##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 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 o
    
    Non-accelerated filer þ
 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
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    36Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46Item 5. Other Information
    
    
    47Item 6. Exhibits
    
    
    47Signatures
    
    
    48Exhibit Index
    
    
    49EXHIBIT 10.19EXHIBIT 10.20EXHIBIT 10.21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 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)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,493
    
    
    $
    23,705Short-term investments
    
    
    41,246
    
    
    
    40,000Accounts receivable, net
    
    
    15,311
    
    
    
    11,063Prepaids and other current assets
    
    
    1,808
    
    
    
    1,581Total current assets
    
    
    73,858
    
    
    
    76,349Property and equipment, net
    
    
    3,392
    
    
    
    2,801Deposits and other assets
    
    
    1,381
    
    
    
    1,494Total assets
    
    $
    78,631
    
    
    $
    80,644LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    618
    
    
    $
    756Accrued payroll and related expenses
    
    
    6,003
    
    
    
    6,383Accrued expenses
    
    
    2,989
    
    
    
    2,043Deferred revenue
    
    
    11,986
    
    
    
    12,205Total current liabilities
    
    
    21,596
    
    
    
    21,387Deferred rent
    
    
    647
    
    
    
    377Long-term deferred revenue
    
    
    409
    
    
    
    729Total liabilities
    
    
    22,652
    
    
    
    22,493Stockholders equity:Common stock, $0.001 par value; 100,000 shares authorized;
27,628 and 26,854 shares issued and outstanding at
June 30, 2006 and December 31, 2005, respectively
    
    
    28
    
    
    
    27Additional
paid-in capital
    
    
    189,785
    
    
    
    186,232Deferred
stock-based compensation
    
    
    
    
    
    
    (445
    )Accumulated other comprehensive income
    
    
    315
    
    
    
    171Accumulated deficit
    
    
    (134,149
    )
    
    
    (127,834
    )Total stockholders equity
    
    
    55,979
    
    
    
    58,151Total liabilities and stockholders equity
    
    $
    78,631
    
    
    $
    80,644
  3




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##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)Revenues:License revenues
    
    $
    5,935
    
    
    $
    1,295
    
    
    $
    12,893
    
    
    $
    4,795Maintenance and service revenues
    
    
    11,729
    
    
    
    11,320
    
    
    
    21,728
    
    
    
    22,321Total revenues
    
    
    17,664
    
    
    
    12,615
    
    
    
    34,621
    
    
    
    27,116Cost of revenues:License revenues
    
    
    148
    
    
    
    86
    
    
    
    284
    
    
    
    183Maintenance and service revenues(1)
    
    
    8,585
    
    
    
    7,725
    
    
    
    16,365
    
    
    
    14,955Total cost of revenues
    
    
    8,733
    
    
    
    7,811
    
    
    
    16,649
    
    
    
    15,138Gross profit
    
    
    8,931
    
    
    
    4,804
    
    
    
    17,972
    
    
    
    11,978Operating expenses:Sales and marketing(1)
    
    
    6,169
    
    
    
    3,612
    
    
    
    12,359
    
    
    
    8,150Research and development(1)
    
    
    3,650
    
    
    
    2,940
    
    
    
    7,220
    
    
    
    6,015General and administrative(1)
    
    
    2,992
    
    
    
    2,357
    
    
    
    6,079
    
    
    
    4,699Total operating expenses
    
    
    12,811
    
    
    
    8,909
    
    
    
    25,658
    
    
    
    18,864Operating loss
    
    
    (3,880
    )
    
    
    (4,105
    )
    
    
    (7,686
    )
    
    
    (6,886
    )Interest expense
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (16
    )Interest and other income, net
    
    
    675
    
    
    
    358
    
    
    
    1,243
    
    
    
    681Loss before provision for income taxes
    
    
    (3,205
    )
    
    
    (3,752
    )
    
    
    (6,443
    )
    
    
    (6,221
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (9
    )Loss before cumulative effect of a change in
accounting principle
    
    
    (3,205
    )
    
    
    (3,718
    )
    
    
    (6,443
    )
    
    
    (6,212
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    Net loss
    
    $
    (3,205
    )
    
    $
    (3,718
    )
    
    $
    (6,315
    )
    
    $
    (6,212
    )Net loss per share  basicLoss before cumulative effect of a change in
accounting principle
    
    $
    (0.12
    )
    
    $
    (0.14
    )
    
    $
    (0.24
    )
    
    $
    (0.24
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.14
    )
    
    $
    (0.23
    )
    
    $
    (0.24
    )Net loss
per share  dilutedLoss before cumulative effect of a change in
accounting principle
    
    $
    (0.12
    )
    
    $
    (0.14
    )
    
    $
    (0.24
    )
    
    $
    (0.24
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.14
    )
    
    $
    (0.23
    )
    
    $
    (0.24
    )Shares used in basic per share computation
    
    
    27,486
    
    
    
    26,144
    
    
    
    27,304
    
    
    
    25,948Shares used in diluted per share computation
    
    
    27,486
    
    
    
    26,144
    
    
    
    27,304
    
    
    
    25,948
 4




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##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (Continued)
(In thousands, except per share data)
 
 (1) Effective January 1, 2006, the Company adopted FASB Statement No. 123R (revised
2004), Share-Based
Payment (SFAS 123R) under the modified prospective method. Accordingly, for the six months ended
June 30, 2006, stock-based compensation was accounted for under SFAS 123R, while for the six months
ended June 30, 2005, stock-based compensation was accounted for under Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees.See Note 6  Stock-based
Compensation. The amounts above include stock-based compensation as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Cost of maintenance
and service revenues
    
    $
    246
    
    
    $
    41
    
    
    $
    510
    
    
    $
    91Sales and marketing
    
    
    264
    
    
    
    63
    
    
    
    530
    
    
    
    189Research and development
    
    
    218
    
    
    
    102
    
    
    
    465
    
    
    
    226General and administrative
    
    
    662
    
    
    
    217
    
    
    
    1,094
    
    
    
    357
  5




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##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months Ended June 30,2006
    
    
    2005(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (6,315
    )
    
    $
    (6,212
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and other amortization
    
    
    872
    
    
    
    813Provision for doubtful accounts and sales returns
    
    
    576
    
    
    
    290Stock-based compensation
    
    
    2,599
    
    
    
    863Non-cash expenses associated with non-employee options and warrants
    
    
    
    
    
    
    4Loss on disposal of property
    
    
    7
    
    
    
    Cumulative effect of a change in accounting principle
    
    
    (128
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,758
    )
    
    
    3,043Prepaids and other current assets
    
    
    (106
    )
    
    
    (20
    )Other assets
    
    
    
    
    
    
    (276
    )Accounts payable
    
    
    (142
    )
    
    
    (411
    )Accrued payroll and related expenses
    
    
    (399
    )
    
    
    (117
    )Accrued expenses
    
    
    966
    
    
    
    (345
    )Deferred revenue
    
    
    (576
    )
    
    
    999Net cash used in operating activities
    
    
    (7,404
    )
    
    
    (1,369
    )Cash flows from investing activities:Purchases of investments
    
    
    (31,736
    )
    
    
    (14,715
    )Proceeds from maturities and sale of investments
    
    
    30,550
    
    
    
    19,200Purchases of property and equipment
    
    
    (1,222
    )
    
    
    (616
    )Change in deposits
    
    
    2
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (2,406
    )
    
    
    3,869Cash flows from financing activities:Repayments of long-term debt
    
    
    
    
    
    
    (298
    )Net proceeds from issuance of common stock and warrants
    
    
    1,527
    
    
    
    1,935Net cash provided by financing activities
    
    
    1,527
    
    
    
    1,637Effect of exchange rates on cash and cash equivalents
    
    
    71
    
    
    
    (144
    )Net (decrease) increase in cash and cash equivalents
    
    
    (8,212
    )
    
    
    3,993Cash and cash equivalents at beginning of period
    
    
    23,705
    
    
    
    7,651Cash and cash equivalents at end of period
    
    $
    15,493
    
    
    $
    11,644Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    5
  6




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##### Table of Contents



CALLIDUS SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Reclassifications
  Cumulative Effect of a Change in Accounting Principle
  Principles of Consolidation
  Use of Estimates
  7




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##### Table of Contents



Valuation Accounts
   Balance at
    
    Provision,
    
    
    
    
    
    Balance atBeginning
    
    Net of
    
    
    
    
    
    End ofof Period
    
    Recoveries
    
    Write-Offs
    
    PeriodAllowance for doubtful accountsThree months ended June 30, 2006
    
    $
    555
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    553Three months ended June 30, 2005
    
    
    327
    
    
    
    (33
    )
    
    
    (254
    )
    
    
    40Six months ended June 30, 2006
    
    
    480
    
    
    
    78
    
    
    
    (5
    )
    
    
    553Six months ended June 30, 2005
    
    
    320
    
    
    
    39
    
    
    
    (319
    )
    
    
    40
 Balance at
    
    Provision,
    
    Remediation
    
    Balance atBeginning
    
    Net of
    
    Service
    
    End ofof Period
    
    Recoveries
    
    Claims
    
    PeriodSales return reserveThree months ended June 30, 2006
    
    $
    257
    
    
    $
    78
    
    
    $
    (54
    )
    
    $
    281Three months ended June 30, 2005
    
    
    394
    
    
    
    89
    
    
    
    (178
    )
    
    
    305Six months ended June 30, 2006
    
    
    310
    
    
    
    498
    
    
    
    (527
    )
    
    
    281Six months ended June 30, 2005
    
    
    537
    
    
    
    251
    
    
    
    (483
    )
    
    
    305
 Restricted Cash
  Revenue Recognition
  8




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##### Table of Contents



Evidence of an Arrangement.
 Delivery.
 Fixed or Determinable Fee.
 Collection is Deemed Probable.
 Residual Method. Software
Revenue Recognition, Software Revenue Recognition with Respect to Certain
Transactions.
  Contract Accounting Method.
 9




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##### Table of Contents



Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
 Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.
    On-Demand Revenue.
 Revenue Recognition Revenue Arrangements with Multiple
Deliverables.
 10




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##### Table of Contents



Accounting for Deferred Commissions.
 Net Loss Per Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Stock options
    
    
    6,806
    
    
    
    4,851
    
    
    
    6,744
    
    
    
    4,736Stock subject to repurchase
    
    
    19
    
    
    
    
    
    
    
    23
    
    
    
    Warrants
    
    
    85
    
    
    
    47
    
    
    
    98
    
    
    
    30Totals
    
    
    6,910
    
    
    
    4,898
    
    
    
    6,865
    
    
    
    4,766
  Recent Accounting Pronouncements
 How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net
Presentation).
 11




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##### Table of Contents



Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes.
 2. Investments
  Unrealized
    
    
    UnrealizedJune 30, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAuction rate securities and preferred stock
    
    $
    33,975
    
    
    $
    
    
    
    $
    
    
    
    $
    33,975Corporate notes and obligations
    
    
    13,780
    
    
    
    
    
    
    
    (26
    )
    
    
    13,754US government and agency obligations
    
    
    1,000
    
    
    
    
    
    
    
    (5
    )
    
    
    995Investments in debt and equity securities
    
    $
    48,755
    
    
    $
    
    
    
    $
    (31
    )
    
    $
    48,724
 Unrealized
    
    
    UnrealizedDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAuction rate securities and preferred stock
    
    $
    20,575
    
    
    $
    
    
    
    $
    
    
    
    $
    20,575Corporate notes and obligations
    
    
    11,997
    
    
    
    
    
    
    
    (35
    )
    
    
    11,962US government and agency obligations
    
    
    12,500
    
    
    
    
    
    
    
    (56
    )
    
    
    12,444Investments in debt and equity securities
    
    $
    45,072
    
    
    $
    
    
    
    $
    (91
    )
    
    $
    44,981
 June 30,
    
    
    December 31,2006
    
    
    2005Recorded as:Cash equivalents
    
    $
    7,478
    
    
    $
    4,981Short-term investments
    
    
    41,246
    
    
    
    40,000$
    48,724
    
    
    $
    44,981
 12




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##### Table of Contents



3. Commitments and Contingencies
      Accounting for Contingencies
 Other Contingencies
  Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.
 13




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##### Table of Contents



4. Segment, Geographic and Customer Information
 Disclosures about Segments of an Enterprise and Related Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    14,417
    
    
    $
    12,014
    
    
    $
    28,215
    
    
    $
    24,602Europe
    
    
    1,926
    
    
    
    394
    
    
    
    2,313
    
    
    
    1,012Asia Pacific
    
    
    1,321
    
    
    
    207
    
    
    
    4,093
    
    
    
    1,502$
    17,664
    
    
    $
    12,615
    
    
    $
    34,621
    
    
    $
    27,116
   Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Customer 1
    
    
    3
    %
    
    
    18
    %
    
    
    3
    %
    
    
    14
    %Customer 2
    
    
    14
    %
    
    
    14
    %
    
    
    15
    %
    
    
    10
    %Customer 3
    
    
    11
    %
    
    
    
    %
    
    
    5
    %
    
    
    
    %Customer 4
    
    
    5
    %
    
    
    1
    %
    
    
    10
    %
    
    
    4
    %
 14




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##### Table of Contents



5. Comprehensive Loss
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (3,205
    )
    
    $
    (3,718
    )
    
    $
    (6,315
    )
    
    $
    (6,212
    )Other comprehensive
income (loss):Change in
accumulated
unrealized loss on
investments, net
    
    
    5
    
    
    
    (93
    )
    
    
    60
    
    
    
    (110
    )Change in cumulative translation
adjustments
    
    
    73
    
    
    
    114
    
    
    
    83
    
    
    
    76Comprehensive loss
    
    $
    (3,127
    )
    
    $
    (3,697
    )
    
    $
    (6,172
    )
    
    $
    (6,246
    )
 6. Stock-based Compensation
 Share-Based Payment Accounting for
Stock-Based Compensation Accounting for Stock Issued to Employees,
     15




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##### Table of Contents



Expense Summary
   Three
    
    
    SixMonths
    
    
    MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net loss as reported
    
    $
    (3,718
    )
    
    $
    (6,212
    )Add: Stock-based employee compensation expense under APB
No. 25 included in reported net loss, net of tax
    
    
    423
    
    
    
    863Less: Stock-based employee compensation expense determined
under the fair value method for all awards, net of tax
    
    
    (934
    )
    
    
    (1,852
    )Pro forma net loss
    
    $
    (4,229
    )
    
    $
    (7,201
    )Basic and diluted net loss per share, as reported
    
    $
    (0.14
    )
    
    $
    (0.24
    )Pro forma basic and diluted net loss per share
    
    $
    (0.16
    )
    
    $
    (0.28
    )
 Determination of Fair Value
  16




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Stock Option PlansExpected life (in years)
    
    
    2.50 to 3.50
    
    
    
    3.03
    
    
    
    2.50 to 6.00
    
    
    
    3.04Risk-free interest rate
    
    4.89% to 5.11%
    
    
    3.73
    %
    
    4.36% to 5.11%
    
    
    3.70
    %Volatility
    
    55% to 60%
    
    
    72
    %
    
    55% to 60%
    
    
    69
    %Employee Stock Purchase PlanExpected life (in years)
    
    
    0.49 to 1.00
    
    
    
    1.00
    
    
    
    0.49 to 1.00
    
    
    
    1.05Risk-free interest rate
    
    4.68% to 4.69%
    
    
    2.06
    %
    
    4.68% to 4.69%
    
    
    1.88
    %Volatility
    
    36% to 43%
    
    
    49
    %
    
    36% to 43%
    
    
    56
    %
 Stockholder-Approved Stock Option Plans
    17




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##### Table of Contents



WeightedShares
    
    
    
    
    
    
    Weighted
    
    
    AverageAvailable
    
    
    
    
    
    
    Average
    
    
    Remaining
    
    
    Aggregatefor
    
    
    Number of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicGrant
    
    
    Shares
    
    
    Price
    
    
    Term (Years)
    
    
    Value(in thousands)Outstanding as of
December 31, 2005
    
    
    2,886,508
    
    
    
    5,325,143
    
    
    $
    4.11Authorized
    
    
    
    
    
    
    Granted
    
    
    (1,214,092
    )
    
    
    1,214,092
    
    
    
    4.56Exercised
    
    
    
    
    
    
    (389,550
    )
    
    
    1.51Forfeited
    
    
    333,496
    
    
    
    (333,496
    )
    
    
    4.77Expired
    
    
    84,156
    
    
    
    (84,156
    )
    
    
    7.70Outstanding as of June 30, 2006
    
    
    2,090,068
    
    
    
    5,732,033
    
    
    $
    4.29
    
    
    
    7.90
    
    
    $
    9,653Vested and Expected to Vest as
of June 30, 2006
    
    
    
    
    
    
    5,336,273
    
    
    $
    4.28
    
    
    
    7.83
    
    
    $
    9,204Exercisable as of June 30, 2006
    
    
    
    
    
    
    2,567,623
    
    
    $
    4.14
    
    
    
    6.88
    
    
    $
    5,706
  Employee Stock Purchase Plan
  Other Plan Awards
   18




---



##### Table of Contents



th
 WeightedShares
    
    
    
    
    
    
    Weighted
    
    
    AverageAvailable
    
    
    
    
    
    
    Average
    
    
    Remaining
    
    
    Aggregatefor
    
    
    Number of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicGrant
    
    
    Shares
    
    
    Price
    
    
    Term (Years)
    
    
    Value(in thousands)Outstanding as of
December 31, 2005
    
    
    
    
    
    
    1,000,000
    
    
    $
    3.45Authorized
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Outstanding as of June 30, 2006
    
    
    
    
    
    
    1,000,000
    
    
    $
    3.45
    
    
    
    8.92
    
    
    $
    1,830Vested and Expected to Vest as
of June 30, 2006
    
    
    
    
    
    
    1,000,000
    
    
    $
    3.45
    
    
    
    8.92
    
    
    $
    1,830Exercisable as of June 30, 2006
    
    
    
    
    
    
    270,833
    
    
    $
    3.45
    
    
    
    8.92
    
    
    $
    496
  7. Related Party Transactions
  19




---



##### 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, 2005 and with the 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 maintenance and service revenues (including on-demand)
and license revenues and gross margins, future operating expense levels, the impact of quarterly
fluctuations of revenue and operating results, levels of recurring revenues, market growth
opportunities, levels of capital expenditure, staffing and expense levels, expected future cash
outlays, the adequacy of our capital resources to fund operations and growth, the impact of our
adoption of one of the fair value methods for measuring stock-based compensation described in SFAS
123R, and the extent of stock-based compensation charges and expectations with respect to research
and development spending. 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 and Six Months Ended June 30, 2006
   Strong Revenue Growth
  20




---



##### Table of Contents



Increased Expenses to Support Growth Strategy
    Growth Strategy Continues but Expense Growth Should be Slower
  21




---



##### Table of Contents



Launch of Hosted On-Demand Service
  Other Business Highlights
   Challenges and Risks
   Application of Critical Accounting Policies and Use of Estimates
   22




---



##### Table of Contents



Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 Fixed or Determinable Fee.
 Collection is Deemed Probable.
 Residual Method. Software Revenue
Recognition, Software Revenue Recognition with Respect to Certain
Transactions.
  23




---



##### Table of Contents



Contract Accounting Method. Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
    On-Demand Revenue.
 24




---



##### Table of Contents



Revenue Recognition Revenue Arrangements with Multiple Deliverables.
  Accounting for Deferred Commissions.
 Allowance for Doubtful Accounts and Sales Return Reserve
  Revenue Recognition When
Right of Return Exists,
 25




---



##### Table of Contents



Stock-Based Compensation
 Share-Based Payment
 Income Taxes
  Recent Accounting Pronouncements
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation).
 Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes.
 26




---



##### Table of Contents



Results of Operations
 Comparison of the Three and Six Months Ended June 30, 2006 and 2005
 Revenues, cost of revenues and gross profit
  Three
    
    
    
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    5,935
    
    
    
    34
    %
    
    $
    1,295
    
    
    
    10
    %
    
    $
    4,640
    
    
    
    358
    %Maintenance and service
    
    
    11,729
    
    
    
    66
    %
    
    
    11,320
    
    
    
    90
    %
    
    
    409
    
    
    
    4
    %Total revenues
    
    $
    17,664
    
    
    
    100
    %
    
    $
    12,615
    
    
    
    100
    %
    
    $
    5,049
    
    
    
    40
    %
 Three
    
    
    
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Related
    
    
    June 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    148
    
    
    
    2
    %
    
    $
    86
    
    
    
    7
    %
    
    $
    62
    
    
    
    72
    %Maintenance and service
    
    
    8,585
    
    
    
    73
    %
    
    
    7,725
    
    
    
    68
    %
    
    
    860
    
    
    
    11
    %Total cost of revenues
    
    $
    8,733
    
    
    
    
    
    
    $
    7,811
    
    
    
    
    
    
    $
    922Gross profit
    
    $
    8,931
    
    
    
    51
    %
    
    $
    4,804
    
    
    
    38
    %
    
    $
    4,127
    
    
    
    86
    %
 27




---



##### Table of Contents



Six
    
    
    
    
    
    
    Six
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:License
    
    $
    12,893
    
    
    
    37
    %
    
    $
    4,795
    
    
    
    18
    %
    
    $
    8,098
    
    
    
    169
    %Maintenance and service
    
    
    21,728
    
    
    
    63
    %
    
    
    22,321
    
    
    
    82
    %
    
    
    (593
    )
    
    
    (3
    )%Total revenues
    
    $
    34,621
    
    
    
    100
    %
    
    $
    27,116
    
    
    
    100
    %
    
    $
    7,505
    
    
    
    28
    %
 Six
    
    
    
    
    
    
    Six
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Related
    
    
    June 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:License
    
    $
    284
    
    
    
    2
    %
    
    $
    183
    
    
    
    4
    %
    
    $
    101
    
    
    
    55
    %Maintenance and service
    
    
    16,365
    
    
    
    75
    %
    
    
    14,955
    
    
    
    67
    %
    
    
    1,410
    
    
    
    9
    %Total cost of revenues
    
    $
    16,649
    
    
    
    
    
    
    $
    15,138
    
    
    
    
    
    
    $
    1,511Gross profit
    
    $
    17,972
    
    
    
    52
    %
    
    $
    11,978
    
    
    
    44
    %
    
    $
    5,994
    
    
    
    50
    %
 Revenues
 License Revenues.
 Maintenance and Service Revenues.
 28




---



##### Table of Contents



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
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and marketing
    
    $
    6,169
    
    
    
    35
    %
    
    $
    3,612
    
    
    
    29
    %
    
    $
    2,557
    
    
    
    71
    %Research and development
    
    
    3,650
    
    
    
    21
    %
    
    
    2,940
    
    
    
    23
    %
    
    
    710
    
    
    
    24
    %General and administrative
    
    
    2,992
    
    
    
    17
    %
    
    
    2,357
    
    
    
    19
    %
    
    
    635
    
    
    
    27
    %Total operating expenses
    
    $
    12,811
    
    
    
    73
    %
    
    $
    8,909
    
    
    
    71
    %
    
    $
    3,902
    
    
    
    44
    %
 29




---



##### Table of Contents



Six
    
    
    
    
    
    
    Six
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and marketing
    
    $
    12,359
    
    
    
    36
    %
    
    $
    8,150
    
    
    
    30
    %
    
    $
    4,209
    
    
    
    52
    %Research and development
    
    
    7,220
    
    
    
    21
    %
    
    
    6,015
    
    
    
    22
    %
    
    
    1,205
    
    
    
    20
    %General and administrative
    
    
    6,079
    
    
    
    18
    %
    
    
    4,699
    
    
    
    17
    %
    
    
    1,380
    
    
    
    29
    %Total operating expenses
    
    $
    25,658
    
    
    
    74
    %
    
    $
    18,864
    
    
    
    70
    %
    
    $
    6,794
    
    
    
    36
    %
 Sales and Marketing.
  Research and Development.
  General and Administrative.
  30




---



##### Table of Contents



Stock-Based Compensation
  Three
    
    
    
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of maintenance and service
revenues
    
    $
    246
    
    
    
    1
    %
    
    $
    41
    
    
    
    0
    %
    
    $
    205
    
    
    
    500
    %Sales and marketing
    
    
    264
    
    
    
    1
    %
    
    
    63
    
    
    
    0
    %
    
    
    201
    
    
    
    319
    %Research and development
    
    
    218
    
    
    
    1
    %
    
    
    102
    
    
    
    1
    %
    
    
    116
    
    
    
    114
    %General and administrative
    
    
    662
    
    
    
    4
    %
    
    
    217
    
    
    
    2
    %
    
    
    445
    
    
    
    205
    %Total stock-based compensation
    
    $
    1,390
    
    
    
    8
    %
    
    $
    423
    
    
    
    3
    %
    
    $
    967
    
    
    
    229
    %
 Six
    
    
    
    
    
    
    Six
    
    
    
    
    
    
    
    
    
    
    PercentageMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    of DollarEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    of Total
    
    
    June 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2006
    
    
    Revenues
    
    
    2005
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of maintenance and service
revenues
    
    $
    510
    
    
    
    1
    %
    
    $
    91
    
    
    
    0
    %
    
    $
    419
    
    
    
    460
    %Sales and marketing
    
    
    530
    
    
    
    2
    %
    
    
    189
    
    
    
    1
    %
    
    
    341
    
    
    
    180
    %Research and development
    
    
    465
    
    
    
    1
    %
    
    
    226
    
    
    
    1
    %
    
    
    239
    
    
    
    106
    %General and administrative
    
    
    1,094
    
    
    
    3
    %
    
    
    357
    
    
    
    1
    %
    
    
    737
    
    
    
    206
    %Total stock-based compensation
    
    $
    2,599
    
    
    
    8
    %
    
    $
    863
    
    
    
    3
    %
    
    $
    1,736
    
    
    
    201
    %
   31




---



##### Table of Contents



Other Items
  Three
    
    
    Three
    
    
    
    
    
    
    PercentageMonths
    
    
    Months
    
    
    
    
    
    
    of DollarEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Increase
    
    
    Year over2006
    
    
    2005
    
    
    (Decrease)
    
    
    YearOther income (expense), net:Interest expense
    
    $
    
    
    
    $
    (5
    )
    
    $
    5
    
    
    
    (100
    )%Interest and other income, net
    
    
    675
    
    
    
    358
    
    
    
    317
    
    
    
    89
    %Total other income, net
    
    $
    675
    
    
    $
    353
    
    
    $
    322
    
    
    
    91
    %Provision (benefit) for income taxes
    
    $
    
    
    
    $
    (34
    )
    
    $
    34
    
    
    
    (100
    )%
 Six
    
    
    Six
    
    
    
    
    
    
    PercentageMonths
    
    
    Months
    
    
    
    
    
    
    of DollarEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeJune 30,
    
    
    June 30,
    
    
    Increase
    
    
    Year over2006
    
    
    2005
    
    
    (Decrease)
    
    
    YearOther income (expense), net:Interest expense
    
    $
    
    
    
    $
    (16
    )
    
    $
    16
    
    
    
    (100
    )%Interest and other income, net
    
    
    1,243
    
    
    
    681
    
    
    
    562
    
    
    
    83
    %Total other income, net
    
    $
    1,243
    
    
    $
    665
    
    
    $
    578
    
    
    
    87
    %Provision (benefit) for income taxes
    
    $
    
    
    
    $
    (9
    )
    
    $
    9
    
    
    
    (100
    )%Cumulative effect of a change
in accounting principle
    
    $
    128
    
    
    $
    
    
    
    $
    128
    
    
    
    100
    %
 Interest Expense and Interest and Other Income, Net
   32




---



##### Table of Contents



Income Taxes
  Cumulative Effect of a Change in Accounting Principle
  Liquidity and Capital Resources
  Net Cash Used in Operating Activities.
 Six Months Ended June 30,2006
    
    
    2005Cash collections
    
    $
    30,070
    
    
    $
    31,734Payroll related costs
    
    
    (26,679
    )
    
    
    (21,432
    )Professional services costs
    
    
    (3,628
    )
    
    
    (4,042
    )Employee expense reports
    
    
    (3,327
    )
    
    
    (2,619
    )Facilities related costs
    
    
    (1,722
    )
    
    
    (1,931
    )Third-party royalty payments
    
    
    (268
    )
    
    
    (528
    )Other
    
    
    (1,850
    )
    
    
    (2,551
    )Net cash used in operating activities
    
    $
    (7,404
    )
    
    $
    (1,369
    )
  Net Cash Used in/Provided by Investing Activities.
 33




---



##### Table of Contents



Net Cash Provided by Financing Activities.
 Contractual Obligations and Commitments
  Payments due by PeriodRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011Contractual Obligations
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    and beyondOperating leases
    
    $
    9,600
    
    
    $
    1,084
    
    
    $
    2,363
    
    
    $
    2,441
    
    
    $
    2,219
    
    
    $
    1,493
    
    
    $
    
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  34




---



##### Table of Contents



Expected MaturityTotal
    
    Total1 Year
    
    More Than
    
    Principal
    
    Fairor Less
    
    1 Year
    
    Amount
    
    ValueAvailable-for-sale securities
    
    $
    48,755
    
    
    $
    
    
    
    $
    48,755
    
    
    $
    48,724Weighted average interest rate
    
    
    5.14
    %
    
    
    
    %
  Foreign Currency Exchange Risk.
 
 Item 4. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 1A. Risk Factors
 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 are dependent on a relatively small number of
transactions involving sales of our products to new customers, and any delay or
failure in closing one or more of these transactions could adversely affect our
results of operations.
  Our success depends upon our ability to develop new products and enhance our
existing products. Failure to successfully introduce new or enhanced products
may adversely affect our operating results.
  
    
    Rapid technological advances in hardware and software development;
    
    evolving standards in computer hardware, software technology and communications infrastructure;
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
    
    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;
    
    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;
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
    
    the utilization rate of our professional services personnel and the degree to which we use
third-party consulting services;
    
    the extent to which our customers elect to engage us versus third parties for configuration
and implementation engagements;
    
    changes in the average selling prices of our products;
    
    timing of product development and new product initiatives;
    
    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 service revenues.
 Our products have long sales cycles, which makes it difficult to plan our expenses and forecast our results.
  
    
    The complex nature of our products;
    
    the need to educate potential customers about the uses and benefits of our products;
    
    the requirement that a potential customer invest significant resources in connection with the
purchase and implementation of our products;
    
    budget cycles of our potential customers that affect the timing of purchases;
    
    customer requirements for competitive evaluation and internal approval before purchasing our
products;
    
    potential delays of purchases due to announcements or planned introductions of new products by
us or our competitors; and
    
    the lengthy approval processes of our potential customers, many of which are large organizations.
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If our on-demand service offering is unsuccessful, our business and operating
results could be adversely affected.
  If we are unable to increase sales of new product licenses, our maintenance and
service revenues will be materially and adversely affected.
  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.
  We may 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 ability 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.
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Our latest product features and functionality may require existing customers to
migrate from their existing versions to more recent versions of our software.
If existing customers fail or delay to migrate, 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 again harm, our overall gross margins in
the future.
   
    
    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.
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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 TrueComp 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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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 and the
loss or inability to maintain these licenses or errors in 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.
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Our revenues might be harmed by resistance to adoption of our software by
information technology departments.
  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.
  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.
  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.
  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.
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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.
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Provisions in our charter documents, our stockholder rights plan and Delaware
law may delay or prevent an acquisition of our company.
  
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
   
 Item 4. Submission of Matters to a Vote of Security Holders
    Nominees of the Board of Directors
    
    For
    
    WithheldCharles M. Boesenberg
    
    
    18,454,325
    
    
    
    5,086,857Michael A. Braun
    
    
    23,413,594
    
    
    
    127,588
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For
    
    Against
    
    Abstain23,527,798
    
    2,884
    
    10,500
 
 Item 5. Other Information
     
 Item 6. Exhibits
 (a) Exhibits
 ExhibitNumber
    
    Description10.19
    
    Form of Director Change of Control Agreement  Full Single-Trigger10.20
    
    Form of Executive Change of Control Agreement  Full Double-Trigger10.21
    
    Stipulation of Settlement31.1
    
    302 Certification31.2
    
    302 Certification32.1
    
    906 Certification
 Availability of this Report
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SIGNATURES
  CALLIDUS SOFTWARE INC.By:
    /s/ RONALD J. FIORRonald J. FiorChief Financial Officer,
Senior Vice President, Finance and Operations 48




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EXHIBIT INDEX
TO
CALLIDUS SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
 ExhibitNumber
    
    Description10.19
    
    Form of Director Change of Control Agreement  Full Single-Trigger10.20
    
    Form of Executive Change of Control Agreement  Full Double-Trigger10.21
    
    Stipulation of Settlement31.1
    
    302 Certification31.2
    
    302 Certification32.1
    
    906 Certification
 49