##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 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
    
    77-0438629(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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




---



##### 



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    56Item 6. Exhibits
    
    
    56Signatures
    
    
    57Exhibit Index
    
    
    58EXHIBIT 10.25EXHIBIT 31.1EXHIBIT 32.1
  ® ® ® ® ® ®
 2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1 Financial Statements
 CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,736
    
    
    $
    21,813Short-term investments
    
    
    14,561
    
    
    
    28,824Accounts receivable, net
    
    
    16,356
    
    
    
    23,575Deferred income taxes
    
    
    423
    
    
    
    423Prepaid and other current assets
    
    
    5,217
    
    
    
    4,038Total current assets
    
    
    66,293
    
    
    
    78,673Long-term investments
    
    
    4,438
    
    
    
    Property and equipment, net
    
    
    5,341
    
    
    
    4,438Goodwill
    
    
    3,716
    
    
    
    Intangible assets, net
    
    
    4,466
    
    
    
    2,333Deferred income taxes, noncurrent
    
    
    90
    
    
    
    90Deposits and other assets
    
    
    1,436
    
    
    
    1,913Total assets
    
    $
    85,780
    
    
    $
    87,447LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,012
    
    
    $
    2,901Accrued payroll and related expenses
    
    
    5,014
    
    
    
    7,326Accrued expenses
    
    
    4,872
    
    
    
    4,137Deferred revenue
    
    
    20,206
    
    
    
    15,231Total current liabilities
    
    
    32,104
    
    
    
    29,595Long-term deferred revenue
    
    
    1,924
    
    
    
    2,326Other liabilities
    
    
    1,802
    
    
    
    1,089Total liabilities
    
    
    35,830
    
    
    
    33,010Stockholders equity:Common stock, $0.001 par value; 100,000 shares authorized;
30,034 and 29,704 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively
    
    
    30
    
    
    
    30Additional paid-in capital
    
    
    206,782
    
    
    
    203,110Accumulated other comprehensive income
    
    
    144
    
    
    
    456Accumulated deficit
    
    
    (157,006
    )
    
    
    (149,159
    )Total stockholders equity
    
    
    49,950
    
    
    
    54,437Total liabilities and stockholders equity
    
    $
    85,780
    
    
    $
    87,447
  3




---



##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)Revenues:License
    
    $
    1,872
    
    
    $
    7,311
    
    
    $
    5,856
    
    
    $
    15,669Subscription and support
    
    
    10,051
    
    
    
    5,965
    
    
    
    18,335
    
    
    
    11,461Services and other
    
    
    11,539
    
    
    
    13,265
    
    
    
    27,394
    
    
    
    24,252Total revenues
    
    
    23,462
    
    
    
    26,541
    
    
    
    51,585
    
    
    
    51,382Cost of revenues:License
    
    
    108
    
    
    
    234
    
    
    
    350
    
    
    
    455Subscription and support
    
    
    3,670
    
    
    
    2,464
    
    
    
    6,949
    
    
    
    5,496Services and other
    
    
    11,081
    
    
    
    12,392
    
    
    
    23,873
    
    
    
    21,740Total cost of revenues
    
    
    14,859
    
    
    
    15,090
    
    
    
    31,172
    
    
    
    27,691Gross profit
    
    
    8,603
    
    
    
    11,451
    
    
    
    20,413
    
    
    
    23,691Operating expenses:Sales and marketing
    
    
    7,088
    
    
    
    7,608
    
    
    
    14,360
    
    
    
    15,863Research and development
    
    
    3,465
    
    
    
    3,895
    
    
    
    7,150
    
    
    
    8,093General and administrative
    
    
    3,339
    
    
    
    3,519
    
    
    
    6,733
    
    
    
    7,421Restructuring
    
    
    
    
    
    
    
    
    
    
    397
    
    
    
    Total operating expenses
    
    
    13,892
    
    
    
    15,022
    
    
    
    28,640
    
    
    
    31,377Operating loss
    
    
    (5,289
    )
    
    
    (3,571
    )
    
    
    (8,227
    )
    
    
    (7,686
    )Interest and other income, net
    
    
    192
    
    
    
    813
    
    
    
    723
    
    
    
    1,582Loss before provision for income taxes
    
    
    (5,097
    )
    
    
    (2,758
    )
    
    
    (7,504
    )
    
    
    (6,104
    )Provision for income taxes
    
    
    122
    
    
    
    87
    
    
    
    343
    
    
    
    108Net loss
    
    $
    (5,219
    )
    
    $
    (2,845
    )
    
    $
    (7,847
    )
    
    $
    (6,212
    )Net loss per share  basic and dilutedNet loss per share
    
    $
    (0.17
    )
    
    $
    (0.10
    )
    
    $
    (0.26
    )
    
    $
    (0.22
    )Shares used in basic per share computation
    
    
    29,989
    
    
    
    28,909
    
    
    
    29,873
    
    
    
    28,762Shares used in diluted per share computation
    
    
    29,989
    
    
    
    28,909
    
    
    
    29,873
    
    
    
    28,762
  4




---



##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months Ended June 30,2008
    
    
    2007(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (7,847
    )
    
    $
    (6,212
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation expense
    
    
    1,141
    
    
    
    946Amortization of intangible assets
    
    
    1,367
    
    
    
    126Provision for doubtful accounts and sales returns
    
    
    (55
    )
    
    
    38Stock-based compensation
    
    
    3,896
    
    
    
    2,744Loss on disposal of property
    
    
    2
    
    
    
    2Estimated loss on fixed fee contracts
    
    
    510
    
    
    
    Net accretion on investments
    
    
    (140
    )
    
    
    (321
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    10,953
    
    
    
    (1,353
    )Prepaid and other current assets
    
    
    (917
    )
    
    
    (203
    )Other assets
    
    
    492
    
    
    
    (347
    )Accounts payable
    
    
    (1,518
    )
    
    
    2,433Accrued payroll and related expenses
    
    
    (2,319
    )
    
    
    436Accrued expenses
    
    
    (2,578
    )
    
    
    3,205Deferred revenue
    
    
    4,366
    
    
    
    (1,667
    )Net cash (used in) provided by operating activities
    
    
    7,353
    
    
    
    (173
    )Cash flows from investing activities:Purchases of investments
    
    
    (13,919
    )
    
    
    (24,097
    )Proceeds from maturities and sale of investments
    
    
    23,600
    
    
    
    23,929Purchases of property and equipment
    
    
    (1,258
    )
    
    
    (1,364
    )Purchases of intangible assets
    
    
    (100
    )
    
    
    (100
    )Acquisition, net of cash acquired
    
    
    (7,500
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    823
    
    
    
    (1,632
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,497
    
    
    
    1,958Purchases of treasury stock
    
    
    (3,721
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (224
    )
    
    
    1,958Effect of exchange rates on cash and cash equivalents
    
    
    (29
    )
    
    
    (45
    )Net increase in cash and cash equivalents
    
    
    7,923
    
    
    
    108Cash and cash equivalents at beginning of period
    
    
    21,813
    
    
    
    12,082Cash and cash equivalents at end of period
    
    $
    29,736
    
    
    $
    12,190Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    1
    
    
    $
    Non-cash investing and financing activities:Purchases of property and equipment not paid as of quarter-end
    
    $
    1,082
    
    
    $
    
  5




---



##### Table of Contents



CALLIDUS SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Reclassifications
  Reserve Accounts
  6




---



##### Table of Contents



Balance at
    
    Provision,
    
    
    
    
    
    Balance atBeginning
    
    Net of
    
    
    
    
    
    End ofof Period
    
    Recoveries
    
    Write-Offs
    
    PeriodAllowance for doubtful accountsThree months ended June 30, 2008
    
    $
    128
    
    
    $
    (15
    )
    
    $
    
    
    
    $
    113Three months ended June 30, 2007
    
    
    483
    
    
    
    
    
    
    
    
    
    
    
    483Six months ended June 30, 2008
    
    
    154
    
    
    
    (41
    )
    
    
    
    
    
    
    113Six months ended June 30, 2007
    
    
    463
    
    
    
    20
    
    
    
    
    
    
    
    483
 Balance at
    
    
    
    
    
    Remediation
    
    Balance atBeginning
    
    
    
    
    
    Service
    
    End ofof Period
    
    Provision
    
    Claims
    
    PeriodSales return reserveThree months ended June 30, 2008
    
    $
    288
    
    
    $
    178
    
    
    $
    (255
    )
    
    $
    211Three months ended June 30, 2007
    
    
    160
    
    
    
    582
    
    
    
    (483
    )
    
    
    259Six months ended June 30, 2008
    
    
    225
    
    
    
    499
    
    
    
    (513
    )
    
    
    211Six months ended June 30, 2007
    
    
    241
    
    
    
    713
    
    
    
    (695
    )
    
    
    259
 Restricted Cash
  Revenue Recognition
   Evidence of an Arrangement.
 7




---



##### Table of Contents



Delivery.
 Fixed or Determinable Fee.
  Collection is Deemed Probable.
 Perpetual Licensing.
  Residual Method. Software Revenue Recognition, Software Revenue Recognition
with Respect to Certain Transactions.
  8




---



##### 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.
   9




---



##### Table of Contents



Maintenance Revenue.
 Professional Service Revenue.
 Net Loss Per Share
  10




---



##### Table of Contents





Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Restricted stock
    
    
    1,211
    
    
    
    13
    
    
    
    995
    
    
    
    9Stock options
    
    
    6,636
    
    
    
    8,370
    
    
    
    6,969
    
    
    
    6,586Warrants
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    1ESPP
    
    
    219
    
    
    
    121
    
    
    
    187
    
    
    
    128Totals
    
    
    8,066
    
    
    
    8,504
    
    
    
    8,151
    
    
    
    6,724
 
 *
    
    Less than 1.000 shares  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
 11




---



##### Table of Contents



Noncontrolling Interests in
Consolidated Financial Statements
 Determination of the Useful
Life of Intangible Assets Goodwill and Other Intangible Assets
 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
  12




---



##### 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,
 13




---



##### Table of Contents



4. Intangible Assets




December 31,
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    June 30,2007
    
    
    2007
    
    
    
    
    
    
    Amortization
    
    
    2008Cost
    
    
    Net
    
    
    Additions
    
    
    Expense
    
    
    NetPurchased technology
    
    $
    3,318
    
    
    $
    2,333
    
    
    $
    
    
    
    $
    (451
    )
    
    $
    1,882Customer backlog
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    (687
    )
    
    
    813Customer relationships
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    (229
    )
    
    
    1,771Total intangible assets, net
    
    $
    3,318
    
    
    $
    2,333
    
    
    $
    3,500
    
    
    $
    (1,367
    )
    
    $
    4,466
  Purchased
    
    
    Customer
    
    
    CustomerTechnology
    
    
    Backlog
    
    
    RelationshipsYear Ending December 31:Remainder of 2008
    
    $
    418
    
    
    $
    750
    
    
    $
    2502009
    
    
    615
    
    
    
    63
    
    
    
    5002010
    
    
    282
    
    
    
    
    
    
    
    5002011
    
    
    389
    
    
    
    
    
    
    
    5002012
    
    
    178
    
    
    
    
    
    
    
    212013 and beyond
    
    
    
    
    
    
    
    
    
    
    Total expected future amortization
    
    $
    1,882
    
    
    $
    813
    
    
    $
    1,771
 5. Investments
  14




---



##### Table of Contents





Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedJune 30, 2008
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    11,706
    
    
    $
    
    
    
    $
    
    
    
    $
    11,706Auction-rate securities
    
    
    4,700
    
    
    
    
    
    
    
    (262
    )
    
    
    4,438Corporate notes and obligations
    
    
    8,045
    
    
    
    32
    
    
    
    (4
    )
    
    
    8,073U.S. government and agency obligations
    
    
    7,995
    
    
    
    
    
    
    
    (10
    )
    
    
    7,985Investments in debt and equity securities
    
    $
    32,446
    
    
    $
    32
    
    
    $
    (276
    )
    
    $
    32,202
 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
 June 30,
    
    
    December 31,2008
    
    
    2007Recorded as:Cash equivalents
    
    $
    13,203
    
    
    $
    10,861Short-term investments
    
    
    14,561
    
    
    
    28,824Long-term investments
    
    
    4,438
    
    
    
    $
    32,202
    
    
    $
    39,685
  15




---



##### 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)
    
    $
    11,706
    
    
    $
    11,706
    
    
    $
    
    
    
    $
    Auction-rate securities (2)
    
    
    4,438
    
    
    
    
    
    
    
    
    
    
    
    4,438Corporate notes and obligations (3)
    
    
    8,073
    
    
    
    
    
    
    
    8,073
    
    
    
    U.S. government and agency obligations (4)
    
    
    7,985
    
    
    
    
    
    
    
    7,985
    
    
    
    Total
    
    $
    32,202
    
    
    $
    11,706
    
    
    $
    16,058
    
    
    $
    4,438
 
 (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 cash and cash equivalents and short-term investments on the condensed consolidated balance sheet(4)
    
    Included in short-term investments on the condensed consolidated balance sheet  Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    Unrealized
    
    
    June 30,2007
    
    
    Sales
    
    
    Gains/Losses, net
    
    
    2008Auction-rate securities
    
    $
    11,750
    
    
    $
    (7,050
    )
    
    $
    (262
    )
    
    $
    4,438Total
    
    $
    11,750
    
    
    $
    (7,050
    )
    
    $
    (262
    )
    
    $
    4,438
 6. Commitments and Contingencies
  Other Contingencies
  Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others.
 16




---



##### Table of Contents



7. Segment, Geographic and Customer Information


Disclosures about Segments of an Enterprise and Related Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    19,938
    
    
    $
    21,433
    
    
    $
    42,690
    
    
    $
    42,275Europe
    
    
    3,343
    
    
    
    4,653
    
    
    
    8,186
    
    
    
    8,038Asia Pacific
    
    
    181
    
    
    
    455
    
    
    
    709
    
    
    
    1,069$
    23,462
    
    
    $
    26,541
    
    
    $
    51,585
    
    
    $
    51,382
   8. Comprehensive Loss
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (5,219
    )
    
    $
    (2,845
    )
    
    $
    (7,847
    )
    
    $
    (6,212
    )Other comprehensive loss:Change in unrealized loss on
investments, net
    
    
    (49
    )
    
    
    (9
    )
    
    
    (283
    )
    
    
    7Change in cumulative translation
adjustments
    
    
    (5
    )
    
    
    (32
    )
    
    
    (28
    )
    
    
    (13
    )Comprehensive loss
    
    $
    (5,273
    )
    
    $
    (2,886
    )
    
    $
    (8,158
    )
    
    $
    (6,218
    )
 17




---



##### Table of Contents



9. Stock-based Compensation
 Expense Summary
 Share-Based Payment
  18




---



##### Table of Contents



Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearStock-based compensation:Subscription and support
    
    $
    177
    
    
    $
    56
    
    
    $
    121
    
    
    
    216
    %Services and other
    
    
    359
    
    
    
    204
    
    
    
    155
    
    
    
    76
    %Sales and marketing
    
    
    597
    
    
    
    274
    
    
    
    323
    
    
    
    118
    %Research and development
    
    
    331
    
    
    
    207
    
    
    
    124
    
    
    
    60
    %General and administrative
    
    
    701
    
    
    
    775
    
    
    
    (74
    )
    
    
    (10
    )%Total stock-based compensation
    
    $
    2,165
    
    
    $
    1,516
    
    
    $
    649
    
    
    
    43
    %
 Six
    
    
    SixMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    
    
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Year to Year
    
    
    Year over2008
    
    
    2007
    
    
    Increase
    
    
    YearStock-based compensation:Subscription and support
    
    $
    314
    
    
    $
    116
    
    
    $
    198
    
    
    
    171
    %Services and other
    
    
    649
    
    
    
    405
    
    
    
    244
    
    
    
    60
    %Sales and marketing
    
    
    1,086
    
    
    
    541
    
    
    
    545
    
    
    
    101
    %Research and development
    
    
    621
    
    
    
    532
    
    
    
    89
    
    
    
    17
    %General and administrative
    
    
    1,226
    
    
    
    1,150
    
    
    
    76
    
    
    
    7
    %Total stock-based compensation
    
    $
    3,896
    
    
    $
    2,744
    
    
    $
    1,152
    
    
    
    42
    %
 Determination of Fair Value
  19




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Stock Option PlansExpected life (in years)
    
    
    2.50
    
    
    
    2.50 to 3.50
    
    
    
    2.50 to 3.50
    
    
    
    2.50 to 3.50Risk-free interest rate
    
    
    2.48
    %
    
    4.60% to 5.00%
    
    
    2.48 to 2.58
    %
    
    4.50% to 5.00%Volatility
    
    
    42
    %
    
    39% to 53%
    
    42% to 44%
    
    39% to 54%Dividend Yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase PlanExpected life (in years)
    
    
    0.50 to 1.00
    
    
    
    0.49 to 1.00
    
    
    
    0.50 to 1.00
    
    
    
    0.49 to 1.00Risk-free interest rate
    
    
    2.05 to 2.10
    %
    
    5.05% to 5.16%
    
    
    2.05 to 2.10
    %
    
    5.05% to 5.16%Volatility
    
    48% to 61%
    
    33% to 37%
    
    48% to 61%
    
    33% to 37%Dividend Yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 10. Stockholders Equity
 Repurchase Program
  11. Related-Party Transactions
    12. Subsequent Event
 Stock Repurchase
  20




---



##### 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 Six Months Ended June 30, 2008
   21




---



##### Table of Contents



Revenue and Cash
    Shift in Business Strategy to On-Demand
  Other Business Highlights
   22




---



##### Table of Contents



Challenges and Risks
    Application of Critical Accounting Policies and Use of Estimates
   23




---



##### Table of Contents



Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 Fixed or Determinable Fee.
  Collection is Deemed Probable.
 Perpetual Licensing.
  Residual Method.
 24




---



##### Table of Contents



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
  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.
 25




---



##### Table of Contents



Maintenance Revenue.
 Professional Service Revenue.
 Allowance for Doubtful Accounts and Sales Return Reserve
  26




---



##### Table of Contents



Revenue Recognition When
Right of Return Exists,
 Stock-Based Compensation
 Share-Based Payment
 Income Taxes
 Accounting for Uncertainty in Income Taxes.
 Goodwill and Intangible Assets
 Goodwill and
Other Intangible Assets,
 27




---



##### Table of Contents



Impairment of Long-Lived Assets
 Accounting for the Impairment or
Disposal of Long-Lived Assets.
 Investments
  Recent Accounting Pronouncements
 Fair Value Measurements
 28




---



##### Table of Contents



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
 29




---



##### Table of Contents



Results of Operations
 Comparison of the Three and Six Months Ended June 30, 2008 and 2007
 Revenues, cost of revenues and gross profit
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    1,872
    
    
    
    8
    %
    
    $
    7,311
    
    
    
    28
    %
    
    $
    (5,439
    )
    
    
    (74
    )%Subscription and
support
    
    
    10,051
    
    
    
    43
    %
    
    
    5,965
    
    
    
    22
    %
    
    
    4,086
    
    
    
    68
    %Services and other
    
    
    11,539
    
    
    
    49
    %
    
    
    13,265
    
    
    
    50
    %
    
    
    (1,726
    )
    
    
    (13
    )%Total revenues
    
    $
    23,462
    
    
    
    100
    %
    
    $
    26,541
    
    
    
    100
    %
    
    $
    (3,079
    )
    
    
    (12
    )%
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Related
    
    
    June 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    108
    
    
    
    6
    %
    
    $
    234
    
    
    
    3
    %
    
    $
    (126
    )
    
    
    (54
    )%Subscription and support
    
    
    3,670
    
    
    
    37
    %
    
    
    2,464
    
    
    
    41
    %
    
    
    1,206
    
    
    
    49
    %Services and other
    
    
    11,081
    
    
    
    96
    %
    
    
    12,392
    
    
    
    93
    %
    
    
    (1,311
    )
    
    
    (11
    )%Total cost of revenues
    
    $
    14,859
    
    
    
    
    
    
    $
    15,090
    
    
    
    
    
    
    $
    (231
    )Gross profit:License
    
    $
    1,764
    
    
    
    94
    %
    
    $
    7,077
    
    
    
    97
    %
    
    $
    (5,313
    )
    
    
    (75
    )%Subscription and support
    
    
    6,381
    
    
    
    63
    %
    
    
    3,501
    
    
    
    59
    %
    
    
    2,880
    
    
    
    82
    %Services and other
    
    
    458
    
    
    
    4
    %
    
    
    873
    
    
    
    7
    %
    
    
    (415
    )
    
    
    (48
    )%Total gross profit
    
    $
    8,603
    
    
    
    37
    %
    
    $
    11,451
    
    
    
    43
    %
    
    $
    (2,848
    )
    
    
    (25
    )%
 30




---



##### Table of Contents



Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    5,856
    
    
    
    11
    %
    
    $
    15,669
    
    
    
    30
    %
    
    $
    (9,813
    )
    
    
    (63
    )%Subscription and
support
    
    
    18,335
    
    
    
    36
    %
    
    
    11,461
    
    
    
    22
    %
    
    
    6,874
    
    
    
    60
    %Services and other
    
    
    27,394
    
    
    
    53
    %
    
    
    24,252
    
    
    
    47
    %
    
    
    3,142
    
    
    
    13
    %Total revenues
    
    $
    51,585
    
    
    
    100
    %
    
    $
    51,382
    
    
    
    100
    %
    
    $
    203
    
    
    
    *
    %
 Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Related
    
    
    June 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    350
    
    
    
    6
    %
    
    $
    455
    
    
    
    3
    %
    
    $
    (105
    )
    
    
    (23
    )%Subscription and support
    
    
    6,949
    
    
    
    38
    %
    
    
    5,496
    
    
    
    48
    %
    
    
    1,453
    
    
    
    26
    %Services and other
    
    
    23,873
    
    
    
    87
    %
    
    
    21,740
    
    
    
    90
    %
    
    
    2,133
    
    
    
    10
    %Total cost of revenues
    
    $
    31,172
    
    
    
    
    
    
    $
    27,691
    
    
    
    
    
    
    $
    3,481Gross profit:License
    
    $
    5,506
    
    
    
    94
    %
    
    $
    15,214
    
    
    
    97
    %
    
    $
    (9,708
    )
    
    
    (64
    )%Subscription and support
    
    
    11,386
    
    
    
    62
    %
    
    
    5,965
    
    
    
    52
    %
    
    
    5,421
    
    
    
    91
    %Services and other
    
    
    3,521
    
    
    
    13
    %
    
    
    2,512
    
    
    
    10
    %
    
    
    1,009
    
    
    
    40
    %Total gross profit
    
    $
    20,413
    
    
    
    40
    %
    
    $
    23,691
    
    
    
    46
    %
    
    $
    (3,278
    )
    
    
    (14
    )%
 
 *
    
    Less than 1% Revenues
 License Revenues.
 31




---



##### 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.
 Cost of
 Services and Other Revenues.
 32




---



##### Table of Contents



Gross Margin.
 Operating Expenses
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and
marketing
    
    $
    7,088
    
    
    
    30
    %
    
    $
    7,608
    
    
    
    29
    %
    
    $
    (520
    )
    
    
    (7
    )%Research and
development
    
    
    3,465
    
    
    
    15
    %
    
    
    3,895
    
    
    
    15
    %
    
    
    (430
    )
    
    
    (11
    )%General and
administrative
    
    
    3,339
    
    
    
    14
    %
    
    
    3,519
    
    
    
    13
    %
    
    
    (180
    )
    
    
    (5
    )%Restructuring
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Total
operating
expenses
    
    $
    13,892
    
    
    
    59
    %
    
    $
    15,022
    
    
    
    57
    %
    
    $
    (1,130
    )
    
    
    (8
    )%
 Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and
marketing
    
    $
    14,360
    
    
    
    28
    %
    
    $
    15,863
    
    
    
    31
    %
    
    $
    (1,503
    )
    
    
    (9
    )%Research and
development
    
    
    7,150
    
    
    
    14
    %
    
    
    8,093
    
    
    
    16
    %
    
    
    (943
    )
    
    
    (12
    )%General and
administrative
    
    
    6,733
    
    
    
    13
    %
    
    
    7,421
    
    
    
    14
    %
    
    
    (688
    )
    
    
    (9
    )%Restructuring
    
    
    397
    
    
    
    1
    %
    
    
    
    
    
    
    
    %
    
    
    397
    
    
    
    100
    %Total
operating
expenses
    
    $
    28,640
    
    
    
    56
    %
    
    $
    31,377
    
    
    
    61
    %
    
    $
    (2,737
    )
    
    
    (9
    )%
 33




---



##### Table of Contents



Sales and Marketing.
  Research and Development.
  General and Administrative.
  34




---



##### Table of Contents



Stock-Based Compensation
  Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearStock-based
compensation:Subscription and
support
    
    $
    177
    
    
    $
    56
    
    
    $
    121
    
    
    
    216
    %Services and other
    
    
    359
    
    
    
    204
    
    
    
    155
    
    
    
    76
    %Sales and marketing
    
    
    597
    
    
    
    274
    
    
    
    323
    
    
    
    118
    %Research and
development
    
    
    331
    
    
    
    207
    
    
    
    124
    
    
    
    60
    %General and
administrative
    
    
    701
    
    
    
    775
    
    
    
    (74
    )
    
    
    (10
    )%Total
stock-based
compensation
    
    $
    2,165
    
    
    $
    1,516
    
    
    $
    649
    
    
    
    43
    %
 Six
    
    
    SixMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    
    
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Year to Year
    
    
    Year over2008
    
    
    2007
    
    
    Increase
    
    
    YearStock-based
compensation:Subscription and
support
    
    $
    314
    
    
    $
    116
    
    
    $
    198
    
    
    
    171
    %Services and other
    
    
    649
    
    
    
    405
    
    
    
    244
    
    
    
    60
    %Sales and marketing
    
    
    1,086
    
    
    
    541
    
    
    
    545
    
    
    
    101
    %Research and
development
    
    
    621
    
    
    
    532
    
    
    
    89
    
    
    
    17
    %General and
administrative
    
    
    1,226
    
    
    
    1,150
    
    
    
    76
    
    
    
    7
    %Total
stock-based
compensation
    
    $
    3,896
    
    
    $
    2,744
    
    
    $
    1,152
    
    
    
    42
    %
  35




---



##### Table of Contents



Other Items
  Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    192
    
    
    $
    813
    
    
    $
    (621
    )
    
    
    (76
    )%Provision for income taxes
    
    $
    122
    
    
    $
    87
    
    
    $
    35
    
    
    
    40
    %
 Six
    
    
    SixMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Increase
    
    
    Year over2008
    
    
    2007
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    723
    
    
    $
    1,582
    
    
    $
    (859
    )
    
    
    (54
    )%Provision for income taxes
    
    $
    343
    
    
    $
    108
    
    
    $
    235
    
    
    
    218
    %
 Interest and Other Income
   Provision for Income Taxes
  Liquidity and Capital Resources
  36




---



##### Table of Contents



Net Cash Provided by/Used in Operating Activities.
 Six Months Ended June 30,2008
    
    
    2007Cash collections
    
    $
    60,421
    
    
    $
    49,376Payroll-related costs
    
    
    (36,058
    )
    
    
    (31,988
    )Professional services costs
    
    
    (10,705
    )
    
    
    (9,362
    )Employee expense reports
    
    
    (3,989
    )
    
    
    (4,545
    )Facilities-related costs
    
    
    (2,715
    )
    
    
    (2,236
    )Third-party royalty payments
    
    
    (313
    )
    
    
    (458
    )Restructuring payments
    
    
    (971
    )
    
    
    Other
    
    
    1,683
    
    
    
    (960
    )Net cash (used in) provided by operating activities
    
    $
    7,353
    
    
    $
    (173
    )
  Net Cash Provided by/ Used in Investing Activities.
 Net Cash Used in/Provided by Financing Activities.
 Auction Rate Securities
   37




---



##### Table of Contents



Accounting for Certain Investments in Debt and Equity
Securities, Miscellaneous Accounting The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.
 Contractual Obligations and Commitments
  Payments due by PeriodRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2013Contractual Obligations
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    and beyondOperating lease
commitments
    
    $
    7,730
    
    
    $
    1,424
    
    
    $
    2,679
    
    
    $
    2,005
    
    
    $
    857
    
    
    $
    180
    
    
    $
    585Unconditional
purchase commitments
    
    $
    3,668
    
    
    $
    1,418
    
    
    $
    1,412
    
    
    $
    634
    
    
    $
    104
    
    
    $
    100
    
    
    $
    
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk.
 38




---



##### Table of Contents



Interest Rate Risk.
  Expected MaturityTotal
    
    Total1 Year
    
    More Than
    
    Principal
    
    Fairor Less
    
    1 Year
    
    Amount
    
    ValueAvailable-for-sale
securities
    
    $
    27,746
    
    
    $
    4,700
    
    
    $
    32,446
    
    
    $
    32,202Weighted average
interest rate
    
    
    2.51
    %
    
    
    2.20
    %
  Foreign Currency Exchange Risk.
 39




---



##### Table of Contents



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.
 RISKS RELATED TO OUR BUSINESS
 We have a history of losses, and we cannot assure you that we will achieve and sustain
profitability.
  40




---



##### Table of Contents



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.
   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.
  41




---



##### Table of Contents



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.
  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.
  42




---



##### Table of Contents



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.
    
    
    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 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;
 43




---



##### Table of Contents




    
    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;
    
    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;
    
    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.
  44




---



##### Table of Contents



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
    
    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.
   45




---



##### Table of Contents



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;
    
    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.
  46




---



##### Table of Contents



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;
    
    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.
   47




---



##### Table of Contents



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.
  If we do not compete effectively, our revenues may not grow and could decline.
    48




---



##### Table of Contents



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.
    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.
  49




---



##### Table of Contents



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.
   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.
 50




---



##### Table of Contents



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.
    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.
  51




---



##### Table of Contents



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.
   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;
 52




---



##### Table of Contents




    
    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.
  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.
 53




---



##### Table of Contents



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.
  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.
  54




---



##### Table of Contents




    
    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.
  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.
  55




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
    Nominees of the Board of Directors
    
    For
    
    WithheldWilliam B. Binch
    
    
    23,567,789
    
    
    
    588,638Michele Vion
    
    
    23,514,489
    
    
    
    637,379
   For
    
    Against
    
    Abstain24,113,335
    
    32,911
    
    5,622
 
 Item 6. Exhibits
 (a) Exhibits
 ExhibitNumber
    
    Description10.25
    
    Form of Executive Change of Control Agreement  Full Double Trigger31.1
    
    302 Certifications32.1
    
    906 Certification
 Availability of this Report
  56




---



##### Table of Contents



SIGNATURES
  CALLIDUS SOFTWARE INC.By:
    /s/ RONALD J. FIORRonald J. FiorChief Financial Officer,

Senior Vice President, Finance and Operations 57




---



##### Table of Contents



EXHIBIT INDEX
TO
CALLIDUS SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2008
 ExhibitNumber
    
    Description10.25
    
    Form of Executive Change of Control Agreement  Full Double Trigger31.1
    
    302 Certifications32.1
    
    906 Certification
 58