##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2007ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
SECURITIES EXCHANGE ACT OF 1934For the transition period from                    to                    .
 Commission file number: 000-50463
 Callidus Software Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(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
 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
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 6. Exhibits
    
    
    44Signatures
    
    
    45Exhibit Index
    
    
    46EXHIBIT 31.1EXHIBIT 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)
 March 31,
    
    
    December 31,2007
    
    

2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,049
    
    
    $
    12,082Short-term investments
    
    
    37,872
    
    
    
    40,857Accounts receivable, net
    
    
    20,089
    
    
    
    23,064Prepaids and other current assets
    
    
    3,652
    
    
    
    3,939Total current assets
    
    
    82,662
    
    
    
    79,942Property and equipment, net
    
    
    3,722
    
    
    
    4,086Deposits and other assets
    
    
    1,136
    
    
    
    1,166Total assets
    
    $
    87,520
    
    
    $
    85,194LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,054
    
    
    $
    899Accrued payroll and related expenses
    
    
    5,768
    
    
    
    6,647Accrued expenses
    
    
    5,933
    
    
    
    3,721Deferred revenue
    
    
    14,537
    
    
    
    13,726Total current liabilities
    
    
    28,292
    
    
    
    24,993Deferred rent
    
    
    669
    
    
    
    681Long-term deferred revenue
    
    
    1,318
    
    
    
    1,578Other liabilities
    
    
    455
    
    
    
    562Total liabilities
    
    
    30,734
    
    
    
    27,814Stockholders equity:Common stock, $0.001 par value; 100,000 shares authorized;
28,869 and 28,354 shares issued and outstanding at
March 31, 2007 and December 31, 2006, respectively
    
    
    29
    
    
    
    28Additional paid-in capital
    
    
    196,385
    
    
    
    193,499Accumulated other comprehensive income
    
    
    445
    
    
    
    408Accumulated deficit
    
    
    (140,073
    )
    
    
    (136,555
    )Total stockholders equity
    
    
    56,786
    
    
    
    57,380Total liabilities and stockholders equity
    
    $
    87,520
    
    
    $
    85,194
  3




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CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Three Months EndedMarch
31,2007
    
    

2006(Unaudited)Revenues:License revenues
    
    $
    8,358
    
    
    $
    6,958Maintenance and service revenues
    
    
    16,483
    
    
    
    9,999Total revenues
    
    
    24,841
    
    
    
    16,957Cost of revenues:License revenues
    
    
    221
    
    
    
    136Maintenance and service revenues
    
    
    12,380
    
    
    
    7,780Total cost of revenues
    
    
    12,601
    
    
    
    7,916Gross profit
    
    
    12,240
    
    
    
    9,041Operating expenses:Sales and marketing
    
    
    8,255
    
    
    
    6,190Research and development
    
    
    4,198
    
    
    
    3,570General and administrative
    
    
    3,902
    
    
    
    3,087Total operating expenses
    
    
    16,355
    
    
    
    12,847Operating loss
    
    
    (4,115
    )
    
    
    (3,806
    )Interest and other income
    
    
    769
    
    
    
    568Loss before provision for income taxes
    
    
    (3,346
    )
    
    
    (3,238
    )Provision for income taxes
    
    
    21
    
    
    
    Loss before cumulative effect of a change in
accounting principle
    
    
    (3,367
    )
    
    
    (3,238
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    128Net loss
    
    $
    (3,367
    )
    
    $
    (3,110
    )Net loss per share  basic and dilutedLoss before cumulative effect of a change in
accounting principle
    
    $
    (0.12
    )
    
    $
    (0.12
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    0.01Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.11
    )Shares used in basic per share computation
    
    
    28,610
    
    
    
    27,116Shares used in diluted per share computation
    
    
    28,610
    
    
    
    27,116
  4




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CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three Months Ended March 31,2007
    
    
    2006(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (3,367
    )
    
    $
    (3,110
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and other amortization
    
    
    472
    
    
    
    418Provision for doubtful accounts and sales returns
    
    
    151
    
    
    
    500Stock-based compensation
    
    
    1,228
    
    
    
    1,209Loss on disposal of property
    
    
    2
    
    
    
    3Net (accretion) amortization on investments
    
    
    (173
    )
    
    
    21Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (128
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,838
    
    
    
    (529
    )Prepaids and other current assets
    
    
    288
    
    
    
    264Other assets
    
    
    31
    
    
    
    (9
    )Accounts payable
    
    
    1,152
    
    
    
    560Accrued payroll and related expenses
    
    
    (881
    )
    
    
    (2,594
    )Accrued expenses
    
    
    (2,111
    )
    
    
    79Deferred revenue
    
    
    542
    
    
    
    (562
    )Net cash provided by (used in) operating activities
    
    
    4,394
    
    
    
    (3,878
    )Cash flows from investing activities:Purchases of investments
    
    
    (7,326
    )
    
    
    (19,808
    )Proceeds from maturities and sale of investments
    
    
    10,500
    
    
    
    18,400Purchases of property and equipment
    
    
    (278
    )
    
    
    (322
    )Net cash provided by (used in) investing activities
    
    
    2,896
    
    
    
    (1,730
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    1,658
    
    
    
    1,106Net cash provided by financing activities
    
    
    1,658
    
    
    
    1,106Effect of exchange rates on cash and cash equivalents
    
    
    19
    
    
    
    (1
    )Net increase (decrease) in cash and cash equivalents
    
    
    8,967
    
    
    
    (4,503
    )Cash and cash equivalents at beginning of period
    
    
    12,082
    
    
    
    23,705Cash and cash equivalents at end of period
    
    $
    21,049
    
    
    $
    19,202
  5




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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
  Valuation Accounts
  6




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Balance at
    
    
    Provision,
    
    
    
    
    
    
    Balance atBeginning
    
    
    Net of
    
    
    
    
    
    
    End ofof Period
    
    
    Recoveries
    
    
    Write-Offs
    
    
    PeriodAllowance for doubtful accountsThree months ended March 31, 2007
    
    $
    463
    
    
    $
    20
    
    
    $
    
    
    
    $
    483Three months ended March 31, 2006
    
    
    480
    
    
    
    80
    
    
    
    (5
    )
    
    
    555
 Balance at
    
    
    
    
    
    
    Remediation
    
    
    Balance atBeginning
    
    
    
    
    
    
    Service
    
    
    End ofof Period
    
    
    Provision
    
    
    Claims
    
    
    PeriodSales return reserveThree months ended March 31, 2007
    
    $
    241
    
    
    $
    131
    
    
    $
    (212
    )
    
    $
    160Three months ended March 31, 2006
    
    
    310
    
    
    
    420
    
    
    
    (473
    )
    
    
    257
 Restricted Cash
  Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 7




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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.
  8




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Contract Accounting Method. Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
  Maintenance Revenue.
 Professional Service Revenue.
 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




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Net Loss Per Share
   10




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Three Months Ended March 31,2007

    2006Stock options
    
    

    
    7,996

    
    
        
6,666Restricted stock
    
    

    
    5

    
    

    
 28Warrants
    
    

    
 2

    
    

    
111ESPP
    
    

    
 67

    
    

    
 73Totals
    
    

    
8,070

    
    

    
6,878
  Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 2. Investments
  11




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Unrealized
    
    
    UnrealizedMarch 31, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAuction rate securities and preferred stock
    
    $
    14,075
    
    
    $
    
    
    
    $
    
    
    
    $
    14,075Corporate notes and obligations
    
    
    26,091
    
    
    
    
    
    
    
    (23
    )
    
    
    26,068US government and agency obligations
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000Investments in debt and equity securities
    
    $
    42,166
    
    
    $
    
    
    
    $
    (23
    )
    
    $
    42,143
 Unrealized
    
    
    UnrealizedDecember 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAuction rate securities and preferred stock
    
    $
    13,750
    
    
    $
    
    
    
    $
    
    
    
    $
    13,750Corporate notes and obligations
    
    
    29,129
    
    
    
    
    
    
    
    (37
    )
    
    
    29,092US government and agency obligations
    
    
    500
    
    
    
    
    
    
    
    (2
    )
    
    
    498Investments in debt and equity securities
    
    $
    43,379
    
    
    $
    
    
    
    $
    (39
    )
    
    $
    43,340
 March 31,
    
    
    December 31,2007
    
    
    2006Recorded as:Cash equivalents
    
    $
    4,271
    
    
    $
    2,483Short-term investments
    
    
    37,872
    
    
    
    40,857$
    42,143
    
    
    $
    43,340
   3. Commitments and Contingencies
  Accounting for Contingencies
 12




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Other Contingencies
  Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.
 4. Segment, Geographic and Customer Information
 Disclosures about Segments of an Enterprise and Related Information
  Three Months Ended March 31,2007
    
    
    2006United States
    
    $
    20,842
    
    
    $
    13,798Europe
    
    
    3,385
    
    
    
    387Asia Pacific
    
    
    614
    
    
    
    2,772$
    24,841
    
    
    $
    16,957
   Three Months Ended March 31,2007
    
    
    2006Customer 1
    
    
    13
    %
    
    
    
    %Customer 2
    
    
    10
    %
    
    
    15
    %Customer 3
    
    
    2
    %
    
    
    16
    %Customer 4
    
    
    1
    %
    
    
    10
    %
 13




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5. Comprehensive Income (Loss
   Three Months Ended March 31,2007
    
    
    2006Net loss
    
    $
    (3,367
    )
    
    $
    (3,110
    )Other comprehensive income (loss):Change in unrealized loss on
investments, net
    
    
    16
    
    
    
    55Change in cumulative translation
adjustments
    
    
    19
    
    
    
    10Comprehensive loss
    
    $
    (3,332
    )
    
    $
    (3,045
    )
 6. Stock-based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees,
    14




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" Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards.
  Expense Summary
 Share-Based Payment
 Determination of Fair Value
  15




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Three Months Ended March 31,2007
    
    
    2006Stock Option PlansExpected life (in years)
    
    
    3.50
    
    
    
    6.00Risk-free interest rate
    
    4.50% to 4.77%
    
    4.36% to 4.70%Volatility
    
    
    54
    %
    
    
    60
    %Dividend Yield
    
    
    
    
    
    
    Employee Stock Purchase PlanExpected life (in years)
    
    
    0.49 to 1.00
    
    
    
    0.49 to 1.00Risk-free interest rate
    
    5.05% to 5.16%
    
    4.68% to 4.69%Volatility
    
    33% to 37%
    
    36% to 43%Dividend Yield
    
    
    
    
    
    
    
 Stockholder-Approved Stock Option Plans
    16




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WeightedShares
    
    
    Number of
    
    
    Weighted
    
    
    AverageAvailable
    
    
    Shares
    
    
    Average
    
    
    Remaining
    
    
    Aggregatefor
    
    
    Subject to
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicGrant
    
    
    Options
    
    
    Price
    
    
    Term (Years)
    
    
    Value(in thousands)Outstanding as of December 31, 2006
    
    
    2,398,987
    
    
    
    6,452,905
    
    
    $
    4.47Authorized
    
    
    
    
    
    
    Granted
    
    
    (1,243,750
    )
    
    
    1,243,750
    
    
    
    7.51Exercised
    
    
    
    
    
    
    (238,586
    )
    
    
    2.36Forfeited
    
    
    72,127
    
    
    
    (72,127
    )
    
    
    4.99Expired
    
    
    5,004
    
    
    
    (5,004
    )
    
    
    13.85Outstanding as of March 31, 2007
    
    
    1,232,368
    
    
    
    7,380,938
    
    
    $
    5.04
    
    
    
    6.39
    
    
    $
    20,578Vested and Expected to Vest as
of March 31, 2007
    
    
    
    
    
    
    6,357,860
    
    
    $
    5.00
    
    
    
    6.41
    
    
    $
    18,310Exercisable as of March 31, 2007
    
    
    
    
    
    
    2,942,088
    
    
    $
    4.53
    
    
    
    6.60
    
    
    $
    10,723
  Employee Stock Purchase Plan
  Other Plan Awards
 th
 17




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7. Income Taxes
 Accounting for Uncertainty
in Income Taxes
   8. Related Party Transactions
  18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of financial condition and results of operations should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and the Notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2006 and with the unaudited condensed
consolidated financial statements and the related notes thereto contained elsewhere in this
Quarterly Report on Form 10-Q . This section of the Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements relate to our future plans,
objectives, expectations, intentions and financial performance and the assumptions that underlie
these statements. 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, new product launches, future operating expense levels, the impact of quarterly
fluctuations of revenue and operating results, levels of recurring revenues, staffing and expense
levels, and the adequacy of our capital resources to fund operations and growth. These statements
involve known and unknown risks, uncertainties and other factors that may cause industry trends or
our actual results, level of activity, performance or achievements to be materially different from
any future results, level of activity, performance or achievements expressed or implied by these
statements. 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 Months Ended March 31, 2007
   Revenue Growth
   19




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Increased Expenses to Support Growth Strategy
   Growth Strategy Continues but Expense Growth Should be Slower
  Other Business Highlights
    Challenges and Risks
  20




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Application of Critical Accounting Policies and Use of Estimates
   Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 Fixed or Determinable Fee.
 21




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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
 22




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Maintenance Revenue.
 Professional Service Revenue.
 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.
  23




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Allowance for Doubtful Accounts and Sales Return Reserve
  Revenue Recognition When
Right of Return Exists,
 Stock-Based Compensation
 Share-Based Payment
 24




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Income Taxes
  Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Results of Operations
 Comparison of the Three Months Ended March 31, 2007 and 2006
 Revenues, cost of revenues and gross profit
  25




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Three
    
    
    
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeMarch 31,
    
    
    of Total
    
    
    March 31,
    
    
    of Total
    
    
    Increase
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    8,358
    
    
    
    34
    %
    
    $
    6,958
    
    
    
    41
    %
    
    $
    1,400
    
    
    
    20
    %Maintenance and service
    
    
    16,483
    
    
    
    66
    %
    
    
    9,999
    
    
    
    59
    %
    
    
    6,484
    
    
    
    65
    %Total revenues
    
    $
    24,841
    
    
    
    100
    %
    
    $
    16,957
    
    
    
    100
    %
    
    $
    7,884
    
    
    
    46
    %
 Three
    
    
    
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeMarch 31,
    
    
    of Related
    
    
    March 31,
    
    
    of Related
    
    
    Increase
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    221
    
    
    
    3
    %
    
    $
    136
    
    
    
    2
    %
    
    $
    85
    
    
    
    63
    %Maintenance and service
    
    
    12,380
    
    
    
    75
    %
    
    
    7,780
    
    
    
    78
    %
    
    
    4,600
    
    
    
    59
    %Total cost of
revenues
    
    $
    12,601
    
    
    
    
    
    
    $
    7,916
    
    
    
    
    
    
    $
    4,685Gross profit
    
    $
    12,240
    
    
    
    49
    %
    
    $
    9,041
    
    
    
    53
    %
    
    $
    3,199
    
    
    
    35
    %
 Revenues
 License Revenues.
 Maintenance and Service Revenues.
 26




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Cost of Revenues and Gross Margin
 Cost of License Revenues.
 Cost of Maintenance and Service Revenues.
 Gross Margin.
 Operating Expenses
  Three
    
    
    
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeMarch 31,
    
    
    of Total
    
    
    March 31,
    
    
    of Total
    
    
    Increase
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and marketing
    
    $
    8,255
    
    
    
    33
    %
    
    $
    6,190
    
    
    
    37
    %
    
    $
    2,065
    
    
    
    33
    %Research and development
    
    
    4,198
    
    
    
    17
    %
    
    
    3,570
    
    
    
    21
    %
    
    
    628
    
    
    
    18
    %General and administrative
    
    
    3,902
    
    
    
    16
    %
    
    
    3,087
    
    
    
    18
    %
    
    
    815
    
    
    
    26
    %Total operating expenses
    
    $
    16,355
    
    
    
    66
    %
    
    $
    12,847
    
    
    
    76
    %
    
    $
    3,508
    
    
    
    27
    %
 Sales and Marketing.
 Research and Development.
 27




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##### Table of Contents



General
and Administrative.
 Stock-Based Compensation
  Three
    
    
    Three
    
    
    
    
    
    
    PercentageMonths
    
    
    Months
    
    
    
    
    
    
    of DollarEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeMarch 31,
    
    
    March 31,
    
    
    Increase
    
    
    Year over2007
    
    
    2006
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of maintenance and service
revenues
    
    $
    261
    
    
    $
    264
    
    
    $
    (3
    )
    
    
    (1
    )%Sales and marketing
    
    
    267
    
    
    
    266
    
    
    
    1
    
    
    
    0
    %Research and development
    
    
    325
    
    
    
    247
    
    
    
    78
    
    
    
    32
    %General and administrative
    
    
    375
    
    
    
    432
    
    
    
    (57
    )
    
    
    (13
    )%Total stock-based compensation
    
    $
    1,228
    
    
    $
    1,209
    
    
    $
    19
    
    
    
    2
    %
  Other Items
  Three
    
    
    Three
    
    
    
    
    
    
    PercentageMonths
    
    
    Months
    
    
    
    
    
    
    of DollarEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeMarch 31,
    
    
    March 31,
    
    
    Increase
    
    
    Year over2007
    
    
    2006
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    769
    
    
    $
    568
    
    
    $
    201
    
    
    
    35
    %Provision for income taxes
    
    $
    21
    
    
    $
    
    
    
    $
    21
    
    
    
    100
    %Cumulative effect of a change
in accounting principle
    
    $
    
    
    
    $
    128
    
    
    $
    (128
    )
    
    
    (100
    )%
 28




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##### Table of Contents



Interest and Other Income
  Provision for Income Taxes
  Liquidity and Capital Resources
  Net Cash Provided by/Used in Operating Activities.
 Three Months Ended March 31,2007
    
    
    2006Cash collections
    
    $
    29,031
    
    
    $
    16,449Payroll related costs
    
    
    (17,197
    )
    
    
    (15,320
    )Professional services costs
    
    
    (3,429
    )
    
    
    (1,599
    )Employee expense reports
    
    
    (1,812
    )
    
    
    (1,561
    )Facilities related costs
    
    
    (905
    )
    
    
    (876
    )Third-party royalty payments
    
    
    (188
    )
    
    
    (163
    )Other
    
    
    (1,106
    )
    
    
    (808
    )Net cash provided by (used in) operating activities
    
    $
    4,394
    
    
    $
    (3,878
    )
  Net Cash Provided by/Used in Investing Activities.
 Net Cash Provided by Financing Activities.
 29




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##### Table of Contents



Contractual Obligations and Commitments
  Payments due by PeriodRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012Contractual Obligations
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    and beyondOperating lease
commitments
    
    $
    8,374
    
    
    $
    1,894
    
    
    $
    2,582
    
    
    $
    2,368
    
    
    $
    1,530
    
    
    $
    
    
    
    $
    Unconditional
purchase commitments
    
    $
    2,162
    
    
    $
    741
    
    
    $
    1,010
    
    
    $
    111
    
    
    $
    100
    
    
    $
    100
    
    
    $
    100
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  30




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##### Table of Contents



Expected MaturityTotal
    
    
    Total1 Year
    
    
    More Than
    
    
    Principal
    
    
    Fairor Less
    
    
    1 Year
    
    
    Amount
    
    
    ValueAvailable-for-sale securities
    
    $
    41,161
    
    
    $
    1,005
    
    
    $
    42,166
    
    
    $
    42,143Weighted average interest rate
    
    
    5.61
    %
    
    
    5.21
    %
  Foreign Currency Exchange Risk.
     Three Months Ended March 31, 2007AverageNotional
    
    
    contract
    
    
    EstimatedAmount
    
    
    rate
    
    
    fair value(In thousands except contract rates)Foreign currency forward contracts:British pounds
    
    $
    433
    
    
    
    1.9710
    
    
    $
    2
 
 Item 4. Controls and Procedures
  31




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Accounting for Contingencies
 
 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.
  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.
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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.
  Our quarterly revenues and operating results are unpredictable and are likely to continue to
fluctuate substantially, which may harm our results of operations.
    
    
    The discretionary nature of our customers purchase and budget cycles and changes in
their budgets for software and related purchases;
    
    the priority our customers place on the purchase of our products as compared to other
information technology and capital acquisitions;
    
    competitive conditions in our industry, including new products, product announcements
and discounted pricing or special payment terms offered by our competitors;
    
    customers selection of our on-demand solution, under which we recognize revenue as part
of
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##### Table of Contents



maintenance and consulting services over the term of the agreement, versus traditional
perpetual license revenue which is typically recognized in the quarter in which the
transaction closes;
    
    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;
    
    strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments or changes in business strategy;
    
    merger and acquisition activities among our customers which may alter their buying patterns;
    
    our ability to timely complete our service obligations related to product sales;
    
    the utilization rate of our professional services personnel and the degree to which we
use third-party consulting services;
    
    changes in the average selling prices of our products;
    
    timing of product development and new product initiatives;
    
    increased operating expenses associated with channel sales, increased product
development efforts, and Sarbanes-Oxley compliance;
    
    customers concerns regarding Sarbanes-Oxley Section 404 compliance and implementing
large, enterprise-wide deployments of products, including our products; and
    
    changes in the mix of revenues attributable to higher-margin product license revenues
as opposed to substantially lower-margin maintenance and service revenues.
 If our on-demand offerings fail to achieve broad market acceptance, or if we are unable to offer
these services on a profitable basis, our operating results could be adversely affected.
  Our products have long sales cycles, which makes it difficult to plan our expenses and forecast
our results.
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##### Table of Contents




    
    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 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.
  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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##### Table of Contents



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
or delay to migrate to newer versions of our software, our revenues may be harmed.
  If we do not compete effectively with competitors, our revenues may not grow and could
decline.
    Our maintenance and service revenues produce substantially lower gross margins than our license
revenues, and decreases in license revenues relative to service revenues have harmed, and may
continue to harm, our overall gross margins.
  36




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##### Table of Contents




    
    Competitive pricing pressure on the rates that we can charge for our professional services;
    
    the complexity of the customers information technology environment;
    
    the resources directed by customers to their implementation projects; and
    
    the extent to which outside consulting organizations provide services directly to customers.
   Managing large-scale deployments of our products requires substantial technical implementation
and support by us or third-party service providers. Failure to meet these requirements could
cause a decline or delay in recognition of our revenues and an increase in our expenses.
    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.
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##### Table of Contents



If we reduce prices or alter our payment terms 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.
   Errors in our products could be costly to correct, adversely affect our reputation and impair
our ability to sell our products.
  38




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##### Table of Contents




    
    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 have experienced changes in our senior management team from time-to-time. The loss of key
personnel or the inability of replacements to quickly and successfully perform in their new
roles could adversely affect our business.
  We may lose sales opportunities and our business may be harmed if we do not successfully develop
and maintain strategic relationships to implement and sell our products.
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##### Table of Contents



Breaches of security or failure to safeguard customer data could create the perception that our
services are not secure causing customers to discontinue or reject the use of our services and
could subject us to significant liability.
  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 on 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.
  41




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##### Table of Contents



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



RISKS RELATED TO OUR STOCK
 Our stock price is likely to remain volatile.
  
    
    Our operating performance and the performance of other similar companies;
    
    announcements by us or our competitors of significant contracts, results of operations,
projections, new technologies, acquisitions, commercial relationships, joint ventures or
capital commitments;
    
    changes in our management team;
    
    publication of research reports about us or our industry by securities analysts; and
    
    developments with respect to intellectual property rights.
  Future sales of substantial amounts of our common stock by us or our existing stockholders could
cause our stock price to fall.
  43




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##### Table of Contents



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
    
    Description10.22
    
    Callidus Software Inc. Form of Executive Incentive Bonus Plan
(incorporated by reference to Exhibit 10.22 to the Companys
8-K filed with the Commission on March 16, 2007)10.23
    
    Separation Agreement and Release of Claims between Robert
Warfield and the Company (incorporated by reference to Exhibit
10.23 to the Companys Form 8-K filed with the Commission on
March 21, 2007)31.1
    
    302 Certification32.1
    
    906 Certification
 Availability of this Report
  44




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##### Table of Contents



SIGNATURES
  CALLIDUS SOFTWARE INC.By:
    /s/ RONALD J. FIORRonald J. FiorChief Financial Officer,
Senior Vice President, Finance and Operations 45




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##### Table of Contents



EXHIBIT INDEX
TO
CALLIDUS SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
 ExhibitNumber
    
    Description10.22
    
    Callidus Software Inc. Form of Executive Incentive Bonus Plan
(incorporated by reference to Exhibit 10.22 to the Companys
8-K filed with the Commission on March 16, 2007)10.23
    
    Separation Agreement and Release of Claims between Robert
Warfield and the Company (incorporated by reference to Exhibit
10.23 to the Companys Form 8-K filed with the Commission on
March 21, 2007)31.1
    
    302 Certification32.1
    
    906 Certification
 46