**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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#### **FORM10-Q**

#### ** **

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| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                       |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                         |
| ** ** | **For the quarterly period ended March 31, 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               ** |

### ** **

**000-31321**

**(Commission File No.)**

 

**RIGHTNOW TECHNOLOGIES, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Delaware**                    | ** ** | **81-0503640**      |
|---------------------------------|------------|---------------------|
| (State or Other Jurisdiction of |       | (I.R.S. Employer    |
| Incorporation or Organization)  |       | Identification No.) |

 

**40 Enterprise Boulevard**

**Bozeman, Montana 59718-9300**

 (Address of Principal Executive Offices) (ZipCode)

 

**(406) 522-4200**

 (Registrant’sTelephone Number, Including Area Code)

 

**N/A**

(Former Name, Former Address and FormerFiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.     Yes  ý           No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

| Large accelerated filer o |   | Accelerated filer ý |   | Non-accelerated filer o |
|---------------------------|--------|--------------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o           No ý

 

The number of shares outstanding of the registrant’s common stock,$0.001 par value, as of April 30, 2006 was 32,143,005.

 

 

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**RightNow Technologies, Inc.**

**Quarterly Report on Form 10-Q**

 

**For the Quarterly Period Ended March 31, 2006**

 

**INDEX**

 
| **Part I.**                                                          |                                                                                        | **FINANCIAL INFORMATION**                            |   |
|----------------------------------------------------------------------|---------------------------------------------------------------------------------------------|------------------------------------------------------|--------|
| Item 1.                                                              | Financial Statements                                                                        |                                                 |
|                                                                 | a)                                                                                          | Condensed consolidated balance sheets                |   |
|                                                                 | b)                                                                                          | Condensed consolidated statements of operations      |   |
|                                                                 | c)                                                                                          | Condensed consolidated statements of cash flows      |   |
|                                                                 | d)                                                                                          | Notes to condensed consolidated financial statements |   |
|                                                                 |                                                                                        |                                                 |
| Item 2.                                                              | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |                                                 |
|                                                                 |                                                                                        |                                                 |
| Item 3.                                                              | Quantitative and Qualitative Disclosures  About Market Risk                                 |                                                 |
|                                                                 |                                                                                        |                                                 |
| Item 4.                                                              | Controls and Procedures                                                                     |                                                 |
|                                                                 |                                                                                        |                                                 |
| **Part II.**                                                         |                                                                                        | **OTHER INFORMATION**                                |   |
| Item 1. Legal Proceedings                                            |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| Item 1A. Risk Factors                                                |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| Item 3.  Defaults Upon Senior Securities                             |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| Item 4.  Submission of Matters to a Vote of Security Holders         |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| Item 5. Other Information                                            |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| Item  6. Exhibits                                                    |                                                                                        |
|                                                                 |                                                                                        |                                                 |
| **SIGNATURES**                                                       |                                                                                        |

 

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**PartI. FINANCIAL INFORMATION**

 

##### **Item 1. Financial Statements**

##### ** **

**RightNow Technologies, Inc.**

**Condensed Consolidated Balance Sheets**

(In thousands) (Unaudited)

 
| ** **                                          | ** ** | **December  31, 2005** | ** ** | **March 31,  2006** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                          |       |                        |       |                     |       |
| Cash and cash equivalents                           |       | $                           | 40,874     |                     | $          | 42,444 |   |
| Short-term investments                              |       | 23,314                      |       | 27,063                   |       |
| Accounts receivable                                 |       | 25,462                      |       | 31,615                   |       |
| Term receivables, current                           |       | 15,376                      |       | 17,268                   |       |
| Allowance for doubtful accounts                     |       | (2,209                      | )          | (2,090                   | )          |
| Receivables, net                                    |       | 38,629                      |       | 46,793                   |       |
| Prepaid & other current assets                  |       | 1,993                       |       | 2,439                    |       |
| Total current assets                                |       | 104,810                     |       | 118,739                  |       |
|                                                |       |                        |       |                     |       |
| Property and equipment, net                         |       | 6,451                       |       | 6,632                    |       |
| Term receivables, non-current                       |       | 10,697                      |       | 12,611                   |       |
| Intangible assets, net                              |       | 1,487                       |       | 1,340                    |       |
| Other                                               |       | 231                         |       | 107                      |       |
| **Total Assets**                                    |       | $                           | 123,676    |                     | $          | 139,429 |   |
|                                                |       |                        |       |                     |       |
| **Liabilities and Stockholders’ Equity**       | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Accounts payable                                    |       | $                           | 2,308      |                     | $          | 2,983 |   |
| Commissions and bonuses payable                     |       | 2,910                       |       | 3,706                    |       |
| Other accrued liabilities                           |       | 5,733                       |       | 6,248                    |       |
| Current portion of long-term debt                   |       | 30                          |       | 30                       |       |
| Current portion of deferred revenue                 |       | 48,673                      |       | 54,191                   |       |
| Total current liabilities                           |       | 59,654                      |       | 67,158                   |       |
|                                                |       |                        |       |                     |       |
| Long-term debt, less current portion                |       | 117                         |       | 109                      |       |
| Deferred revenue, net of current portion            |       | 19,250                      |       | 26,715                   |       |
|                                                |       |                        |       |                     |       |
| Stockholders’ equity:                          |       |                        |       |                     |       |
| Common stock                                        |       | 32                          |       | 32                       |       |
| Additional paid-in capital                          |       | 78,312                      |       | 79,536                   |       |
| Accumulated other comprehensive loss                |       | (401                        | )          | (393                     | )          |
| Accumulated deficit                                 |       | (33,288                     | )          | (33,728                  | )          |
| Total stockholders’ equity                     |       | 44,655                      |       | 45,447                   |       |
| **Total Liabilities and Stockholders’ Equity** |       | $                           | 123,676    |                     | $          | 139,429 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements ofOperations**

(In thousands, except per share amounts) (Unaudited)

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
| Revenue:                                 |       |                                             |       |   |   |
| Software, hosting and support            |       | $                                                | 13,874     |   | $ | 19,310 |   |
| Professional services                    |       | 4,468                                            |       | 5,321 |   |
| Total revenue                            |       | 18,342                                           |       | 24,631 |   |
|                                     |       |                                             |       |   |   |
| Cost of revenue:                         |       |                                             |       |   |   |
| Software, hosting and support            |       | 2,064                                            |       | 2,771 |   |
| Professional services                    |       | 2,696                                            |       | 4,104 |   |
| Total cost of revenue                    |       | 4,760                                            |       | 6,875 |   |
|                                     |       |                                             |       |   |   |
| Gross profit                             |       | 13,582                                           |       | 17,756 |   |
|                                     |       |                                             |       |   |   |
| Operating expenses:                      |       |                                             |       |   |   |
| Sales and marketing                      |       | 9,457                                            |       | 13,726 |   |
| Research and development                 |       | 2,161                                            |       | 3,130 |   |
| General and administrative               |       | 1,410                                            |       | 2,056 |   |
| Total operating expenses                 |       | 13,028                                           |       | 18,912 |   |
|                                     |       |                                             |       |   |   |
| Income (loss) from operations            |       | 554                                              |       | (1,156 | ) |
|                                     |       |                                             |       |   |   |
| Interest and other income (expense), net |       | 292                                              |       | 672 |   |
|                                     |       |                                             |       |   |   |
| Income (loss) before income taxes        |       | 846                                              |       | (484 | ) |
| (Provision) benefit for income taxes     |       | (45                                              | )          | 44 |   |
| Net income (loss)                        |       | $                                                | 801        |   | $ | (440 | ) |
|                                     |       |                                             |       |   |   |
| Net income (loss) per share:             |       |                                             |       |   |   |
| Basic                                    |       | $                                                | 0.03       |   | $ | (0.01 | ) |
| Diluted                                  |       | $                                                | 0.02       |   | $ | (0.01 | ) |
|                                     |       |                                             |       |   |   |
| Shares used in the computation:          |       |                                             |       |   |   |
| Basic                                    |       | 29,816                                           |       | 31,943 |   |
| Diluted                                  |       | 33,564                                           |       | 31,943 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements of CashFlows**

(In thousands) (Unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
| **Operating activities:**                                            |       |                                             |       |   |   |
| Net income (loss)                                                    |       | $                                                | 801        |   | $ | (440 | ) |
| Non-cash adjustments:                                                |       |                                             |       |   |   |
| Depreciation and amortization                                        |       | 742                                              |       | 1,105 |   |
| Provision (recoveries) for uncollectible  accounts receivable        |       | 52                                               |       | (248 | ) |
| Stock-based compensation                                             |       | —                                           |       | 783 |   |
| Changes in operating accounts:                                       |       |                                             |       |   |   |
| Receivables                                                          |       | (2,402                                           | )          | (9,798 | ) |
| Prepaid expenses                                                     |       | (44                                              | )          | (167 | ) |
| Accounts payable                                                     |       | 776                                              |       | 688 |   |
| Commissions and bonuses payable                                      |       | (663                                             | )          | 787 |   |
| Other accrued liabilities                                            |       | 208                                              |       | 503 |   |
| Deferred revenue                                                     |       | 3,819                                            |       | 12,976 |   |
| Other                                                                |       | (50                                              | )          | (137 | ) |
| Cash provided by operating activities                                |       | 3,239                                            |       | 6,052 |   |
|                                                                 |       |                                             |       |   |   |
| **Investing activities:**                                            |       |                                             |       |   |   |
| Net change in short-term investments                                 |       | 11,490                                           |       | (3,749 | ) |
| Acquisition of property and equipment                                |       | (1,080                                           | )          | (1,140 | ) |
| Acquisition of intangible assets                                     |       | —                                           |       | (10 | ) |
| Cash provided by (used in) investing  activities                     |       | 10,410                                           |       | (4,899 | ) |
|                                                                 |       |                                             |       |   |   |
| **Financing activities:**                                            |       |                                             |       |   |   |
| Proceeds from issuance of common stock  under employee benefit plans |       | 588                                              |       | 433 |   |
| Payments on long-term debt                                           |       | —                                           |       | (8 | ) |
| Cash provided by financing activities                                |       | 588                                              |       | 425 |   |
|                                                                 |       |                                             |       |   |   |
| Effect of foreign exchange rates on cash  and cash equivalents       |       | (26                                              | )          | (8 | ) |
|                                                                 |       |                                             |       |   |   |
| Increase in cash and cash equivalents                                |       | 14,211                                           |       | 1,570 |   |
|                                                                 |       |                                             |       |   |   |
| Cash and cash equivalents at beginning of  period                    |       | 18,944                                           |       | 40,874 |   |
| Cash and cash equivalents at end of period                           |       | $                                                | 33,155     |   | $ | 42,444 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**RightNow Technologies, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

 

**(1)**                     Business Description and Basis of Presentation

** **

***Business Description***

*** ***

RightNowTechnologies, Inc. (the “Company” or “RightNow”) provides customer experiencemanagement software solutions for companies of all sizes. The Company’s ondemand software is designed to go beyond traditional customer relationshipmanagement (“CRM”) solutions to support a business’s external customer-facingchannels as well as sales, marketing and customer service operations. Founded in 1997, RightNow isheadquartered in Bozeman, Montana, with additional offices in Chicago,Illinois; Dallas, Texas; San Mateo, California; Princeton, New Jersey;Rochester, New York; London, England; Sydney, Australia, Munich, Germany; and aliaison office in Tokyo, Japan. The Company operates in one segment, which isthe customer experience management market.

 

***Basis of Presentation***

*** ***

The accompanying interimconsolidated financial statements are unaudited. These financial statements andnotes should be read in conjunction with the audited consolidated financialstatements and related notes, together with management’s discussion andanalysis of financial condition and results of operations, contained in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

The accompanying interimconsolidated financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles. In the opinion of management,the interim consolidated financial statements and notes have been prepared onthe same basis as the audited consolidated financial statements in the AnnualReport on Form 10-K and include all adjustments necessary for the fairpresentation of the Company’s financial position at March 31, 2006, and resultsof operations and cash flows for the three month periods ended March 31, 2005and 2006. The interim period results are not necessarily indicative of theresults to be expected for the full year.

 

The preparation offinancial statements in conformity with United States generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and disclosures of contingent assets and liabilities. Management evaluatesthese estimates and assumptions on an on-going basis. Significant estimates andassumptions made by management include the identification and fair value ofindividual elements in multiple-element sales arrangements, whether the feescharged for our products and services are fixed and determinable, valuationallowances for trade receivables and deferred income tax assets, andassumptions used in estimating the fair value of stock options granted forstock-based compensation.

 

5

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***(2) Certain Risks and Concentrations***

*** ***

The Company’s revenue isderived from the license, hosting and support of its software products andprovision of related professional services. The markets in which the Companycompetes are highly competitive and rapidly changing. Significant technologicalchanges, changes in customer requirements, or the emergence of competitiveproducts with new capabilities or technologies could adversely affect theCompany’s operating results. The Company has historically derived a majority ofits revenue from customer service software solutions. These products areexpected to continue to account for a significant portion of revenue for theforeseeable future. As a result of this revenue concentration, the Company’sbusiness could be harmed by a decline in demand for, or in the prices of, theseproducts or as a result of, among other factors, any change in pricing model, amaturation in the markets for these products, increased price competition or afailure by the Company to keep up with technological change.

 

The Company’s customersare worldwide with approximately 70% to 75% of sales in the United States. Noindividual customer accounted for more than 10% of the Company’s revenue in2005 or the first three months of 2006. One customer represented more than 10%of term receivables at December 31, 2005, and one customer represented 12% ofaccounts receivable at March 31, 2006.

 

As of December 31, 2005and March 31, 2006, assets located outside the United States were 11% of totalassets. The loss from operations outside of the United States totaled $1.6million and $1.9 million for the three months ended March 31, 2005 and 2006,respectively. Revenue by geographical region follows (in thousands):

 
| ** **    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|          |       |                                             |       |   |   |
| United States |       | $                                                | 13,757     |   | $ | 17,368 |   |
| Europe        |       | 2,751                                            |       | 5,014 |   |
| Asia Pacific  |       | 1,834                                            |       | 2,249 |   |
|          |       | $                                                | 18,342     |   | $ | 24,631 |   |

 

6

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**(3) Net Income (Loss) Per Share**

 

***Areconciliation of the denominator used in the calculation of basic and dilutednet income (loss) per share is as follows (in thousands):***

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|                                                                              |       |                                             |       |   |   |
| Weighted average common shares outstanding  for basic net income (loss) per share |       | 29,816                                           |       | 31,943 |   |
| Effect of dilutive securities:                                                    |       |                                             |       |   |   |
| Employee stock options                                                            |       | 3,684                                            |       | — |   |
| Warrants                                                                          |       | 64                                               |       | — |   |
| Weighted average shares outstanding for  dilutive net income (loss) per share     |       | 33,564                                           |       | 31,943 |   |

 

The following commonstock equivalents were excluded from the computation of diluted earnings pershare because their impact was anti-dilutive (in thousands):

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|
| ** **             | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|                   |       |                                             |       |   |   |
| Employee stock options |       | 288                                              |       | 4,052 |   |

 

**(4) Comprehensive Income (Loss)**

 

***Comprehensiveloss for the comparative periods was as follows (in thousands):***

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|                                             |       |                                             |       |   |   |
| Net income (loss)                                |       | $                                                | 801        |   | $ | (440 | ) |
| Other comprehensive income (loss):               |       |                                             |       |   |   |
| Unrealized gain (loss) on short-term investments |       | (41                                              | )          | 14 |   |
| Foreign currency translation adjustments         |       | 28                                               |       | (6 | ) |
| Comprehensive income (loss)                      |       | $                                                | 788        |   | $ | (432 | ) |

 

7

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**(5) Stock-Based Compensation**

 

***TheCompany’s 1998 Long-Term Incentive and Stock Option Plan, as amended, and the2004 Equity Incentive Plan (the “plans”) provide for stock options to begranted to employees, consultants, independent contractors, officers anddirectors. The plans have been approved by stockholders. Except for directorautomatic grants, options are granted at the discretion of the Company’s boardof directors, at an exercise price and term determined by the board. However,exercise prices are not less than the fair market value at the date of grant,and the term of the options is not greater than ten years. Options generallyvest over a period of four years in eight equal increments. The Company alsohas an employee stock purchase plan (“ESPP”) that allows employees to purchaseshares of common stock at a discount to the fair market value at the date ofpurchase. Purchase periods under the ESPP are consecutive six-month periodsending on the last day in June and December each year. Shares issued to satisfystock option exercises and ESPP are newly issued. At March 31, 2006, theCompany had approximately 4.3 million shares available for future issuanceunder the plans and ESPP.***

*** ***

On January 1, 2006, theCompany adopted the provisions of Statement of Financial Accounting StandardsNo. 123(R), *Share Based Payment*, (“SFAS 123R”), forits stock-based compensation plans. Under SFAS 123R, stock-based compensationcosts are recognized based on the estimated fair value at the grant date forall stock-based awards. The Company estimates grant date fair values using theBlack-Scholes-Merton option pricing model, which requires assumptions of thelife of the award and the stock price volatility over the term of the award. TheCompany records compensation cost of stock-based awards using the straightline, single option method, which is recorded into earnings over the vestingperiod of the award.

 

The Company previouslyaccounted for its stock-based compensation plans under the intrinsic valuerecognition and measurement provisions of Accounting Principles Board OpinionNo. 25 (“APB 25”), *Accounting for StockIssued to Employees*, and related interpretations, and adopted thedisclosure-only provisions of Statement of Financial Accounting Standards No.123 (“SFAS 123”), *Accounting for Stock-Based Compensation*,as amended by Statement of Financial Accounting Standards No. 148 (“SFAS 148”),*Accounting for Stock-Based Compensation –Transition and Disclosures*. Under APB 25, no compensation expensewas recorded in earnings for the Company’s stock-based awards. The pro formaeffects on net income and earnings per share for stock-based awards wereinstead disclosed in the footnotes to the consolidated financial statements.

 

The Company has electedto use the modified prospective transition method as permitted under SFAS 123Rand therefore has not restated its financial results for prior periods. Underthis transition method, compensation cost recorded in the three months endedMarch 31, 2006 includes the cost for all stock-based awards granted prior to,but not yet vested as of December 31, 2005, based on the grant-date fair valueestimated in accordance with the original provisions of SFAS 123. Compensationexpense for all stock-based awards granted after December 31, 2005 was based onthe grant-date fair value estimated in accordance with the provisions of SFAS123R.

 

Compensation expenserecognized in the statement of operations for the three months ended March 31,2006 is based on awards ultimately expected to vest and reflects an estimate ofawards that will be forfeited. SFAS 123R requires forfeitures to be estimatedat the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Prior to the adoption of SFAS 123R,forfeitures were recorded as they occurred. The cumulative effect of estimatedforfeitures was $160,000 for the three months ended March 31, 2006.

 

8

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The following tableillustrates the stock-based compensation expense resulting from stock-basedawards included in the condensed consolidated statement of operations (amountsin thousands):

 
| ** **                                             | ** ** | **Three months ended  Mar 31, 2006** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Stock-based compensation expense:            |       |                                                     |       |   |
| Cost of software, hosting and support                  |       | $                                                        | 38         |   |
| Cost of professional services                          |       | 97                                                       |       |
| Sales and marketing                                    |       | 366                                                      |       |
| Research and development                               |       | 159                                                      |       |
| General and administrative                             |       | 123                                                      |       |
| Stock-based compensation expense before  income taxes  |       | 783                                                      |       |
| Income tax provision (benefit)                         |       | —                                                   |       |
| Stock-based compensation expense, net of  income taxes |       | $                                                        | 783        |   |

 

No stock-basedcompensation expense was capitalized during the three months ended March 31,2006.

 

The following tablepresents the impact of our adoption of SFAS 123R on selected line items fromour condensed consolidated financial statements for the three months endedMarch 31, 2006 (amounts in thousands, except per-share amounts):

 
| ** **                                       | ** ** | **As Reported  Following  SFAS 123R** | ** ** | **If Reported  Following  APB 25** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|
| Condensed consolidated statement of  operations: |       |                                            |       |                                         |       |
| Income (loss) from operations                    |       | $                                               | (1,156     | )                                            | $          | (373 | ) |
| Income (loss) before income taxes                |       | (484                                            | )          | 299                                          |       |
| Net income (loss)                                |       | (440                                            | )          | 343                                          |       |
|                                             |       |                                            |       |                                         |       |
| Net income (loss) per share:                     |       |                                            |       |                                         |       |
| Basic                                            |       | $                                               | (0.01      | )                                            | $          | 0.01 |   |
| Diluted                                          |       | (0.01                                           | )          | 0.01                                         |       |
|                                             |       |                                            |       |                                         |       |
| Condensed consolidated statement of cash  flows: |       |                                            |       |                                         |       |
| Cash provided by operating activities            |       | $                                               | 6,052      |                                         | $          | 6,052 |   |
| Cash provided by financing activities            |       | 425                                             |       | 425                                          |       |

 

Unrecognized compensationexpense of outstanding stock options at March 31, 2006 was approximately $10million, which is expected to be recognized over a weighted average period of2.5 years.

 

The following tableillustrates the effect on reported net income and net income per share for thethree months ended March 31, 2005 as if the Company had applied the fair valuerecognition provisions of SFAS 123 to stock-based awards (in thousands, exceptper-share data):

 
| ** **                     | ** ** | **Three months ended  Mar 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|
| Net income, as reported        |       | $                                                        | 801        |   |
| Less: stock-based compensation |       | (591                                                     | )          |
| Pro forma net income           |       | $                                                        | 210        |   |
|                           |       |                                                     |       |
| Net income per share:          |       |                                                     |       |
| Basic:                         |       |                                                     |       |
| As reported                    |       | $                                                        | 0.03       |   |
| Pro forma                      |       | 0.01                                                     |       |
| Diluted:                       |       |                                                     |       |
| As reported                    |       | $                                                        | 0.02       |   |
| Pro forma                      |       | 0.01                                                     |       |

 

9

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The estimated weightedaverage fair value per share of stock options granted in the three months endedMarch 31, 2005 and 2006 was $8.01 and $9.59, respectively. The estimated fairvalue of shares purchased under the ESPP for the three months ended March 31,2005 was $5.79. There was no compensation expense under the ESPP for the threemonths ended March 31, 2006 because the terms of the plan for the purchaseperiod ending June 30, 2006 were deemed noncompensatory under SFAS 123R. Assumptionsused to obtain the estimated fair values were: 

 
| ** **                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
| Employee Stock Options |       |                                             |       |   |   |
| Weighted average risk free rate  |       | 3.9                                              | %          | 4.4 | % |
| Expected term                    |       | 5 yrs                                            |       | 4.8 yrs |   |
| Volatility                       |       | 74                                               | %          | 57 | % |
| Dividend yield                   |       | 0                                                | %          | 0 | % |
|                             |       |                                             |       |   |   |
| Employee Stock Purchase Plan     |       |                                             |       |   |   |
| Risk free rate                   |       | 2.9                                              | %          | — |   |
| Expected term                    |       | 0.5 yrs                                          |       | — |   |
| Volatility                       |       | 74                                               | %          | — |   |
| Dividend yield                   |       | 0                                                | %          | — |   |

 

Key assumptions used toestimate the fair value of stock awards are as follows:

 

*Risk Free Rate:* The risk-free rate is determined byreference to the U.S. Treasury yield curve in effect at or near the time ofgrant for the expected term of the award.

 

*Expected Term*: The expected term represents the periodthat the Company’s stock-based awards are expected to be outstanding and isdetermined based on historical experience of similar awards, givingconsideration to the contractual term of the awards, vesting schedules andexpectations of employee exercise behavior.

 

*Volatility*: The Company’s estimate of expectedvolatility for the three month period ended March 31, 2006 is based on acombination of the Company’s historical volatility and peer-companyvolatilities. The Company has a limited history of volatility, as well aslimited traded options from which to derive implied volatility. The Companybelieves the combination of its historical and peer-company volatilities ismore representative of future stock price trends than its historical volatilityalone.

 

*Dividend Yield:* The dividend yield assumption is basedon the Company’s history and expectation of dividend payouts.

 

Activity under theCompany’s stock option plans for the three months ended March 31, 2006 was asfollows (option shares in thousands):

 

10

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| ** **                                     | ** ** | **Shares  available  for grant** | ** ** | **Outstanding  options** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Aggregate  intrinsic  value (in  thousands)** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Balance at December 31, 2005                   |       | 3,007                                 |       | 3,898                    |       | $                                                      | 6.41       |                                                 |       |                                                                     |       |   |
| Annual reserve addition (1)                    |       | 1,000                                 |       | —                   |       | —                                                 |       |                                                 |       |                                                                     |       |
| Granted                                        |       | (347                                  | )          | 347                      |       | 18.48                                                  |       |                                                 |       |                                                                     |       |
| Exercised                                      |       | —                                |       | (151                     | )          | 2.87                                                   |       |                                                 |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled  (2) |       | 25                                    |       | (42                      | )          | 10.41                                                  |       |                                                 |       |                                                                     |       |
| Balance at March 31, 2006                      |       | 3,685                                 |       | 4,052                    |       | $                                                      | 7.53       |                                                 | $          | 34,964                                                                   |       | 7.4 |   |
|                                           |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Vested or expected to vest at March 31,  2006  |       |                                  |       | 3,745                    |       | $                                                      | 7.15       |                                                 | $          | 33,628                                                                   |       | 7.2 |   |
|                                           |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Exercisable at March 31, 2006                  |       |                                  |       | 1,855                    |       | $                                                      | 3.85       |                                                 | $          | 22,309                                                                   |       | 5.8 |   |

 

----

(1)          The 2004 Equity IncentivePlan provides for an automatic, annual increase on the first of each year in anamount equal to the lesser of: a) 1,000,000 shares; b) 4% of the number ofoutstanding common shares on the last day of the previous fiscal year; or c)such lesser amount as determined by the board of directors. The annualautomatic increase has been approved by shareholders through December 31, 2014.

 

(2)          Shares forfeited, expired,exchanged or canceled under the 1998 Long-Term Equity Incentive and StockOption Plan are not available for re-grant under the 2004 Equity IncentivePlan.

 

The total intrinsic valueof options exercised during the three months ended March 31, 2005 and 2006 was$13.6 million and $2.1 million, respectively.

 

From time to time theCompany may grant options to purchase stock to consultants. The Companyaccounts for consultant stock options in accordance with SFAS 123 and EmergingIssues Task Force Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling, Goods orServices*. Compensation expense for the grant of stock options toconsultants is determined based on the estimated fair value of the stockoptions at the measurement date as defined in EITF 96-18 and is recognized overthe vesting period. There were no stock options granted to non-employees forthe three months ended March 31, 2005 or 2006.

 

11

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**(6)**                     Commitments and Contingencies

** **

***Warranties andIndemnification***

*** ***

The Company’s on-demandapplication service is typically warranted to perform in accordance with itsuser documentation.

 

The Company’sarrangements generally include certain provisions for indemnifying customersagainst liabilities if its products or services infringe a third-party’sintellectual property rights. To date, the Company has not incurred anymaterial costs as a result of such indemnifications and has not accrued anyliabilities related to such obligations in the accompanying consolidatedfinancial statements.

 

The Company has enteredinto service level agreements with a small number of its customers warrantingcertain levels of uptime reliability and permitting those customers to receivecredits or terminate their license agreements in the event that the Companyfails to meet those levels. To date, the Company has not provided any materialcredits, or cancelled any agreements related to these service level agreements.

 

The Company has also agreedto indemnify its directors and executive officers for costs associated with anyfees, expenses, judgments, fines and settlement amounts incurred by any ofthese persons in any action or proceeding to which any of those persons is, oris threatened to be, made a party by reason of the person’s service as adirector or officer, including any action by the Company, arising out of thatperson’s services as the Company’s director or officer or that person’sservices provided to any other company or enterprise at the Company’s request.

 

***Litigation***

*** ***

From time to time, theCompany is involved in legal proceedings arising in the normal course ofbusiness. The Company believes that the resolution of these matters will nothave a material effect on the Company’s consolidated financial position,results of operations or liquidity.

 

12

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**Item 2.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

***Cautionary Statement***

*** ***

*The following discussionand analysis of our financial condition and results of operations should beread in conjunction with the financial statements and related notes in thisreport. This discussion contains forward-looking statements that involve risksand uncertainties. These forward-looking statements are based on our currentexpectations, estimates and projections about our industry, management’sbeliefs, and certain assumptions made by us, all of which are subject to change.Forward-looking statements can often be identified by words such as “anticipates,”“expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “ estimates,” “may,”“will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similarexpressions, and variations or negatives of these words and include, but arenot limited to, statements regarding projected results of operations andmanagement’s future strategic plans. Our actual results could differsignificantly from those projected in the forward-looking statements as aresult of factors, including those discussed under “Risk Factors” and elsewherein this report. We assume no obligation to update the forward-lookingstatements or such risk factors.*

 

***Overview***

*** ***

We are a leading provider of customer experiencemanagement software solutions for companies of all sizes. Our on demandsoftware is designed to go beyond traditional customer relationship management(“CRM”) solutions to support a business’s external customer-facing channels aswall as sales, marketing and customer service operations.

 

We released our initial version of RightNowService in 1997. This product addressed the new customer service needsresulting from the increasing use of the Internet as a customer service channel.Since then, we have significantly enhanced product features and functionalityto address customer service needs across multiple communication channels,including web, interactive voice, e-mail, chat, telephone and proactiveoutbound e-mail communications. We have also added several products that arecomplementary to our RightNow Service solution, including RightNow Marketingand RightNow Sales, which automate aspects of marketing campaigns and salesoperations. In May 2005, we purchased the assets of Convergent Voice, and addedvoice self-service capabilities to our product portfolio. To date,approximately 90% of our revenue has been generated by the RightNow Servicesuite.

 

During the three months ended March 31, 2006,we acquired 97 new customers to bring our customer base to more than 1,500, andour products served more than 280 million customer interactions, or uniquesessions hosted by our solutions. Our solutions, whether sold pursuant to termor perpetual licenses, are available either on a hosted basis, where they aredeployed in our co-location facilities and accessed on-demand by our clients,or on a non-hosted basis, where our clients deploy them in their own facilities.Approximately 87% of our clients have elected the hosted option as of March 31,2006. We distribute our solutions primarily through direct sales efforts and toa lesser extent through indirect channels.

 

***Sources of Revenue***

*** ***

Our revenue is comprised of fees for term andperpetual licenses of our software, fees for hosting and support related to ourlicenses, and fees for professional services. Our term license agreements aregenerally two years in length, but can range from six months to five years, andinclude our software and related upgrades, and hosting and support servicesover the term of the agreement. The majority of our revenue in each of our lastthree years and the three months ended March 31, 2006 was derived from two-yearterm license agreements. We also offer monthly term license agreements thatcontain a minimum commitment period and include our software and related upgrades,hosting and support. Perpetual licenses are typically sold with annualmaintenance contracts that include upgrades, hosting and support.

 

13

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Our software license agreements generallyinclude capacity-based fees, which are measured primarily by web pages served,user seats, outgoing email transactions, or minutes used, and certain fixedfees. A number of our agreements provide for additional fees for usage aboveestablished levels, which are billed and recognized into revenue when earned.

 

Hosting and support agreements providemaintenance and management of our software at a third party facility, technicalsupport for our software products, and unspecified product upgrades on a whenand if available basis.

 

Professional services revenue is comprised ofrevenue from consulting, education and development services, and reimbursementof related travel costs. Consulting and education services includeimplementation and best practices consulting. Development services includecustomizations and integrations for a client’s specific business application.

 

Professional services are sold with initiallicense agreements and periodically over the client engagement. The averagedeployment time for our clients is approximately 50 days. We typically invoiceclients for the entire amount at the beginning of the agreement with paymentgenerally due within 30 days for our term and perpetual license agreements, ordue monthly for our monthly agreements. Our typical education courses arebilled on a per person, per class basis.

 

Depending on the size and complexity of theclient project, our consulting or development services contracts are eitherfixed price/fixed scope or, less frequently, billed on a time and materialsbasis. We have determined that the professional services element of oursoftware arrangements is not essential to the functionality of the software. Wehave also determined that our professional services: a) are available fromother vendors; b) do not involve a significant degree of risk or uniqueacceptance criteria; and c) qualify for separate accounting as we havesufficient experience in providing such services.

 

***Costof Revenue and Operating Expenses***

*** ***

*Cost of Revenue.*Costof revenue consists primarily of salaries and related expenses (e.g. employeebenefits and payroll taxes) for our hosting, support and professional servicesorganizations, third-party costs and equipment depreciation relating to ourhosting services, third-party costs for interactive voice self-serviceapplications, travel expenses related to providing professional services to ourclients, amortization of acquired intangible assets and allocated overhead. Weallocate most overhead expenses, such as office supplies, computer supplies,utilities, rent, depreciation for furniture and equipment, payroll taxes andemployee benefits, based on headcount. As a result, overhead expenses arereflected in each cost of revenue and operating expense category. BeginningJanuary 1, 2006, cost of revenue also includes stock-based compensationexpense.

 

Our hosting costs are affected by thepercentage of clients who license our products on a hosted basis and the numberof times our clients and their customers use our solutions, which we refer toas customer interactions. As a result of economies of scale in our hostinginfrastructure and declines in computer hardware and telecommunications costs,we were able to reduce hosting costs as a percentage of total revenue in 2003,2004 and 2005, despite significant increases in the number of hosted clientsand the level of customer interactions.

 

As our client base and solutions usage grows,we intend to continue to invest additional resources in our hosting services,technical support and professional services. We expect our professionalservices costs to increase in absolute dollars as we increase our professionalservices as a percentage of total revenue. Because cost as a percentage ofrevenue is higher for professional services revenue than for software, hostingand support revenue, an increase in professional services as a percentage oftotal revenue reduces gross profit as a percentage of total revenue.

 

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*Sales and MarketingExpenses.*Sales and marketing expenses consistprimarily of salaries and related expenses for employees in sales andmarketing, including commissions and bonuses, advertising, marketing events,corporate communications, product management expenses, travel costs andallocated overhead. Beginning January 1, 2006, sales and marketing expensesalso include stock-based compensation expense. Weexpense our sales commissions when earned, which is typically at the time therelated sale is invoiced to the client, and werecognize the majority of our revenue from our agreements ratably over theterms of the licenses. Accordingly, we generally experience a delay betweenincreasing sales and marketing expenses and the recognition of correspondingrevenue. We expect significant additional increases in sales and marketingexpenses in absolute dollars as we continue to hire additional sales andmarketing personnel and increase the level of marketing activities.

 

*Research andDevelopment Expenses.*Research and development expenses consistprimarily of salary and related expenses for development personnel and costsrelated to the development of new products, enhancement of existing products,translation fees, quality assurance, testing and allocated overhead. BeginningJanuary 1, 2006, research and development expenses also include stock-basedcompensation expense. To date, we have not capitalized any software developmentcosts because the timing of the commercial releases of our products hassubstantially coincided with the attainment of technological feasibility. As aresult, research and development costs have been expensed as incurred. Weintend to continue to expand and enhance our product offerings. To accomplishthis, we plan to hire additional personnel and, from time to time, contractwith third parties. We expect that research and development expenses willincrease in absolute dollars as we seek to expand our technology and productofferings.

 

*General andAdministrative Expenses*. General and administrative expensesconsist primarily of salary and related expenses for management, finance andaccounting, legal, information systems and human resources personnel,professional fees, other corporate expenses and allocated overhead. BeginningJanuary 1, 2006, general and administrative expenses also include stock-basedcompensation expense. We anticipate that we will incur additional employeesalaries and related expenses, professional service fees and insurance costsrelated to the growth of our business and operations.

 

***Critical Accounting Policies and Estimates***

*** ***

Our financial statements and accompanying notes are prepared inaccordance with accounting principles generally accepted in the United States. Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses. Theseassumptions are affected by management’s application of accounting policies. Ourcritical accounting policies include: revenue recognition; valuation ofreceivables and deferred tax assets; and accounting for equity-basedcompensation.

 

We believe the following critical accounting policies require us tomake significant judgments and estimates in the preparation of our consolidatedfinancial statements:

 

***RevenueRecognition***

*** ***

We account for our sales arrangements in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, and SOP 98-9, Modification ofSOP 97-2, *Software Revenue Recognition With Respect toCertain Transactions*. The application of these SOPs requiresjudgment, including the identification of individual elements in multipleelement arrangements, and whether vendor specific objective evidence (“VSOE”)exists for those elements. Customers may receive certain elements upon deliveryor over time. For example, under our sales arrangements customers typicallyreceive the software license up front, and receive hosting and support servicescontinuously over the length of the agreement. Under our term arrangements,revenues for the software, hosting and support elements are aggregated andrecognized ratably over the length of the agreement because VSOE for theindividual elements does not exist. Under a perpetual license arrangement, VSOEof the hosting and support elements is based on the price charged at renewal,and therefore the license element is recognized immediately into revenue upondelivery using the residual 

 

15

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method, andthe hosting and support elements are recognized ratably over the contractualterm. Changes to the elements in our software arrangements, the ability toestablish VSOE for those elements, and the fair value of the respectiveelements could materially effect the amount of our earned and deferred revenue.

 

Our standard payment terms are net 30, although payment within 90 daysis considered normal. We provide extended payment terms in certaincircumstances. In such cases, judgment is required in determining whether ourfee is fixed and determinable and the appropriate timing of revenue recognition.Changes in our business practices for providing extended payment terms and/orproviding concessions following a sale, may effect our assessment of fixed anddeterminable fees and result in a material change to the amount of revenuerecorded in a given period.

 

***Allowancefor doubtful accounts***

*** ***

We regularly assess the collectibility of outstanding customer invoicesand, in so doing, we maintain an allowance for estimated losses resulting fromthe non-collection of customer receivables. In estimating this allowance, weconsider factors such as: historical collection experience; a customer’scurrent creditworthiness; customer concentration; age of the receivablebalance; and general economic conditions that may affect a customer’s abilityto pay. Actual customer collections could differ from our estimates and exceedour related loss allowance.

 

***IncomeTaxes***

*** ***

We record income taxes under the asset and liability method. Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect of a change in tax rates ondeferred tax assets and liabilities is recognized in income in the period thatincludes the enactment date. When applicable, a valuation allowance isestablished to reduce any deferred tax asset when it is determined that it ismore likely than not that some portion of the deferred tax asset will not berealized.

 

We have established a valuation allowance equal to our net deferred taxassets due to uncertainties regarding the realization of our net operating losscarryforwards, tax credits, and deductible timing differences. The uncertaintyof realizing these benefits is based primarily on our lack of taxable earnings.

 

***Equity-BasedCompensation***

*** ***

We have adopted the provisions of Statement of Financial AccountingStandards No. 123(R), *Share Based Payment*,(“SFAS 123R”) beginning January 1, 2006 utilizing the modified prospectivemethod. This statement requires the cost of share-based payment arrangements tobe recorded in the statement of operations. Prior to 2006, the estimated costof share-based payment arrangements was disclosed in a footnote to thefinancial statements. Share-based compensation amounts are affected by ourstock price as well as our assumptions regarding the expected volatility of ourstock, our employee stock option exercise behaviors, and the related income taxeffects. Our assumptions are based primarily on our historical information,some of which was developed when we were a private company.

 

***RecentlyIssued Accounting Standards***

*** ***

In February 2006, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards (“SFAS”) No. 155, *Accounting for Certain Hybrid Instruments*, which amends SFAS133, *Accounting for Derivative Instruments and HedgingActivities*, and SFAS 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Debt*. Thenew standard allows financial instruments that have embedded derivatives to beaccounted for as a whole, thereby eliminating the need to bifurcate thederivative from the host instrument, if the holder elects to account for thewhole instrument on a fair value basis. The new standard also clarifies certainitems that are not subject to SFAS 

 

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133,establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation,clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives, and amends SFAS 140 to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. We do not believe the adoption of SFAS 155will have a material effect on our financial statements.

 

***Resultsof Operations***

*** ***

The following table sets forth certainconsolidated statement of operations data expressed as a percentage of totalrevenue for the periods indicated:

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
| Revenue:                                 |       |                                             |       |   |   |
| Software, hosting and support            |       | 76                                               | %          | 78 | % |
| Professional services                    |       | 24                                               |       | 22 |   |
| Total revenue                            |       | 100                                              |       | 100 |   |
|                                     |       |                                             |       |   |   |
| Cost of revenue:                         |       |                                             |       |   |   |
| Software, hosting and support            |       | 11                                               |       | 11 |   |
| Professional services                    |       | 15                                               |       | 17 |   |
| Total cost of revenue                    |       | 26                                               |       | 28 |   |
|                                     |       |                                             |       |   |   |
| Gross profit                             |       | 74                                               |       | 72 |   |
|                                     |       |                                             |       |   |   |
| Operating expenses:                      |       |                                             |       |   |   |
| Sales and marketing                      |       | 51                                               |       | 56 |   |
| Research and development                 |       | 12                                               |       | 13 |   |
| General and administrative               |       | 8                                                |       | 8 |   |
| Total operating expenses                 |       | 71                                               |       | 77 |   |
|                                     |       |                                             |       |   |   |
| Income (loss) from operations            |       | 3                                                |       | (5 | ) |
|                                     |       |                                             |       |   |   |
| Interest and other income (expense), net |       | 1                                                |       | 3 |   |
|                                     |       |                                             |       |   |   |
| Income (loss) before income taxes        |       | 4                                                |       | (2 | ) |
| Provision for income taxes               |       | —                                           |       | — |   |
| Net income (loss)                        |       | 4                                                | %          | (2 | )% |

 

The following table sets forth our on-demandcustomer interactions and percent of clients hosting and our revenue by typeand geography expressed as a percentage of total revenue for each of theperiods indicated:

 
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|                                           |       |                                             |       |   |   |
| Customer interactions (in millions)            |       | 166                                              |       | 281 |   |
| Percentage of clients hosting                  |       | 86                                               | %          | 87 | % |
|                                           |       |                                             |       |   |   |
| Revenue by type:                               |       |                                             |       |   |   |
| Recurring (term licenses, hosting and support) |       | 58                                               | %          | 57 | % |
| Perpetual licenses                             |       | 18                                               |       | 22 |   |
| Professional services                          |       | 24                                               |       | 22 |   |
|                                           |       |                                             |       |   |   |
| Revenue by geography in:                       |       |                                             |       |   |   |
| United States                                  |       | 75                                               | %          | 71 | % |
| Europe                                         |       | 15                                               |       | 20 |   |
| Asia Pacific                                   |       | 10                                               |       | 9 |   |

 

17

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***Overview of Current Period and Outlook***

*** ***

Revenue for the quarter ended March 31, 2006 of$24.6 million was 34% more than the first quarter of 2005, and represented our33rd consecutive quarter of top-line growth. Revenue growth has been driven bynew customer acquisitions, the release of new products, and customer purchasesof additional capacity. We signed 97 new customers during the quarter endedMarch 31, 2006 to bring our total customer base to more than 1,500 and ourdeferred revenue balance to $80.9 million. Growth in revenue and deferredrevenue during the quarter ended March 31, 2006 increased sales commissions,which increased sales and marketing expenses to 56% of revenue in the firstquarter of 2006 as compared to 51% of revenue in the first quarter of 2005. BeginningJanuary 1, 2006 we adopted the provisions of the new accounting standard forstock-based compensation and recorded $783,000 of stock-based compensationexpenses in the first quarter of 2006. The higher sales and marketing expensescombined with the stock-based compensation expenses caused a negative operatingmargin in the first quarter of 2006.

 

For the three months ended March 31, 2006, wegenerated $6.1 million of cash from operations compared to $3.2 million of cashfrom operations in the first quarter of 2005.

 

As of March 31, 2006 we had an accumulateddeficit of $33.7 million. This deficit resulted primarily from costs incurredin the development, sales and marketing of our products and for general andadministrative purposes. We intend to continue to invest in our sales andmarketing activities, product development and business infrastructure. Duringperiods of investment and growth, because the majority of expenses are recordedas incurred and the majority of revenue is deferred, we anticipate that anygrowth in revenue will be largely offset by an increase in cost of revenue andoperating expenses.

 

***ThreeMonths Ended March 31, 2005 and 2006***

*** ***

***Revenue***

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                 |       |   |   |   |   |
| Software, hosting and support        |       | $                                                    | 13,874     |   | $ | 19,310 |   | 39 | % |
| Professional services                |       | 4,468                                                |       | 5,321 |   | 19 |   |
| Total revenue                        |       | $                                                    | 18,342     |   | $ | 24,631 |   | 34 | % |

 

*Software, hostingand support*

 

For the quarter ended March 31, 2006,software, hosting and support revenue increased $5.4 million, or 39%, over thefirst quarter of 2005. The increase resulted primarily from a 16% increase inaverage revenue per client and a 20% increase in the average number of clients.Average revenue per client has grown from additional usage capacity andupgrades and enhancements purchased by clients. Additional usage capacitypurchased by clients is reflected by customer interactions, which grew to 281million for the quarter ended March 31, 2006 from 166 million in the comparable2005 quarter. We added 97 new clients during the quarter ended March 31, 2006primarily due to the addition of sales representatives focused on new clientacquisition. Recurring software, hosting and support revenue was $14 million inthe quarter ended March 31, 2006, or 32% more than the comparable 2005 quarter.  In addition, beginning January 1, 2006,average software, hosting and support revenue per client includes the value ofcertain tools that had been categorized as professional services revenue in priorperiods. This change in revenue categorization follows the transfer of ongoingdevelopment and support responsibility for these tools from the professionalservices organization to the software, hosting and support organizationeffective January 1, 2006.

 

Perpetual license fee revenue represented 22%of total revenue in the quarter ended March 31, 2006 compared to 18% in thequarter ended March 31, 2005. The mix of perpetual license revenue affects ouroverall profitability in any given period since it is recorded into revenue infull upon delivery instead of 

 

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being ratably recognized intorevenue, as is the case with term licenses. Perpetual license revenue hasranged between 18% and 29% of total revenue over the past eight quarters, buthas been declining over the past four quarters. We believe there are manyfactors that cause our perpetual license revenue to fluctuate as a percentageof total revenue, including the strategic importance of our products in clientorganizations, client planning horizons, and client purchasing preferences andpatterns. For these reasons, we expect perpetual license revenue to continue tofluctuate in future periods.

 

*Professional services*

 

For the quarter ended March 31,2006, professional services revenue increased $853,000, or 19%, over the firstquarter of 2005. Average professional services revenue per client decreasedslightly in the first quarter of 2006 compared to the first quarter of 2005,while average number of clients increased 20%. Average professional servicesrevenue per client decreased slightly during the first quarter ended March 31,2006 primarily because of a prospective change in classification of certaintools from professional services revenue to software, hosting and supportrevenue. These tools, consisting of connectors to other general-use softwareapplications and customization tools, had been created by our professionalservices organization and included in professional services revenue in 2005 andprior years. Effective January 1, 2006, we transferred the ongoing developmentand support responsibilities for these tools to our product group, andaccordingly, the associated revenue is classified as software, hosting andsupport revenue beginning in 2006.

 

The mix of professionalservices revenue to total revenue will also affect our operating results fromperiod-to-period, due to the lower gross profit earned on professional servicesrevenue as compared to software, hosting and support revenue. We expectprofessional services revenue to range between 20% and 25% of total revenue infuture periods.

 

***Costof Revenue***

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                 |       |   |   |   |   |
| Software, hosting and support        |       | $                                                    | 2,064      |   | $ | 2,771 |   | 34 | % |
| Professional services                |       | 2,696                                                |       | 4,104 |   | 52 |   |
| Total cost of revenue                |       | $                                                    | 4,760      |   | $ | 6,875 |   | 44 | % |

 

*Software, hostingand support*

 

For the quarter ended March 31,2006, cost of software, hosting and support revenue increased $707,000, or 34%,over the comparable 2005 quarter mostly due to the additions of staff andcapacity to our hosting data centers. Staff additions in our software, hostingand support organization increased salaries and related employee costs by$331,000 in the first quarter of 2006 over the first quarter of 2005. Stock-basedcompensation expense included in the cost of software, hosting and support was$38,000 and zero in the first quarter of 2006 and 2005, respectively. Additionalhosting capacity increased equipment depreciation expenses and third-partyhosting service costs by $172,000 in the first quarter of 2006 over the firstquarter of 2005. Average employee count in our hosting and support organizationwas 59 in the first quarter of 2006 compared to 52 in the first quarter of 2005.As a percent of the associated revenue, cost of software, hosting and supportdeclined slightly to 14% in the first quarter of 2006 from 15% in the firstquarter of 2005, primarily due to efficiencies gained in our hostingoperations.

 

*Professionalservices*

 

For the quarter ended March 31,2006, professional services costs increased $1.4 million, or 52%, over thecomparable 2005 quarter. The growth in absolute dollars in the first quarter of2005 resulted primarily from staff additions, which increased salaries andrelated expenses by $920,000. Travel and living expenses increased by $279,000in the first quarter of 2006 over the first quarter of 2005 mostly due to atraining forum held in January 2006. Stock-based compensation expense in the costof professional services was $97,000 in the first quarter of 2006 as comparedto zero in the first quarter of 2005. Average employee count in ourprofessional services group was 108 in the first quarter of 2006 compared to 77in the first quarter of 2005. As a percent of the associated revenue,professional services costs were 77% in 

 

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the2006 quarter as compared to 60% in the 2005 quarter, mostly due to the 2006reclassification noted above in the discussion under professional servicesrevenue. We expect the cost of professional services to range between 65% and75% of the associated revenue in the future.

 

***OperatingExpenses***

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| **(****Amounts in thousands)** | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|                                     |       |                                                 |       |   |   |   |   |
| Sales and marketing                      |       | $                                                    | 9,457      |   | $ | 13,726 |   | 45 | % |
| Research and development                 |       | 2,161                                                |       | 3,130 |   | 45 |   |
| General and administrative               |       | 1,410                                                |       | 2,056 |   | 46 |   |
| Total operating expenses                 |       | $                                                    | 13,028     |   | $ | 18,912 |   | 45 | % |

 

*Sales and MarketingExpenses*

 

For the quarter ended March 31, 2006, salesand marketing expense increased $4.3 million, or 45%, over the comparable 2005quarter primarily due to the addition of sales representatives and increasedsales incentive costs. Average employee count in our sales and marketingorganization increased to 235 in the first quarter of 2006 from 188 in thefirst quarter of 2005. The employee growth added $1.5 million in salaries andrelated expenses, $309,000 in travel and living expenses, and $282,000 inrecruiting and employee relations expenses. Stock-based compensation expense inour sales and marketing organization was $366,000 in the quarter ended March31, 2006 as compared to zero in the quarter ended March 31, 2005. In addition,sales commissions increased $1.4 million in the quarter ended March 31, 2006over the quarter ended March 31, 2005 due to growth in the value of newcustomer contracts invoiced. As a percent of total revenue, sales and marketingexpenses increased to 56% in the first quarter of 2006 from 51% in the firstquarter of 2005 mostly due to the current expense of sales incentives while themajority of revenue is deferred and recognized over the contractual periods.

 

*Research andDevelopment Expenses*

 

For the quarter ended March 31, 2006,research and development expenses increased $969,000, or 45%, over thecomparable 2005 quarter due to higher salaries and related costs of $753,000. Averageemployee count in our research and development organization grew to 112employees in the first quarter of 2006 from 89 employees in the first quarterof 2005. Stock-based compensation expense in the first quarter of 2006 for theresearch and development group was $159,000 as compared to zero in the firstquarter of 2005.

 

*General andAdministrative Expenses*

 

For the quarter ended March 31, 2006, generaland administrative expenses increased $646,000, or 46%, over the first quarterof 2005 due to employee growth and increased costs for Sarbanes-Oxleycompliance. Average employees in our general and administrative organizationwere 52 in the first quarter of 2006 and 37 in the first quarter of 2005, whichincreased payroll and related costs by approximately $289,000. Sarbanes-Oxelycompliance costs increased $115,000 in the 2006 quarter over the 2005 quarterprimarily due to higher fees from our independent public accounting firm forthe estimated costs of their attestation work on our 2006 internal controlprocedures. Stock-based compensation expense for the first quarter of 2006 inour general and administrative group was $123,000 as compared to zero in thefirst quarter of 2005.

 

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*Stock-basedCompensation*

 

We adopted the provisions of Statement ofFinancial Accounting Standards No. 123(r), *Share Based Payment*,using the modified prospective method, on January 1, 2006. Under the modifiedprospective method, prior periods have not been restated to conform with thecurrent period accounting treatment. Adoption of this accounting standardrequired the recognition of $783,000 of stock-based compensation expense in thefirst quarter of 2006, which has been recorded to each cost and expensecategory in our statement of operations. Amounts recorded to each cost andexpense category have been noted in the above discussion. At March 31, 2006, wehad approximately $10 million of deferred stock-based compensation expense thatis expected to be recorded into earnings over a weighted-average period of 2.5years. Total stock-based compensation expense for the year ended December 31,2006 is anticipated to be approximately $5 million. This estimate is based onassumptions regarding our stock price, the number and timing of stock awardsgranted and forfeited, our stock price volatility, and employee exercisebehaviors. Actual stock-based compensation expense could differ materially fromour estimates.

 

***Interestand Other Income (Expenses), Net***

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
|                                      |       |                                             |       |   |   |
| Interest income                           |       | $                                                | 303        |   | $ | 674 |   |
| Interest expense                          |       | —                                           |       | (2 | ) |
| Other income (expense)                    |       | (11                                              | )          | — |   |
| Total interest and other income (expense) |       | $                                                | 292        |   | $ | 672 |   |

 

Interest income of $674,000 in the quarterended March 31, 2006 increased 122% over interest income of $303,000 in thequarter ended March 31, 2005 due to growth in the average yield-to-maturity inour investment portfolio, as well as growth in our cash and short-terminvestment balances. Investment yields have risen along with the periodicincreases in the federal funds rate. Our investment portfolio consistsprimarily of investment-grade, short-term government and corporate debtinstruments. Interest expense in the 2006 quarter resulted from a capitalizedlease obligation. Other income (expense) consists of gains or losses onequipment disposals and realized foreign currency exchange gains or losses,which has not been material individually or in the aggregate for the periodspresented.

 

***Provisionfor Income Taxes***

 

Our effective tax rate was 9% of the pre-taxloss in the three months ended March 31, 2006 as compared to 5% of pre-taxincome in the quarter ended March 31, 2005. The effective tax rate is based onour expectations for the full year results, and is dependent on many factors,including actual tax deductions for stock-based compensation as compared tobook deductions, the level of business conducted in state and foreign taxjurisdictions, management’s expectations of the realization of deferred taxassets and the associated valuation allowance, and other factors.

 

At March 31, 2006, we had $22.6 million ofnet deferred income tax assets that have been reserved in full by a valuationallowance. In the future, if available evidence indicates that it is morelikely than not that we will be able to utilize some or all of our deferred taxassets, we will record an income tax benefit or a credit to additional paid-incapital in the amount of the asset recognized. At that time, we expect that oureffective tax rate would increase to more closely approximate the U.S. federalstatutory rate.

 

***Liquidityand Capital Resources***

 

Information regarding deferred revenue andcash provided by operating activities follows (in thousands):

 

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| ** **                            | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| **(Amounts in thousands)**  | ** ** | **Mar 31,  2005** | ** ** | **Jun 30,  2005** | ** ** | **Sep 30,  2005** | ** ** | **Dec 31,  2005** | ** ** | **Mar 31,  2006** | ** ** |
|                                  |       |                   |       |   |   |   |   |   |   |   |   |
| Deferred revenue                      |       | $                      | 52,810     |   | $ | 57,368 |   | $ | 63,752 |   | $ | 67,923 |   | $ | 80,906 |   |
| Cash provided by operating activities |       | 3,239                  |       | 2,564 |   | 5,248 |   | 3,844 |   | 6,052 |   |
|                                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have historically funded our operationswith cash from operations, equity financings and debt borrowings. In August2004 we completed our initial public offering of 6.4 million shares of commonstock and received net proceeds of approximately $40 million. The offeringproceeds are invested in short-term, interest-bearing securities.

 

At March 31, 2006, cash and cash equivalents,and short-term investments, totaled $69.5 million. In addition to our cash andshort-term investments, other sources of liquidity at March 31, 2006 included a$3.0 million bank line of credit facility under which there have been noborrowings to date.

 

Operating activities provided $6.1 million ofcash during the three months ended March 31, 2006, as compared to $3.2 millionof cash from operations in the corresponding period of the prior year. Themajority of our cash from operations in the first quarter of 2006 was fromgrowth in deferred revenue and collections of accounts receivable. We typicallybill customers on net 30-day terms at the beginning of the license period,which is reflected in accounts receivable and deferred revenue. In periods ofincreasing sales, we would expect growth in accounts receivable and deferredrevenue which, historically, has provided funding for operations. A change inour billing practice resulting in delayed payment terms could have a materialadverse effect on cash provided from operations and growth in deferred revenue.

 

The allowance for uncollectible accountsreceivable represented 4% and 5% of current accounts and term receivables atMarch 31, 2006 and December 31, 2005, respectively. We regularly assess theadequacy of the allowance for uncollectible accounts. Actual customercollections could differ from our estimates and exceed the related lossallowance.

 

We do not expect to pay significant cashincome taxes in 2006 primarily because of the availability of operating losscarryforwards that may be utilized to offset taxable income, if any, in 2006.

 

Investing activities used $4.9 million incash during the three months ended March 31, 2006 due to net purchases ofshort-term investments and capital expenditures. Capital expenditures consistprimarily of capacity additions to our hosting operations and are expected torange between $8 million and $9 million for the full year 2006.

 

Financing activities provided $0.4 million inthe three months ended March 31, 2006 from the exercise of employee stockoptions.

 

We believe our existing cash and short-terminvestments, together with funds generated from operations, should besufficient to fund operating and investment requirements for at least****the foreseeable future. Our future capitalrequirements will depend on many factors, including our rate of revenue growthand expansion of our sales and marketing activities, the possible acquisitionof complementary products or businesses, the timing and extent of spendingrequired for research and development efforts, and the continuing marketacceptance of our products. To the extent that available funds are insufficientto fund our future activities, we may need to raise additional funds throughpublic or private equity or debt financings. Additional equity or debtfinancing may not be available on terms favorable to us or at all.

 

*Off-Balance Sheet Arrangements*

 

As of March 31, 2006, we did not have anysignificant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K promulgated by the SEC.

 

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***ContractualObligations and Commitments***

*** ***

We did not incur any material new orincreased contractual obligations or commitments during the quarter ended March31, 2006.

 

**Item 3. Quantitativeand Qualitative Disclosures about Market Risk**

 

***ForeignCurrency Exchange Risk***

*** ***

Our results of operations and cash flows aresubject to fluctuations due to changes in foreign currency exchange rates,particularly changes in the Euro, British pound, Australian dollar, andJapanese yen, because our contracts are frequently denominated in localcurrency. To date, we have not entered into any hedge transactions sinceexchange rate fluctuations have had little impact on our operating results andcash flows. In the future, we may utilize foreign currency forward and optioncontracts to manage currency exposures.

 

***InterestRate Sensitivity***

*** ***

Interest income and expense are sensitive tochanges in the general level of U.S. interest rates. Net proceeds of ourinitial public offering of common stock are invested in short-term,interest-bearing securities, which are subject to credit and interest rate risk.Our investment portfolio is investment-grade and diversified among issuers andtypes to reduce credit risk. The average maturity of our investment portfoliois less than 90 days and we expect to hold the investments until maturity. Ifmarket interest rates were to increase by 100 basis points from the level atMarch 31, 2006, the fair value of our investment portfolio would decline byapproximately $141,000.

 

**Item 4. Controls andProcedures**

 

***(a)******                                 Evaluationof Disclosure Controls and Procedures***

Our management, with the participation of ourChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of theend of the period covered by this report. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, our disclosure controls and procedures wereeffective in ensuring that information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act of 1934 is (i)recorded, processed, summarized and reported, within the time periods specifiedin the rules and forms of the Securities and Exchange Commission and (ii)accumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

 

***(b)******                                 Changesto Internal Control over Financial Reporting***

During the most recent completed fiscalquarter covered by this report, there has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934) that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**Part II. Other Information**

 

***Item 1. Legal Proceedings***

*** ***

From time to time, we are involved in legalproceedings in the ordinary course of business. We believe that the resolutionof these matters will not have a material effect on the Company’s consolidatedfinancial position, results of operations or liquidity.

 

***Item 1A. Risk Factors***

*** ***

*               *Arestated description of the risk factors associated with our business is setforth below.  This description includesany changes (whether or not material) to, and supercedes, the description ofthe risk factors associated with our business previously disclosed in Part 1,Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005.

* *

*                Beforedeciding to purchase, hold or sell our common stock, you should carefullyconsider the risks described below, in addition to the other cautionarystatements and risks described elsewhere and the other information contained inthis report and in our other filings with the Securities and ExchangeCommission, including our reports on Forms 10-K, 10-Q and 8-K. The risks anduncertainties described below are not the only ones we face. Additional risksand uncertainties not presently known to us or that we currently deemimmaterial may also affect our business. If any of these known or unknown risksor uncertainties actually occurs with material adverse effects on RightNow, ourbusiness, financial condition and results of operations could be seriouslyharmed. In that event, the market price for our common stock could decline andyou may lose all or part of your investment.*

 

**                *We may not be able to achieve, sustain or increaseprofitability in the future.***

 

Prior to 2004,we incurred significant operating losses of approximately $4.1 million in2003, $2.7 million in 2002 and $15.3 million in 2001. We alsoincurred an operating loss of $440,000 in the first quarter of 2006. As ofMarch 31, 2006, we had an accumulated deficit of approximately $33.7 million.We expect to continue to incur significant sales and marketing, research anddevelopment and general and administrative expenses as we expand our operationsand, as a result, we will need to generate significant revenue to maintainprofitability. Even if we achieve profitability, we may not be able to increaseprofitability on a quarterly or annual basis in the future, which may cause theprice of our stock to decline.

 

***                Our quarterly results ofoperations may fluctuate in the future.***

 

Our quarterly revenue andresults of operations may fluctuate as a result of a variety of factors, manyof which are outside of our control. If our quarterly revenue or results ofoperations fall below the expectations of investors or securities analysts, theprice of our common stock could decline substantially. Fluctuations in ourresults of operations may be due to a number of factors, including, but notlimited to, those listed below and identified throughout this “Risk Factors”section:

 

•               our ability to retain and increase sales to existingclients, attract new clients and satisfy our clients’ requirements;

•               changes in the volume and mix of term and perpetuallicenses sold in a particular quarter, because perpetual license revenue isrecorded into revenue upon delivery whereas term licenses are recorded intorevenue ratably over the period of license;

•               our policy of expensing sales commissions when earned,which is typically at the time of invoice, while the majority of our revenue isrecognized ratably over future periods;

•               changes in the mix of revenue between professionalservices and software, hosting and support, because the gross margin onprofessional services is typically lower than the gross margin on software,hosting and support;

•               changes in the mix of voice self service applicationssold and/or usage volume, because the gross margin on voice self serviceapplications is typically lower than the gross margin on our sales, marketingand service applications;

•               the timing and success of new product introductions orupgrades by us or our competitors;

•               changes in our pricing policies or those of ourcompetitors;

•               the amount and timing of expenditures related toexpanding our operations;

 

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•         changes in the payment terms for our productsand services, including changes in the mix of payment options chosen by ourcustomers;

•         the purchasing and budgeting cycles of ourclients; and

•         general economic, industry and marketconditions.

 

Becausethe sales cycle for the evaluation and implementation of our solutionstypically ranges from 60 to 180 days, we may also experience a delaybetween increasing operating expenses and the generation of correspondingrevenue, if any. Moreover, because the majority of our clients purchase termlicenses, and we recognize revenue from these licenses over the term of theagreement, downturns or upturns in sales may not be immediately reflected inour operating results. Most of our expenses, such as salaries and third-partyhosting co-location costs, are relatively fixed in the short-term, and ourexpense levels are based in part on our expectations regarding future revenuelevels. As a result, if revenue for a particular quarter is below ourexpectations, we may not be able to proportionally reduce operating expensesfor that quarter, causing a disproportionate effect on our expected results ofoperations for that quarter.

 

Dueto the foregoing factors, and the other risks discussed in this report, youshould not rely on quarter-to-quarter comparisons of our results of operationsas an indication of our future performance.

 

***If our efforts toenhance existing solutions, introduce new solutions or expand the applicationsfor our products and solutions to broader CRM markets do not succeed, ourability to grow our business will be adversely affected.***

 

Approximately90% of our revenue is derived from RightNow Service, a suite of solutions usedto optimize customer service operations. If we are unable to successfullydevelop and sell new and enhanced versions of RightNow Service, or introducenew products and solutions for the customer service market, our financialperformance will suffer. Although to date the majority of business has beenfocused on providing solutions for customer service operations, we recentlyintroduced RightNow CRM 7.5 and voice-enabled CRM applications to expand oursolution offerings. Our efforts to expand beyond the customer service marketmay not be successful because certain of our competitors have far greaterexperience and brand recognition in the broader segments of the CRM market. Inaddition, our efforts to expand our on-demand software solutions beyond thecustomer service market may divert management resources from our existingoperations and require us to commit significant financial resources to a marketwhere we are unproven, which may harm our business, financial condition andresults of operations.

 

***We face intensecompetition, and our failure to compete successfully could make it difficultfor us to add and retain clients and could reduce or impede the growth of ourbusiness.***

 

Themarket for customer relationship management solutions is highly competitive andfragmented, and is subject to rapidly changing technology, shifting clientrequirements, frequent introductions of new products and services, andincreased marketing activities of other industry participants. Competition hasintensified with our most recent product releases. Increased competition couldresult in pricing pressure, reduced sales, lower margins or the failure of oursolutions to achieve or maintain broad market acceptance. If we are unable tocompete effectively, it will be difficult for us to add and retain clients, andour business, financial condition and results of operations will be seriouslyharmed.

 

Weface competition from:

•         companies currently providing customer servicesolutions, some of whom offer hosted services, including BMC SoftwareCorporation, Inc., eGain Communications Corporation, FrontRangeSolutions, Inc., IBM Corporation, Kana Software, Inc., MicrosoftCorporation, Netsuite, Oracle Corporation/Siebel Systems, SAP AG,salesforce.com, inc., and SSA Global;

•         CRM systems that are developed and maintainedinternally by businesses;

•         CRM products or services that are developed,or bundled with other products or services, and installed on a client’spremises by software vendors;

•         outsourced contact center providers who bundlesolutions and agent labor in their service offerings;

•         new companies entering the CRM softwaremarket, the on-demand applications market and the on-demand CRM market, orexpanding from any one of these markets to the others; and

 

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•         voice system integrators and voice-enabled IVRtechnology providers, such as Edify, Unveil Technologies, Apptera, Voxify,TuVox, Microsoft, IBM, and Intervoice.

 

Manyof our current and potential competitors have longer operating histories andlarger presence in the general CRM market, greater name recognition, access tolarger customer bases and substantially greater financial, technical, sales andmarketing, management, service, support and other resources than we have. As aresult, such competitors may be able to respond more quickly than we can to newor changing opportunities, technologies, standards or client requirements ordevote greater resources to the promotion and sale of their products andservices than we can. To the extent our competitors have an existingrelationship with a potential client, that client may be unwilling to switchvendors due to the time and financial commitments already made with ourcompetitors.

 

Inaddition, many of our current and potential competitors have established or mayestablish business, financial or strategic relationships among themselves orwith existing or potential clients, alliance partners or other third parties,or may combine and consolidate to become more formidable competitors withbetter resources. For example, in January 2006, Oracle Corporation completedits acquisition of Siebel Systems, Inc. We also expect that new competitors,such as enterprise software vendors and online service providers that havetraditionally focused on enterprise resource planning or back officeapplications, will continue to enter the on-demand CRM market with competingproducts as the on-demand CRM market develops and matures. It is possible thatthese new competitors could rapidly acquire significant market share.

 

***The market for ouron-demand application services is at an early stage of development, and if itdoes not develop or develops more slowly than we expect, our business will beharmed.***

 

Themarket for on-demand application services is at an early stage of development,and it is uncertain whether these application services will achieve and sustainhigh levels of demand and market acceptance. Our success will depend to asubstantial extent on the willingness of companies to increase their use ofon-demand application services in general and for on-demand customerrelationship management applications in particular. The willingness ofcompanies to increase their use of any on-demand application services is inpart dependent on the actual and perceived reliability of hosted solutions. Inaddition, many companies have invested substantial personnel and financialresources to integrate traditional enterprise software into their businesses,and therefore may be reluctant or unwilling to migrate to on-demand applicationservices. While we have supported and continue to support traditional on-sitedeployment of our software applications, widespread market acceptance of ouron-demand software solutions is critical to the success of our business. Otherfactors that may affect the market acceptance of our solutions include:

 

•         on-demand security capabilities andreliability;

•         concerns with entrusting a third party tostore and manage critical customer data;

•         our ability to meet the needs of broadersegments of the CRM market or other on-demand markets;

•         the level of customization we offer;

•         our ability to continue to achieve andmaintain high levels of client satisfaction;

•         concerns with purchasing critical CRMsolutions from a company with a history of operating losses that only recentlyturned profitable; and

•         the price, performance and availability of competingproducts and services.

 

Ifbusinesses do not perceive the benefits of on-demand solutions in general, orour on-demand solutions in particular, then the market for these solutions maynot develop further, or it may develop more slowly than we expect, either ofwhich would adversely affect our business, financial condition and results ofoperations.

 

***Failure to effectivelydevelop and expand our sales and marketing capabilities could harm our abilityto increase our client base and achieve broader market acceptance of oursolutions.***

 

Increasingour client base and achieving broader market acceptance of our solutions willdepend to a significant extent on our ability to expand our sales and marketingoperations. We plan to continue to expand our direct sales force and engageadditional third-party channel partners, both domestically and 

 

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internationally. This expansionwill require us to invest significant financial and other resources. Ourbusiness will be seriously harmed if our efforts do not generate acorresponding significant increase in revenue. We may not achieve anticipatedrevenue growth from expanding our direct sales force if we are unable to hireand develop talented direct sales personnel, if our new direct sales personnelare unable to achieve desired productivity levels in a reasonable period oftime, or if we are unable to retain our existing direct sales personnel. Wealso may not achieve anticipated revenue growth from our third-party channelpartners if we are unable to attract and retain additional motivated channelpartners, if any existing or future channel partners fail to successfullymarket, resell, implement or support our solutions for their customers, or ifthey represent multiple providers and devote greater resources to market,resell, implement and support competing products and services.

 

***The majority of oursolutions are sold pursuant to term license agreements, and if our existingclients elect not to renew their licenses or to renew their licenses on termsless favorable to us, our business, financial condition and results ofoperations will be adversely affected.***

 

Themajority of our solutions are sold pursuant to term license agreements that aresubject to renewal every two years or less and our clients have no obligationto renew their licenses. Because our clients may elect not to renew, we may notbe able to consistently and accurately predict future renewal rates. Ourclients’ renewal rates may decline or fluctuate as a result of a number offactors, including their level of satisfaction with our solutions, theirability to continue their operations or invest in customer service, or theavailability and pricing of competing products. If large numbers of existing clientsdo not renew their licenses, or renew their licenses on terms less favorable tous, and if we cannot replace or supplement those non-renewals with new licensesgenerating the same or greater level of revenue, our business, financialcondition and results of operations will be adversely affected.

 

***We have experienced rapidgrowth in recent periods. If we fail to manage our growth effectively, we maybe unable to execute our business plan, maintain high levels of service oradequately address competitive challenges.***

 

Wehave substantially expanded our overall business, headcount and operations inrecent periods. We have increased our total number of full-time employees to578 at March 31, 2006 from 530 at December 31, 2005. To achieve ourbusiness objectives, we will need to continue to expand our business at a rapidpace. This expansion has placed, and is expected to continue to place, asignificant strain on our managerial, administrative, operational, financialand other resources. We anticipate that this expansion will require substantialmanagement effort and significant additional investment in our infrastructure.If we are unable to successfully manage our growth, our business, financialcondition and results of operations will be adversely affected.

 

Partof the challenge that we expect to face in the course of our expansion is tomaintain the high level of customer service to which our clients have becomeaccustomed. To date, we have focused on providing personalized accountmanagement and customer service on a frequent basis to ensure our clients areeffectively leveraging the capabilities of our solution. We believe that muchof our success to date has been the result of high client satisfaction,attributable in part to this focus on client service. To the extent our clientbase grows, we will need to expand our account management, client service andother personnel, and third party channel partners, in order to enable us tocontinue to maintain high levels of client service and satisfaction. If we arenot able to continue to provide high levels of client service, our reputation,as well as our business, financial condition and results of operations, couldbe harmed.

 

***If there are interruptionsor delays in our hosting services through third-party error, our own error orthe occurrence of unforeseeable events, delivery of our solutions could becomeimpaired, which could harm our relationships with clients and subject us toliability.***

 

Asof March 31, 2006, approximately 87% of our clients were using our hostingservices for deployment of our software applications. We provide our hostingservices for our non-voice applications through computer hardware that we ownand that is currently located in third-party web hosting co-location facilitiesmaintained and operated in California and New Jersey. We provide hostingservices for our voice 

 

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applications through athird-party hosting facility based in Georgia, using hardware owned andoperated by the third party. We do not maintain long-term supply contracts withany of our hosting providers, and providers do not guarantee that our clients’access to hosted solutions will be uninterrupted, error-free or secure. Ouroperations depend on our providers’ ability to protect their and our systems intheir facilities against damage or interruption from natural disasters, poweror telecommunications failures, criminal acts and similar events. Our back-upcomputer hardware and systems located in our Montana headquarters (non-voice)and in New York (voice) have not been tested under actual disaster conditionsand may not have sufficient capacity to recover all data and services in theevent of an outage occurring simultaneously at all hosting facilities. In theevent that our hosting facility arrangements were terminated, or there was alapse of service or accidental or willful damage to such facilities, we couldexperience lengthy interruptions in our hosting service as well as delaysand/or additional expense in arranging new facilities and services. Any or allof these events could cause our clients to lose access to their important data.In addition, the failure by our third-party hosting facilities to meet ourcapacity requirements could result in interruptions in our service or impedeour ability to scale our operations.

 

Designand mechanical errors, spikes in usage volume and failure to follow systemprotocols and procedures could cause our systems to fail, resulting ininterruptions in our clients’ service to their customers. Any interruptions ordelays in our hosting services, whether as a result of third-party error, ourown error, natural disasters or security breaches, whether accidental orwillful, could harm our relationships with clients and our reputation. This inturn could reduce our revenue, subject us to liability, cause us to issuecredits or pay penalties or cause clients to fail to renew their licenses, anyof which could adversely affect our business, financial condition and resultsof operations. In the event of damage or interruption, our insurance policiesmay not adequately compensate us for any losses that we may incur.

 

***If the security of ourclients’ confidential information contained in our systems or stored by use ofour software is breached or otherwise subjected to unauthorized access, ourhosting service or our software may be perceived as not being secure andclients may curtail or stop using our hosting service and our solutions.***

 

Ourhosting systems and our software store and transmit proprietary information andcritical data belonging to our clients and their customers. Any accidental orwillful security breaches or other unauthorized access could expose us to arisk of information loss, litigation and other possible liabilities. If securitymeasures are breached because of third-party action, employee error,malfeasance or otherwise, or if design flaws in our software are exposed andexploited, and, as a result, a third party obtains unauthorized access to anyof our clients’ data, our relationships with clients and our reputation will bedamaged, our business may suffer and we could incur significant liability.Because techniques used to obtain unauthorized access or to sabotage systemschange frequently and generally are not recognized until launched against atarget, we and our third-party hosting co-location facilities may be unable toanticipate these techniques or to implement adequate preventative measures.

 

***We have significantinternational sales and are subject to risks associated with operating ininternational markets.***

 

Internationalsales comprised 29% and 25% of our revenue for the quarters ended March 31,2006 and 2005, respectively. We intend to continue to pursue and expand ourinternational business activities. Adverse political and economic conditionscould make it difficult for us to increase our international sales or tooperate abroad. International operations are subject to many inherent risks,including:

 

•         political, social and economic instability,including conflicts in the Middle East and elsewhere abroad, terrorist attacksand security concerns in general;

•         adverse changes in tariffs and otherprotectionist laws and business practices that favor local competitors;

•         fluctuations in currency exchange rates;

•         longer collection periods and difficulties incollecting receivables from foreign entities;

•         exposure to different legal standards andburdens of complying with a variety of foreign laws, including employment, tax,privacy and data protection laws and regulations;

•         reduced protection for our intellectualproperty in some countries;

 

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•         expenses associated with localizing productsfor foreign countries, including translation into foreign languages; and

•         import and export license requirements andrestrictions of the United States and each other country in which we operate.

 

Webelieve that international sales will continue to represent a significantportion of our revenue for the foreseeable future, and that continued growthwill require further expansion of our international operations. A substantialpercentage of our international sales are denominated in the local currency. Asa result, an increase in the relative value of the dollar could make ourproducts more expensive and potentially less price competitive in internationalmarkets. We typically do not engage in any transactions as a hedge againstrisks of loss due to foreign currency fluctuations. Any of these factors mayadversely affect our future international sales and, consequently, affect ourbusiness, financial condition and results of operations.

 

***If we fail to respondeffectively to rapidly changing technology and evolving industry standards,particularly in the on-demand CRM industry, our solutions may become lesscompetitive or obsolete.***

 

TheCRM industry is characterized by rapid technological advances, changes inclient requirements, frequent new product and service introductions andenhancements, changes in protocols and evolving industry standards. Our hostedbusiness model and the on-demand CRM market are relatively new and may evolveeven more rapidly than the rest of the CRM market. Competing products andservices based on new technologies or new industry standards may perform betteror cost less than our solutions and could render our solutions less competitiveor obsolete. In addition, because our solutions are designed to operate on avariety of network hardware and software platforms using a standard Internetweb browser, we will need to continuously modify and enhance our solutions tokeep pace with changes in Internet-related hardware, software, communication,browser and database technologies and to integrate with our clients’ systems asthey change and evolve. Furthermore, uncertainties about the timing and natureof new network platforms or technologies, or modifications to existingplatforms or technologies, could increase our research and developmentexpenses. If we are unable to successfully develop and market new and enhancedsolutions that respond in a timely manner to changing technology and evolvingindustry standards, and if we are unable to satisfy the diverse and evolvingtechnology needs of our clients, our business, financial condition and resultsof operations will suffer.

 

***Our failure to attract andretain qualified or key personnel may prevent us from effectively developing,marketing, selling, integrating and supporting our products.***

 

Oursuccess and future growth depends to a significant degree upon the skills,experience, performance and continued service of our senior management,engineering, sales, marketing, service, support and other key personnel.Specifically, we believe that our future success is highly dependent on GregGianforte, our founder, Chairman and Chief Executive Officer. In addition, wedo not have employment agreements with any of our senior management or keypersonnel that require them to remain our employees and, therefore, they couldterminate their employment with us at any time without penalty. If we lose theservices of Mr. Gianforte or any of our other key personnel, our businesswill be severely disrupted and we may be unable to operate effectively. We donot maintain “key person” life insurance policies on any of our key employeesexcept Mr. Gianforte. This life insurance policy would not be sufficientto compensate us for the loss of his services. Our future success also dependsin large part upon our ability to attract, train, integrate, motivate andretain highly skilled employees, particularly sales, marketing and professionalservices personnel, software engineers, product trainers, and senior personnel.Competition for these personnel is intense, especially for engineers with highlevels of expertise in designing and developing software and for senior salesexecutives.

 

***If our solutions fail toperform properly or if they contain technical defects, our reputation will beharmed, our market share would decline and we could be subject to productliability claims.***

 

Oursoftware products may contain undetected errors or defects that may result inproduct failures, slow response times, or otherwise cause our products to failto perform in accordance with client 

 

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expectations. Because ourclients use our products for important aspects of their business, any errors ordefects in, or other performance problems with, our products could hurt ourreputation and may damage our clients’ businesses. If that occurs, we couldlose future sales, or our existing clients could elect to not renew or to delayor withhold payment to us, which could result in an increase in our provisionfor doubtful accounts and an increase in collection cycles for accountsreceivable. Clients also may make warranty claims against us, which couldresult in the expense and risk of litigation. Product performance problemscould result in loss of market share, failure to achieve market acceptance andthe diversion of development resources. If one or more of our products fails toperform or contains a technical defect, a client may assert a claim against usfor substantial damages, whether or not we are responsible for the productfailure or defect. We do not currently maintain any warranty reserves.

 

Productliability claims could require us to spend significant time and money inlitigation or to pay significant settlements or damages. Although we maintaingeneral liability insurance, including coverage for errors and omissions, thiscoverage may not be sufficient to cover liabilities resulting from such productliability claims. Also, our insurer may disclaim coverage. Our liabilityinsurance also may not continue to be available to us on reasonable terms, insufficient amounts, or at all. Any product liability claims successfully broughtagainst us would cause our business to suffer.

 

***If we are unable toprotect our intellectual property rights, our competitive position could beharmed or we could be required to incur significant expenses to enforce ourrights.***

 

Oursuccess depends to a significant degree upon the protection of our software andother proprietary technology rights. We rely on trade secret, copyright andtrademark laws, patents and confidentiality agreements with employees and thirdparties, all of which offer only limited protection. The steps we have taken toprotect our intellectual property may not prevent misappropriation of ourproprietary rights or the reverse engineering of our solutions. We may not beable to obtain any further patents or trademarks, and our pending applicationsmay not result in the issuance of patents or trademarks. Any of our issuedpatents may not be broad enough to protect our proprietary rights or could besuccessfully challenged by one or more third parties, which could result in ourloss of the right to prevent others from exploiting the inventions claimed inthose patents. Furthermore, legal standards relating to the validity,enforceability and scope of protection of intellectual property rights in othercountries are uncertain and may afford little or no effective protection of ourproprietary technology. Consequently, we may be unable to prevent ourproprietary technology from being exploited abroad, which could diminishinternational sales or require costly efforts to protect our technology.Policing the unauthorized use of our products, trademarks and other proprietaryrights is expensive, difficult and, in some cases, impossible. Litigation maybe necessary in the future to enforce or defend our intellectual propertyrights, to protect our trade secrets or to determine the validity and scope ofthe proprietary rights of others. Such litigation could result in substantialcosts and diversion of management resources, either of which could harm ourbusiness. Accordingly, despite our efforts, we may not be able to prevent thirdparties from infringing upon or misappropriating our intellectual property.

 

***Our product developmentefforts may be constrained by the intellectual property of others, and we maybecome subject to claims of intellectual property infringement, which could becostly and time-consuming.***

 

Thesoftware and Internet industries are characterized by the existence of a largenumber of patents, trademarks and copyrights, and by frequent litigation basedupon allegations of infringement or other violations of intellectual propertyrights. As we seek to extend our CRM product and service offerings, we may beconstrained by the intellectual property rights of others. We have in the pastbeen named as a defendant in a lawsuit alleging intellectual propertyinfringement, and we may again in the future have to defend againstintellectual property lawsuits. We may not prevail in any future intellectualproperty infringement litigation given the complex technical issues andinherent uncertainties in litigation. Any claims, regardless of their merit,could be time-consuming and distracting to management, result in costlylitigation or settlement, cause product development delays, or require us toenter into royalty or licensing agreements. If any of our products violatethird-party proprietary rights, we may be required to re-engineer our productsor seek to obtain licenses from third parties, which may not be available onreasonable terms 

 

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or at all. Because our licenseagreements typically require us to indemnify our clients from any claim orfinding of intellectual property infringement, any such litigation orsuccessful infringement claims could adversely affect our business, financial conditionand results of operations. Any efforts to re-engineer our products, obtainlicenses from third parties on favorable terms or license a substitutetechnology may not be successful and, in any case, may substantially increaseour costs and harm our business, financial condition and results of operations.Further, our software products contain open source software components that arelicensed to us under various public domain licenses. While we believe we havecomplied with our obligations under the various applicable licenses for opensource software that we use, there is little or no legal precedent governingthe interpretation of many of the terms of certain of these licenses andtherefore the potential impact of such terms on our business is somewhatunknown. Use of open source standards also may make us more vulnerable tocompetition because the public availability of open source software could makeit easier for new market entrants and existing competitors to introduce similarcompeting products quickly and cheaply.

 

***Future acquisitions coulddisrupt our business and harm our financial condition and results ofoperations.***

 

Inorder to expand our addressable market, we may decide to acquire additionalbusinesses, products and technologies. In May 2005, we acquired theintellectual property and other assets of Convergent Voice, Inc., our firstacquisition since becoming a public company. Acquisitions could requiresignificant capital infusions and could involve many risks, including, but notlimited to, the following:

 

•          an acquisition may negatively impact ourresults of operations because it may require incurring large one-time charges,substantial debt or liabilities; it may require the amortization or write downof amounts related to deferred compensation, goodwill and other intangibleassets; or it may cause adverse tax consequences, substantial depreciation ordeferred compensation charges;

•          we may encounter difficulties in assimilatingand integrating the business, technologies, products, personnel or operationsof companies that we acquire, particularly if key personnel of the acquiredcompany decide not to work for us;

•          our existing and potential clients and thecustomers of the acquired company may delay purchases due to uncertaintyrelated to an acquisition;

•          an acquisition may disrupt our ongoingbusiness, divert resources, increase our expenses and distract our management;

•          the acquired businesses, products ortechnologies may not generate sufficient revenue to offset acquisition costs;

•          we may have to issue equity securities tocomplete an acquisition, which would dilute our stockholders and couldadversely affect the market price of our common stock; and

•          acquisitions may involve the entry into ageographic or business market in which we have little or no prior experience.

 

Wecannot assure you that we will be able to identify or consummate any futureacquisitions on favorable terms, or at all. If we do pursue any futureacquisitions, it is possible that we may not realize the anticipated benefitsfrom the acquisitions or that the financial markets or investors willnegatively view the acquisitions. Even if we successfully complete anacquisition, it could adversely affect our business, financial condition andresults of operations.

 

***Changes to financialaccounting standards may affect our results of operations and financialcondition.***

 

Generallyaccepted accounting principles and accompanying accounting pronouncements,implementation guidelines and interpretations for many aspects of our business,such as software revenue recognition and accounting for stock-basedcompensation, are complex and involve subjective judgments by management. Changesto generally accepted accounting principles, their interpretation, or changesin our products or business could significantly change our reported earningsand financial condition and could add significant volatility to those measures.For example, since our inception in 1997, we have used stock options as afundamental component of our employee compensation programs. New accounting 

 

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requirements that began January1, 2006 make the use of stock-based compensation much more expensive andintroduce additional volatility in our results of operations. See Note 5 to theCondensed Consolidated Financial Statements and *Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies* in this report for additionalinformation on recently enacted changes to generally accepted accountingprinciples.

 

***Volatility in the price of our common stock may adversely affect ourability to predict the fair value of our stock awards and the resultingstock-based compensation expense.***

 

Thefair value of stock awards under SFAS 123R is estimated using several factors,including the underlying price of the stock option, which is not known untilthe date of grant, and Company assumptions of expected stock price volatility,the expected term of the award, and other factors. These factors can causesignificant variations in the estimated fair value of the awards, and thereforecause significant fluctuations in our operating results. For example, theestimated fair value of stock options granted in our third quarter endedSeptember 30, 2005 was $6.93 per share. However, due to an increase in theunderlying price of our common stock, the estimated fair value of a like awardgranted in our fourth quarter ended December 31, 2005 would have increased 67%to $11.57 per share. Volatility in the market value of our stock could cause usto incur significantly higher or lower stock-based compensation expense infuture periods. The trading price of our common stock depends in part on ourability to accurately forecast our results, and if we were to miss ourforecasts, we may lose credibility with investors and research analysts, whichin turn could cause the price of our common stock to decline.

 

***The required adoption of SFAS 123R makes stock options a lessattractive form of employee compensation, and our use of alternative forms ofemployee compensation in response to SFAS 123R could adversely affect ourability to attract and retain personnel.***

 

Wehave historically used stock options as a key component of our employeecompensation because, we believe it aligns employees’ interests with ourstockholders’ interest, encourages employee retention, and provides acompetitive component of our overall compensation program. Due to the requiredadoption of SFAS 123R, and the recording of stock option expense on ouroperating statements, we may determine that it is in our best interest toreduce the number or size of our stock-based awards, or change the type ofawards granted. In doing so, we may not be able to attract, retain and motivateour employees.

 

***We may not be able tosecure additional financing on favorable terms, or at all, to meet our futurecapital needs.***

 

Wemay require additional capital to respond to business challenges, including theneed to develop new solutions or enhance our existing solutions, enhance ouroperating infrastructure, fund expansion, respond to competitive pressures andacquire complementary businesses, products and technologies. Absent sufficientcash flow from operations, we may need to engage in equity or debt financingsto secure additional funds to meet our operating and capital needs. Inaddition, even though we may not need additional funds, we may still elect tosell additional equity or debt securities or obtain credit facilities for otherreasons. We may not be able to secure additional debt or equity financing onfavorable terms, or at all, at the time when we need such funding. If we raiseadditional funds through further issuances of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution intheir percentage ownership of our company, and any new equity securities weissue could have rights, preferences and privileges senior to those of holdersof our common stock. Any debt financing secured by us in the future could involverestrictive covenants relating to our capital raising activities and otherfinancial and operational matters, which may make it more difficult for us toobtain additional capital, to pay dividends and to pursue businessopportunities, including potential acquisitions. In addition, if we decide toraise funds through debt or convertible debt financings, we may be unable tomeet our interest or principal payments.

 

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***The success of ourproducts and our hosted business depends on the continued growth and acceptanceof the Internet as a business and communications tool, and the relatedexpansion of the Internet infrastructure.***

 

Thefuture success of our products and our hosted business depends upon the continuedand widespread adoption of the Internet as a primary medium for commerce,communication and business applications. Our business growth would be impededif the performance or perception of the Internet, or companies providing hostedsolutions, was harmed by security problems such as “viruses,” “worms” and othermalicious programs, reliability issues arising from outages and damage toInternet infrastructure, delays in development or adoption of new standards andprotocols to handle increased demands of Internet activity, increased costs,decreased accessibility and quality of service, or increased governmentregulation and taxation of Internet activity.

 

Federal,state or foreign government bodies or agencies have in the past adopted, andmay in the future adopt, laws or regulations affecting data privacy, thesolicitation, collection, processing or use of personal or consumerinformation, the use of the Internet as a commercial medium and the use ofe-mail for marketing or other consumer communications. In addition, governmentagencies or private organizations may begin to impose taxes, fees or othercharges for accessing the Internet or for sending commercial e-mail. These lawsor charges could limit the growth of Internet-related commerce or communicationsgenerally, result in a decline in the use of the Internet and the viability ofInternet- based services such as ours and reduce the demand for our products,particularly our RightNow Marketing solution.

 

TheInternet has experienced, and is expected to continue to experience,significant user and traffic growth, which has, at times, caused userfrustration with slow access and download times. If Internet activity growsfaster than Internet infrastructure or if the Internet infrastructure isotherwise unable to support the demands placed on it, or if hosting capacitybecomes scarce, our business growth may be adversely affected.

 

***Privacy concerns and lawsor other domestic or foreign regulations may adversely affect our business orreduce sales of our solutions.***

 

Businessesusing our solutions collect personal information regarding their customers whenthose customers contact them with customer service inquiries. A valuablecomponent of our solutions is their ability to allow our clients to use andanalyze their customers’ information to increase sales, marketing and up-sellor cross-sell opportunities. Federal, state and foreign government bodies andagencies, however, have adopted and are considering adopting laws andregulations regarding the collection, use and disclosure of personalinformation obtained from consumers. The costs of compliance with, and otherburdens imposed by, such laws and regulations that are applicable to thebusinesses of our clients may limit the use and adoption of this component ofour solutions and reduce overall demand for our solutions. Furthermore, evenwhere a client desires to make full use of these features in our solutions,privacy concerns may cause our clients’ customers to resist providing thepersonal data necessary to allow our clients to use our solutions mosteffectively. Even the perception of privacy concerns, whether or not valid, mayinhibit market acceptance of our products.

 

TheEuropean Union has also adopted a directive that requires member states toimpose restrictions on the collection and use of personal data that are farmore stringent, and impose more significant burdens on subject businesses, thancurrent privacy standards in the United States. All of these domestic andinternational legislative and regulatory initiatives may adversely affect ourclients’ ability to collect and/or use demographic and personal informationfrom their customers, which could reduce demand for our solutions.

 

Inaddition to government activity, privacy advocacy groups and the technology anddirect marketing industries are considering various new, additional ordifferent self-regulatory standards that may place additional burdens on us. Ifthe gathering of profiling information were to be curtailed in this manner, 

 

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customer service CRM solutionswould be less effective, which would reduce demand for our solutions and harmour business.

 

***Non-solicitation concerns,laws or regulations may adversely affect our clients’ ability to performoutbound marketing and other e-mail communications, which could reduce sales ofour solutions.***

 

InJanuary 2004, the federal Controlling the Assault of Non-SolicitedPornography and Marketing Act of 2003, or CAN-SPAM Act, became effective. TheCAN-SPAM Act regulates the transmission and content of commercial e-mails and,among other things, obligates the sender of such e-mails to provide recipientswith the ability to opt-out of receiving future e-mails from the sender, andestablishes penalties for the transmission of e-mail messages which areintended to deceive the recipient as to source or content. Many statelegislatures also have adopted laws that impact the delivery of commerciale-mail, and laws that regulate commercial e-mail practices have been enacted inmany of the international jurisdictions in which we do business, includingEurope, Australia, and Canada. In addition, Internet service providers andlicensors of software products have introduced a variety of systems andproducts to filter out certain types of commercial e-mail, without any commonprotocol to determine whether the recipient desired to receive the e-mail beingblocked. As a result, it is difficult for us to determine in advance whether ornot e-mails generated by our clients using our solutions will be permitted byspam filters to reach the intended recipients.

 

OurRightNow Marketing solution specifically serves the market for massdistribution marketing and other e-mail communications. The increasingregulation of e-mail delivery, both domestically and internationally, and thespam filtering practices of Internet service providers and e-mail usersgenerally, will place significant additional burdens on our clients who haveoutbound communication programs, and may cause those clients to substantiallychange their outbound communications programs or abandon them altogether. Thesefactors may lead to a reduction in sales of our RightNow Marketing solution,may make it necessary to redesign our RightNow Marketing solution to make iteasier for our clients to conform to the requirements of such laws andstandards, which would increase our expenses, or may make it necessary for usto redefine the market for and use of our RightNow Marketing solution, whichcould reduce our revenue.

 

***General economicconditions could adversely affect our clients’ ability or willingness topurchase our products, which could materially and adversely affect our resultsof operations.***

 

Ourclients consist of large and small companies in nearly all industry sectors andgeographies. Potential new clients or existing clients could defer purchases ofour products because of unfavorable macroeconomic conditions, such as risinginterest rates, fluctuations in currency exchange rates, industry or nationaleconomic downturns, industry purchasing patterns, and other factors. Ourability to grow revenues may be adversely affected by unfavorable economicconditions.

 

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*** ***

***The significant control overstockholder voting matters and our office leases that may be exercised by ourfounder and Chief Executive Officer will limit your ability to influencecorporate actions and may require us to find alternative office space to leaseor buy in the future.***

 

AtMarch 31, 2006, Greg Gianforte, our founder and Chief Executive Officer, andhis spouse, Susan Gianforte, together beneficially owned approximately 35% ofour currently outstanding common stock and, together with our other officersand directors, beneficially owned approximately 51% of our currentlyoutstanding common stock. In addition, none of the shares of common stock heldby Mr. Gianforte and Mrs. Gianforte are subject to vesting restrictions. As aresult, Mr. Gianforte and Mrs. Gianforte, acting alone or together with some ofour other officers and directors, will be able to control all matters requiringstockholder approval, including the election of directors, management changesand approval of significant corporate transactions. This concentration ofownership may have the effect of delaying, preventing or deterring a change incontrol of RightNow, could deprive our stockholders of an opportunity toreceive a premium for their common stock as part of a sale of RightNow andmight reduce the market price of our common stock.

 

Inaddition, Mr. Gianforte beneficially owns, directly or indirectly, a 50%membership interest in Genesis Partners, LLC, our landlord from whom we leaseour principal offices in Bozeman, Montana. Consequently, Mr. Gianforte hassignificant control over any decisions by Genesis Partners regarding renewal,modification or termination of our Bozeman, Montana leases. In the event thatour current leases with Genesis Partners were terminated or otherwise could notbe renewed, or came up for renewal on commercially unreasonable terms, we wouldbe required to find alternative office space to lease or buy.

 

***Anti-takeover provisions in ourcharter documents and Delaware law could discourage, delay or prevent a changein control of our company and may affect the trading price of our common stock.***

 

Provisionsof our certificate of incorporation and bylaws and Delaware law may discourage,delay or prevent a merger or acquisition that a stockholder may considerfavorable and may limit the market price of our common stock. These provisionsinclude the following:

 

•      establishing a classified board in which onlya portion of the total board members will be elected at each annual meeting;

•      authorizing the board to issue preferredstock;

•      providing the board with sole authority toset the number of authorized directors and to fill vacancies on the board;

•      limiting the persons who may call specialmeetings of stockholders;

•      prohibiting certain transactions undercertain circumstances with interested stockholders;

•      requiring supermajority approval to amendcertain provisions of the certificate of incorporation; and

•      prohibiting stockholder action by writtenconsent.

 

Itis possible that the provisions contained in our certificate of incorporationand bylaws, the existence of super voting rights held by insiders and theability of our board of directors to issue preferred stock without stockholderaction may have the effect of delaying, deferring or preventing a change incontrol of our company without further action by the stockholders, maydiscourage bids for our common stock at a premium over the market price of ourcommon stock and may adversely affect the market price of our common stock andthe voting and other rights of the holders of our common stock.

 

***Item 2. Unregistered Sales of Equity Securities andUse of Proceeds***

*** ***

**(a)****                                  Salesof Unregistered Securities**

None.

 

**(b)****                                  Useof Proceeds from Sales of Registered Securities**

 

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On August 5, 2004, the Securities and Exchange Commission declaredeffective our Registration Statement on From S-1 (Reg. File No. 333-115331)under the Securities Act of 1933, as amended, in connection with the initialpublic offering of our common stock, par value $.0001 per share. Of the7,245,000 shares registered under the registration statement for an aggregateoffering price of $50,715,000, we sold 6,416,961 shares, including shares soldupon exercise of the underwriters’ over-allotment option, for an aggregateoffering price of $44,918,727, and 321,945 shares, including shares sold uponexercise of the underwriters’ over-allotment option, were sold by a sellingstockholder for an aggregate offering price of $2,253,615. After deducting $3.3million in underwriting discounts and commissions and $1.8 million in otheroffering costs, we received net proceeds from the offering of approximately $40million. None of the expenses and none of our net proceeds from the offeringwere paid directly or indirectly to any director, officer, general partner ofRightNow or their associates, persons owning 10% or more of any class of equitysecurities of RightNow, or an affiliate of RightNow.

 

In May 2005, we spent $1 million of the offering proceeds for theacquisition of the assets of Convergent Voice. We currently intend to use theremaining proceeds for general corporate purposes as described in theprospectus for the offering. Pending these uses, the net proceeds from theoffering are invested in short-term, interest-bearing, investment-gradesecurities.

 

**(c)****                                  Notapplicable.**

 

***Item 3.***          DefaultsUpon Senior Securities.

*** ***

None.

 

***Item 4.***          Submissionof Matters to a Vote of Security Holders.

*** ***

None.

 

***Item 5.***          OtherInformation.

*** ***

None.

 

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**Item 6.****          ****Exhibits**

 

***Exhibits***

*** ***

The exhibits listed below are part of this Form 10-Q, unless otherwiseindicated.

 
| Exhibit 3.1† |   | Amended and Restated Certificate of  Incorporation of the Registrant.                                                                                                                                  |
|-------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.2*      |   | Amended and Restated Bylaws of the  Registrant.                                                                                                                                                        |
| Exhibit 10.9**(1) |   | Form of Executive Officer Offer Letter and  schedule of omitted material details thereto.                                                                                                              |
| Exhibit 10.20(1)  |   | Form of Incentive Stock Option Agreement.                                                                                                                                                              |
| Exhibit 10.21(1)  |   | Form of Non-Incentive Stock Option  Agreement.                                                                                                                                                         |
| Exhibit 31.1      |   | Certification of Chief Executive Officer pursuant  to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                               |
| Exhibit 31.2      |   | Certification of Chief Financial Officer  pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                               |
| Exhibit 32.1      |   | Certifications of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |

 

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†                  Incorporatedby reference to Exhibit 4.2 to the Company’s registration statement on Form S-8(File No. 333-118515) filed with the Securities and Exchange Commission onAugust 24, 2004.

*                 Incorporatedby reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (FileNo. 000-31321) filed with the Securities and Exchange Commission on January 25,2006.

**          Incorporatedby reference to the exhibit of the same number from the Company’s registrationstatement on Form S-1 (File No. 333-115331) initially filed with the Securitiesand Exchange Commission on May 10, 2004, as amended, and to Exhibit 10.19 tothe Company’s Current Report on Form 8-K filed with the Securities and ExchangeCommission on April 18, 2006.

(1)          Denotesmanagement contract or compensatory plan or arrangement.

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Dated:  May 8, 2006             |                                          |
|---------------------------------|-----------------------------------------------|
|                            |                                          |
| **RightNow Technologies, Inc.** |                                          |
| (Registrant)                    |                                          |
|                            |                                          |
| By:                             | /s/  Susan J. Carstensen                      |   |   |
|                            | Susan  J. Carstensen                          |   |
|                            | Chief  Financial Officer, Vice President,     |   |
|                            | Treasurer  and Assistant Secretary            |   |
|                            | (Principal  Financial and Accounting Officer) |   |
|                                 |                                               |  |  |

 

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