
    379
    
    
    
    416
    
    
    
    110
    %Total stock-based compensation
    
    $
    1,994
    
    
    $
    1,205
    
    
    $
    789
    
    
    
    65
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearStock-based compensation:Subscription and support
    
    $
    497
    
    
    $
    177
    
    
    $
    320
    
    
    
    181
    %Services and other
    
    
    970
    
    
    
    632
    
    
    
    338
    
    
    
    53
    %Sales and marketing
    
    
    1,487
    
    
    
    874
    
    
    
    613
    
    
    
    70
    %Research and development
    
    
    915
    
    
    
    737
    
    
    
    178
    
    
    
    24
    %General and administrative
    
    
    2,021
    
    
    
    1,529
    
    
    
    492
    
    
    
    32
    %Total stock-based compensation
    
    $
    5,890
    
    
    $
    3,949
    
    
    $
    1,941
    
    
    
    49
    %
 38




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Other Items
  Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    103
    
    
    $
    657
    
    
    $
    (554
    )
    
    
    (84)
    %Provision for income taxes
    
    $
    64
    
    
    $
    36
    
    
    $
    28
    
    
    
    78
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    914
    
    
    $
    2,239
    
    
    $
    (1,325
    )
    
    
    (59)
    %Provision for income taxes
    
    $
    407
    
    
    $
    144
    
    
    $
    263
    
    
    
    183
    %
 Interest and Other Income
   Provision for Income Taxes
  39




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Liquidity and Capital Resources
  Net Cash Provided by/Used in Operating Activities.
 Nine Months Ended September 30,2008
    
    
    2007Cash collections
    
    $
    84,358
    
    
    $
    74,327Payroll-related costs
    
    
    (52,192
    )
    
    
    (49,591
    )Professional services costs
    
    
    (14,925
    )
    
    
    (15,955
    )Employee reimbursable expenses
    
    
    (6,011
    )
    
    
    (6,846
    )Facilities-related costs
    
    
    (4,098
    )
    
    
    (3,346
    )Third-party royalty payments
    
    
    (675
    )
    
    
    (848
    )Restructuring payments
    
    
    (971
    )
    
    
    Other
    
    
    (145
    )
    
    
    (2,080
    )Net cash (used in) provided by operating activities
    
    $
    5,341
    
    
    $
    (4,339
    )
  Net Cash Provided by/ Used in Investing Activities.
 Net Cash Used in/Provided by Financing Activities.
 Auction Rate Securities
  40




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Contractual Obligations and Commitments
  Payments due by PeriodRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2013Contractual Obligations
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    and beyondOperating lease
commitments
    
    $
    7,018
    
    
    $
    712
    
    
    $
    2,679
    
    
    $
    2,005
    
    
    $
    857
    
    
    $
    180
    
    
    $
    585Unconditional
purchase commitments
    
    $
    3,188
    
    
    $
    909
    
    
    $
    1,434
    
    
    $
    632
    
    
    $
    113
    
    
    $
    100
    
    
    $
    
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk.
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Interest Rate Risk.
  Expected Maturity
    
    Total
    
    Total1 Year
    
    More Than
    
    Principal
    
    Fairor Less
    
    1 Year
    
    Amount
    
    ValueAvailable-for-sale securities
    
    $
    33,439
    
    
    $
    4,700
    
    
    $
    38,139
    
    
    $
    37,765Weighted average interest
rate
    
    
    1.06
    %
    
    
    2.88
    %
  42




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Foreign Currency Exchange Risk.
    
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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.
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RISKS RELATED TO OUR BUSINESS
 We have a history of losses, and we cannot assure you that we will achieve and sustain
profitability.
  If our hosted on-demand offering fails to achieve broad market acceptance, or if we are unable
to consistently offer this service on a profitable basis, our operating results could be
adversely affected.
   Disruptions in the financial and insurance industries or the global economic crisis may
materially and adversely affect our revenues, operating results and financial condition.
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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.
  We cannot accurately predict customer subscription and maintenance renewal rates and the impact
these renewal rates will have on our future revenues or operating results.
  Because we recognize revenue from subscriptions for our on-demand service and maintenance
support over the terms of the subscription and maintenance support agreements, downturns or
upturns in sales may not be immediately reflected in our operating results.
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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.
  The market for sales performance management software is still 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.
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
    
    The discretionary nature of our customers purchase and budget cycles and changes in
their budgets for software and related purchases;
    
    disruption in the financial and insurance industries and the global financial crisis,
which may result in the deferral or cancellation of future purchases of our products and
services;
    
    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 product introductions, 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 subscription and support revenues 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 subscription, service and other revenues;
    
    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, or failure of potential customers, which may reduce demand for our products and
services;
    
    our ability to satisfy revenue recognition criteria or timely complete our service
obligations related to product sales;
    
    the extent to which our customers needs for professional services are reduced as a
result of product improvements as well as implementation efficiencies in our on-demand
offering over traditional on-premise implementations;
    
    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;
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
    
    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.
  Our service revenues produce substantially lower gross margins than our license and subscription
and support revenues, and periodic variations in the proportional relationship between services
revenues and higher margin license and subscription and support 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;
    
    increases or decreases in the number of services projects being performed on a fixed
bid or acceptance basis that may defer recognition of revenue;
    
    the complexity of the customers information technology environments;
    
    the priority and resources customers place on their implementation projects; and
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
    
    the extent to which outside consulting organizations provide services directly to
customers.
  We recently experienced changes in our senior management team. The loss of key personnel or the
inability of replacements to quickly and successfully perform in their new roles could adversely
affect our business.
   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 some potential customers may need to invest significant financial
and other
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resources in connection with the purchase and implementation of our products and services;
    
    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.
  Acquisitions and investments present many risks, and we may not realize the anticipated financial
and strategic goals for any such transactions.
  
    
    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;
    
    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;
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
    
    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 or 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.
   If we are unable to hire and retain qualified employees, including sales, professional
services, and engineering personnel, our growth may be impaired.
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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.
  If we do not compete effectively, our revenues may not grow and could decline.
    Deployment of our products frequently 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.
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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, alter our payment terms or modify our products or services in order to
compete successfully, our margins and operating results may be adversely affected.
  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.
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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.
  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.
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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.
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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.
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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.
  We expect to continue expanding 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.
  Our use of third party international product development and support services may prove
difficult to manage or of inadequate quality to allow us to realize our cost reduction goals and
produce new products to drive growth.
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Our investment portfolio may be impaired by further deterioration of the capital markets.
    RISKS RELATED TO OUR STOCK
 Our stock price is likely to remain volatile.
  
    
    Our operating performance and the performance of other similar companies;
    
    significant sales or distributions by existing investors coupled with a lack of trading
volume for our stock;
    
    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.
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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.
  
 Item 6. Exhibits
 (a) Exhibits
 ExhibitNumber
    
    Description31.1
    
    302 Certifications32.1
    
    906 Certification
 Availability of this Report
  59




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SIGNATURES
  CALLIDUS SOFTWARE INC.By:
    /s/ RONALD J. FIORRonald J. FiorChief Financial Officer,
Senior Vice President, Finance and Operations 60




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EXHIBIT INDEX
TO
CALLIDUS SOFTWARE INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
 ExhibitNumber
    
    Description31.1
    
    302 Certifications32.1
    
    906 Certification
 61