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**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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#### **FORM 10-Q**

 

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**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

# **For thequarterly period ended June 30, 2008**

# ** **

**or**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

### **For thetransition 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.) |

 

**136 Enterprise Boulevard**

###### **Bozeman, Montana59718-9300**

(Address of Principal Executive Offices) (ZipCode)

 

**(406) 522-4200**

(Registrant’s Telephone Number, IncludingArea 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 SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.     Yes  x           No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o                    Accelerated filer  x

Non-accelerated filer o  (Donot check if a smaller reporting company)                    Smallerreporting company o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o   Nox

 

The number of shares outstanding of the registrant’s common stock,$0.001 par value, as of July 31, 2008 was 33,611,759

 

 

 

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**RightNow Technologies, Inc.**

**Quarterly Report on Form 10-Q**

 

**For the Quarterly Period Ended June 30,2008**

 

**INDEX**

 
| ** **        | ** **                                                                                  | **Page**                                                          |
|-------------------|---------------------------------------------------------------------------------------------|-------------------------------------------------------------------|
|              |                                                                                        |                                                              |
| **Part I.**  |                                                                                        | **FINANCIAL INFORMATION**                                         | 3 |
|              |                                                                                        |                                                              |
| Item 1.           | Financial Statements                                                                        | 3                                                                 |
|              | a)                                                                                          | Condensed consolidated balance sheets  (unaudited)                | 3 |
|              | b)                                                                                          | Condensed consolidated statements of  operations (unaudited)      | 4 |
|              | c)                                                                                          | Condensed consolidated statements of cash  flows (unaudited)      | 5 |
|              | d)                                                                                          | Notes to condensed consolidated financial  statements (unaudited) | 6 |
|              |                                                                                        |                                                              |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 16                                                                |
|              |                                                                                        |                                                              |
| Item 3.           | Quantitative and Qualitative Disclosures  About Market Risk                                 | 31                                                                |
|              |                                                                                        |                                                              |
| Item 4.           | Controls and Procedures                                                                     | 31                                                                |
|              |                                                                                        |                                                              |
| **Part II.** |                                                                                        | **OTHER INFORMATION**                                             | 33 |
|              |                                                                                        |                                                              |
| Item 1.           | Legal Proceedings                                                                           | 33                                                                |
|              |                                                                                        |                                                              |
| Item 1A.          | Risk Factors                                                                                | 33                                                                |
|              |                                                                                        |                                                              |
| Item 2.           | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 49                                                                |
|              |                                                                                        |                                                              |
| Item 3.           | Defaults Upon Senior Securities                                                             | 49                                                                |
|              |                                                                                        |                                                              |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                        | 50                                                                |
|              |                                                                                        |                                                              |
| Item 5.           | Other Information                                                                           | 50                                                                |
|              |                                                                                        |                                                              |
| Item 6.           | Exhibits                                                                                    | 51                                                                |
|              |                                                                                        |
| **SIGNATURES**    | 52                                                                                          |
|                   |                                                                                             |                                                                   |  |  |

 

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**Part I.  FINANCIAL INFORMATION**

 

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

##### ** **

**RightNow Technologies, Inc.**

**CondensedConsolidated Balance Sheets**

(In thousands) (Unaudited)

 
| ** **                                          | ** ** | **December**      | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                          | ** ** | **31, 2007** | ** ** | **2008**          | ** ** |
| **Assets**                                          |       |              |       |              |       |
| Cash and cash equivalents                           |       | $                 | 43,681     |              | $          | 52,781 |   |
| Short-term investments                              |       | 52,644            |       | 41,540            |       |
| Accounts receivable                                 |       | 29,480            |       | 26,722            |       |
| Term receivables, current                           |       | 13,069            |       | 8,814             |       |
| Allowance for doubtful accounts                     |       | (1,918            | )          | (2,177            | )          |
| Receivables, net                                    |       | 40,631            |       | 33,359            |       |
| Deferred commissions                                |       | 3,336             |       | 3,970             |       |
| Prepaid and other current assets                    |       | 2,643             |       | 3,112             |       |
| Total current assets                                |       | 142,935           |       | 134,762           |       |
|                                                |       |              |       |              |       |
| Long-term investments                               |       | —            |       | 11,925            |       |
| Property and equipment, net                         |       | 10,856            |       | 10,798            |       |
| Term receivables, non-current                       |       | 9,859             |       | 5,728             |       |
| Intangible assets, net                              |       | 7,996             |       | 7,206             |       |
| Deferred commissions, non-current                   |       | 1,680             |       | 2,305             |       |
| Other                                               |       | 460               |       | 514               |       |
| **Total Assets**                                    |       | $                 | 173,786    |              | $          | 173,238 |   |
|                                                |       |              |       |              |       |
| **Liabilities and Stockholders’ Equity**       | ** ** | ** **        | ** ** | ** **        | ** ** |
| Accounts payable                                    |       | $                 | 4,386      |              | $          | 5,982 |   |
| Commissions and bonuses payable                     |       | 5,044             |       | 4,279             |       |
| Other accrued liabilities                           |       | 11,404            |       | 11,937            |       |
| Current portion of long-term debt                   |       | 43                |       | 44                |       |
| Current portion of deferred revenue                 |       | 76,995            |       | 76,693            |       |
| Total current liabilities                           |       | 97,872            |       | 98,935            |       |
|                                                |       |              |       |              |       |
| Long-term debt, less current portion                |       | 68                |       | 45                |       |
| Deferred revenue, net of current portion            |       | 37,665            |       | 39,289            |       |
|                                                |       |              |       |              |       |
| Stockholders’ equity:                          |       |              |       |              |       |
| Common stock                                        |       | 33                |       | 34                |       |
| Additional paid-in capital                          |       | 95,377            |       | 99,187            |       |
| Accumulated other comprehensive loss                |       | (292              | )          | (787              | )          |
| Accumulated deficit                                 |       | (56,937           | )          | (63,465           | )          |
| Total stockholders’ equity                     |       | 38,181            |       | 34,969            |       |
| **Total Liabilities and Stockholders’ Equity** |       | $                 | 173,786    |              | $          | 173,238 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**CondensedConsolidated Statements of Operations**

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

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue:                             |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support        |       | $                                               | 20,693     |                                          | $          | 25,573 |   | $ | 40,512 |   | $ | 50,129 |   |
| Professional services                |       | 5,772                                           |       | 9,648                                         |       | 11,655 |   | 17,990 |   |
| Total revenue                        |       | 26,465                                          |       | 35,221                                        |       | 52,167 |   | 68,119 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Cost of revenue:                     |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support        |       | 4,565                                           |       | 5,043                                         |       | 8,959 |   | 10,078 |   |
| Professional services                |       | 5,036                                           |       | 7,810                                         |       | 10,207 |   | 15,095 |   |
| Total cost of revenue                |       | 9,601                                           |       | 12,853                                        |       | 19,166 |   | 25,173 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Gross profit                         |       | 16,864                                          |       | 22,368                                        |       | 33,001 |   | 42,946 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Operating expenses:                  |       |                                            |       |                                          |       |   |   |   |   |
| Sales and marketing                  |       | 15,788                                          |       | 17,627                                        |       | 31,515 |   | 34,445 |   |
| Research and development             |       | 4,343                                           |       | 4,507                                         |       | 8,639 |   | 8,993 |   |
| General and administrative           |       | 3,178                                           |       | 3,890                                         |       | 6,038 |   | 7,406 |   |
| Total operating expenses             |       | 23,309                                          |       | 26,024                                        |       | 46,192 |   | 50,844 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Loss from operations                 |       | (6,445                                          | )          | (3,656                                        | )          | (13,191 | ) | (7,898 | ) |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Interest and other income, net       |       | 885                                             |       | 519                                           |       | 1,713 |   | 1,457 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Loss before income taxes             |       | (5,560                                          | )          | (3,137                                        | )          | (11,478 | ) | (6,441 | ) |
| (Provision) benefit for income taxes |       | (181                                            | )          | 5                                             |       | (265 | ) | (87 | ) |
| Net loss                             |       | $                                               | (5,741     | )                                             | $          | (3,132 | ) | $ | (11,743 | ) | $ | (6,528 | ) |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Net loss per share:                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                |       | $                                               | (0.17      | )                                             | $          | (0.09 | ) | $ | (0.36 | ) | $ | (0.19 | ) |
| Diluted                              |       | $                                               | (0.17      | )                                             | $          | (0.09 | ) | $ | (0.36 | ) | $ | (0.19 | ) |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in the computation:      |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                |       | 32,983                                          |       | 33,582                                        |       | 32,921 |   | 33,557 |   |
| Diluted                              |       | 32,983                                          |       | 33,582                                        |       | 32,921 |   | 33,557 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**RightNow Technologies, Inc.**

**CondensedConsolidated Statements of Cash Flows**

(In thousands) (Unaudited)

 
| ** **                                                           | ** ** | **Six Months Ended June  30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                      | ** ** | **2008** | ** ** |
| **Operating activities:**                                            |       |                                          |       |   |   |
| Net loss                                                             |       | $                                             | (11,743    | ) | $ | (6,528 | ) |
| Non-cash adjustments:                                                |       |                                          |       |   |   |
| Depreciation and amortization                                        |       | 3,555                                         |       | 3,886 |   |
| Provisions (recoveries) of uncollectible  accounts receivable        |       | (56                                           | )          | 115 |   |
| Stock-based compensation                                             |       | 3,293                                         |       | 3,163 |   |
| Loss on disposal of fixed assets                                     |       | —                                        |       | 24 |   |
| Changes in operating accounts:                                       |       |                                          |       |   |   |
| Receivables                                                          |       | 23,651                                        |       | 11,509 |   |
| Prepaid expenses                                                     |       | (983                                          | )          | (443 | ) |
| Deferred commissions                                                 |       | (2,100                                        | )          | (1,213 | ) |
| Accounts payable                                                     |       | (1,193                                        | )          | 1,584 |   |
| Commissions and bonuses payable                                      |       | (1,172                                        | )          | (781 | ) |
| Other accrued liabilities                                            |       | 3,751                                         |       | 451 |   |
| Deferred revenue                                                     |       | (6,870                                        | )          | 567 |   |
| Other                                                                |       | (10                                           | )          | (90 | ) |
| Cash provided by operating activities                                |       | 10,123                                        |       | 12,244 |   |
|                                                                 |       |                                          |       |   |   |
| **Investing activities:**                                            |       |                                          |       |   |   |
| Net change in investments                                            |       | (13,784                                       | )          | (1,222 | ) |
| Acquisition of property and equipment                                |       | (3,338                                        | )          | (3,033 | ) |
| Other                                                                |       | (61                                           | )          | (27 | ) |
| Cash used in investing activities                                    |       | (17,183                                       | )          | (4,282 | ) |
|                                                                 |       |                                          |       |   |   |
| **Financing activities:**                                            |       |                                          |       |   |   |
| Proceeds from issuance of common stock  under employee benefit plans |       | 1,179                                         |       | 648 |   |
| Excess tax benefits of stock options  exercised                      |       | 209                                           |       | — |   |
| Payments on long-term debt                                           |       | (15                                           | )          | (22 | ) |
| Cash provided by financing activities                                |       | 1,373                                         |       | 626 |   |
|                                                                 |       |                                          |       |   |   |
| Effect of foreign exchange rates on cash  and cash equivalents       |       | 321                                           |       | 512 |   |
|                                                                 |       |                                          |       |   |   |
| Increase (decrease) in cash and cash  equivalents                    |       | (5,366                                        | )          | 9,100 |   |
|                                                                 |       |                                          |       |   |   |
| Cash and cash equivalents at beginning of  period                    |       | 39,208                                        |       | 43,681 |   |
| Cash and cash equivalents at end of period                           |       | $                                             | 33,842     |   | $ | 52,781 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**Notes to CondensedConsolidated Financial Statements**

(Unaudited)

 

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

** **

***Business Description***

 

RightNow Technologies, Inc. (the “Company” or “RightNow”) providescustomer experience management software solutions for companies of all sizes.The Company’s on demand software is designed to help companies improve theircustomer experiences while reducing operating costs. RightNow’s solutions gobeyond traditional customer relationship management (“CRM”) solutions tosupport a business’ external customer-facing channels as well as sales,marketing and customer service operations. Founded in 1997, RightNow isheadquartered in Bozeman, Montana, with additional offices in North America,Europe, Asia, and Australia. The Company operates in one segment, which is thecustomer experience management market.

 

***Basis ofPresentation***

 

The accompanyingcondensed interim consolidated financial statements are unaudited.  These financial statements and notes shouldbe read in conjunction with the audited consolidated financial statements andrelated notes, together with management’s discussion and analysis of financialcondition and results of operations, contained in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2007.

 

The accompanyinginterim condensed consolidated financial statements have been prepared inaccordance with United States generally accepted accounting principles.  In the opinion of management, the interimcondensed consolidated financial statements and notes have been prepared on thesame 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 June 30, 2008, andresults of operations for the three and six month periods ended June 30,2007 and 2008, and cash flows for the six month period ended June 30, 2007and 2008.  The interim period results arenot necessarily indicative of the results 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 evaluates these estimates andassumptions on an on-going basis. Significant estimates and assumptions made by management include theidentification and fair value of individual elements in multiple-element salesarrangements, whether the fees charged for our products and services are fixedor determinable, valuation allowances for trade receivables and deferred incometax assets, and assumptions used in estimating the fair value of stock optionsgranted for stock-based compensation.

 

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

 

The Company’s revenue is derived from thesubscription, 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.

 

Financial instruments subjecting the Company to concentrations ofcredit risk consist primarily of cash and cash equivalents, short and long-terminvestments, and accounts and term receivables. The Company maintains cash,cash equivalents, and short and long-term investments with various domestic andforeign financial institutions. From time to time, the Company’s cash balanceswith its financial institutions may exceed deposit insurance limits. Short andlong-term investments are investment grade, interest-earning securities, andare diversified by type and industry. Our long-term investments consist of approximately $12.4 million parvalue auction rate securities as further described in Note 7.

 

The Company’scustomers are worldwide with historical sales of approximately 70% to 75% inthe United States, 20% to 25% in Europe and 5% to 8% in Asia Pacific.  No individual customer accounted for morethan 10% of the Company’s revenue in 2007 or the three and six months ended June 30,2008.  One customer represented 12% ofterm receivables at December 31, 2007 and the same one customerrepresented 16% of term receivables at June 30, 2008.  No individual customer accounted for morethan 10% of the Company’s accounts receivable at December 31, 2007 and June 30,2008.

 

As of December 31,2007 and June 30, 2008, assets located outside the United States were 14%and 16% of total assets, respectively.  The loss from operations outside of the United States totaled $6.1million and $8.5 million for the six months ended June 30, 2007 and 2008,respectively.  Revenue by geographicalregion follows (in thousands):

 
| ** **    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|          |       |                                            |       |                                          |       |   |   |   |   |
| United States |       | $                                               | 18,908     |                                          | $          | 23,384 |   | $ | 37,380 |   | $ | 45,741 |   |
| Europe        |       | 5,321                                           |       | 8,876                                         |       | 10,680 |   | 16,942 |   |
| Asia Pacific  |       | 2,236                                           |       | 2,961                                         |       | 4,107 |   | 5,436 |   |
|          |       | $                                               | 26,465     |                                          | $          | 35,221 |   | $ | 52,167 |   | $ | 68,119 |   |

 

***(3) Revenue Recognition***

*** ***

The Company earns its revenues from the delivery of software,hosting, and support services, and from the delivery of professional services.Software, hosting and support services 

 

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are sold under subscription arrangementsand license arrangements. In 2007, the Company essentially discontinued salesof perpetual licenses. Hosting and support services involve the remotemanagement of software, technical assistance, and unspecified product upgradesand enhancements on a when and if available basis. Professional servicesinclude consulting, training and development services.

 

The Company recognizesrevenue for subscriptions and licenses when all of the following criteria aremet: a) the Company has entered into a legally binding agreement with thecustomer; b) the software has been made available or delivered to thecustomer; c) the Company’s fee for providing the software and services isfixed or determinable; and d) collection of the Company’s fee is probable.

 

Subscriptions include accessto the Company’s software through its hosting services, technical support, andproduct upgrades when and if available, all for a bundled fee. The Companyaccounts for subscriptions in accordance with Emerging Issues Task Force Issue No. 00-21,*Revenue Arrangements with MultipleDeliverables* (“EITF 00-21”). Under EITF 00-21, value isallocated to each deliverable of an arrangement using prices established whenthe elements are sold stand-alone. Stand-alone sales are evidenced bysubscription renewals and  by ratescharged for consulting, education, and development services in stand-alone transactions.The arrangement fee is then allocated to the individual elements based on theirrelative fair values. Revenue for subscriptions are recognized ratably over thecontractual period and professional services are recognized as incurredprovided the above criteria have been met.

 

Under the Company’ssubscription contracts, the Company applies EITF 00-21 to itssubscriptions as opposed to Statement of Position 97-2, *Software Revenue Recognition* (“SOP 97-2”)as the customer does not have the right to take possession of the softwarewithout incurring a significant incremental penalty. In accordance withEmerging Issues Task Force Issue No. 00-03, *Application of AICPA Statement of Position 97-2, Software RevenueRecognition, to Arrangements That Include the Right to Use Software Stored onAnother Entity’s Hardware* (“EITF 00-03”), such arrangements areconsidered service contracts and are not within the scope of SOP 97-2.

 

Prior to 2007, themajority of the Company’s revenues were earned under license arrangements.Revenue under these arrangements is recognized pursuant to the requirements ofStatement of Position (SOP) 97-2, *SoftwareRevenue Recognition*, and SOP 98-9, Modification ofSOP 97-2, *Software Revenue RecognitionWith Respect to Certain Transactions*, issued by the AmericanInstitute of Certified Public Accountants. Licenses generally include the sameelements as subscriptions, plus the right to take possession of the softwarefor no additional fee and are sold for a period of time (a “term” license) orperpetually. Term contracts are non-cancelable, and generally cover a period oftwo years, but can range from a period of six months to five years. For termcontracts, the Company treats the software license, hosting and supportservices as a single element (“term license bundle”) for purposes of allocatingrevenue. The Company has established vendor specific objective evidence of fairvalue for the term license bundle based on stand-alone sales of the bundleditems. When sold with professional services, revenue is allocated between thesoftware license, hosting and support element and the professional serviceselement using the relative fair value method. Revenue for the term licenseelement is recognized ratably over the period of thearrangement and revenue for professional services in these arrangements isrecognized as performed.

 

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Sales of perpetual softwarelicenses include hosting and support services for a period of time, typicallyone year. The Company has established vendor specific objective evidence forthe combined element of hosting and support elements of perpetual licensesales, based on the prices charged when sold separately. Accordingly, revenuefor the perpetual software license element is determined using the residualmethod and is recognized upon delivery. Revenue for the hosting and supportelements is recognized ratably over the contractual time period.

 

The Company’s policy is torecord revenue net of any applicable sales, use or excise taxes.

 

If an arrangement includes aright of acceptance or a right to cancel, revenue is recognized when acceptanceis received or the right to cancel has expired. If the fee for the license hasany payment term that is due in excess of the Company’s normal payment terms(over 90 days), the fee is considered to not be fixed or determinable, andthe amount of revenue recognized (a) for perpetual license arrangements,is limited to the amount currently due from the customer, or (b) for termlicense or subscription arrangements, is limited to the lesser of the amountcurrently due from the customer or a ratable portion of the total unallocatedarrangement fee.

 

Certain customers havelicense agreements that provide for usage fees above fixed minimums. Usage ofthe Company’s software requires additional fees if used by more than aspecified number of users or for more than a specified number of interactions.Fixed minimums are recognized as revenue ratably over the term of thearrangement. Usage fees above fixed minimums are recognized as revenue whensuch amounts are known and billed.

 

Separate contracts with thesame customer that are entered into at or near the same time are generallypresumed to have been negotiated together and are combined and accounted for asa single arrangement.

 

Professional servicesrevenue is recognized as performed, based on hours incurred, unless sold inconjunction with a term license or subscription where objective and reliableevidence (including vendor specific objective evidence) for the term orsubscription element does not exist, in which case professional servicesrevenue is recognized ratably over the contractual period. The Company hasdetermined that the professional service elements of its software arrangementsare not essential to the functionality of the software. The Company has alsodetermined that its professional services (a) are available from othervendors, (b) do not involve a significant degree of risk or uniqueacceptance criteria, and (c) are not required for the customer to use thesoftware.

 

**(4) Sales Commissions**

 

Beginningin 2007, in conjunction with the Company’s business model change, salescommissions paid for subscriptions are deferred and charged to expense inproportion to the revenue recognized. Sales incentives paid for licenses are expensed when earned, which istypically at the time the related sale is invoiced.  Sales incentive expense was $2.6 millionand $3.8 million for the three months ended June 30, 2007 and 2008,respectively.  Sales incentive expensewas $4.7 million and $7.0 million for the six months ended June 30,2007 and 2008, respectively.  Deferredcommissions were $5.0 million and $6.3 million at December 31, 2007 and June 30,2008, respectively.

 

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**(5) NetLoss Per Share**

 

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

 
| ** **                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average common shares outstanding  for basic net loss per share |       | 32,983                                          |       | 33,582                                        |       | 32,921 |   | 33,557 |   |
| Effect of dilutive securities:                                           |       |                                            |       |                                          |       |   |   |   |   |
| Employee stock options                                                   |       | —                                          |       | —                                        |       | — |   | — |   |
| Weighted average shares outstanding for  dilutive net loss per share     |       | 32,983                                          |       | 33,582                                        |       | 32,921 |   | 33,557 |   |

 

The following common stock equivalents were excludedfrom the computation of diluted earnings per share because their impact wasanti-dilutive (in thousands):

 
| ** **             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|                   |       |                                            |       |                                          |       |   |   |   |   |
| Employee stock options |       | 4,272                                           |       | 4,584                                         |       | 4,272 |   | 4,584 |   |

 

**(6) ComprehensiveLoss**

 

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

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                                          |       | $                                               | (5,741     | )                                             | $          | (3,132 | ) | $ | (11,743 | ) | $ | (6,528 | ) |
| Other comprehensive income (loss):                |       |                                            |       |                                          |       |   |   |   |   |
| Unrealized gain (loss) on short-term  investments |       | (13                                             | )          | (172                                          | )          | 3 |   | 25 |   |
| Unrealized loss on long-term investments          |       | —                                          |       | (10                                           | )          | — |   | (425 | ) |
| Foreign currency translation adjustments          |       | (110                                            | )          | (71                                           | )          | (175 | ) | (95 | ) |
| Comprehensive loss                                |       | $                                               | (5,864     | )                                             | $          | (3,385 | ) | $ | (11,915 | ) | $ | (7,023 | ) |

 

**(7) Fair Value**

 

Effective January 1, 2008, the Company adoptedthe provisions of Statement of Financial Accounting Standards No. 157, *Fair Value Measurements*(“SFAS 157”).* *In February 2008,the Financial Accounting Standards Board (FASB) issued Staff Position No. SFAS157-2, “Effective Date of FASB Statement No. 157,” which provides a oneyear deferral of the effective date of SFAS 157 for non-financial assets and non-financialliabilities, except those that are recognized or disclosed in the financialstatements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 withrespect to its financial assets and liabilities only.  

 

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SFAS 157 defines fair value, establishes a framework for measuring fairvalue in GAAP, and enhances disclosures about fair value measurements. Fairvalue is defined under SFAS 157 as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.  Valuation techniques used to measure fairvalue under SFAS 157 must maximize the use of observable inputs and minimizethe use of unobservable inputs.  Thestandard describes a fair value hierarchy based on three levels of inputs, ofwhich the first two are considered observable and the last unobservable, thatmay be used to measure fair value which are the following:

 

·                  Level1 – Quoted prices in active markets for identical assets or liabilities.

 

·                  Level2 – Inputs other than Level 1 that are observable, either directly orindirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable orcan be corroborated by observable market data for substantially the full termof the assets or liabilities.

 

·                  Level3 – Unobservable inputs that are supported by little or no market activity andthat are significant to the fair value of the assets or liabilities.

 

The adoption of this statement did not have amaterial impact on the Company’s consolidated results of operations andfinancial condition.

 

In accordance with SFAS 157, the following tablerepresents the Company’s fair value hierarchy for its financial assets (cashequivalents and investments) measured at fair value on a recurring basis as of June 30,2008 (in thousands):

 
| ** **                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money Market funds                |       | $                | 13,423     |             |       |             |       |      | $          | 13,423 |   |
| Commercial paper                  |       |             |       | $                | 1,100      |             |       |      | 1,100      |   |
| Corporate notes and bonds         |       |             |       | 8,341            |       |             |       | 8,341     |       |
| U.S. Government agency securities |       |             |       | 37,175           |       |             |       | 37,175    |       |
| State and Municipal securities    |       |             |       | 8,567            |       | 4,725            |       | 13,292    |       |
| Auction rate preferred stocks     |       |             |       |             |       | 7,200            |       | 7,200     |       |
|                              |       | $                | 13,423     |             | $          | 55,183           |       | $         | 11,925     |   | $ | 80,531 |   |
|                                   |            |                  |            |                  |            |                  |            |           |            |  |  |  |  |

 

The following table illustrates the activity of “level 3” assets fromMarch 31, 2008 to June 30, 2008 (in thousands):

 

| ** **        | ** ** | **June 30, 2008** | ** ** |
|-------------------|------------|-------------------|------------|
| Fair value        |       | $                 | 17,810     |   |
| Unrealized Losses |       | (10               | )          |
| Redemptions       |       | (5,875            | )          |
| Fair value        |       | $                 | 11,925     |   |

 

As of June 30, 2008,assets characterized as “level 3” for fair value purposes consist ofapproximately $12.4 million in par value auction rate state and municipalsecurities and auction rate preferred stocks with investment grades of AAA orAA.  The auction rate state and municipalsecurities are comprised of federally insured student loan bonds, and theauction rate preferred securities are comprised of preferred shares of closedend mutual funds. Auction rate securities are long-term bonds or preferredstocks that act like short-term debt, where interest rates reset in Dutchauctions held daily, weekly or monthly and have historically provided liquidityfor these investments.  Despite thelong-term contractual maturities of the underlying securities, all of thesesecurities were considered available for sale and were available to fund theCompany’s current operations as of December 31, 2007.  Since February 2008, uncertainties inthe credit markets caused substantially all auctions of these  securities held by the Company to beunsuccessful.  An unsuccessful auction isan event when there are fewer securities bid for than are available forsale.  Upon an unsuccessful auction, theinterest rate is reset at a predetermined rate. Given that substantially all of the auctions have been unsuccessfulsince February, the Company reclassified

 

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the investments from short-term to long-term,and recorded a temporary impairment valuation adjustment of approximately$425,000 in accumulated other comprehensive loss.  Our determination of fair value was basedupon broker statements, assumed risk premiums, and assumed work out periods,using a discounted cash flow model.

 

The Company’s management believes that the unrealized losses aretemporary, and it has the ability and intent to hold the investments until atleast substantially all of the cost of the investment is recovered. The Companybelieves the impairment is temporary due primarily to the credit quality of theunderlying securities. Additionally, $5.85 million of the auction ratesecurities held by the Company were redeemed at par by the issuers in thesecond quarter of 2008. To date, the Companyhas collected all interest paymentson all of the auction rate securities held by it when due.  If the auction rate securities continue toexperience unsuccessful auctions, or if the credit rating of the auction ratesecurities deteriorates, the Company may be required to realize an impairmentcharge as “other than temporary.”  Whilethe recent auction failures will limit the Company’s ability to liquidate theseinvestments for some period of time, the Company does not believe the auctionfailures will materially impact its ability to fund its working capital needs,capital expenditures, or other business requirements.  The Company will continue to monitor thestate of the credit markets and its potential impact, if any, on the fair valueand classification of its portfolio of auction rate securities.

 

**(8) Stock-BasedCompensation**

 

Stock-basedcompensation costs are recognized based on the estimated fair value at thegrant date for all 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 theaward.  The Company records compensationcost of stock-based awards using the straight line method, which is recordedinto earnings over the vesting period of the award.

 

The followingtable illustrates the stock-based compensation expense resulting fromstock-based awards included in the condensed consolidated statement ofoperations (amounts in thousands):

 
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **Stock-based compensation expense:** | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| Cost of software, hosting and support           |       | $                                               | 79         |                                          | $          | 79 |   | $ | 137 |   | $ | 156 |   |
| Cost of professional services                   |       | 149                                             |       | 165                                           |       | 274 |   | 318 |   |
| Sales and marketing expenses                    |       | 731                                             |       | 595                                           |       | 1,389 |   | 1,133 |   |
| Research and development expenses               |       | 289                                             |       | 242                                           |       | 515 |   | 477 |   |
| General and administrative expenses             |       | 743                                             |       | 816                                           |       | 978 |   | 1,079 |   |
| Stock-based compensation expense                |       | $                                               | 1,991      |                                          | $          | 1897 |   | $ | 3,293 |   | $ | 3,163 |   |

 

Nostock-based compensation expense was capitalized during the six months ended June 30,2007 or 2008.

 

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Unrecognizedcompensation expense of outstanding stock options at June 30, 2008 wasapproximately $14 million, which is expected to be recognized over a weightedaverage period of 2.8 years.

 

Informationregarding the fair value of stock options granted, and the weighted-averageassumptions used to obtain the fair values, for the respective periods follows:

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **           | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| Fair value per share |       | $                                               | 6.43       |                                          | $          | 5.98 |   | $ | 7.46 |   | $ | 5.46 |   |
| Risk free rate       |       | 4.9                                             | %          | 3.0                                           | %          | 4.8 | % | 2.67 | % |
| Expected term        |       | 3.6 yrs                                         |       | 4.1 yrs                                       |       | 4.1 yrs |   | 4.5 yrs |   |
| Volatility           |       | 51                                              | %          | 54                                            | %          | 53 | % | 55 | % |
| Dividend yield       |       | 0                                               | %          | 0                                             | %          | 0 | % | 0 | % |
|                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

Keyassumptions used to estimate the fair value of stock awards are as follows:

 

*Risk Free Rate:* The risk-free rate is determined by reference to theU.S. Treasury yield curve in effect at or near the time of grant for theexpected term of the award.

 

*Expected Term*: The expected term represents the period that theCompany’s stock-based awards are expected to be outstanding and is determinedbased on historical experience of similar awards, giving consideration to thecontractual term of the awards, vesting schedules and expectations of employeeexercise behavior.

 

*Volatility*: The Company’s estimate of expected volatility isbased on a combination of the Company’s historical volatility and peer-companyvolatilities. The Company believes the combined data points are morerepresentative of future stock price trends than its historical volatilityalone.

 

*Dividend Yield:* The dividend yield assumption is based on the Company’shistory and expectation of dividend payouts.

 

Activityunder the Company’s stock option plans for the six months ended June 30,2008 was as follows (option shares in thousands):

 
| ** **                                     | ** ** | **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, 2007                   |       | 3,404                                 |       | 3,874                    |       | $                                                      | 11.81      |                                            |       |                                                                     |       |   |
| Annual reserve addition (1)                    |       | 1,000                                 |       | —                   |       | —                                                 |       |                                            |       |                                                                     |       |
| Granted                                        |       | (1,053                                | )          | 1,053                    |       | 11.57                                                  |       |                                            |       |                                                                     |       |
| Exercised                                      |       | —                                |       | (142                     | )          | 3.75                                                   |       |                                            |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled  (2) |       | 200                                   |       | (201                     | )          | 14.60                                                  |       |                                            |       |                                                                     |       |
| Balance at June 30, 2008                       |       | 3,551                                 |       | 4,584                    |       | $                                                      | 11.89      |                                            | $          | 13,466                                                                   |       | 7.4 |   |
|                                           |       |                                  |       |                     |       |                                                   |       |                                            |       |                                                                     |       |
| Vested or expected to vest at June 30, 2008    |       |                                  |       | 4,265                    |       | $                                                      | 11.76      |                                            | $          | 13,045                                                                   |       | 7.3 |   |
|                                           |       |                                  |       |                     |       |                                                   |       |                                            |       |                                                                     |       |
| Exercisable at June 30, 2008                   |       |                                  |       | 2,341                    |       | $                                                      | 10.02      |                                            | $          | 10,755                                                                   |       | 6.0 |   |

 

----

(1)         The 2004 EquityIncentive Plan provides for an automatic, annual increase on the first of eachyear in an amount equal to the lesser of: a) 1,000,000 shares; b) 4% of thenumber of outstanding common shares on

 

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thelast day of the previous fiscal year; or c) such lesser amount as determined bythe board of directors.  The annualautomatic increase has been approved by shareholders through December31, 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 value of options exercisedduring the six months ended June 30, 2007 and 2008 was $2.8 million and $3.5million, respectively.

 

Fromtime to time the Company may grant options to purchase stock toconsultants.  The Company accounts forconsultant stock options in accordance with SFAS 123 and Emerging Issues TaskForce Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued to Other ThanEmployees for Acquiring, or in Conjunction With Selling, Goods or Services*.  Compensation expense for the grant of stockoptions to consultants is determined based on the estimated fair value of thestock options at the measurement date as defined in EITF 96-18 and isrecognized over the vesting period. There were no stock options granted to non-employees for the six monthsended June 30, 2007 or 2008.

 

**(9)**                     Commitments and Contingencies

** **

***Warranties andIndemnification***

*** ***

The Company’s ondemand application service is typically warranted to perform in accordance withits user 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 any material costs as a result of suchindemnifications and has not accrued any liabilities related to suchobligations in the accompanying consolidated financial statements.

 

The Company hasentered into service level agreements with a 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, theCompany has not provided any material credits, or cancelled any agreementsrelated to these service level agreements.

 

The Company hasalso agreed to indemnify its directors and executive officers for costsassociated with any fees, expenses, judgments, fines and settlement amountsincurred by any of these persons in any action or proceeding to which any ofthose persons is, or is threatened to be, made a party by reason of the person’sservice as a director or officer, including any action by the Company, arisingout of that person’s services as the Company’s director or officer or thatperson’s services provided to any other company or enterprise at the Company’srequest.

 

***Litigation***

*** ***

From time to time,the Company is involved in legal proceedings arising in the normal course ofbusiness.  The Company believes that theresolution of these matters will not have a material effect on the Company’sconsolidated financial position, results of operations or liquidity.

 

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**(10)**              IncomeTaxes

** **

As of December 31, 2007 and June30, 2008, the Company had an insignificant amount of unrecognized tax benefits,none of which would materially affect its effective tax rate ifrecognized.  The Company does not expectthat the amount of unrecognized tax benefits will significantly increase ordecrease within the next twelve months. The Company’s policy is to recognize interest and penalties onunrecognized tax benefits as interest expense and other expense, respectively,in its Consolidated Statements of Operations. The amount of interest and penalties for the three and six months ended June30, 2008 was insignificant.  Tax yearsbeginning in 2004 are subject to examination by taxing authorities, althoughnet operating loss and credit carryforwards from all years are subject toexaminations and adjustments for at least three years following the year inwhich the attributes are used. The U.S. jurisdictions subject to examinationinclude Montana, California, New Jersey, Illinois and the foreign jurisdictionssubject to examination include the United Kingdom, Germany, Australia, Japan,Canada, and the Netherlands.

 

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**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*               **In this report, the terms “RightNowTechnologies,” “RightNow,” “Company,” “we,” “us” and “our” refer to RightNowTechnologies, Inc. and its subsidiaries.*

 

***Cautionary Statement***

 

        *All statements included or incorporated by referencein this report, other than statements or characterizations of historical fact,are forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements are based onour current expectations, estimates and projections about our industry,management’s beliefs, and certain assumptions made by us, all of which aresubject to change. Forward-looking statements can often be identified by wordssuch as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,”“estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,”“ongoing,” similar expressions, and variations or negatives of these words, andinclude, but are not limited to, statements regarding projected results ofoperations, market acceptance and performance of our products, our ability toretain and hire key executives, sales and technical personnel and otheremployees in the numbers, with the capabilities, and at the compensation levelsneeded to implement our business and product plans, the competitive nature ofand anticipated growth in our markets, our accounting estimates, assumptionsand judgments, and management’s future strategic plans. These forward-lookingstatements are not guarantees of future results and are subject to risks,uncertainties and assumptions that are difficult to predict and that couldcause our actual results to differ materially and adversely from thoseexpressed in any forward-looking statement. The risks and uncertaintiesreferred to above include, but are not limited to, our ability to develop oracquire, introduce, market and gain market acceptance for new products andenhancements to existing products in a cost-effective and timely manner; theability to gain and retain key customers; competitive pressures and othersimilar factors such as the availability and pricing of competing products andtechnologies and the resulting effects on sales and pricing of our products;the rate at which our present and future customers adopt our existing andfuture products and services; our ability to expand operations; possiblefluctuations in our operating results including our revenue mix and our rate ofgrowth; the credit markets and potential impact on the recoverability of ourportfolio of auction rate securities; fluctuations in our operating results from the impact of stock-basedcompensation expense; our ability to manage and expand our partnerrelationships; interruptions or delays in our hosting operations; breaches ofour security measures; our ability to hire, retain and motivate our employees andmanage our growth; general economic conditions; the impact of potentialacquisitions, if any; and various other factors, some of which are describedunder the section below entitled “Risk Factors,” in Part II, Item 1Aof this report. These forward-looking statements speak only as of the date ofthis report. We undertake no obligation to revise or update publicly anyforward-looking statement for any reason, except as otherwise required by law.*

 

***Overview***

 

Weare a leading provider of customer experience management software solutions forcompanies of all sizes.   Our on demandsoftware is designed to go beyond traditional customer relationship management(“CRM”) solutions to help companies improve their customer experiences, whilereducing operating costs.  Our softwaresolutions support a business’s external customer-facing channels as well assales, marketing and customer service operations.

 

Wereleased our initial version of RightNow Service TM in 1997.  This product addressed the new customerservice needs resulting from the increasing use of the Internet as a customerservice channel.  Since then, we havesignificantly enhanced product features and functionality to 

 

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addresscustomer service needs across multiple communication channels, including web,interactive voice, email, chat, telephone and proactive outbound emailcommunications. We have also added several products that are complementary toour RightNow Service solution, including RightNow Marketing TM, RightNow SalesTM, and RightNow Feedback TM which automate aspects of marketing campaigns, salesoperations, and customer monitoring.  In February 2007,we released RightNow 8, our newest enterprise-class solution for service, salesand marketing.  To date, approximately80% to 90% of our revenue has been generated by the RightNow Service suite.

 

Wehave approximately 1,900 customers worldwide as of June 30, 2008, and ourproducts served more than 477 and 939 million customer interactions, or uniquesessions hosted by our solutions, during the three and six months ended June 30,2008, respectively.  We distribute oursolutions primarily through direct sales efforts and to a lesser extent throughindirect channels.

 

***2007 Business Model Changes***

*** ***

Tobetter align with industry practice, beginning in 2007 we changed our productofferings from software license arrangements to subscription servicearrangements.  As the industry andbusiness models for “software as a service” or “on demand” have evolved, thestandard form of arrangements is subscription service arrangements that can behosted rather than licenses of software. We believe providing offerings in this manner will ultimately increaseour market penetration.

 

Accordingly,our terms of sale have been revised to provide a hosting service where thecustomer accesses the software and data via the Internet.  Our previous terms of sale provided thecustomer a software license, and for no additional fee, the customer couldchoose to have the software hosted by us, by themselves or by someone else.Revenue recognition for our subscription service arrangements is not materiallydifferent from our previous term license arrangements, as revenue under eithertype of contract is generally recognized ratably over the period of theagreement. As a result of this change, the amount of deferred revenue on thebalance sheet under subscription arrangements decreased because only the amountcurrently due from the customer is recorded to accounts receivable and deferredrevenue. Conversely, under software license arrangements, the full customercommitment is recorded to receivables and deferred revenue whether or notcurrently due because we have the contractual right to collect the entirearrangement fee.

 

Alsobeginning in 2007, we essentially discontinued selling perpetual softwarelicenses, which represented 21% of our revenue in 2006.  Consequently, perpetual software licenseswere 2% of revenue in 2007 and less than 1% for the three and six months ended June 30,2008.

 

Ourpolicy for subscription contract acquisition costs, such as sales commissions,is to recognize them in proportion to the revenue recognized under thesubscription arrangement.  Salesincentives paid for licenses and professional services are expensed whenearned, which is typically at the time the related sale is invoiced.

 

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***Sources of Revenue***

*** ***

Ourrevenue is comprised of fees for software, hosting and support, and fees forprofessional services.  “Recurringrevenue,” referred to in this report includes software, hosting and supportrevenue from term license and subscription agreements.

 

Software,hosting and support revenue includes fees earned under subscriptions andsoftware license arrangements. Subscription arrangements include a bundled feeto access the software and data through our hosting services, and supportservices. Subscription revenue is recorded ratably over the length of theagreement. Our hosting services provide remote management and maintenance ofour software and customers’ data which is physically located in third partyfacilities. Customers access “hosted” software and data through a secureInternet connection. Support services include technical assistance for oursoftware products and unspecified product upgrades and enhancements on a whenand if available basis.

 

Licensearrangements can be over time (a “term” license) or perpetual. For termlicenses, software, hosting and support revenue is recognized ratably over thelength of the agreement. Perpetual license revenue is generally recorded infull upon delivery of the license, and the hosting and support elements arerecognized ratably over the contractual period. Perpetual license revenueranged from 21% to 25% of our total revenue from 2004 through 2006. Due to thechange in our business model noted above, perpetual license revenue decreasedfrom 21% of revenue in the quarter ended June 30, 2006 to 1% of revenue inthe quarter ended June 30, 2007 to less than 1% of revenue in the quarterended June 30, 2008.

 

Oursales arrangements generally provide customers with the right to use oursoftware up to a maximum number of users or transactions. A number of ourarrangements provide for additional fees for usage above the maximum, which arebilled and recognized into revenue when determinable and earned.

 

Professionalservices revenue is comprised of revenue from consulting, education, developmentservices, and reimbursement of related travel costs. Consulting and educationservices include implementation and best practices consulting. Developmentservices include customizations and integrations for a client’s specificbusiness application. Professional services revenue was approximately 22% oftotal revenue in each of the past three years ended December 31, 2007.Professional services revenue increased from 22% of total revenue in thequarter ended June 30, 2007 to 27% of total revenue in the quarter endedJune 30, 2008.

 

Professionalservices are typically sold with initial sales arrangements and thenperiodically over the client engagement. Our typical education courses arebilled on a per person, per class basis.

 

Dependingon the size and complexity of the client project, our consulting or developmentservices contracts are either fixed price/fixed scope or, more frequently,billed on a time and materials basis. We have determined that the professionalservices element of our software and subscription arrangements is not essentialto the functionality of the software.

 

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***Cost of Revenue and Operating Expenses***

*** ***

*Cost of Revenue.*    Cost of revenue consists primarily of salariesand related expenses (such as employee benefits and payroll taxes) for ourhosting, support and professional services organizations, third-party costs andequipment depreciation relating to our hosting services, third-party costs forvoice enabled CRM applications, travel expenses related to providingprofessional services to our clients, amortization of acquired intangibleassets and allocated overhead. We allocate most overhead expenses, such asoffice supplies, computer supplies, utilities, rent, and depreciation forfurniture and equipment, based on headcount. As a result, overhead expenses arereflected in each cost of revenue and operating expense category.

 

*Sales and MarketingExpenses. *Salesand marketing expenses consist primarily of salaries and related expenses foremployees in sales and marketing, including commissions and bonuses,advertising, marketing events, corporate communications, product managementexpenses, travel costs and allocated overhead. For subscription arrangements,we expense the related sales commission in proportion to the revenuerecognized.  We expense our salescommissions on license and professional service arrangements when earned, whichis typically at the time the related sale is invoiced to the client.  Since the majority of our revenue prior to2007 was from license arrangements recognized over time, we have experienced adelay between increasing sales and marketing expenses and the recognition ofcorresponding revenue. We also expect significant additional increases in salesand marketing expenses in absolute dollars as we continue to hire additionalsales and marketing personnel and increase the level of marketing activities.

 

*Research andDevelopment Expenses. *Researchand development expenses consist primarily of salary and related expenses fordevelopment personnel and costs related to the development of new products,enhancement of existing products, translation fees, quality assurance, testingand allocated overhead. To date, we have not capitalized any softwaredevelopment costs because the timing of the commercial releases of our productshas substantially coincided with the attainment of technological feasibility.As a result, 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 expenses consistprimarily of salary and related expenses for management, finance andaccounting, legal, information systems and human resources personnel,professional fees, other corporate expenses and allocated overhead. Weanticipate that we will incur additional employee salaries and relatedexpenses, professional fees and insurance costs related to the growth of ourbusiness and operations.

 

***Critical Accounting Policiesand Estimates***

*** ***

Ourfinancial statements and accompanying notes are prepared in accordance withU.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses.  These assumptions areaffected by management’s application of accounting 

 

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policies.  Our critical accounting policies includerevenue recognition, valuation of receivables and deferred tax assets, andaccounting for share-based compensation.

 

***Revenue Recognition***

*** ***

Beginning in 2007, we changed the nature of our sales arrangements fromlicense arrangements to subscription arrangements (“subscriptions”). For abundled fee, subscriptions provide the customer with access to the software anddata over the Internet, or on demand, and provide technical support servicesand software upgrades when and if available. Under subscriptions, customers donot have the right to take possession of the software and, in accordance withEITF 00-03, such arrangements are considered service contracts which areoutside the scope of SOP 97-2. Accordingly, we account for sales of subscriptionsunder EITF 00-21 and recognize subscription revenue ratably over thelength of the agreement in accordance with SAB 104.

 

Priorto 2007, we sold the majority of products under software license arrangements (“licenses”)and accounted for them in accordance with SOP 97-2 and SOP 98-9.Licenses generally include multiple elements that are delivered up front orover time. For example, under a term license, we deliver the software up frontand provide hosting and support services over time. Fair value for each elementin a license does not exist since none are sold separately, and consequently,the bundled revenue is recognized ratably over the length of the agreement.Under a perpetual license, vendor specific objective evidence of fair value ofthe hosting and support elements is based on the price charged at renewal whensold separately, and therefore the license element is recognized immediatelyinto revenue upon delivery using the residual method, and the hosting andsupport elements are recognized ratably over the contractual term.

 

Theapplication of these rules requires judgment, including the identificationof individual elements in multiple element arrangements, whether there isobjective and reliable evidence of fair value, including vendor specificobjective evidence (“VSOE”) of fair value, for some or all elements. Changes tothe elements in our sales arrangements, or our ability to establish VSOE orfair value for those elements, may result in a material change to the amount ofrevenue recorded in a given period.

 

Feescharged for professional services are recognized when delivered. We believe thefees for professional services qualify for separate accounting because:a) the services have value to the customer on a stand-alone basis;b) objective and reliable evidence of fair value exists for theseservices; and c) performance of the services is considered probable anddoes not involve unique customer acceptance criteria.

 

Ourstandard payment terms are net 30, although payment within 90 days isconsidered normal. We periodically provide extended payment terms and weconsider any fees due beyond 90 days to not be fixed or determinable.  In such cases, judgment is required indetermining the appropriate timing of revenue recognition. Changes to ourpractice of providing extended payment terms or providing concessions followinga sale, may result in a material change to the amount of revenue recorded in agiven period.

 

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***Allowance for doubtful accounts***

*** ***

Weregularly assess the collectibility of outstanding customer invoices and, in sodoing, we maintain an allowance for estimated losses resulting from thenon-collection of customer receivables. In estimating this allowance, we consider factors such as: historicalcollection experience; a customer’s current creditworthiness; customerconcentration; age of the receivable balance; and general economic conditionsthat may affect a customer’s ability to pay. Actual customer collections could differ from our estimates and exceedour related loss allowance.

 

***Income Taxes***

*** ***

Werecord income taxes under the asset and liability method. Deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect of a change in tax rates on deferred taxassets and liabilities is recognized in income in the period that includes theenactment date. When applicable, a valuation allowance is established to reduceany deferred tax asset when it is determined that it is more likely than notthat some portion of the deferred tax asset will not be realized.

 

Wehave established a valuation allowance equal to our net deferred tax assets dueto 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.

 

EffectiveJanuary 1, 2007, the Company adopted Financial Accounting Standards Board(“FASB”) Interpretation No. 48, *Accountingfor Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109*(“FIN 48”) and it did not have a significant impact on our financialposition or results of operations. FIN 48 requires judgment whenevaluating tax positions. Our judgment includes, but is not limited to, anevaluation of our material positions taken on tax provisions and tax returnfilings.  The ultimate resolution of taxissues may result in a significant change to our recorded tax assets andliabilities.

 

***Share-Based Compensation***

*** ***

Statementof Financial Accounting Standards No. 123(R), *Share BasedPayment*, (“SFAS 123R”) requires the cost of share-based paymentarrangements to be recorded in the statement of operations.  Prior to 2006, the estimated cost ofshare-based payment arrangements was disclosed in a footnote to the financialstatements.  Share-based compensationamounts are affected by our stock price as well as our assumptions regardingthe expected volatility of our stock, our employee stock option exerciseforfeitures, and the related income tax effects.  Our assumptions are based primarily on ourhistorical information, some of which was developed when we were a privatecompany.

 

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***RecentlyIssued Accounting Standards***

 

InDecember 2007, the Financial Accounting Standards Board issued Statement No. 141(revised 2007), *Business Combinations*(SFAS 141R). SFAS 141R requires the use of “full fair value” torecord all the identifiable assets, liabilities, noncontrolling interests andgoodwill acquired in a business combination. SFAS 141R is effective forfiscal years beginning on or after December 15, 2008. The requirements areeffective for us beginning in the first quarter of 2009. We do not believeadoption of SFAS 141R will have a material effect on our financialstatements.

 

InDecember 2007, the Financial Accounting Standards Board issued Statement No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements* (SFAS 160). SFAS 160 requires thenoncontrolling interests (minority interests) to be recorded at fair value andreported as a component of equity. SFAS 160 is effective for fiscal yearsbeginning on or after December 15, 2008. The requirements are effectivefor us beginning in the first quarter of 2009. We do not believe adoption ofSFAS 160 will have a material effect on our financial statements.

 

InMay 2008, the Financial Accounting Standards Board issued Statement No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples*(SFAS 162).  SFAS162 identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (the GAAP hierarchy).  SFAS 162 will become effective 60 daysfollowing SEC approval of the Public Company Accounting Oversight Boardamendments to AU Section 411, “The Meaning of Present Fairly in Conformitywith Generally Accepted Accounting Principles.” We do not believe adoption of SFAS 160 will have a material effecton our financial statements.

 

**Results of Operations**

 

The following table sets forth certain consolidated statements ofoperations data for each of the periods indicated, expressed as a percentage oftotal revenue:

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                             |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support        |       | 78                                              | %          | 73                                            | %          | 78 | % | 74 | % |
| Professional services                |       | 22                                              |       | 27                                            |       | 22 |   | 26 |   |
| Total revenue                        |       | 100                                             |       | 100                                           |       | 100 |   | 100 |   |
| Cost of revenue:                     |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support        |       | 17                                              |       | 14                                            |       | 17 |   | 15 |   |
| Professional services                |       | 19                                              |       | 22                                            |       | 20 |   | 22 |   |
| Total cost of revenue                |       | 36                                              |       | 36                                            |       | 37 |   | 37 |   |
| Gross profit                         |       | 64                                              |       | 64                                            |       | 63 |   | 63 |   |
| Operating expenses:                  |       |                                            |       |                                          |       |   |   |   |   |
| Sales and marketing                  |       | 60                                              |       | 50                                            |       | 60 |   | 51 |   |
| Research and development             |       | 16                                              |       | 13                                            |       | 17 |   | 13 |   |
| General and administrative           |       | 12                                              |       | 11                                            |       | 11 |   | 11 |   |
| Total operating expenses             |       | 88                                              |       | 74                                            |       | 88 |   | 75 |   |
| Loss from operations                 |       | (24                                             | )          | (10                                           | )          | (25 | ) | (12 | ) |
| Interest and other income, net       |       | 3                                               |       | 1                                             |       | 3 |   | 2 |   |
| Loss before income taxes             |       | (21                                             | )          | (9                                            | )          | (22 | ) | (10 | ) |
| (Provision) benefit for income taxes |       | (1                                              | )          | (-                                            | )          | (1 | ) | (- | ) |
| Net loss                             |       | (22                                             | )%         | (9                                            | )%         | (23 | )% | (10 | )% |

 

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The following table sets forth our on demandcustomer interactions and our revenue by type and geography expressed as apercentage of total revenue for each of the periods indicated.

 
| ** **                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer interactions (in millions)                            |       | 332                                             |       | 477                                           |       | 684 |   | 939 |   |
| Revenue by type:                                               |       |                                            |       |                                          |       |   |   |   |   |
| Recurring (subscriptions, term licenses,  hosting and support) |       | 77                                              | %          | 73                                            | %          | 76 | % | 74 | % |
| Perpetual licenses                                             |       | 1                                               |       | —                                        |       | 2 |   | — |   |
| Professional services                                          |       | 22                                              |       | 27                                            |       | 22 |   | 26 |   |
| Revenue by geography in:                                       |       |                                            |       |                                          |       |   |   |   |   |
| United States                                                  |       | 72%                                             |       | 67                                            | %          | 72 | % | 67 | % |
| Europe                                                         |       | 20                                              |       | 25                                            |       | 20 |   | 25 |   |
| Asia Pacific                                                   |       | 8                                               |       | 8                                             |       | 8 |   | 8 |   |

 

***Quarter Overview***

*** ***

Total revenue for the second quarter of 2008increased 33% over the second quarter of 2007. Within software, hosting and support, during the second quarter of 2008recurring revenue increased 25% and perpetual revenue decreased 68% compared tothe second quarter of 2007.  Recurringrevenue increased in the second quarter of 2008 due to higher average revenueper customer and growth in the number of customers. Additionally, these factorsalso contributed to the increase in the European geographical revenue.  The much lower perpetual license revenueresulted from our business model change in early 2007 in which we essentiallyeliminated sales of new perpetual licenses.

 

During the quarter ended June 30, 2008, wecontinued to invest in our operations by adding professional service personneland partners to support our solution offerings, added sales and marketingpersonnel to focus on new customer acquisition, and added capacity to ourhosting, and technical support organizations to broaden and enhance oursolution offerings.   These investmentsincreased total expenses in absolute dollars, but decreased as a percentage ofrevenue during the quarter ended June 30, 2008 compared to the quarterended June 30, 2007. Consequently, our operating loss as a percentage ofrevenue improved to (10)% during the quarter ended June 30, 2008 comparedto (24)% during the quarter ended June 30, 2007.

 

For the quarter ended June 30, 2008, wegenerated $8.6 million of cash from operations compared to $4.8 million of cashfrom operations in the quarter ended June 30, 2007.  We increased our cash and investment balancesto $106.2 million at June 30, 2008 from $86.8 million one year earlier.

 

As of June 30, 2008, we had an accumulateddeficit of $63.5 million.  This deficitand our historical operating losses were primarily the result of costs incurredin the development, sales and marketing of our products and for general andadministrative purposes.

 

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***Three andSix Months Ended June 30, 2008 and 2007***

 

***Revenue***

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Software, hosting and support:       |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Recurring                            |       | $                                                   | 20,341     |                                              | $          | 25,459 |   | 25 | % | $ | 39,566 |   | $ | 49,871 |   | 26 | % |
| Perpetual                            |       | 352                                                 |       | 114                                               |       | (68 | ) | 946 |   | 258 |   | (73 | ) |
| Professional services                |       | 5,772                                               |       | 9,648                                             |       | 67 |   | 11,655 |   | 17,990 |   | 54 |   |
| Total revenue                        |       | $                                                   | 26,465     |                                              | $          | 35,221 |   | 33 | % | $ | 52,167 |   | $ | 68,119 |   | 31 | % |

 

Total revenue for the threemonths ended June 30, 2008 was $35.2 million, an increase of $8.7 million,or 33%, over total revenue of $26.5 million for the three months ended June 30,2007.  Total revenue for the six monthsended June 30, 2008 was $68.1 million, an increase of $16.0 million, or31%, over total revenue of $52.2 million for the six months ended June 30,2007.

 

Software, hosting andsupport revenue, consisting of recurring revenue and perpetual license revenue,for the three months ended June 30, 2008 increased $4.9 million, or 24%,over the three months ended June 30, 2007. For the six months ended June 30, 2008, software, hosting andsupport revenue increased $9.6 million, or 24%, from the comparable 2007period.  Recurring revenue, comprised ofsubscriptions, term licenses, hosting and support, for the three and six monthperiods ended June 30, 2008 increased 25% and 26% over the comparable 2007three and six month periods, respectively, primarily due to a 22% increase in the average revenue percustomer.  We believe our latest product,RightNow 8, appeals to large customers because of its robust performancecharacteristics, which in turn has driven larger average purchase volumes andhigher average selling prices per customer. Average revenue per customer increased as a result of sales of capacityadditions, contract renewals and new products. Customer interactions, a measure of unique customer sessions hosted inour data centers and customer usage, exceeded 477 million in the quarter ended June 30,2008 as compared to 332 million in the quarter ended June 30, 2007.

 

Perpetual license revenuedecreased $0.2 million, or 68%, in the quarter ended June 30, 2008compared to the quarter ended June 30, 2007, and decreased as a percentageof total revenue to less than 1% in the second quarter of 2008 from 1% in thesecond quarter of 2007. For the six months ended June 30, 2008, perpetuallicense revenue decreased $688,000, or 73%, from the comparable 2007period.  Beginning January 2007, wesubstantially eliminated the sale of perpetual arrangements.

 

Professional servicesrevenue increased $3.9 million, or 67%, in the quarter ended June 30, 2008over the comparable 2007 quarter, due to improved billable utilizations,capacity growth, and an improvement in working through backlog.  Consequently, we have increased professionalservice revenue per customer.  Inaddition, many customers have purchased professional services as part of theirplans to automate call-centers while upgrading to RightNow 8.  Professional services revenue for the sixmonths ended June 30, 2008 increased $6.3 million, or 54%, over the sixmonths ended June 30, 2007. Customers generally purchase professional services with initialsubscription or license arrangements, and periodically over the life of thecontract.

 

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The mix of professionalservices revenue affects our profitability from period-to-period due to thelower gross profit earned on professional services as compared to the grossprofit earned on software, hosting and support revenue.  Professional services revenue represented 27%and 22% of total revenue in the three months ended June 30, 2008 and 2007,respectively. 

 

Revenue from Europeancustomers grew to represent 25% of total revenue in the quarter ended June 30,2008 from 20% of total revenue in the quarter ended June 30, 2007, whilerevenue from Asia Pacific clients represented 8% of total revenue in each ofthe quarters ended June 30, 2008 and June 30, 2007.  Total revenue outside the United Statesincreased to represent 33% of revenue from 28% for the comparative three monthand six month periods ended June 30, 2008 and 2007, due to our focus ofincreasing sales penetration in global markets.

 

***Cost of Revenue***

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Software, hosting and support        |       | $                                               | 4,565      |                                          | $          | 5,043 |   | 10 | % | $ | 8,959 |   | $ | 10,078 |   | 12 | % |
| Professional services                |       | 5,036                                           |       | 7,810                                         |       | 55 |   | 10,207 |   | 15,095 |   | 48 |   |
| Total cost of revenue                |       | 9,601                                           |       | 12,853                                        |       | 34 | % | $ | 19,166 |   | $ | 25,173 |   | 31 | % |
|                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Totalcost of revenue for the quarter ended June 30, 2008 was $12.9 million, an increaseof $3.3 million, or 34%, over total cost of revenue of $9.6 million for thequarter ended June 30, 2007. Total cost of revenue for the six monthsended June 30, 2008 was $25.2 million, or 31% over total cost of revenueof $19.2 million for the six months ended June 30, 2007.

 

Costof software, hosting and support increased $0.5 million, or 10%, in the secondquarter of 2008 over the second quarter of 2007 due to increased voice andnon-voice hosting volume, increased depreciation expense, and staff additionsin our hosting and technical support operations.  For the six months ended June 30, 2008, cost of software, hostingand support increased $1.1 million, or 12%, from the comparable 2007period.  Adding increased capacity to assist with voice and non-voice hostingvolume increased third-party hosting costs $133,000 in the quarter ended June 30,2008 compared to the quarter ended June 30, 2007.  Depreciation from capacity additions to ourdata centers, which occurred during 2007, combined with development of newlanguage packages, increased depreciation expense in the second quarter of 2008by $80,000 over the second quarter of 2007. Average employee count in our hosting and technical support operationswas 88 during the second quarter of 2008 as compared to 80 during the secondquarter of 2007, which increased salaries and related expenses by $77,000during the second quarter of 2008.  As apercent of the associated revenue, software, hosting and support costs were 20%in both the three months and six months ended June 30, 2008 as compared to22% in both the three and six months ended June 30, 2007.

 

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Costof professional services increased $2.8 million, or 55%, in the quarter ended June 30,2008 over the quarter ended June 30, 2007 due primarily to employee staffadditions, increased utilization of third-party partners, and higher travel andmeals expenses.  For the six months ended June 30, 2008,cost of professional services increased $4.9 million, or 48%, from thecomparable 2007 period.  Average employee count in our professionalservices organization grew to 168 during the second quarter of 2008 from 138during the second quarter of 2007, which increased salaries and bonus expensesby $1.2 million during the second quarter of 2008.  Increased utilization of third-party partnersused to assist in the deployment of professional services increased by $936,000during the second quarter of 2008. Travel and meal expenses associated with professional servicedeployments increased by $248,000 during the second quarter of 2008.  As a percent of the associated revenue,professional services costs decreased to 81% and 84% in the three and six months ended June 30, 2008,respectively, from 87% and 88% in the three and six months ended June 30,2007, respectively.  Employee and/or partnertraining and customer scheduling requirements can cause the cost ofprofessional services to fluctuate as a percentage of revenue.

 

***Operating Expenses***

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Sales and marketing                  |       | $                                               | 15,788     |                                          | $          | 17,627 |   | 12 | % | 31,515 |   | $ | 34,445 |   | 9 | % |
| Research and development             |       | 4,343                                           |       | 4,507                                         |       | 4 |   | 8,639 |   | 8,993 |   | 4 |   |
| General and administrative           |       | 3,178                                           |       | 3,890                                         |       | 22 |   | 6,038 |   | 7,406 |   | 23 |   |
| Total operating expenses             |       | $                                               | 23,309     |                                          | $          | 26,024 |   | 12 | % | $ | 46,192 |   | $ | 50,844 |   | 10 | % |
|                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

## ***Sales and Marketing Expenses***

## ** **

Sales and marketing expenseswere $17.6 million in the second quarter of 2008 an increase of $1.8 million,or 12% over sales and marketing expenses of $15.8 million in the second quarterof 2007.  Sales incentives increased $1.2million in the second quarter of 2008 due primarily to the 25% increase inrecurring revenue compared to the second quarter of 2007.  Averageemployee count in our sales and marketing organization grew to 275 during thesecond quarter of 2008 from 265 during the second quarter of 2007, whichincreased salaries and related expense by $833,000 during the second quarter of2008.  These costs were partially offsetby a planned reduction in direct marketing and advertising costs of $303,000 inthe quarter ended June 30, 2008 compared to the quarter ended June 30,2007.

 

Sales and marketing expenseswere $34.4 million for the six months ended June 30, 2008, an increase of$2.9 million, or 9%, over sales and marketing expenses of $31.5 million for thesix months ended June 30, 2007, primarily due to $2.3 million of salesincentive increase due to the 26% increase in recurring revenue for the sixmonths ended June 30, 2008. Additionally, employee growth increased salaries and related expenses by$1.0 million that were partially offset 

 

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by a reduction in direct marketing and advertisingcosts of $440,000 for the six months ended June 30, 2008 compared to thesix months ended June 30, 2007.

 

As noted above under “2007Business Model Changes,” we changed the nature of our sales arrangements fromlicenses to subscriptions beginning in 2007. Under license arrangements, we expense sales incentives when earned,which is typically upon contract signing. Under subscription arrangements, we defer the related sales incentivecosts and expense them in proportion to the revenue recognized.  We deferred $2.1 million of sales commissionsearned on subscription sales in the second quarter of 2008, as compared to $1.0million of deferred sales commissions in the second quarter of 2007.  Net sales incentive expense in the quarterended June 30, 2008 was $3.8 million compared to $2.6 million in thequarter ended June 30, 2007.  Netsales incentive expense for the six months ended June 30, 2008 was $7.0million as compared to $4.7 million in the six months ended June 30, 2007.

 

*Research and Development Expenses*

 

#### **Researchand development expenses were $4.5 million in the three months ended June 30,2008, an increase of $0.2 million, or 4%, over research and developmentexpenses of $4.3 million in the three months ended June 30, 2007,primarily due to annual salary increases. Average employee count in our research and development organizationremained relatively constant at 140 during the second quarter of 2008 comparedto 138 during the second quarter of 2007. Research and development expenses forthe six months ended June 30, 2008 were $354,000, or 4%, over thecomparable 2007 period primarily due to the annual salary increases.**

#### ** **

*General and AdministrativeExpenses*

 

Generaland administrative expenses were $3.9 million in the second quarter of 2008 anincrease of $0.7 million, or 22% over general and administrative expenses of$3.2 million in the second quarter of 2007, which was mostly due to staffadditions. Average employees in our general and administrative organizationwere 76 during the second quarter of 2008 compared to 69 during the secondquarter of 2007. General and administrative expenses for the six months ended June 30,2008 were $7.4 million, or 23% over the comparable 2007 period primarily due toemployee growth, which increased salaries and related expense by $677,000during the second quarter of 2008.  Inaddition charitable contributions and other expenses increased $285,000 andlegal and other third-party service expenses increased $176,000 during thesecond quarter of 2008.

 

*Stock-Based Compensation Expense*

 

Total stock-basedcompensation expense for the three months ended June 30, 2008 was $1.9million as compared to $2.0 million in the three months ended June 30,2007. Stock-based compensation was $3.2 million for the six months ended June 30,2008 as compared to $3.3 million for the six months ended June 30,2007.  Stock-based compensation increasedfor the three and six months ended June 30, 2008 over June 30, 2007,primarily due to an increase of stock option grants.

 

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***Interest and Other Income (Expense), Net***

 
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)**            | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                            |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Interest income                                 |       | $                                               | 918        |                                          | $          | 729 |   | (21 | )% | $ | 1,803 |   | $ | 1,653 |   | (8 | )% |
| Interest expense                                |       | (2                                              | )          | (2                                            | )          | n/m |   | (3 | ) | (6 | ) | n/m |   |
| Other income (expense)                          |       | (31                                             | )          | (208                                          | )          | n/m |   | (87 | ) | (190 | ) | n/m |   |
| Total interest and other income (expense),  net |       | $                                               | 885        |                                          | $          | 519 |   | (41 | )% | $ | 1,713 |   | $ | 1,457 |   | (15 | )% |

 

Interest income decreased 21% in the second quarterof 2008 from the second quarter of 2007 due to declining investment yieldsdriven by the periodic decreases in the federal funds rate. For the six monthsended June 30, 2008, interest income decreased $.3 million, or 15%, fromthe comparable 2007 period.  Ourinvestment portfolio consists primarily of investment-grade government,corporate debt instruments, and auction-rate securities.  Other income (expense) consists primarily oflosses on the remeasurement of non-monetary liabilities denominated innon-functional currencies.

 

***Provision for Income Taxes***

 

The provision for income taxes of $87,000 in the sixmonths ended June 30, 2008, consists primarily of state minimum taxes andforeign taxes withheld.  Oureffective tax rate differs from the federal statutory rate primarily due to theutilization of net operating loss carryforwards, foreign rate differentials,and non-deductible meal and entertainment expenses.Our effective tax rate in 2008 will depend ona number of factors, such as the amount and mix of stock-based compensationexpense to be recorded under SFAS 123R, the level of business in state andforeign tax jurisdictions, management’s expectation of the realization ofdeferred tax assets and the associated valuation allowance, and other factors.

 

**Liquidity and Capital Resources**

** **
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term  investments |       | $                                                   | 86,753     |                                              | $          | 94,321 |   | 9 | % | $ | 86,753 |   | $ | 94,321 |   | 9 | % |
| Long-term investments                              |       | —                                              |       | 11,925                                            |       | 100 | % | — |   | 11,925 |   | 100 | % |
| Cash provided by operating activities              |       | 4,763                                               |       | 8,574                                             |       | 80 | % | 10,123 |   | 12,244 |   | 21 |   |
|                                                    |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

At June 30, 2008, cash, cashequivalents, and short-term investments totaled $94.3 million.  In addition to our cash and short-terminvestments, other sources of liquidity at June 30, 

 

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2008 included a $3.0 million bank line of creditfacility, under which there have been no borrowings.

 

Operating activities provided $8.6million and $12.2 million of cash during the three and six months ended June 30,2008, respectively, as compared to $4.8 and $10.1 million during the three andsix months ended June 30, 2007. Cash flow from operations can vary significantly from quarter-to-quarterfor many reasons, including the timing of business in a given period, andcustomer payment preferences and patterns. The collections of receivables and growth in deferred revenue were theprimary drivers in the growth in cash provided by operating activities duringthe quarter ended June 30, 2008.

 

We have generated cash from operationsfrom increasing sales and the upfront billing of our sales arrangements, whichis typically reflected in accounts receivable and deferred revenue.    Beginning in 2007, our change tosubscriptions from license arrangements requires that we no longer recordadditions to term receivables, and consequently, we expect term receivables togradually decline on our balance sheet.

 

The allowance for uncollectible accountsreceivable represented approximately 6% of current accounts and termreceivables at June 30, 2008 and 5% at December 31, 2007,respectively.  We regularly assess theadequacy of the allowance for doubtful accounts.  Actual write-offs could exceed our estimatesand adversely affect operating cash flows in the future.

 

Investing activities used $0.8 millionand $4.3 million in the quarter and six months ended June 30, 2008,respectively. Second quarter 2008 investing activities consisted of net salesof short-term investments of $748,000 and $1.5 million of purchased capitalexpenditures. Capital asset additions consisted primarily of equipment acquisitionsfor our hosting operations and employee growth.

 

Financing activities provided $0.2 and$0.6 million in the three and six months ended June 30, 2008,respectively, and relates to employee purchases of RightNow stock under ourequity incentive plans.

 

As of June 30, 2008, we held approximately $12.4 million in parvalue auction rate securities with investment grades of AAA or AA.  The auction rate state and municipalsecurities are comprised of federally insured student loan bonds, and theauction ate preferred securities are comprised of preferred shares of closedend mutual funds. Auction rate securities are long-term bonds or preferredstocks that act like short-term debt, where interest rates reset in Dutchauctions held daily, weekly or monthly which have historically providedliquidity for these investments.  Despitethe long-term contractual maturities of the underlying securities, all of thesesecurities were considered available for sale and were available to fund theCompany’s current operations as of December 31, 2007.  Since February 2008, uncertainties inthe credit markets caused substantially all auctions of these securities heldby us to be unsuccessful.  Anunsuccessful auction is an event when there are fewer securities bid for thanare available for sale.  Upon anunsuccessful auction, the interest rate is reset at a predetermined rate.  Given that substantially all of the auctionswere unsuccessful since February, we reclassified the investments fromshort-term to long-term investments, and recorded a temporary impairment onthese securities of approximately $425,000 in accumulated other comprehensiveloss.  Our determination of fair 

 

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valuewas based upon broker statements, assumed risk premiums, and assumed work outperiods, using a discounted cash flow model.

 

Our management believes that theunrealized losses are temporary, and  wehave the ability and intent to hold the investments until at leastsubstantially all of the cost of the investment is recovered. We believe theimpairment is temporary due primarily to the credit quality of the underlyingsecurities. Because failed auctions typically result in above-market interestrates, we believe the issuers will refinance the obligations at more attractiverates in the near future.  Additionally,$5.85 million our auction rate securities held by us were redeemed at par bythe issuers in the second quarter of 2008.   To date, we have collected all interest payable on all of the auctionrate securities held by us when due.  Ifthe auction rate securities continue to experience unsuccessful auctions, or ifthe credit rating of the auction rate securities deteriorates, we may berequired to realize an impairment charge as “other than temporary” in ourstatement of operations.  While therecent auction failures will limit our ability to liquidate these investmentsfor some period of time, we do not believe the auction failures will materiallyimpact our ability to fund our working capital needs, capital expenditures, orother business requirements.    We willcontinue to monitor the state of the credit markets and its potential impact,if any, on the fair value and classification of our portfolio of auction ratesecurities.

 

We believe our existing cash andshort-term investments, together with funds generated from operations, shouldbe sufficient to fund operating and investment requirements for at least****the next twelve months. 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 theextent that available funds are insufficient to fund our future activities, wemay need to raise additional funds through public or private equity or debtfinancings.  Additional equity or debtfinancing may not be available on terms favorable to us or at all.

 

**Off-Balance Sheet Arrangements**

 

As of June 30, 2008, we did not have anysignificant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K promulgated by the SEC.

 

# **Contractual Obligations and Commitments**

# ** **

There have been nomaterial changes to our contractual obligations or commitments since December 31,2007.

 

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**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

*Foreign Currency Exchange Risk*

 

Our results of operations and cash flows are subjectto fluctuation due to changes in foreign currency exchange rates, particularlychanges in the Euro, British pound, Australian dollar and Japanese yen, becauseour contracts are frequently denominated in local currency. In the future, wemay utilize foreign currency forward and option contracts to manage currencyexposures. We do not currently have any such contracts in place, nor did weenter into any such contracts during the quarters ended June 30, 2007 or June 30,2008.

 

*Interest Rate Sensitivity*

* *

Our investments consist ofshort-term and long-term interest-bearing securities, which are subject tocredit and interest rate risk.  Ourportfolio is investment-grade and diversified among issuers and security typesto reduce credit risk.  We manage ourinterest rate risk by maintaining a large portion of our investment portfolioin instruments with short maturities or frequent interest rate resets.  We also manage interest rate risk bymaintaining sufficient cash and cash equivalents such that we are able to holdinvestments until maturity.  If marketinterest rates were to increase by 100 basis points from the level at June 30,2008, the fair value of our portfolio would decline by approximately $379,000.

 

*Liquidation and Valuation Risk*

 

Our long-term investmentsconsist of approximately $12.4 million in par value auction ratesecurities with investment grades of AAA or AA, as of June 30, 2008.Despite the long-term contractual maturities of the auction rate securities,all of these securities are considered available for sale. Since February 2008uncertainties in the credit markets caused substantially all auctions ofthese  securities held by us to beunsuccessful. As a result, we recorded a temporary impairment on thesesecurities of approximately $425,000 as of June 30, 2008.  If auctions continue to be unsuccessful, orif credit ratings deteriorate, we may be required to record a permanentimpairment charge on these investments. Based on our expected operating cashflows, and other sources and uses of cash, we do not anticipate that the lackof liquidity on these investments will affect our ability to execute ourcurrent business plan. We will continue to monitor the state of the creditmarkets and its potential impact, if any, on the recoverability of ourportfolio of auction rate securities.

 

**Item 4.  Controls and Procedures**

 

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

 

Our management, under the supervision andwith the participation of our Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission and (ii) accumulated 

 

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and communicated to our management, includingour principal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

***(b)******                                ******Changes toInternal 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) and15d-15(f) under the Securities Exchange Act of 1934) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**Part II. OtherInformation**

 

***Item1. Legal Proceedings***

*** ***

From time to time, we are involved inlegal proceedings in the ordinary course of business. We believe that theresolution of these matters will not have a material effect on our consolidatedfinancial position, results of operations or liquidity.

 

**Item1A. Risk Factors**

** **

A restated description ofthe risk factors associated with our business is set forth below. Thisdescription includes any and all changes (whether or not material) to, andsupersedes, the description of the risk factors associated with our businesspreviously disclosed in Part 1, Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

*Before deciding to purchase, holdor sell our common stock, you should carefully consider the risks describedbelow, in addition to the other cautionary statements and risks describedelsewhere and the other information contained in this Report and in our otherfilings with the SEC, including our reports on Forms 10-Q and 8-K. The risksand uncertainties described below are not the only ones we face. Additionalrisks and 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 increase profitability in thefuture.***

 

We incurred a net loss of$6.5 million in the first half of 2008, and as of June 30, 2008, we had anaccumulated deficit of $63.5 million. We expect to continue to incursignificant professional services, 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 achieveprofitability. In 2007, we changed our business model to substantiallyeliminate sales of perpetual licenses, which materially and adversely affectedour operating margin. Although we improved second quarter operating margins in2008 compared to each of the quarters in 2007, we may not be able to continueto improve our operating results at the rate that has occurred in the past.Even if we achieve profitability, we may not be able to increase profitabilityon a quarterly or annual basis in the future, which may cause the price of ourstock to decline.

 

***If our efforts to enhance existing solutions, introduce new solutionsor expand the applications for our products and solutions to broader CRMmarkets do not succeed, our ability to grow our business will be adverselyaffected.***

 

Approximately 80% to 90% ofour revenue is derived from RightNow Service, a suite of solutions used tooptimize customer service operations. If we are unable to successfully developand sell new and enhanced versions of RightNow Service, or introduce newproducts 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 haveintroduced sales, marketing, feedback and voice-enabled applications to expandour solution offerings. Our efforts to expand beyond the customer servicemarket may not be successful because certain of our competitors have fargreater experience and brand recognition

 

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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 less proven, 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.***

 

The market for CRM 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. Increasedcompetition could result in commoditization, pricing pressure, reduced sales,lower margins or the failure of our solutions to achieve or maintain broadmarket acceptance. If we are unable to compete effectively, it will bedifficult for us to add and retain clients, and our business, financialcondition and results of operations will be seriously harmed.

 

We face competitionfrom:

 

· Companies currently providing customerservice solutions, some of whom offer hosted services, including BMC SoftwareCorporation, Inc., eGain Communications Corporation, Kana Software, Inc.,Microsoft Corporation, Netsuite, Oracle Corporation, SAP AG, salesforce.com,and Talisma;

 

· CRM systems that are developed andmaintained internally 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 whobundle solutions and agent labor in their service offerings;

 

· new companies who may enter CRM softwaremarket, the on demand applications market and the on demand CRM market, orexpanding from any one of these markets to the others; and

 

·voice system integrators and voice-enabledIVR technology providers, such as Apptera, Intervoice, Microsoft, TuVox,Voxify, and Unveil Technologies.

 

Many of our current and potential competitors have longeroperating histories and larger presence in the general CRM market, greater namerecognition, access to larger customer bases and substantially greaterfinancial, technical, sales and marketing, management, service, support andother resources than we have. As a result, such competitors may be able torespond more quickly than we can to new or changing opportunities,technologies, standards or client requirements or devote greater resources tothe promotion and sale of their products and services than we can. To theextent our competitors have an existing relationship with a potential client,that client may be unwilling to switch vendors due to the time and financialcommitments already made with our competitors.

 

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In addition, many of ourcurrent and potential competitors have established or may establish business,financial or strategic relationships among themselves or with existing orpotential clients, alliance partners or other third parties, or may combine andconsolidate to become more formidable competitors with better resources. Forexample, in January 2006, Oracle Corporation completed its acquisition ofSiebel Systems, Inc. We also expect that new competitors, such asenterprise software vendors and online service providers that havetraditionally focused on enterprise resource planning or back office applications,will continue to enter the on demand CRM market with competing products as theon demand CRM market develops and matures.

 

***The market for our ondemand application services is at an early stage of development, and if it doesnot develop or develops more slowly than we expect, our business will beharmed.***

 

The market for on demand application services is at an earlystage of development, and it is uncertain whether these application serviceswill achieve and sustain high levels of demand and market acceptance. Oursuccess will depend to a substantial extent on the willingness of companies toincrease their use of on demand application services in general and for ondemand customer relationship management applications in particular. Thewillingness of companies to increase their use of any on demand applicationservices is in part dependent on the actual and perceived reliability of hostedsolutions. In addition, many companies have invested substantial personnel andfinancial resources to integrate traditional enterprise software into theirbusinesses, and therefore may be reluctant or unwilling to migrate to on demandapplication services. While we have supported traditional on site deployment ofour software applications, widespread market acceptance of our on demandsoftware solutions is critical to the success of our business. Other factorsthat 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;

 

· customer acceptance of our subscriptionsales arrangements beginning in 2007; and

 

· the price, performance and availability ofcompeting products and services.

 

If businesses do notperceive the benefits of on demand solutions in general, or our on demandsolutions in particular, then the market for these solutions may not developfurther, or it may develop more slowly than we expect, either of which wouldadversely affect our business, financial condition and results of operations.

 

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***Our quarterly results of operations 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:

 

·   ourability to retain and increase sales to existing clients, attract new clientsand satisfy our clients’ requirements;

 

·   themix of revenue between license arrangements, professional services andsubscription arrangements as sales commissions are generally expensed wheninvoiced for license arrangements and professional services, and expensedratably over the term of an agreement for subscription services;

 

·   changesin the mix of revenue between professional services and software, hosting andsupport, because the gross margin on professional services is typically lowerthan the gross margin on software, hosting and support;

 

·   changesin the mix of voice self service applications sold and/or usage volume, becausethe gross margin on voice self service applications is typically lower than thegross margin on our sales, marketing, feedback and service applications;

 

·   thetiming and success of new product introductions or upgrades by us or ourcompetitors;

 

·   the timing of professional service sales andour ability to appropriately staff and train professional service resourceswithout negatively impacting professional service margins changes in ourpricing policies or those of our competitors;

 

·   theamount and timing of expenditures related to expanding our operations;

 

·   changesin our assumptions of stock price volatility, employee exercise behaviors, andoption forfeiture rates, or changes in the number of stock options granted andvesting requirements in any particular period, which effects the amount ofstock-based compensation expense;

 

·   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 changes in the mix of subscription and perpetual licenses sold in aparticular quarter, because perpetual license revenue is recorded into revenueupon delivery whereas subscriptions are recorded into revenue ratably over thecontractual period;

 

·   changes in credit market conditionsassociated with auction rate securities, which could permanently impair therecoverability of these investments; and

 

·   general economic, industry and marketconditions.

 

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Because the sales cycle for the evaluation and implementationof our solutions typically ranges from 60 to 180 days, we may alsoexperience a delay between increasing operating expenses and the generation ofcorresponding revenue, if any. Moreover, because most of the revenue from newsales agreements is recognized over time, downturns or upturns in sales may notbe immediately reflected in our operating results. Additionally, ourprofessional service margins may be negatively impacted by trainingrequirements for new professional service resources and/or customer schedulingissues. Most of our expenses, such as salaries and third-party hostingco-location costs, are relatively fixed in the short-term, and our expenselevels are based in part on our expectations regarding future revenue levels.As a result, if revenue for a particular quarter is below our expectations, wemay not be able to proportionally reduce operating expenses for that quarter,causing a disproportionate effect on our expected results of operations forthat quarter.

 

Due to the foregoing factors, and the other risks discussedin this report, you should not rely on quarter-to-quarter comparisons of ourresults of operations as an indication of our future performance.

 

***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.***

 

Increasing our client base and achieving broader marketacceptance of our solutions will depend to a significant extent on our abilityto expand our sales and marketing operations. We plan to continue to expand oursales and marketing resources and engage additional third-party channelpartners, both domestically and internationally. This expansion will require usto invest significant financial and other resources. Our business will beseriously harmed if our efforts do not generate a corresponding significantincrease in revenue. We may not achieve anticipated revenue growth fromexpanding our sales and marketing resources if we are unable to hire anddevelop talented sales and marketing personnel, if our new sales personnel areunable to achieve desired productivity levels in a reasonable period of time,or if we are unable to retain our existing sales and marketing 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 time-based agreements, and if our existingclients elect not to renew or to renew on terms less favorable to us, ourbusiness, financial condition and results of operations will be adverselyaffected.***

 

Our solutions are generally sold pursuant to time-basedagreements that are typically subject to renewal every two years or less andour clients have no obligation to renew. Because our clients may elect not torenew, we may not be able to consistently and accurately predict future renewalrates. Our clients’ renewal rates may decline or fluctuate as a result of anumber of factors, including their level of satisfaction with our solutions,their ability to continue their operations or invest in customer service, theiracceptance of a change from term license

 

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agreementsto subscription service agreements, or the availability and pricing ofcompeting products. If large numbers of existing clients do not renew, or renewon terms less favorable to us, and if we cannot replace or supplement thosenon-renewals with new agreements generating the same or greater level ofrevenue, our business, financial condition and results of operations will beadversely 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.***

 

To achieve our business objectives, we will need to continueto expand our business at a rapid pace. This expansion has placed, and isexpected to continue to place, a significant strain on our managerial,administrative, operational, financial and other resources. We anticipate thatthis expansion will require substantial management effort and significantadditional investment in our infrastructure. If we are unable to successfullymanage our growth, our business, financial condition and results of operationswill be adversely affected.

 

Part of the challenge that we expect to face in thecourse of our expansion is to maintain the high level of customer service towhich our clients have become accustomed. To date, we have focused on providingpersonalized account management and customer service on a frequent basis toensure our clients are effectively leveraging the capabilities of our solution.We believe that much of our success to date has been the result of high clientsatisfaction, attributable in part to this focus on client service. To theextent our client base grows, we will need to expand our account management,client service and other personnel, and third-party channel partners, in orderto enable us to continue to maintain high levels of client service andsatisfaction. If we are not able to continue to provide high levels of clientservice, our reputation, as well as our business, financial condition andresults of operations, could be 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.***

 

As of June 30, 2008, approximately 90% of our clientswere using our hosting services for deployment of our software applications. Wegenerally provide our hosting services for our non-voice applications throughcomputer hardware that we own and that is currently located in third-party webhosting co-location facilities maintained and operated in California, Illinois,Massachusetts, New Jersey and London, England. Our voice applications forseveral international customers are hosted by third parties who also own andoperate the hardware on which our applications reside. We do not maintainlong-term supply contracts with any of our hosting providers, and providers donot guarantee that our clients’ access to hosted solutions will beuninterrupted, error-free or secure. Our operations depend on our providers’ability to protect their and our systems in their facilities against damage orinterruption from natural disasters, power or telecommunications failures,criminal acts and similar events. Our back-up computer hardware and systemshave not been tested under actual disaster conditions and may not havesufficient capacity to recover all data and services in the event of an outageoccurring simultaneously at all hosting facilities. In the event that ourhosting facility arrangements were terminated, or there was a lapse of serviceor accidental or willful damage to such facilities, we could experience lengthyinterruptions in our hosting service as well as delays and/or additionalexpense in arranging new facilities and services. Any or all of these eventscould cause our clients to lose access to their important data. In addition,the failure by our third-party hosting facilities to meet our capacity

 

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requirementscould result in interruptions in our service or impede our ability to scale ouroperations.

 

Design and mechanical errors, spikes in usage volume andfailure to follow system protocols and procedures could cause our systems tofail, resulting in interruptions in our clients’ service to their customers.Any interruptions or delays in our hosting services, whether as a result ofthird-party error, our own error, natural disasters or security breaches,whether accidental or willful, could harm our relationships with clients andour reputation. This in turn could reduce our revenue, subject us to liability,cause us to issue credits or pay penalties or cause clients to fail to renewtheir licenses, any of which could adversely affect our business, financialcondition and results of operations. In the event of damage or interruption,our insurance policies may not adequately compensate us for any losses that wemay 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.***

 

Our hosting systems and our software store and transmitproprietary information and critical data belonging to our clients and theircustomers. Any accidental or willful security breaches or other unauthorizedaccess could expose us to a risk of information loss, litigation and otherpossible liabilities. If security measures are breached because of third-partyaction, employee error, malfeasance or otherwise, or if design flaws in oursoftware are exposed and exploited, and, as a result, a third party obtainsunauthorized access to any of our clients’ data, our relationships with clientsand our reputation will be damaged, our business may suffer and we could incursignificant liability. Because techniques used to obtain unauthorized access orto sabotage systems change frequently and generally are not recognized untillaunched against a target, we and our third-party hosting co-locationfacilities may be unable to anticipate these techniques or to implementadequate preventative measures.

 

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

 

International sales comprised 28% and 33% of our revenue forthe quarters ended June 30, 2007 and 2008, respectively. We intend tocontinue to pursue and expand our international business activities. Adversepolitical and economic conditions could make it difficult for us to increaseour international sales or to operate abroad. International operations aresubject to many inherent risks, including:

 

·  political,social and economic instability, including conflicts in the Middle East andelsewhere abroad, terrorist attacks and security concerns in general;

 

·  adversechanges in tariffs and other protectionist laws and business practices thatfavor local competitors;

 

·  fluctuationsin currency exchange rates;

 

·  longercollection periods and difficulties in collecting receivables from foreignentities;

 

·  exposureto different legal standards and burdens of complying with a variety of foreignlaws, including employment, tax, privacy and data protection laws andregulations;

 

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·  reducedprotection for our intellectual property in some countries;

 

·  expensesassociated with localizing products for foreign countries, includingtranslation into foreign languages; and

 

·  importand export license requirements and restrictions of the United States and eachother country in which we operate.

 

We believe that international sales will continue torepresent a significant portion of our revenue for the foreseeable future, andthat continued growth will require further expansion of our internationaloperations. A substantial percentage of our international sales are denominatedin the local currency. As a result, an increase in the relative value of thedollar could make our products more expensive and potentially less pricecompetitive in international markets. We have not historically entered intotransactions designed to hedge against risks of loss due to foreign currencyfluctuations; but if we were to enter into any transactions we cannot guaranteethat any such transactions would be effective. 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.***

 

The CRM industry is characterized by rapid technologicaladvances, changes in client requirements, frequent new product and serviceintroductions and enhancements, changes in protocols and evolving industrystandards. Our hosted business model and the on demand CRM market arerelatively new and may evolve even more rapidly than the rest of the CRMmarket. Competing products and services based on new technologies or newindustry standards may perform better or cost less than our solutions and couldrender our solutions less competitive or obsolete. In addition, because oursolutions are designed to operate on a variety of network hardware and softwareplatforms using a standard Internet web browser, we will need to continuouslymodify and enhance our solutions to keep pace with changes in Internet-relatedhardware, software, communication, browser and database technologies and tointegrate with our clients’ systems as they change and evolve. Furthermore,uncertainties about the timing and nature of new network platforms ortechnologies, or modifications to existing platforms or technologies, couldincrease our research and development expenses.

 

Our software incorporates use of Microsoft’s .NET Framework,and its Smart Client methodology. The .NET Framework is core functionality thatMicrosoft incorporates into operating systems, while the Smart Clientmethodology enables development and deployment of software applications usingthe .NET Framework. We believe that the .NET Framework and Smart Client enableus to provide users with a richer experience and better functionality thanwould be possible using a pure Web-based application. However, the .NETFramework has not been universally adopted. If software users do not adopt the..NET Framework or if the .NET Framework is superseded, the potential market forour solutions will be reduced and we may need to develop an alternativearchitecture.

 

If we are unable to successfully develop and market new andenhanced solutions that respond in a timely manner to changing technology andevolving industry standards, and if we are

 

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unableto satisfy the diverse and evolving technology needs of our clients, ourbusiness, financial condition and results of 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.***

 

Our success and future growth depends to a significant degreeupon the skills, experience, performance and continued service of our seniormanagement, engineering, sales, marketing, service, support and other keypersonnel. Specifically, we believe that our future success is highly dependenton Greg Gianforte, our founder, Chairman and Chief Executive Officer. Inaddition, we do not have employment agreements with any of our seniormanagement or key personnel that require them to remain our employees and,therefore, they could terminate their employment with us at any time withoutpenalty. If we lose the services of Mr. Gianforte or any of our other keypersonnel, our business will be severely disrupted and we may be unable tooperate effectively. We do not maintain “key person” life insurance policies onany of our key employees except Mr. Gianforte. This life insurance policywould not be sufficient to compensate us for the loss of his services. Ourfuture success also depends in large part upon our ability to attract, train,integrate, motivate and retain highly skilled employees, particularly sales,marketing and professional services personnel, software engineers, producttrainers, and senior personnel. Competition for these personnel is intense, especiallyfor engineers with high levels of expertise in designing and developingsoftware and for senior sales executives.

 

***Our failure toattract, manage, support and retain qualified partners may prevent us fromeffectively deploying product and professional services.***

 

Our success and future growth depends in part uponthe skills, experience, performance and continued service of our partners. Weengage with partners in a number of ways, including to assist us to identifyprospective customers, to distribute our solutions, to develop complementarysolutions, and to help us to fulfill professional services engagements. Webelieve that our future success depends in part upon our ability to developstrategic, long term and profitable partnerships. If we do not acquire andretain the right partners, our products might become uncompetitive, we may beunable to take full advantage of the potential demand for our solutions, or ourability to rapidly deliver our solutions may be impaired. The use of partnersto fulfill customer requirements may impact our normal margins, and affect theprofitability of customer transactions.

 

***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.***

 

Our software products may contain undetected errors ordefects that may result in product failures, slow response times, or otherwisecause our products to fail to perform in accordance with client expectations.Because our clients use our products for important aspects of their business,any errors or defects in, or other performance problems with, our productscould hurt our reputation and may damage our clients’ businesses. If thatoccurs, we could lose future sales, or our existing clients could elect to notrenew or to delay or withhold payment to us, which could result in an increasein our provision for doubtful accounts and an increase in collection cycles for

 

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accountsreceivable. Clients also may make warranty or other claims against us, whichcould result in the expense and risk of litigation. Product performanceproblems could result in loss of market share, failure to achieve marketacceptance and the diversion of development resources. If one or more of ourproducts fails to perform or contains a technical defect, a client may assert aclaim against us for substantial damages, whether or not we are responsible forthe product failure or defect. We do not currently maintain any warrantyreserves.

 

Product liability claims could require us to spendsignificant time and money in litigation or to pay significant settlements ordamages. Although we maintain general liability insurance, including coveragefor errors and omissions, this coverage may not be sufficient to coverliabilities resulting from such product liability claims. Also, our insurer maydisclaim coverage. Our liability insurance also may not continue to beavailable to us on reasonable terms, in sufficient amounts, or at all. Anyproduct liability claims successfully brought against us would cause ourbusiness 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.***

 

Our success depends to a significant degree upon theprotection of our software and other proprietary technology rights. We rely ontrade secret, copyright and trademark laws, patents and confidentialityagreements with employees and third parties, all of which offer only limitedprotection. The steps we have taken to protect our intellectual property maynot prevent misappropriation of our proprietary rights or the reverseengineering of our solutions. We may not be able to obtain any further patentsor trademarks, and our pending applications may not result in the issuance ofpatents or trademarks. Any of our issued patents may not be broad enough toprotect our proprietary rights or could be successfully challenged by one ormore third parties, which could result in our loss of the right to preventothers from exploiting the inventions claimed in those patents. Furthermore,legal standards relating to the validity, enforceability and scope ofprotection of intellectual property rights in other countries are uncertain andmay afford little or no effective protection of our proprietary technology.Consequently, we may be unable to prevent our proprietary technology from beingexploited abroad, which could diminish international sales or require costlyefforts to protect our technology. Policing the unauthorized use of ourproducts, trademarks and other proprietary rights is expensive, difficult and,in some cases, impossible. Litigation may be necessary in the future to enforceor defend our intellectual property rights, to protect our trade secrets or todetermine the validity and scope of the proprietary rights of others. Suchlitigation could result in substantial costs and diversion of managementresources, either of which could harm our business. Accordingly, despite ourefforts, we may not be able to prevent third parties from infringing upon ormisappropriating 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.***

 

The software and Internet industries are characterized by theexistence of a large number of patents, trademarks and copyrights, and byfrequent litigation based upon allegations of infringement or other violationsof intellectual property rights. As we seek to extend our CRM product andservice offerings, we may be constrained by the intellectual property rights ofothers. We have in the past been named as a defendant in a lawsuit allegingintellectual property infringement, and we may again in the future have todefend against intellectual property lawsuits. We may not prevail in any futureintellectual property infringement litigation given the

 

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complextechnical issues and inherent uncertainties in litigation. Any claims,regardless of their merit, could be time-consuming and distracting tomanagement, result in costly litigation or settlement, cause productdevelopment delays, or require us to enter into royalty or licensingagreements. If any of our products violate third-party proprietary rights, wemay be required to re-engineer our products or seek to obtain licenses fromthird parties, which may not be available on reasonable terms or at all.Because our sales agreements typically require us to indemnify our clients fromany claim or finding of intellectual property infringement, any such litigationor successful infringement claims could adversely affect our business,financial condition and results of operations. Any efforts to re-engineer ourproducts, obtain licenses from third parties on favorable terms or license asubstitute technology may not be successful and, in any case, may substantiallyincrease our costs and harm our business, financial condition and results ofoperations. Further, our software products contain open source softwarecomponents that are licensed to us under various public domain licenses. Whilewe believe we have complied with our obligations under the various applicablelicenses for open source software that we use, there is little or no legalprecedent governing the interpretation of many of the terms of certain of theselicenses and therefore the potential impact of such terms on our business issomewhat unknown. Use of open source standards also may make us more vulnerableto competition because the public availability of open source software couldmake it easier for new market entrants and existing competitors to introducesimilar competing products quickly and cheaply.

 

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

 

In order to expand our addressable market, we may decide toacquire additional businesses, products and technologies. In May 2005, weacquired the assets of Convergent Voice and in May 2006, we acquiredSalesnet, Inc. Acquisitions could require significant capital infusionsand could involve many risks, including, but not limited 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 inassimilating and integrating the business, technologies, products, personnel oroperations of companies that we acquire, particularly if key personnel of theacquired company 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

 

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

 

We cannot assure you that we will be able to identify orconsummate any future acquisitions on favorable terms, or at all. If we dopursue any future acquisitions, it is possible that we may not realize theanticipated benefits from the acquisitions or that the financial markets orinvestors will negatively view the acquisitions. Even if we successfullycomplete an acquisition, it could adversely affect our business, financialcondition and results of operations.

 

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

 

Generally accepted accounting principles and accompanyingaccounting pronouncements, implementation guidelines and interpretations formany aspects of our business, such as software revenue recognition, accountingfor stock-based compensation, and income tax uncertainties, are complex andinvolve subjective judgments by management. Changes to generally acceptedaccounting principles, their interpretation, or changes in our products orbusiness could significantly change our reported earnings and financialcondition and could add significant volatility to those measures. For example,since our inception in 1997, we have used stock options as a fundamentalcomponent of our employee compensation programs. New accounting requirementsthat began January 1, 2006 make the use of stock-based compensation muchmore expensive and introduce additional volatility in our results of operations.See *Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Critical Accounting Policies* inthis report for additional information on recently enacted changes to generallyaccepted accounting principles.

 

***The required adoption ofSFAS 123R makes stock options a less attractive form of employee compensation,and our use of alternative forms of employee compensation in response to SFAS123R could adversely affect our ability to attract and retain personnel.***

 

We have historically used stock options as a key component ofour employee compensation because we believe it aligns employees’ interestswith our stockholders’ 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.

 

***With the recent volatilityin the capital markets, there is a risk that we could suffer a loss ofprincipal in our cash and cash equivalents and short term investments andsuffer a reduction in our interest or in our return on investments.Additionally funds associated with auction rate securities may be inaccessiblein excess of 12 months, which may result in an other-than-temporary decline inthe value of these investments.***

 

We invest our cash and cash equivalents and short-terminvestments pursuant to our investment policy in cash, money market funds,commercial paper, corporate bonds and government agency securities, which areof investment grade quality. Prior to March 3, 2008 our investment policy hadallowed us to invest cash in auction-rate securities. Certain of theseinvestments are subject to general credit, liquidity, market, and interest raterisks, which may be

 

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exacerbatedby U.S. sub-prime mortgage defaults that have affected various sectors of thefinancial markets and caused credit and liquidity issues. To date, we believethat any declines in the market value of our investments have been temporary.There could be future declines in the value of these investments, however,which we may determine to be other-than-temporary. If we record another-than-temporary impairment charge, we will record a loss in our statementof operations, which could have a material impact on our operating results inthe period it is recognized. These market risks associated with our investmentportfolio may have a material adverse effect on our results of operations,liquidity, and financial condition.

 

At December 31, 2007 and June 30, 2008, we hadapproximately $18.3 million and $12.4 million, respectively, in par valueauction rate securities with investment grades of AAA or AA. Recentuncertainties in the credit market caused substantially all auctions of theauction rate securities we hold to fail. An auction failure means that theparties wishing to sell securities could not. Given the recent failures in theauctions, we reclassified these investments from short-term investments tolong-term investments on the balance sheet due to illiquidity. Additionally, wehave recorded a temporary impairment charge of approximately $425,000 in othercomprehensive income due to our inability to liquidate these securities at par.If the issuers of these securities are unable to successfully close futureauctions and their credit ratings deteriorate, we may in the future be requiredto record an other-than temporary impairment charge on these investments.Determining whether there has been an other-than-temporary impairment of ourshort-term investments requires significant judgment. With the recentvolatility in the capital markets, the funds associated with these investmentsmay not be accessible for in excess of twelve months and there is a risk thatwe could suffer a loss of principal and suffer a reduction in our interest orin our return on these and other investments, which could result in a permanentimpairment charge and harm our operating results and financial condition.

 

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

 

We may require additional capital to respond to businesschallenges, including the need to develop new solutions or enhance our existingsolutions, enhance our operating infrastructure, fund expansion, respond tocompetitive pressures and acquire complementary businesses, products andtechnologies. Absent sufficient cash flow from operations, we may need toengage in equity or debt financings to secure additional funds to meet our operatingand capital needs. In addition, even though we may not need additional funds,we may still elect to sell additional equity or debt securities or obtaincredit facilities for other reasons. We may not be able to secure additionaldebt or equity financing on favorable terms, or at all, at the time when weneed such funding. If we raise additional funds through further issuances ofequity or convertible debt securities, our existing stockholders could suffersignificant dilution in their percentage ownership of our company, and any newequity securities we issue could have rights, preferences and privileges seniorto those of holders of our common stock. Any debt financing secured by us inthe future could involve restrictive covenants relating to our capital raisingactivities and other financial and operational matters, which may make it moredifficult for us to obtain additional capital, to pay dividends and to pursuebusiness opportunities, including potential acquisitions. In addition, if wedecide to raise funds through debt or convertible debt financings, we may beunable to meet our interest or principal payments.

 

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***The success of our products and our hostedbusiness depends on the continued growth and acceptance of the Internet as abusiness and communications tool, and the related expansion of the Internetinfrastructure.***

 

        Thefuture success of our products and our hosted business depends upon thecontinued and widespread adoption of the Internet as a primary medium forcommerce, communication and business applications. Our business growth would beimpeded if the performance or perception of the Internet, or companiesproviding hosted solutions, was harmed by security problems such as “viruses,” “worms”and other malicious programs, reliability issues arising from outages anddamage to Internet infrastructure, delays in development or adoption of newstandards and protocols to handle increased demands of Internet activity,increased costs, decreased accessibility and quality of service, or increasedgovernment regulation 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 ofemail for marketing or other consumer communications. In addition, governmentagencies or private organizations may begin to impose taxes, fees or other chargesfor accessing the Internet or for sending commercial email. These laws orcharges 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 andlaws or other domestic or foreign regulations may adversely affect our businessor reduce 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.

 

EuropeanUnion members have imposed restrictions on the collection and use of personaldata that are far more stringent, and impose more significant burdens on subjectbusinesses, than current privacy standards in the United States. All of thesedomestic and international legislative and regulatory initiatives may adverselyaffect our clients’ ability to collect and/or use 

 

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demographic and personalinformation from 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,customer service CRM solutions would be less effective, which would reducedemand for our solutions and harm our business.

 

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

 

        InJanuary 2004, the federal Controlling the Assault of Non-Solicited Pornographyand Marketing Act of 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Actregulates the transmission and content of commercial emails and, among otherthings, obligates the sender of such emails to provide recipients with theability to opt-out of receiving future emails from the sender, and establishespenalties for the transmission of email messages which are intended to deceivethe recipient as to source or content. Many state legislatures also haveadopted laws that impact the delivery of commercial email, and laws thatregulate commercial email practices have been enacted in many of theinternational jurisdictions in which we do business, including Europe,Australia, and Canada. In addition, Internet service providers and licensors ofsoftware products have introduced a variety of systems and products to filterout certain types of commercial email, without any common protocol to determinewhether the recipient desired to receive the email being blocked. As a result,it is difficult for us to determine in advance whether or not emails generatedby our clients using our solutions will be permitted by spam filters to reachthe intended recipients.

 

        OurRightNow Marketing solution specifically serves the market for massdistribution marketing and other email communications. The increasingregulation of email delivery, both domestically and internationally, and thespam filtering practices of Internet service providers and email 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.  These factors may lead to a reduction insales of our RightNow Marketing solution, may make it necessary to redesign ourRightNow Marketing solution to make it easier for our clients to conform to therequirements of such laws and standards, which would increase our expenses, ormay make it necessary for us to redefine the market for and use of our RightNowMarketing solution, which could 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, which haverecently deteriorated significantly in many industry sectors and geographies.These unfavorable macroeconomic conditions may include rising interest rates,fluctuations in currency exchange rates, industry or national economicdownturns, industry purchasing patterns, and other factors.   Our ability to grow revenues may beadversely affected by unfavorable economic conditions.

 

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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.***

 

AtJune 30, 2008, Greg Gianforte, our founder and Chief Executive Officer,and his spouse, Susan Gianforte, have voting power over approximately 25.0% ofour outstanding common stock and, together with other officers and directors,have voting power over approximately 27.8% of our outstanding common stock. Inaddition, none of the shares of common stock over which Mr. Gianforte and Mrs. Gianfortehave voting power are subject to vesting restrictions. As a result, Mr. Gianforteand Mrs. Gianforte, acting together with some of our other officers anddirectors, may be able to control matters requiring stockholder approval,including the election of directors, management changes and approval ofsignificant corporate transactions. This concentration of voting power may havethe effect of delaying, preventing or deterring a change in control ofRightNow, could deprive our stockholders of an opportunity to receive a premiumfor their common stock as part of a sale of RightNow and might reduce themarket price of our common stock.

 

        In addition, Mr. Gianforte beneficiallyowns, directly or indirectly, a 50% membership interest in GenesisPartners, LLC, our landlord from whom we lease our principal offices inBozeman, Montana. Consequently, Mr. Gianforte has significant control overany decisions by Genesis Partners regarding renewal, modification ortermination of our Bozeman, Montana leases. In the event that our currentleases with Genesis Partners were terminated or otherwise could not be renewed,or came up for renewal on commercially unreasonable terms, we would be requiredto 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;

 

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·      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 voting rights held by insiders and the ability of our board ofdirectors to issue preferred stock without stockholder action may have theeffect of delaying, deferring or preventing a change in control of our companywithout further action by the stockholders, may discourage bids for our commonstock at a premium over the market price of our common stock and may adverselyaffect the market price of our common stock and the voting and other rights ofthe holders of our common stock.

 

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

*** ***

**(a)           Sales ofUnregistered Securities**

 

                None.

 

**(b)           Use ofProceeds from Sales of Registered Securities**

 

OnAugust 5, 2004, the Securities and Exchange Commission declared effectiveour Registration Statement on From S-1 (Reg. File No. 333-115331) underthe Securities Act of 1933, as amended, in connection with the initial publicoffering of our common stock, par value $.0001 per share.  We sold 6.4 million shares, including sharessold upon exercise of the underwriters’ over-allotment option, for an aggregateoffering price of $44.9 million, 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 $2.3 million.  After deducting $3.3 million in underwritingdiscounts and commissions and $1.8 million in other offering costs, we receivednet proceeds from the offering of approximately $40 million.  None of the expenses and none of our netproceeds from the offering were paid directly or indirectly to any director,officer, general partner of RightNow or their associates, persons owning 10% ormore of any class of equity securities of RightNow, or an affiliate ofRightNow.

 

InMay 2005, we spent $1 million of the offering proceeds for the acquisitionof the assets of Convergent Voice.  In May 2006,we spent $8.7 million of the offering proceeds to acquire Salesnet, Inc.We currently intend to use the remaining proceeds for general corporatepurposes as described in the prospectus for the offering.  Pending these uses, the net proceeds from theoffering are invested in short and long-term, interest-bearing,investment-grade securities.

 

** (c)          Purchases of Equity Securities.**

 

                Not applicable.

 

***Item 3.    Defaults Upon Senior Securities.***

*** ***

None.

 

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***Item 4.    Submission of Matters to a Vote of SecurityHolders.***

*** ***

                                                Our2008 annual meeting of stockholders was held on June 6, 2008. Thefollowing proposals were approved as follows:

 

1.               Toelect one director to serve for a three-year term ending at the 2011 annualmeeting of stockholders or until his successor is elected and qualified oruntil his earlier resignation and removal:

 
| **Director Candidate** | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-----------------------------|------------|------------|------------|--------------|------------|
| William J.  Lansing         |       | 32,045,937 |       | 69,463       |       |

 

Thefollowing are the other directors whose terms of office as directors continuedafter the 2008 annual meeting of stockholders: Messrs. Allen, Avis,Gianforte and Kendra and Ms. Taylor.

 

2.               Toratify the appointment of KPMG LLP as the Company’s independent registeredpublic accounting firm for 2008:

 
| For     |   | 32,048,483 | ** ** |
|---------|--------|------------|------------|
| Against |   | 35,324     |       |
| Abstain |   | 31,593     |       |

 

***Item 5.    Other Information.***

*** ***

None.

 

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**Item 6. Exhibits**

 

***Exhibits***

*** ***

The exhibits listed below are part of this Form 10-Q, unlessotherwise indicated.

 
| Exhibit 3.1  | Amended and Restated Certificate of  Incorporation of the Registrant. (1)                                                                                                                                         |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                              |
| Exhibit 3.2  | Amended and Restated Bylaws of the  Registrant. (2)                                                                                                                                                               |
|              |                                                                                                                                                                                                              |
| 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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| (1)   | Incorporated by 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  on August 24, 2004. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)             | Incorporated by reference to  Exhibit 3.1 of the Company’s Current Report on Form 8-K (File  No. 000-31321) filed with the Securities and Exchange Commission on  January 25, 2006.         |

 

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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 the undersigned,thereunto duly authorized.

 
| Dated:  August 8, 2008          |
|--------------------------------------|
|                                 |
| **RightNow Technologies, Inc.** |
| (Registrant)                         |
|                                 |
| By:                                  | /s/  Jeffrey C. Davison |   |
|                                 | Jeffrey  C. Davison |
|                                 | Chief  Financial Officer, Vice President and, |
|                                 | Treasurer |
|                                 | (Principal  Financial and Accounting Officer) |

 

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