**UNITEDSTATES****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 THESECURITIES EXCHANGE ACT OF 1934**    |
|------------|------------|------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                     |
|       |       | **For the quarterly period ended  June 30, 2007**                                              |
|       |       | ** **                                                                                     |
|       |       | **or**                                                                                         |
| ** ** |       | ** **                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** ** | ** **                                                                                     |
|       |       | **For the transition period from        to**           |

 

**000-31321**

**(Commission File No.)**

**RIGHTNOW TECHNOLOGIES, INC.**

(Exact Name of Registrant as Specified in Its Charter)

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

 

**136Enterprise Boulevard**

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

 (Address ofPrincipal Executive Offices) (Zip Code)

**(406)522-4200**

 (Registrant’sTelephone Number, Including Area Code)

**N/A**

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

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes  x           No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o      No x

The number of sharesoutstanding of the registrant’s common stock, $0.001 par value, as of July 31,2007 was 33,054,647.

 

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**RightNowTechnologies, Inc.**

**QuarterlyReport on Form 10-Q**

**Forthe Quarterly Period Ended June 30, 2007**

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

 

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**Part I.  FINANCIAL INFORMATION**

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

**RightNowTechnologies, Inc.**

**CondensedConsolidated Balance Sheets**

(In thousands)(Unaudited)
| ** **                                           | ** ** | **December  31, 2006** | ** ** | **June 30,  2007** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|
| **Assets**                                           |       |                        |       |               |       |
| Cash and cash  equivalents                           |       | $                           | 39,208     |               | $          | 33,842 |   |
| Short-term investments                               |       | 39,127                      |       | 52,911             |       |
| Accounts receivable                                  |       | 32,021                      |       | 27,797             |       |
| Term receivables,  current                           |       | 23,806                      |       | 15,756             |       |
| Allowance for doubtful  accounts                     |       | (2,621                      | )          | (2,046             | )          |
| Receivables, net                                     |       | 53,206                      |       | 41,507             |       |
| Prepaid & other  current assets                  |       | 2,498                       |       | 4,980              |       |
| Total current assets                                 |       | 134,039                     |       | 133,240            |       |
|                                                 |       |                        |       |               |       |
| Property and equipment,  net                         |       | 10,073                      |       | 10,494             |       |
| Term receivables,  non-current                       |       | 24,805                      |       | 13,239             |       |
| Intangible assets, net                               |       | 8,836                       |       | 8,226              |       |
| Other                                                |       | 489                         |       | 1,126              |       |
| **Total Assets**                                     |       | $                           | 178,242    |               | $          | 166,325 |   |
|                                                 |       |                        |       |               |       |
| **Liabilities and Stockholders’  Equity**       | ** ** | ** **                  | ** ** | ** **         | ** ** |
| Accounts payable                                     |       | $                           | 4,417      |               | $          | 3,233 |   |
| Commissions and bonuses  payable                     |       | 4,069                       |       | 2,918              |       |
| Other accrued  liabilities                           |       | 7,588                       |       | 11,455             |       |
| Current portion of  long-term debt                   |       | 31                          |       | 32                 |       |
| Current portion of  deferred revenue                 |       | 67,560                      |       | 66,660             |       |
| Total current  liabilities                           |       | 83,665                      |       | 84,298             |       |
|                                                 |       |                        |       |               |       |
| Long-term debt, less  current portion                |       | 85                          |       | 69                 |       |
| Deferred revenue, net  of current portion            |       | 47,018                      |       | 41,718             |       |
|                                                 |       |                        |       |               |       |
| Stockholders’ equity:                           |       |                        |       |               |       |
| Common stock                                         |       | 33                          |       | 33                 |       |
| Additional  paid-in capital                          |       | 86,069                      |       | 90,750             |       |
| Accumulated  other comprehensive loss                |       | (332                        | )          | (504               | )          |
| Accumulated  deficit                                 |       | (38,296                     | )          | (50,039            | )          |
| Total  stockholders’ equity                     |       | 47,474                      |       | 40,240             |       |
| **Total Liabilities and  Stockholders’ Equity** |       | $                           | 178,242    |               | $          | 166,325 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**RightNowTechnologies, Inc.**

**CondensedConsolidated Statements of Operations**

(In thousands,except per share amounts) (Unaudited)
| ** **                       | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenue:                         |       |                                                  |       |                                          |       |   |   |   |   |
| Software, hosting and support    |       | $                                                     | 20,636     |                                          | $          | 20,693 |   | $ | 39,946 |   | $ | 40,512 |   |
| Professional services            |       | 6,272                                                 |       | 5,772                                         |       | 11,593 |   | 11,655 |   |
| Total revenue                    |       | 26,908                                                |       | 26,465                                        |       | 51,539 |   | 52,167 |   |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Cost of revenue:                 |       |                                                  |       |                                          |       |   |   |   |   |
| Software, hosting and support    |       | 3,159                                                 |       | 4,565                                         |       | 5,930 |   | 8,959 |   |
| Professional services            |       | 4,941                                                 |       | 5,036                                         |       | 9,045 |   | 10,207 |   |
| Total cost of revenue            |       | 8,100                                                 |       | 9,601                                         |       | 14,975 |   | 19,166 |   |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Gross profit                     |       | 18,808                                                |       | 16,864                                        |       | 36,564 |   | 33,001 |   |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Operating  expenses:             |       |                                                  |       |                                          |       |   |   |   |   |
| Sales and marketing              |       | 14,852                                                |       | 15,788                                        |       | 28,578 |   | 31,515 |   |
| Research and development         |       | 3,476                                                 |       | 4,343                                         |       | 6,606 |   | 8,639 |   |
| General and administrative       |       | 2,709                                                 |       | 3,178                                         |       | 4,765 |   | 6,038 |   |
| Total operating expenses         |       | 21,037                                                |       | 23,309                                        |       | 39,949 |   | 46,192 |   |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Loss from  operations            |       | (2,229                                                | )          | (6,445                                        | )          | (3,385 | ) | (13,191 | ) |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Interest and  other income, net  |       | 768                                                   |       | 885                                           |       | 1,440 |   | 1,713 |   |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Loss before  income taxes        |       | (1,461                                                | )          | (5,560                                        | )          | (1,945 | ) | (11,478 | ) |
| Provision for  income taxes      |       | (294                                                  | )          | (181                                          | )          | (250 | ) | (265 | ) |
| Net loss                         |       | $                                                     | (1,755     | )                                             | $          | (5,741 | ) | $ | (2,195 | ) | $ | (11,743 | ) |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Net loss per  share:             |       |                                                  |       |                                          |       |   |   |   |   |
| Basic                            |       | $                                                     | (0.05      | )                                             | $          | (0.17 | ) | $ | (0.07 | ) | $ | (0.36 | ) |
| Diluted                          |       | $                                                     | (0.05      | )                                             | $          | (0.17 | ) | $ | (0.07 | ) | $ | (0.36 | ) |
|                             |       |                                                  |       |                                          |       |   |   |   |   |
| Shares used in  the computation: |       |                                                  |       |                                          |       |   |   |   |   |
| Basic                            |       | 32,172                                                |       | 32,983                                        |       | 32,057 |   | 32,921 |   |
| Diluted                          |       | 32,172                                                |       | 32,983                                        |       | 32,057 |   | 32,921 |   |

 

See accompanying notes to condensed consolidated financialstatements.

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**RightNowTechnologies, Inc.**

**CondensedConsolidated Statements of Cash Flows**

(In thousands)(Unaudited)
| ** **                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| **Operating  activities:**                                           |       |                                          |       |   |   |
| Net loss                                                             |       | (2,195                                        | )          | (11,743 | ) |
| Non-cash  adjustments:                                               |       |                                          |       |   |   |
| Depreciation and amortization                                        |       | 2,442                                         |       | 3,555 |   |
| Recoveries of uncollectible accounts receivable                      |       | (241                                          | )          | (56 | ) |
| Stock-based compensation                                             |       | 2,461                                         |       | 3,293 |   |
| Changes in  operating accounts:                                      |       |                                          |       |   |   |
| Receivables                                                          |       | (8,412                                        | )          | 23,651 |   |
| Prepaid expenses                                                     |       | (159                                          | )          | (3,083 | ) |
| Accounts payable                                                     |       | 744                                           |       | (1,193 | ) |
| Commissions and bonuses payable                                      |       | 35                                            |       | (1,172 | ) |
| Other accrued liabilities                                            |       | (191                                          | )          | 3,751 |   |
| Deferred revenue                                                     |       | 18,325                                        |       | (6,870 | ) |
| Other                                                                |       | 107                                           |       | (10 | ) |
| Cash provided by operating activities                                |       | 12,916                                        |       | 10,123 |   |
|                                                                 |       |                                          |       |   |   |
| **Investing  activities:**                                           |       |                                          |       |   |   |
| Net change in  short-term investments                                |       | (11,889                                       | )          | (13,784 | ) |
| Acquisition of  property and equipment                               |       | (3,910                                        | )          | (3,338 | ) |
| Business  acquisitions, net of cash acquired                         |       | (8,731                                        | )          | — |   |
| Other                                                                |       | (10                                           | )          | (61 | ) |
| Cash used in  investing activities                                   |       | (24,540                                       | )          | (17,183 | ) |
|                                                                 |       |                                          |       |   |   |
| **Financing  activities:**                                           |       |                                          |       |   |   |
| Proceeds from  issuance of common stock under employee benefit plans |       | 999                                           |       | 1,179 |   |
| Excess tax  benefits of stock options exercised                      |       | —                                        |       | 209 |   |
| Payments on  long-term debt                                          |       | (14                                           | )          | (15 | ) |
| Cash provided by  financing activities                               |       | 985                                           |       | 1,373 |   |
|                                                                 |       |                                          |       |   |   |
| Effect of  foreign exchange rates on cash and cash equivalents       |       | 311                                           |       | 321 |   |
|                                                                 |       |                                          |       |   |   |
| Decrease in cash  and cash equivalents                               |       | (10,328                                       | )          | (5,366 | ) |
|                                                                 |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                    |       | 40,874                                        |       | 39,208 |   |
| Cash and cash  equivalents at end of period                          |       | $                                             | 30,546     |   | $ | 33,842 |   |
|                                                                      |            |                                               |            |  |  |  |  |

 

See accompanying notes to condensed consolidated financialstatements.

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**RightNowTechnologies, Inc.**

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

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

***BusinessDescription***

RightNow Technologies, Inc.(the “Company” or “RightNow”) provides industry-leading software solutions thathelp companies improve customer experiences while reducing operatingcosts.  The Company’s solutions aredesigned to go beyond traditional customer relationship management (“CRM”)solutions to support a business’s external customer-facing channels as well assales, marketing and customer service operations.  Founded in 1995, RightNow is headquartered in Bozeman,Montana, with additional offices in the United States, Europe, Australia andJapan.  The Company operates in onesegment, which is the customer experience management market.

***Basisof Presentation***

The accompanying condensed interim consolidatedfinancial statements are unaudited. These financial statements and notes should be read in conjunction withthe audited consolidated financial statements and related notes, together withmanagement’s discussion and analysis of financial condition and results ofoperations, contained in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006.

The accompanying interim condensed consolidatedfinancial statements have been prepared in accordance with United Statesgenerally accepted accounting principles. In the opinion of management, the interim condensed consolidatedfinancial statements and notes have been prepared on the same basis as theaudited consolidated financial statements in the Annual Report on Form 10-K andinclude all adjustments necessary for the fair presentation of the Company’sfinancial position at June 30, 2007, and results of operations for the threeand six month periods ended June 30, 2006 and 2007, and cash flows for the sixmonth periods ended June 30, 2006 and 2007. The interim period results are not necessarily indicative of the resultsto be expected for the full year.

The preparation of financial statements in conformitywith United States generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and disclosures of contingent assets andliabilities.  Management evaluates theseestimates and assumptions 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 fixedand determinable, valuation allowances for trade receivables and deferredincome tax assets, and assumptions used in estimating the fair value of stockoptions granted for stock-based compensation.

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***(2) Certain Risks andConcentrations***

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 Company competes are highly competitive andrapidly changing.  Significanttechnological changes, changes in customer requirements, or the emergence ofcompetitive products with new capabilities or technologies could adverselyaffect the Company’s operating results. The Company has historically derived a majority of its revenue fromcustomer service software solutions. These products are expected to continue to account for a significantportion of revenue for the foreseeable future. As a result of this revenue concentration, the Company’s business couldbe harmed by a decline in demand for, or in the prices of, these products or asa result of, among other factors, any change in pricing model, a maturation inthe markets for these products, increased price competition or a failure by theCompany to keep up with technological change.

The Company’s customers are located around the worldwith approximately 70% to 75% of sales in the United States.  No individual customer accounted for morethan 10% of the Company’s revenue in 2006 or the first six months of 2007.  No individual customer balances were 10% ormore of accounts or term receivables at June 30, 2006 or 2007.  One customer represented 13% of accounts receivableat December 31, 2006 and one other customer represented 11% of term receivablesat December 31, 2006.

As of December 31, 2006 and June 30, 2007, assetslocated outside the United States were 12% and 14% of total assets,respectively.   The loss from operationsoutside of the United States totaled $3.7 million and $6.1 million for the sixmonths ended June 30, 2006 and 2007, respectively.  Revenue by geographical region follows (inthousands):
|               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|          |       |                                            |       |                                          |       |   |   |   |   |
| United States |       | $                                               | 20,072     |                                          | $          | 18,908 |   | $ | 37,440 |   | $ | 37,380 |   |
| Europe        |       | 5,335                                           |       | 5,321                                         |       | 10,349 |   | 10,680 |   |
| Asia Pacific  |       | 1,501                                           |       | 2,236                                         |       | 3,750 |   | 4,107 |   |
|          |       | $                                               | 26,908     |                                          | $          | 26,465 |   | $ | 51,539 |   | $ | 52,167 |   |

 

***(3) Revenue Recognition***

The Company earns itsrevenues from the delivery of software, hosting and support services, and fromthe delivery of professional services. Beginning in 2007, the majority of software, hosting and supportrevenues are earned under subscription service arrangements (“subscriptions”).  Prior to and continuing into 2007, software,hosting and support revenues are also earned under software licensearrangements (“licenses”).

The Company recognizesrevenue in accordance with the provisions of SEC Staff Accounting Bulletin No.104, *Revenue Recognition* and Emerging Issues TaskForce Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables* (“EITF 00-21”)*. *Revenue is recognized when all ofthe following criteria are met: a) the Company has entered into a legallybinding agreement with the customer; b) the software has been madeavailable or delivered to the 

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customer; c) the Company’s fee for providingthe software and services is fixed and determinable; and d) collection ofthe Company’s fee is probable.

Subscriptions include accessto the Company’s software via its hosting services, technical support, andproduct upgrades when and if available, all for a bundled fee.  Subscription revenue is recognized ratablyover the contractual term.  Under EITF00-21, value is assigned to each deliverable of an arrangement using pricesestablished when the elements are sold stand-alone.  The arrangement fee is then allocated to theindividual elements based on their relative fair values.  Revenue for each element is recognized basedon the criteria above.  If fair value ofone or more undelivered elements does not exist, the revenue is recognized whendelivery of those elements occurs or when fair value can be established.

The Company applies EITF00-21 to its subscriptions as opposed to Statement of Position 97-2, *Software Revenue Recognition* (“SOP 97-2”) because under theCompany’s subscription contracts, the customer does not have the right to takepossession of the software.  Inaccordance with Emerging 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.

Professional services, whensold with a subscription offering, are accounted for separately when theseservices have value to the customer on a standalone basis and there isobjective and reliable evidence of fair value of each deliverable.  When accounted for separately, professionalservices revenues are recognized as performed based on hours incurred.  If professional services do not qualify forseparate accounting, the Company recognizes the professional services revenueratably over the term of the agreement.

Prior to its change toselling subscriptions, the majority of the Company’s revenues were earned underlicense arrangements.  License sales havecontinued into 2007 for a limited number of new and existing customers.  Revenue under license arrangements isrecognized pursuant to the requirements of SOP 97-2 and SOP 98-9, Modificationof SOP 97-2, *Software Revenue Recognition With Respect toCertain Transactions*. Licenses include the same elements as subscriptions, plus the right totake possession of the software for no additional fee.  Licenses are sold for a period of time (a “term”license) or perpetually.  Term licenserevenue is recognized ratably over the contractual period.  Revenue for perpetual licenses is determinedusing the residual method and is recognized upon delivery.  Revenue for the hosting and support elementsunder a perpetual license is determined based on the price when soldseparately, and recognized ratably over the contractual timeframe.

The Company records revenuenet 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 not to be fixed or determinable, andthe amount of revenue recognized (a) for perpetual license arrangements islimited 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 arrangement fee.

Certain customers haveentered into agreements with us that require them to pay a minimum charge forfixed usage and excess usage charges if they exceed fixed minimums. Usage 

8

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above fixed minimums requires payment of additionalfees if the Company’s software is used by more than a specified number of usersor for more than a specified number of interactions. Fixed minimums arerecognized as revenue ratably over the term of the arrangement. Usage feesabove fixed minimums are recognized as revenue when such amounts are known andbilled.

Separate contracts with thesame customer that are entered into at or near the same time are generallypresumed to have been negotiated together and may be combined and accounted foras a single arrangement, depending on facts and circumstances.

Deferred revenue representsamounts received or due from customers for which the revenue recognitioncriteria have not been met. The majority of deferred revenue results from theup front billing of term and subscription contracts while revenue is recognizedratably over the contractual period. Deferred revenue is recognized intorevenue when the Company provides its products and services, assuming all otherrevenue recognition criteria noted above are met. Under subscriptions, theamount currently due and payable from the customer is reflected in accountsreceivable and deferred revenue.  Underlicenses, the full customer commitment is reflected in accounts receivable foramounts currently due, or term receivables for amounts due over the contractualterm, and deferred revenue.

**(4)****          ****SalesIncentives**

In conjunction with theCompany’s business model change, beginning in 2007 sales incentives paid forsubscriptions are deferred and charged to expense in proportion to the revenuerecognized.  Sales incentives paid forlicenses are expensed when earned, which is typically at the time the relatedsale is invoiced.  Sales incentiveexpense was $6.7 million and $4.4 million for the six months ended June30, 2006 and 2007, respectively. Deferred commissions were zero and $2.3 million at June 30, 2006 and2007, respectively.

**(5)Net Loss Per Share**

***A reconciliation of the denominator used in the calculation of basicand diluted net loss per share is as follows (in thousands):***
|                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  common shares outstanding for basic net loss per share |       | 32,172                                          |       | 32,983                                        |       | 32,057 |   | 32,921 |   |
| Effect of  dilutive securities:                                          |       |                                            |       |                                          |       |   |   |   |   |
| Employee stock options                                                   |       | —                                          |       | —                                        |       | — |   | — |   |
| Weighted average  shares outstanding for dilutive net loss per share     |       | 32,172                                          |       | 32,983                                        |       | 32,057 |   | 32,921 |   |

 

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,** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|                   |       |                                            |       |                                          |       |   |   |   |   |
| Employee stock options |       | 4,179                                           |       | 4,272                                         |       | 4,179 |   | 4,272 |   |

 

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**(6) Comprehensive Income (Loss)**

***Comprehensive loss for the comparative periods was as follows (inthousands):***
| ** **                                       | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                             |       |                                                  |       |                                          |       |   |   |   |   |
| Net loss                                         |       | $                                                     | (1,755     | )                                             | $          | (5,741 | ) | $ | (2,195 | ) | $ | (11,743 | ) |
| Other  comprehensive income (loss):              |       |                                                  |       |                                          |       |   |   |   |   |
| Unrealized gain (loss) on short-term investments |       | 1                                                     |       | (13                                           | )          | 15 |   | 3 |   |
| Foreign currency translation adjustments         |       | 80                                                    |       | (110                                          | )          | 74 |   | (175 | ) |
| Comprehensive  loss                              |       | $                                                     | (1,674     | )                                             | $          | (5,864 | ) | $ | (2,106 | ) | $ | (11,915 | ) |

 

**(7)****          ****Stock-Based Compensation**

On January 1, 2006, theCompany adopted the provisions of Statement of Financial Accounting StandardsNo. 123(R), *Share Based Payment*, (“SFAS 123R”), forits stock-based compensation plans. Under SFAS 123R, stock-based compensation costs are recognized based onthe estimated fair value at the grant date for all stock-based awards.  The Company estimates grant date fair valuesusing the Black-Scholes-Merton option pricing model, which requires assumptionsof the life 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 following tableillustrates the stock-based compensation expense resulting from stock-basedawards included in the condensed consolidated statement of operations (amountsin thousands):
| ** **                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Stock-based  compensation expense:    |       |                                            |       |                                          |       |   |   |   |   |
| Cost of software, hosting and support |       | $                                               | 55         |                                          | $          | 79 |   | $ | 93 |   | $ | 137 |   |
| Cost of professional services         |       | 137                                             |       | 149                                           |       | 234 |   | 274 |   |
| Sales and marketing expenses          |       | 535                                             |       | 731                                           |       | 901 |   | 1,389 |   |
| Research and development expenses     |       | 233                                             |       | 289                                           |       | 392 |   | 515 |   |
| General and administrative expenses   |       | 718                                             |       | 743                                           |       | 841 |   | 978 |   |
| Stock-based  compensation expense     |       | $                                               | 1,678      |                                          | $          | 1,991 |   | $ | 2,461 |   | $ | 3,293 |   |

 

No stock-based compensation expense was capitalizedduring the three or six months ended June 30, 2006 or 2007.

Unrecognized compensation expense of outstanding stockoptions at June 30, 2007 was approximately $18 million, which is expected to berecognized over a weighted average period of 2.7 years.

Information regarding the fair value of stock optionsgranted, and the weighted-average assumptions used to obtain the fair values,for the respective periods follows:

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| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Fair value per  share |       | $                                               | 7.69       |                                          | $          | 6.43 |   | $ | 8.55 |   | $ | 7.46 |   |
| Risk free rate        |       | 5.0                                             | %          | 4.9                                           | %          | 4.7 | % | 4.8 | % |
| Expected term         |       | 4.0 yrs                                         |       | 3.6 yrs                                       |       | 4.4 yrs |   | 4.1 yrs |   |
| Volatility            |       | 57                                              | %          | 51                                            | %          | 57 | % | 53 | % |
| Dividend yield        |       | 0                                               | %          | 0                                             | %          | 0 | % | 0 | % |
|                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

Key assumptions used to estimate the fair value ofstock 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 has a limitedhistory of volatility, as well as limited traded options from which to deriveimplied volatility.  The Company believesthe combination of its historical and peer-company volatilities is 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.

Activity under the Company’s stock option plans forsix months ended June 30, 2007 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, 2006                 |       | 3,029                                 |       | 3,913                    |       | $                                                      | 9.96       |                                                 |       |                                                                     |       |   |
| Annual reserve addition (1)                   |       | 1,000                                 |       | —                   |       | —                                                 |       |                                                 |       |                                                                     |       |
| Granted                                       |       | (878                                  | )          | 878                      |       | 16.11                                                  |       |                                                 |       |                                                                     |       |
| Exercised                                     |       | —                                |       | (240                     | )          | 4.40                                                   |       |                                                 |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled (2) |       | 270                                   |       | (279                     | )          | 15.32                                                  |       |                                                 |       |                                                                     |       |
| Balance at June  30, 2007                     |       | 3,421                                 |       | 4,272                    |       | $                                                      | 11.19      |                                                 | $          | 22,087                                                                   |       | 7.4 |   |
|                                          |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Vested or  expected to vest at June 30, 2007  |       |                                  |       | 3,454                    |       | $                                                      | 10.39      |                                                 | $          | 20,458                                                                   |       | 7.1 |   |
|                                          |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Exercisable at  June 30, 2007                 |       |                                  |       | 2,113                    |       | $                                                      | 7.89       |                                                 | $          | 17,491                                                                   |       | 6.1 |   |

 

----

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

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

The total intrinsic value of options exercised duringthe six months ended June 30, 2006 and 2007 was $5.2 million and $2.8 million,respectively.

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From time to time the Company may grant options topurchase stock to consultants.  TheCompany accounts for consultant stock options in accordance with SFAS 123 andEmerging Issues Task Force Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling, Goods orServices*.  Compensationexpense for the grant of stock options to consultants is determined based onthe estimated fair value of the stock options at the measurement date asdefined in EITF 96-18 and is recognized over the vesting period.  There were no stock options granted tonon-employees for the six months ended June 30, 2006 or 2007.

**(8)**                     Commitments and Contingencies

***Warrantiesand Indemnification***

The Company’s on demand application service istypically warranted to perform in accordance with its 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 small number of its customerswarranting certain levels of uptime reliability and permitting those customersto receive credits or terminate their license agreements in the event that theCompany fails to meet those levels.  Todate, the Company has not provided any material credits, or cancelled anyagreements related 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 legalproceedings arising in the normal course of business.  The Company believes that the resolution ofthese matters will not have a material effect on the Company’s consolidatedfinancial position, results of operations or liquidity.

**(9)**                     Income Taxes

We adopted the FinancialAccounting Standard Board’s Interpretation No. 48, *Accountingfor Income Tax Uncertainties* (“FIN 48”), on January 1, 2007.  FIN 48 clarifies the accounting for uncertainincome tax positions recognized in financial statements and requires the impactof a tax position to be recognized in the financial statements if that positionis more likely than not of being sustained by the taxing authority.  As of December 31, 2006 and June 30, 2007, wehad an insignificant amount of unrecognized tax benefits, none of which wouldmaterially affect our 

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effective tax rate if recognized. We do not expect that the amount of unrecognized tax benefits willsignificantly increase or decrease within the next twelve months.  Our policy is to recognize interest andpenalties on unrecognized tax benefits in provision for income taxes in theconsolidated statements of operations. The amount of interest and penalties for the three and six months endedJune 30, 2007 was insignificant.  Taxyears beginning in 2003 are subject to examination by taxing authorities,although net operating loss and credit carryforwards from all years are subjectto examinations and adjustments for at least three years following the year inwhich the attributes are used.

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**Item 2.            Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

***CautionaryStatement***

*The followingdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with the financial statements and related notesin this report.  This discussion containsforward-looking statements that involve risks and uncertainties.  These forward-looking statements are based onour current expectations, estimates and projections about our industry, management’sbeliefs, and certain assumptions made by us, all of which are subject tochange.  Forward-looking statements canoften be identified by words such as “anticipates,” “expects,” “intends,” “plans,”“predicts,” “believes,” “seeks,” “ estimates,” “may,” “will,” “should,” “would,”“could,” “potential,” “continue,” “ongoing,” similar expressions, andvariations or negatives of these words and include, but are not limited to,statements regarding projected results of operations and management’s future strategicplans. Our actual results could differ significantly from those projected inthe forward-looking statements as a result of factors, including thosediscussed under “Risk Factors” and elsewhere in this report.  We assume no obligation to update theforward-looking statements or such risk factors.*

***Overview***

We are a leading provider of customer experiencemanagement software solutions for companies of all sizes.   Our on demand software is designed to gobeyond traditional customer relationship management (“CRM”) solutions to helpcompanies improve their customer experiences, while reducing operatingcosts.  Our software solutions support abusiness’s external customer-facing channels as well as sales, marketing andcustomer service operations.

We released our initial version of RightNow Servicein 1997.  This product addressed the newcustomer service needs resulting from the increasing use of the Internet as acustomer service channel.  Since then, wehave significantly enhanced product features and functionality to 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, RightNow Sales,and RightNow Feedback which automate aspects of marketing campaigns salesoperations, and customer monitoring.  InMay 2005, we purchased the assets of Convergent Voice, and added voiceenabled-CRM capabilities to our product portfolio.  In May 2006, we purchased Salesnet, Inc., aprovider of salesforce automation solutions. In February 2007, we released RightNow 8, our newest enterprise-classsolution for service, sales and marketing. To date, approximately 80% to 90% of our revenue has been generated bythe RightNow Service suite.

We have approximately 1,800 customers worldwide asof June 30, 2007, and our products served more than 330 million customerinteractions, or unique sessions hosted by our solutions, during the quarterended June 30, 2007.  We distribute oursolutions primarily through direct sales efforts and to a lesser extent throughindirect channels.

***2007 Business Model Changes***

To better align with industry practice, beginning in2007, we changed our product offerings from software license arrangements tosubscription service arrangements (e.g. “subscriptions”).  As the industry and business models for “softwareas a service” or “on demand” have evolved, the standard form of arrangementsare service agreements rather than licenses of software that can 

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be hosted.  We believe providingofferings in this manner will ultimately increase our market penetration.

Accordingly, our terms of sale have been revised toprovide a hosting service where the customer accesses the software and data viathe Internet.  Our previous terms of saleprovided the customer a software license, and for no additional fee, thecustomer could choose to have the software hosted by us, by themselves or bysomeone else.  We believe that revenuerecognition for service arrangements will not be materially different from ourprevious term license arrangements, as revenue under either type of contract isgenerally recognized ratably over the period of the agreement.  We also believe that additions to deferredrevenue for our subscriptions will be less than that deferred for our licensesbecause, under subscriptions, only the amount currently due from the customeris recorded to accounts receivable and deferred revenue.  Under licenses, the full customer commitmentis recorded to receivables and deferred revenue whether or not currently duebecause we have the contractual right to collect the entire arrangement fee.

As part of this business model change, we discontinuedsales of new perpetual software licenses, which represented 21% of our revenuein 2006. Although we expect to ultimately increase the lifetime value of ourcustomer arrangements through sales of subscriptions, the substantiveelimination of perpetual license sales will materially and adversely impact ouroperating results for 2007 when compared to 2006 as perpetual revenue hasgenerally been recognized in full upon delivery of the license.

Last, our policy for subscription contractacquisition costs, such as sales commissions, is to recognize them inproportion to the revenue recognized under the subscription arrangement. Sincewe expect the majority of new business to be subscriptions in 2007, we believethis policy will have a material and beneficial impact on our 2007 and 2008operating results.  Commissions paid onlicense sales in 2007 will continue to be expensed when earned.

***Sources of Revenue***

Our revenue is comprised of fees for software,hosting and support, and fees for professional services.

Software, hosting and support revenue includes feesearned under subscriptions and software license arrangements.  Subscription arrangements include a bundledfee to access the software and data via our hosting services, and supportservices.  Subscription revenue isrecorded ratably over the length of the agreement.  Our hosting services provide remotemanagement and maintenance of our software and customers’ data which isphysically located in third party facilities. Customers’ access “hosted” software and data via secure Internetconnection.  Support services includetechnical assistance for our software products and unspecified product upgradeson a when and if available basis.

License arrangements can be over time orperpetual.  For term licenses, software,hosting and support revenue is recognized ratably over the length of theagreement.  Perpetual license revenue isrecorded in full upon delivery of the license, and the hosting and supportelements are recognized ratably over the contractual period.  Perpetual license revenue has ranged from 21%to 25% of our revenue during the past three years.  Due to the change in our business model notedabove, perpetual license revenue decreased from $10.9 million, or 21% ofrevenue, in the six months ended June 30, 2006 to $946,000, or 2% of revenue,in the six months ended June 30, 2007.

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Our sales arrangements generally provide customerswith the right to use our software up to a maximum number of users ortransactions.  A number of ourarrangements provide for additional fees for usage above the maximum, which arebilled and recognized into revenue when earned.

Professional services revenue is comprised ofrevenue from consulting, education and development services, and reimbursementof related travel costs.  Consulting andeducation services include implementation and best practices consulting.  Development services include customizationsand integrations for a client’s specific business application.  Professional services revenue ranged from 19%to 22% of total revenue in the past three years.

Professional services are typically sold withinitial sales arrangements and then periodically over the clientengagement.  Our typical educationcourses are billed on a per person, per class basis.

Depending on the size and complexity of the clientproject, our consulting or development services contracts are either fixedprice/fixed scope or, less frequently, billed on a time and materials basis. Wehave determined that the professional services element of our softwarearrangements is not essential to the functionality of the software.

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

*Cost of Revenue.*    Cost of revenue consists primarily ofsalaries and related expenses (such as employee benefits and payroll taxes) forour hosting, support and professional services organizations, third-party costsand equipment depreciation relating to our hosting services, third-party costsfor voice 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, depreciation for furnitureand equipment, payroll taxes and employee benefits, based on headcount. As aresult, overhead expenses are reflected in each cost of revenue and operatingexpense category.

*Sales and Marketing Expenses. *Sales and marketingexpenses consist primarily of salaries and related expenses for employees insales and marketing, including commissions and bonuses, advertising, marketingevents, corporate communications, product management expenses, travel costs andallocated overhead. For subscription arrangements, we expense the related salescommission in proportion to the revenue recognized.  We expense our sales commissions on licensearrangements when earned, which is typically at the time the related sale isinvoiced to the client.  Since the majorityof our historical revenue has been from license arrangements recognized overtime, we have experienced a delay between increasing sales and marketingexpenses and the recognition of corresponding revenue. We expect significantadditional increases in sales and marketing expenses in absolute dollars as wecontinue to hire additional sales and marketing personnel and increase thelevel of marketing activities.

*Research and DevelopmentExpenses. *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 

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assurance,testing and 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 and AdministrativeExpenses*. General and administrative expenses consist primarily of salary andrelated expenses for management, finance and accounting, legal, informationsystems and human resources personnel, professional fees, other corporateexpenses and allocated overhead. We anticipate that we will incur additionalemployee salaries and related expenses, professional service fees and insurancecosts related to the growth of our business and operations.

***Critical Accounting Policies and Estimates***

Our financial statements and accompanying notes areprepared in accordance with U.S. generally accepted accounting principles.  Preparing financial statements requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses. These assumptions are affected by management’s application of accountingpolicies.  Our critical accountingpolicies include revenue recognition, valuation of receivables and deferred taxassets, and accounting for share-based compensation.

***Revenue Recognition***

Beginning in 2007, we changed the nature of oursales arrangements from license arrangements to subscription arrangements (“subscriptions”).  For a bundled fee, subscriptions provide thecustomer with access to the software and data over the Internet, or on demand,and provide technical support services and software upgrades when and ifavailable.  Under subscriptions,customers do not have the right to take possession of the software and, inaccordance with EITF 00-03, such arrangements are considered service contractsand are outside the scope of SOP 97-2. Accordingly, we account for sales of subscriptions under EITF 00-21, andrecognize subscription revenue ratably over the length of the agreement.

Prior to 2007, we sold the majority of productsunder software license arrangements (“licenses”), and accounted for them inaccordance with SOP 97-2 and SOP 98-9. License arrangements generally include multiple elements that aredelivered up front or over time.  Forexample, under a term license, we deliver the software up front and providehosting and support services over time. Fair value for each element in a license does not exist since none aresold separately, and consequently, the bundled revenue is recognized ratablyover the length of the agreement.  Undera perpetual license, vendor specific objective evidence of fair value of thehosting and support elements is based on the price charged at renewal when soldseparately, and therefore the license element is recognized immediately intorevenue upon delivery using the residual method, and the hosting and supportelements are recognized ratably over the contractual term.

The application of these rules requires judgment,including the identification of individual elements in multiple element arrangements,whether there is objective and reliable evidence of fair value, includingvendor specific objective evidence (“VSOE”) of fair value, for 

17

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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.

Fees charged for professional services arerecognized when delivered.  We believethe fees for professional services qualify for separate accounting because: a)the services have value to the customer on a stand-alone basis; b) objectiveand reliable evidence of fair value exists for these services; and c)performance of the services is considered probable and does not involve uniquecustomer acceptance criteria.

 Our standardpayment terms are net 30, although payment within 90 days is considerednormal.  We provide extended paymentterms in certain circumstances.  In suchcases, judgment is required in determining whether our fee is fixed ordeterminable and the appropriate timing of revenue recognition.  Changes to our practice of providing extendedpayment terms or providing concessions following a sale, may result in amaterial change to the amount of revenue recorded in a given period.

***Allowance for doubtful accounts***

We regularly assess the collectibility ofoutstanding customer invoices and, in so doing, we maintain an allowance forestimated losses resulting from the non-collection of customerreceivables.  In estimating this allowance,we consider factors such as: historical collection experience; a customer’scurrent creditworthiness; customer concentration; age of the receivablebalance; and general economic conditions that may affect a customer’s abilityto pay.  Actual customer collectionscould differ from our estimates and exceed our related loss allowance.

***Income Taxes***

We record income taxes under the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect of a change in tax rates ondeferred tax assets and liabilities is recognized in income in the period thatincludes the enactment date.  Whenapplicable, a valuation allowance is established to reduce any deferred taxasset when it is determined that it is more likely than not that some portionof the deferred tax asset will not be realized.

We have established a valuation allowance equal toour net deferred tax assets due to uncertainties regarding the realization ofour net operating loss carryforwards, tax credits, and deductible timingdifferences.  The uncertainty ofrealizing these benefits is based primarily on our lack of taxable earnings.

***Share-Based Compensation***

We have adopted the provisions of Statement ofFinancial Accounting Standards No. 123(R), *Share Based Payment*,(“SFAS 123R”) beginning January 1, 2006 utilizing the modified prospectivemethod.  This statement requires the costof share-based payment arrangements to be recorded in the statement ofoperations.  Prior to 2006, the estimatedcost of share-based payment 

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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 exercisebehaviors, and the related income tax effects. Our assumptions are based primarily on our historical information, someof which was developed when we were a private company.

***Recently Issued Accounting Standards***

SFAS 157, *Fair Value Measurements*,defines fair value, establishes a framework for measuring fair value in GAAP,and enhances disclosures about fair value measurements.  This statement applies when other accountingpronouncements require fair value measurements; it does not require new fairvalue measurements.  SFAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those years.  We do not believe adoption of SFAS 157 willhave a material effect on our financial statements.

**Results of Operations**

The following table setsforth certain consolidated statements of operations data for each of theperiods indicated, expressed as a percentage of total revenue:
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                |       |                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                  |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support             |       | 77                                              | %          | 78                                            | %          | 77 | % | 78 | % |
| Professional services                     |       | 23                                              |       | 22                                            |       | 23 |   | 22 |   |
| Total revenue                             |       | 100                                             |       | 100                                           |       | 100 |   | 100 |   |
| Cost of revenue:                          |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support             |       | 12                                              |       | 17                                            |       | 12 |   | 17 |   |
| Professional services                     |       | 18                                              |       | 19                                            |       | 17 |   | 20 |   |
| Total cost of revenue                     |       | 30                                              |       | 36                                            |       | 29 |   | 37 |   |
| Gross profit                              |       | 70                                              |       | 64                                            |       | 71 |   | 63 |   |
| Operating  expenses:                      |       |                                            |       |                                          |       |   |   |   |   |
| Sales and marketing                       |       | 55                                              |       | 60                                            |       | 56 |   | 60 |   |
| Research and development                  |       | 13                                              |       | 16                                            |       | 13 |   | 17 |   |
| General and administrative                |       | 10                                              |       | 12                                            |       | 9 |   | 11 |   |
| Total operating expenses                  |       | 78                                              |       | 88                                            |       | 78 |   | 88 |   |
| Loss from  operations                     |       | (8                                              | )          | (24                                           | )          | (7 | ) | (25 | ) |
| Interest and  other income (expense), net |       | 3                                               |       | 3                                             |       | 3 |   | 3 |   |
| Loss before  income taxes                 |       | (5                                              | )          | (21                                           | )          | (4 | ) | (22 | ) |
| Provision for  income taxes               |       | (1                                              | )          | (1                                            | )          | — |   | (1 | ) |
| Net loss                                  |       | (6                                              | )%         | (22                                           | )%         | (4 | )% | (23 | )% |

 

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Thefollowing table sets forth our on demand customer interactions and our revenueby type and geography expressed as a percentage of total revenue for each ofthe periods indicated.
| ** **                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer  interactions (in millions)                           |       | 223                                             |       | 332                                           |       | 504 |   | 684 |   |
| Revenue by type:                                               |       |                                            |       |                                          |       |   |   |   |   |
| Recurring (subscriptions, term licenses, hosting and  support) |       | 56                                              | %          | 77                                            | %          | 56 | % | 76 | % |
| Perpetual licenses                                             |       | 21                                              |       | 1                                             |       | 21 |   | 2 |   |
| Professional services                                          |       | 23                                              |       | 22                                            |       | 23 |   | 22 |   |
| Revenue by  geography in:                                      |       |                                            |       |                                          |       |   |   |   |   |
| United States                                                  |       | 74                                              | %          | 72                                            | %          | 73 | % | 72 | % |
| Europe                                                         |       | 20                                              |       | 20                                            |       | 20 |   | 20 |   |
| Asia Pacific                                                   |       | 6                                               |       | 8                                             |       | 7 |   | 8 |   |

 

***Quarter Overview***

Total revenuein the second quarter of 2007 decreased 2% from the second quarter of 2006mostly due to our change from selling software licenses to selling subscriptionservices which we announced in early 2007. Under this business model change, perpetual license revenue decreased94% to $352,000 in the quarter ended June 30, 2007 from $5.6 million in theyear-ago quarter.  Offsetting much of thedecreased perpetual revenue was 35% growth in recurring revenue year-over-year.  Recurring revenue increased in the June 2007quarter due to growth in the number of customers and higher average revenue percustomer.

During thequarter ended June 30, 2007, we continued to invest in our operations by addingcapacity to our hosting, technical support, and professional servicesorganizations, as well as sales and marketing personnel to focus on newcustomer acquisition, and software developers to broaden and enhance oursolution offerings.  These investmentsincreased total expenses which, when combined with the much lower amount ofperpetual license revenue, caused us to incur an operating loss of 24% ofrevenue in the quarter ended June 30, 2007 as compared to an 8% operating lossin the quarter ended June 30, 2006.

For the quarterended June 30, 2007, we generated $4.8 million of cash from operations comparedto $6.9 million of cash from operations in the comparative 2006 quarter, andincreased our cash and short-term investment balances to $86.8 million at June30, 2007 from $65.7 million one year earlier.

As of June 30,2007, we had an accumulated deficit of $50 million.  This deficit and our historical operatinglosses were primarily the result of costs incurred in the development, salesand marketing of our products and for general and administrative purposes.

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***ThreeMonths and Six Months Ended June 30, 2006 and 2007***

***Revenue***
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **Percent  Change** | ** ** | **2006** | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Software,  hosting and support:      |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Recurring                            |       | $                                                   | 15,083     |                                              | $          | 20,341 |   | 35 | % | $ | 29,060 |   | $ | 39,566 |   | 36 | % |
| Perpetual                            |       | 5,553                                               |       | 352                                               |       | (94 | ) | 10,886 |   | 946 |   | (91 | ) |
| Professional  services               |       | 6,272                                               |       | 5,772                                             |       | (8 | ) | 11,593 |   | 11,655 |   | 01 |   |
| Total revenue                        |       | $                                                   | 26,908     |                                              | $          | 26,465 |   | (2 | )% | $ | 51,539 |   | $ | 52,167 |   | 1 | % |

 

Total revenue for the threemonths ended June 30, 2007 was $26.5 million, a decrease of $0.4 million, or2%, from total revenue of $26.9 million for the three months ended June 30,2006.  Total revenue for the six monthsended June 30, 2007 increased 1% to $52.2 million from $51.5 million for thesix months ended June 30, 2006.

Software, hosting andsupport revenue, consisting of recurring revenue and perpetual license revenue,for the three months ended June 30, 2007 increased slightly, from $20.6 millionto $20.7 million, over the three months ended June 30, 2006.  Recurring revenue, comprised ofsubscriptions, term licenses, hosting and support, increased 35% and 36% overthe comparable 2006 three and six month periods, respectively.  Recurring revenue has grown primarily due toa 12% increase in the average number of customers and a 21% increase in averagerevenue per customer.  Total active customersincreased to approximately 1,800 at June 30, 2007 as compared to approximately1,700 at June 30, 2006, due to our focus on new customer acquisition.   Average revenue per customer increased as aresult of sales of new products, capacity additions, and contract renewals.  Customer interactions, a measure of uniquecustomer sessions hosted in our data centers and customer usage volume,increased approximately 50% to 332 million in the quarter ended June 30, 2007from the quarter ended June 30, 2006.

Perpetual license revenuedecreased $5.2 million, or 94%, in the quarter ended June 30, 2007 as comparedto the quarter ended June 30, 2006, and decreased as a percentage of totalrevenue to 1% in the 2007 quarter from 21% in the 2006 quarter.  For the six months ended June 30, 2007,perpetual license revenue decreased $9.9 million, or 91%, from the comparable2006 period.  The mix of perpetuallicense revenue affects our profitability in any given period because it isrecorded in full into revenue upon delivery instead of being recorded ratably intorevenue over time, as is the case with subscriptions and term licenses.Beginning in 2007, we discontinued sales of new perpetual licenses which causedthe significant decrease in perpetual revenue from the prior year.

Professional servicesrevenue decreased $500,000, or 8%, in the quarter ended June 30, 2007 comparedto the year-ago quarter, primarily due to a lower volume of large customerprojects in the current year. Professional services revenue for the six months ended June 30, 2007increased $62,000, or 1%, over the six months ended June 30, 2006. Customersgenerally purchase professional services with initial license or subscriptionarrangements, and periodically over the life of the contract.

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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 22%and 23% of total revenue in the three months ended June 30, 2007 and 2006,respectively.  We expect professionalservices revenue to range between 20% and 25% of total revenue in the future.

Revenue from Asia Pacificcustomers grew slightly to represent 8% of total revenue in the quarter endedJune 30, 2007 from 6% of total revenue in the quarter ended June 30, 2006, andwhile revenue from European clients was constant at 20% of total revenue foreach of the respective quarters.  Totalrevenue outside the United States remained relatively constant at 26% to 28% ofrevenue for the comparative three month and six month periods ended June 30,2007 and 2006.

***Cost of Revenue***
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **Percent  Change** | ** ** | **2006** | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Software,  hosting and support       |       | $                                               | 3,159      |                                          | $          | 4,565 |   | 45 | % | $ | 5,930 |   | $ | 8,959 |   | 51 | % |
| Professional  services               |       | 4,941                                           |       | 5,036                                         |       | 2 |   | 9,045 |   | 10,207 |   | 13 |   |
| Total cost of revenue                |       | $                                               | 8,100      |                                          | 9,601      |   | 19 | % | $ | 14,975 |   | $ | 19,166 |   | 28 |   |
|                                      |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Totalcost of revenue for the quarter ended June 30, 2007 was $9.6 million, anincrease of $1.5 million, or 19%, over total cost of revenue of $8.1 millionfor the quarter ended June 30, 2006. Total cost of revenue for the six months ended June 30, 2007 was $19.2 million,or 28% more than total cost of revenue of $15.0 million for the six monthsended June 30, 2006.

Costof software, hosting and support increased $1.4 million, or 45%, in the secondquarter ended June 30, 2007 over the second quarter of 2006 due to staffadditions in our hosting and technical support operations, capacity additionsto our hosting data centers, including new data centers in London, England, andChicago, Illinois, and increased voice and non-voice hosting volume.  Staff additions to our hosting and technicalsupport organizations increased salaries and related expenses (i.e. payrolltaxes, benefits, bonuses) by $510,000 in the quarter ended June 30, 2007 whencompared to the quarter ended June 30, 2006. Average employee count in our hosting and technical support operationswas 80 in the second quarter of 2007 as compared to 65 in the second quarter of2006.  New data centers added since Juneof 2006 and growth in customer interactions increased third party hostingprovider costs by $602,000 in the quarter ended June 30, 2007 as compared tothe quarter ended June 30, 2006. Capacity additions to our data centers increased depreciation expense inthe second quarter of 2007 by $174,000 over the second quarter of 2006.  As a percent of the associated revenue,software, hosting and support costs were 22% in both the three months and sixmonths ended June 30, 2007 as compared to 15% in both the three months and sixmonths ended June 30, 2006 mostly due to the lower revenue contribution fromperpetual licenses combined with the capacity increases noted above.

Costof professional services increased $95,000, or 2%, in the quarter ended June30, 2007 over the quarter ended June 30, 2006 due to employee staff additionspartly offset by lower charges for third party services and lower travel &entertainment expenses.  Average employeecount in our professional services organization grew to 138 in the secondquarter of 2007 from 

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122 in the second quarterof 2006, which increased salaries and related expenses by $727,000.  This increase was partially offset by lowerthird party implementation and technical resource charges of $393,000 and lowertravel and entertainment expenses of $280,000. As a percent of the associated revenue, professional services costsincreased to 87% and 88% in the quarter and six months ended June 30, 2007,respectively, from 79% and 78% in the quarter and six months ended June 30,2006.  Employee training and customerscheduling requirements can cause the cost of professional services tofluctuate as a percentage of revenue.  Weexpect professional services costs to range between 80% and 85% of theassociated revenue in 2007.

***Operating Expenses***
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **Percent  Change** | ** ** | **2006** | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Sales and  marketing                 |       | $                                               | 14,852     |                                          | $          | 15,788 |   | 6 | % | $ | 28,578 |   | $ | 31,515 |   | 10 | % |
| Research and  development            |       | 3,476                                           |       | 4,343                                         |       | 25 |   | 6,606 |   | 8,639 |   | 31 |   |
| General and  administrative          |       | 2,709                                           |       | 3,178                                         |       | 17 |   | 4,765 |   | 6,038 |   | 27 |   |
| Total operating  expenses            |       | $                                               | 21,037     |                                          | $          | 23,309 |   | 11 | % | $ | 39,949 |   | $ | 46,192 |   | 16 | % |

 

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

Sales and marketing expensesof $15.8 million in the second quarter of 2007 were 6%, or $936,000, greaterthan expenses of $14.9 million in the second quarter of 2006.  Average employee count in our sales andmarketing organizations increased to 265 in the quarter ended June 30, 2007from 255 in the quarter ended June 30, 2006, which increased salaries andrelated expenses by $1.7 million.  Inaddition, stock-based compensation expenses increased by $196,000 in the secondquarter of 2007 over the second quarter of 2006 mostly due to growth in thefair market value of our stock price since our initial public offering in 2004,and additional employee stock option grants. These expenses were largely offset by increased deferred charges forsales incentives (see below) and lower travel and entertainment expenses of$371,000.

Sales and marketing expensesof $31.5 million for the six months ended June 30, 2007 were $2.9 million, or 10%,greater than expenses of $28.6 million for the six months ended June 30, 2006primarily due to employee growth which increased salaries and related expensesby $4.2 million, partially offset by the deferral of $2.1 million of sales incentivecosts in the 2007 period as compared to zero deferral in 2006.

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 $1.0 million of sales incentivesearned on subscription sales in the second quarter of 2007, as compared to zerodeferred sales incentives in the second quarter of 2006.  Net sales incentive expense in the quarterending June 30, 2007 was $2.6 million as compared to $3.3 million in thequarter ended June 30, 2006.  Net sales incentiveexpense for the six months ended June 30, 2007 was $4.7 million as compared to$6.9 million in the six months ended June 30, 2006.

*Research and Development Expenses*

#### Researchand development expenses of $4.3 million in the three months ended June 30,2007 were $867,000, or 25%, more than research and development expenses of $3.5million in the three months ended June 30, 2006, primarily due to employeestaff additions.  Average employee countin our research and development organization increased to 138 in the secondquarter ended June 30, 2007 from 121 in the corresponding 2006 quarter, whichincreased salaries and related expenses by $645,000.  In addition, higher outside service costs of$153,000 were incurred in the quarter ended June 30, 2007 principally relatedto language translations of 

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#### installation and operation manuals for ournewest product, RightNow 8, which was made generally available to customers inFebruary 2007.  Research and developmentexpenses for the six months ended June 30, 2007 were $2 million, or 31%,greater than the comparable 2006 period primarily due to employee growth whichincreased salaries and related expenses by $1.5 million.

*General and AdministrativeExpenses*

Generaland administrative expenses increased $469,000, or 17%, in the second quarterof 2007 over the second quarter of 2006 mostly due to staff additions.  Average employees in our general andadministrative organization were 69 in the second quarter of 2007 as comparedto 57 in the second quarter of 2006, which increased salaries and relatedexpenses by $420,000.  General andadministrative expenses for the six months ended June 30, 2007 were $1.3million, or 27%, greater than the comparable 2006 period primarily due toemployee growth which increased salaries and related expenses by $1.0 million.

*Stock-Based Compensation Expense*

Total stock-basedcompensation expense for the three months ended June 30, 2007 was $2.0 millionas compared to $1.8 million in the three months ended June 30, 2006.  Stock-based compensation was $3.3 million forthe six months ended June 30, 2007 as compared to $2.5 million for the sixmonths ended June 30, 2006.   Theyear-over-year increase in stock-based compensation expense results primarilyfrom growth in the fair market value of our stock since our initial publicoffering in 2004, which in turn drives growth in the estimated fair value ofour stock options and the corresponding expense.

***Interest and OtherIncome (Expense), Net***
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)**            | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **Percent  Change** | ** ** | **2006** | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                            |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Interest income                                 |       | $                                               | 723        |                                          | $          | 918 |   | 27 | % | $ | 1,397 |   | $ | 1,803 |   | 29 | % |
| Interest expense                                |       | (6                                              | )          | (2                                            | )          | n/m |   | (8 | ) | (3 | ) | n/m |   |
| Other income  (expense)                         |       | 51                                              |       | (31                                           | )          | n/m |   | 51 |   | (87 | ) | n/m |   |
| Total interest and  other income (expense), net |       | $                                               | 768        |                                          | $          | 885 |   | 15 | % | $ | 1,440 |   | $ | 1,713 |   | 19 | % |

 

Interest income increased 27% in the second quarterof 2007 over the second quarter of 2006 primarily due to growth in our cash andshort-term investment balances.  Cash andinvestment balances have increased primarily from cash generated by thebusiness, and to a lesser extent, from employee stock purchases.  Our investment portfolio consists primarilyof short-term, investment-grade government and corporate debt instruments.  Other income (expense) consists primarily ofgains or losses on asset sales and foreign currency transaction gains orlosses.

***Provision for Income Taxes***

 The provision for income taxes of $181,000 inthe second quarter, and $265,000 in the six months ended June 30, 2007,consists primarily of the state and foreign taxes payable.  Our effective tax rate differs from thefederal statutory rate primarily due to unrealized operating losses, taxcredits, federal alternative minimum taxes, foreign rate differentials, statetaxes and non-deductible expenses.  Oureffective tax rate in 2007 will depend on a number of factors, such as theamount and mix of stock-based compensation expense to be recorded under SFAS123R, the level of business in state and foreign tax jurisdictions, management’sexpectation of the realization of deferred tax assets and the associatedvaluation allowance, and other factors.

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**Liquidity and Capital Resources**
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2006**                                            | ** ** | **2007**                                          | ** ** | **Percent  Change** | ** ** | **2006** | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments |       | $                                                   | 65,749     |                                              | $          | 86,753 |   | 32 | % | $ | 65,749 |   | $ | 86,753 |   | 32 | % |
| Cash provided by  operating activities             |       | 6,864                                               |       | 4,763                                             |       | (31 | ) | 12,916 |   | 10,123 |   | (22 | ) |
|                                                    |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

At June 30,2007, cash, cash equivalents, and short-term investments, totaled $86.8million.  In addition to our cash andshort-term investments, other sources of liquidity at June 30, 2007 included a$3.0 million bank line of credit facility, under which there have been noborrowings.

Operatingactivities provided $4.8 million and $10.1 million of cash during the quarterand six months ended June 30, 2007, respectively, as compared to $6.9 millionand $12.9 million in the quarter and six months ended June 30, 2006.  Cash flow from operations can varysignificantly from quarter-to-quarter from many reasons, including the timingof business in a given period, and customer payment preferences andpatterns.  We expect full year 2007 cashflow from operations to range from $15 to $20 million, as compared to $27million cash flow from operations in 2006. The expected decrease in full year cash from operations is primarily theresult of our business model change announced earlier this year where wediscontinued selling perpetual software licenses, which are typically largerdollar contracts and paid net 30.

Historically,we have generated cash from operations from increasing sales and the upfrontbilling of our sales arrangements, which is typically reflected in accountsreceivable and deferred revenue.  Whencustomers chose to pay over time, we recorded a term receivable to reflect thecustomer commitment.  Beginning in 2007,our change to subscriptions from license arrangements requires that we nolonger record additions to term receivables, and consequently, we expect termreceivables to gradually disappear from our balance sheet.  This change in the recording of termreceivables is not expected to affect cash flow from operations.

The allowancefor uncollectible accounts receivable represented approximately 5% of currentaccounts and term receivables at June 30, 2007 and December 31, 2006,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.

Investingactivities used $16.7 million and $17.2 million in the quarter and six monthsended June 30, 2007, respectively. Second quarter 2007 investing activities consisted of purchases ofshort-term investments of $15.3 million and $1.4 million of capitalexpenditures.  Capital asset additionsconsisted primarily of equipment acquisitions for our hosting operations andemployee growth, and are expected to be approximately $9 million in 2007.

Financingactivities provided $688,000 and $1.4 million in the quarter and six monthsended June 30, 2007, respectively, mostly from the employee purchases ofRightNow stock under our equity incentive plans and the related excess taxbenefits.

We believe ourexisting cash and short-term investments, together with funds generated fromoperations, should be sufficient to fund operating and investment requirementsfor at least****the next twelvemonths. Our future capital requirements will depend on many factors, including 

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our rate of revenue growth and expansionof our sales and marketing activities, the possible acquisition ofcomplementary 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, 2007, we did not have any significantoff-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K promulgated by the SEC.

# **Contractual Obligations andCommitments**

There were no significant contractual obligations orcommitments incurred during the quarter ended June 30, 2007.

**Item 3.  Quantitative and Qualitative DisclosuresAbout 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, 2006 or 2007.

*InterestRate Sensitivity*

Net proceeds from ourinitial public offering of common stock are invested in short-term,interest-bearing securities, which are subject to credit and interest raterisk.  Our portfolio is investment-gradeand diversified among issuers and security types to reduce credit risk.  We manage our interest rate risk bymaintaining a large portion of our investment portfolio in instruments withshort 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 30,2007, the fair value of our portfolio would decline by approximately $210,000.

**Item 4.  Controls and Procedures**

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

Our management,with 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) under the SecuritiesExchange Act of 1934) as of the end of the period covered by this report. Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, our disclosurecontrols and procedures were effective in ensuring that information required tobe 

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disclosed by us in the reports that wefile or submit under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported, within the time periods specified in therules and forms of the Securities and Exchange Commission and (ii) accumulatedand communicated to our management, including our principal executive andprincipal financial officers, or persons performing similar functions, as appropriateto allow timely decisions regarding required disclosure.

***(b)******                                ******Changes toInternal Control over Financial Reporting***

During the most recent completed fiscal quartercovered by this report, there has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934) that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

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**Part II.  Other Information**

***Item 1.  LegalProceedings***

From time to time, we are involved inlegal proceedings in the ordinary course of business.  We believe that the resolution of thesematters will not have a material effect on the Company’s consolidated financialposition, results of operations or liquidity.

**Item 1A.  Risk Factors**

A restated description ofthe risk factors associated with our business is set forth below.  This description includes any and all changes(whether or not material) to, and supersedes, the description of the riskfactors associated with our business previously disclosed in Part 1, Item 1A ofour Annual Report on Form 10-K for the year ended December 31, 2006.

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

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

Weincurred a net loss of nearly $12 million in the first half of 2007, and as ofJune 30, 2007, we had an accumulated deficit of $50 million. We expect tocontinue to incur significant sales and marketing, research and development andgeneral and administrative expenses as we expand our operations and, as aresult, we will need to generate significant revenue to achieve profitability.Additionally, with our business model change beginning in 2007 we expect tosell substantially less perpetual licenses than in prior years, which willunfavorably impact revenue and earnings. Even if we achieve profitability, we may not be able to increaseprofitability on a quarterly or annual basis in the future, which may cause theprice of our stock to decline.

***Our recently announced business modelchanges carry a number of risks which may be harmful to our business.***

InJanuary 2007, we announced that we are changing the nature of our productofferings from substantially all software license arrangements to substantiallyall subscription service arrangements. We expect the impact of this change will be to largely eliminateperpetual license revenue in 2007 which will negatively and materially affectour operating results when compared to 2006. Increased operating losses in 2007 could result in a significant declinein the price of our common stock.  Additionally,customers may choose to pay for their subscription agreements over time insteadof upfront, or could choose to pay upfront for a shorter period of service,which could reduce our cash flow from operations as compared to prioryears.  A decline in cash flow fromoperations could cause investors and market analysts to react negativelytowards investing in our stock which could materially and adversely affect theprice of our stock.   In addition, oursubscription strategy caries a number of additional risks, including:

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·       we mayincur declining demand for our products because certain customers may preferlicense arrangements and select competitors’ products instead of ours;

·       ouraverage price per transaction could decline substantially;

·       we maysee declining demand for our implementation services;

·       we maynot achieve the expected level of market penetration under our subscriptionstrategy; and

·       we mayhave a short-term and/or long-term decrease in total revenue as a result ofthis transition.

***Our quarterly results of operations may fluctuate in the future.***

Our quarterly revenue and results ofoperations may fluctuate as a result of a variety of factors, many of which areoutside of our control. If our quarterly revenue or results of operations fallbelow the expectations of investors or securities analysts, the price of our commonstock could decline substantially. Fluctuations in our results of operationsmay be due to a number of factors, including, but not limited to, those listedbelow and identified throughout this “Risk Factors” section:

·       our ability to retain and increase sales to existing clients, attractnew clients and satisfy our clients’ requirements;

·       changes in the volume and mix of subscriptions and perpetual licensessold in a particular quarter, because perpetual license revenue is recordedinto revenue upon delivery whereas subscriptions are recorded into revenueratably over the contractual period;

·       our success in shifting our business model away from software licensearrangements and toward subscription services arrangements;

·       our policy of expensing sales commissions when earned under licensearrangements, which is typically at the time of invoice, while the majority ofour revenue is recognized ratably over future periods;

·       changes in the mix of revenue between professional services andsoftware, hosting and support, because the gross margin on professionalservices is typically lower than the gross margin on software, hosting andsupport;

·       changes in the mix of voice self service applications sold and/or usagevolume, because the gross margin on voice self service applications istypically lower than the gross margin on our sales, marketing, feedback andservice applications;

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

·       changesin our pricing policies or those of our competitors;

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

·       changesin our assumptions of stock price volatility or employee exercise behaviors, orchanges in the number of stock options granted and vesting requirements in anyparticular period, which effects the amount of stock-based compensationexpense;

·       changesin the payment terms for our products and services, including changes in themix of payment options chosen by our customers;

·       thepurchasing and budgeting cycles of our clients; and

·       generaleconomic, industry and market conditions.

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. Most of our expenses, suchas salaries and third-party hosting co-location costs, are relatively fixed inthe short-term, and our expense levels

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arebased in part on our expectations regarding future revenue levels. As a result,if revenue for a particular quarter is below our expectations, we may not beable to proportionally reduce operating expenses for that quarter, causing adisproportionate effect on our expected results of operations for that 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.

***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% of our revenue is derived from RightNowService, a suite of solutions used to optimize customer service operations. Ifwe are unable to successfully develop and sell new and enhanced versions ofRightNow Service, or introduce new products and solutions for the customerservice market, our financial performance will suffer. Although to date themajority of business has been focused on providing solutions for customerservice operations, we have introduced sales, marketing, feedback andvoice-enabled applications to expand our solution offerings. Our efforts toexpand beyond the customer service market may not be successful because certainof our competitors have far greater experience and brand recognition in thebroader segments of the CRM market. In addition, our efforts to expand our ondemand software solutions beyond the customer service market may divert managementresources from our existing operations and require us to commit significantfinancial resources to a market where we are less proven, which may harm ourbusiness, financial condition and results of operations.

***We face intense competition, and our failure to compete successfullycould make it difficult for us to add and retain clients and could reduce orimpede the growth of our business.***

The market for CRM solutions is highly competitive and fragmented, andis subject to rapidly changing technology, shifting client requirements,frequent introductions of new products and services, and increased marketingactivities of other industry participants. Competition has intensified with our most recent product releases.  Increased competition could result in pricingpressure, reduced sales, lower margins or the failure of our solutions toachieve or maintain broad market acceptance. If we are unable to competeeffectively, it will be difficult for us to add and retain clients, and ourbusiness, financial condition and results of operations will be seriouslyharmed.

We face competition from:

·       companies currently providing customer service solutions, some of whomoffer hosted services, including BMC Software Corporation, Inc., eGainCommunications Corporation, FrontRange Solutions, Inc., IBM Corporation,Kana Software, Inc., Microsoft Corporation, Netsuite, OracleCorporation/Siebel Systems, SAP AG, and salesforce.com;

·       CRMsystems that are developed and maintained internally by businesses;

·       CRM products or services that are developed, or bundled with otherproducts or services, and installed on a client’s premises by software vendors;

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·       outsourced contact center providers who bundle solutions and agentlabor in their service offerings;

·       new companies entering the CRM software market, the on demandapplications market and the on demand CRM market, or expanding from any one ofthese markets to the others; and

·       voicesystem integrators and voice-enabled IVR technology providers, such as Apptera,IBM, 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.

In addition, many of our current and potential competitorshave established or may establish business, financial or strategicrelationships among themselves or with existing or potential clients, alliancepartners or other third parties, or may combine and consolidate to become moreformidable competitors with better resources. For example, in January 2006, Oracle Corporation completed itsacquisition of Siebel Systems, Inc.  Wealso expect that new competitors, such as enterprise software vendors andonline service providers that have traditionally focused on enterprise resourceplanning or back office applications, will continue to enter the on demand CRMmarket with competing products as the on demand CRM market develops andmatures.

***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 companieshave invested substantial personnel and financial resources to integratetraditional enterprise software into their businesses, and therefore may bereluctant or unwilling to migrate to on demand application services. While wehave supported traditional on site deployment of our software applications,widespread market acceptance of our on demand software solutions is critical tothe success of our business. Other factors that may affect the marketacceptance of our solutions include:

·       ondemand security capabilities and reliability;

·       concernswith entrusting a third party to store and manage critical customer data;

·       our ability to meet the needs of broader segments of the CRM market orother on demand markets;

·       thelevel of customization we offer;

·       ourability to continue to achieve and maintain high levels of client satisfaction;

·       concernswith purchasing critical CRM solutions from a company with a history of operatinglosses;

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·       customer acceptance of our subscription sales arrangements beginning in2007;and

·       theprice, performance and availability of competing products and services.

If businesses do not perceive the benefits of on demandsolutions in general, or our on demand solutions in particular, then the marketfor these solutions may not develop further, or it may develop more slowly thanwe expect, either of which would adversely affect our business, financialcondition and results of operations.

***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 from expandingour sales and marketing resources if we are unable to hire and develop talentedsales and marketing personnel, if our new sales personnel are unable to achievedesired productivity levels in a reasonable period of time, or if we are unableto retain our existing sales and marketing personnel. We also may not achieveanticipated revenue growth from our third-party channel partners if we areunable to attract and retain additional motivated channel partners, if anyexisting or future channel partners fail to successfully market, resell,implement or support our solutions for their customers, or if they representmultiple providers and devote greater resources to market, resell, implementand 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 our intended change from a term license agreement to asubscription service agreement beginning in 2007, or the availability andpricing of competing products. If large numbers of existing clients do notrenew, or renew on terms less favorable to us, and if we cannot replace orsupplement those non-renewals with new agreements generating the same orgreater level of revenue, our business, financial condition and results ofoperations will be adversely affected.

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

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We have substantially expanded our overall business,headcount and operations in recent periods. We have increased our total numberof full-time employees to 698 at June 30, 2007 from 649 at June 30, 2006. Toachieve our business objectives, we will need to continue to expand ourbusiness at a rapid pace. This expansion has placed, and is expected tocontinue to place, a significant strain on our managerial, administrative,operational, financial and other resources. We anticipate that this expansionwill require substantial management effort and significant additional investmentin our infrastructure. If we are unable to successfully manage our growth, ourbusiness, financial condition and results of operations will be adverselyaffected.

Part of the challenge that we expect to face in the course ofour expansion is to maintain the high level of customer service to which ourclients 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.***

Approximately 85% to 90% of our clients use our hostingservices for deployment of our software applications. We generally provide ourhosting services for our non-voice applications through computer hardware thatwe own and that is currently located in third-party web hosting co-locationfacilities maintained and operated in California, Illinois, Massachusetts, NewJersey and London, England. Our voice applications for several Internationalcustomers are hosted by third parties who also own and operate the hardware onwhich our applications reside.  We do notmaintain long-term supply contracts with any of our hosting providers, andproviders do not 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 capacityrequirements could result in interruptions in our service or impede our abilityto scale our operations.

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

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resultsof operations. In the event of damage or interruption, our insurance policiesmay not adequately compensate us for any losses that we may incur.

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

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 significant internationalsales and are subject to risks associated with operating in internationalmarkets.***

International sales comprised 28% of our revenue for thequarters ended June  30, 2006 and 2007,respectively. We intend to continue to pursue and expand our internationalbusiness activities. Adverse political and economic conditions could make itdifficult for us to increase our international sales or to operate abroad.International operations are subject to many inherent risks, including:

·       political, social and economic instability, including conflicts in theMiddle East and elsewhere abroad, terrorist attacks and security concerns ingeneral;

·       adverse changes in tariffs and other protectionist laws and businesspractices that favor local competitors;

·       fluctuationsin currency exchange rates;

·       longercollection periods and difficulties in collecting receivables from foreignentities;

·       exposure to different legal standards and burdens of complying with avariety of foreign laws, including employment, tax, privacy and data protectionlaws and regulations;

·       reducedprotection for our intellectual property in some countries;

·       expenses associated with localizing products for foreign countries,including translation 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 entered into any transactionsdesigned to hedge against risks of loss due to foreign currency fluctuations.Any of these factors may adversely affect our future international sales and,consequently, affect our business, financial condition and results ofoperations.

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***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 that Microsoft incorporates into operatingsystems, while the Smart Client methodology enables development and deploymentof software applications using the .NET Framework.  We believe that the .NET Framework and SmartClient enable us to provide users with a richer experience and betterfunctionality that would be possible using a pure Web-based application.  However, the .NET Framework has not beenuniversally adopted.  If software usersdo not adopt the .NET Framework or if the .NET Framework is superseded, thepotential market for our solutions will be reduced and we may need to developan alternative architecture.

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 unable to satisfy the diverse andevolving technology needs of our clients, our business, financial condition andresults 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,especially for engineers with high levels of expertise in designing anddeveloping software and for senior sales executives.

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***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 or defectsthat may result in product failures, slow response times, or otherwise causeour products to fail to perform in accordance with client expectations. Becauseour clients use our products for important aspects of their business, anyerrors or defects in, or other performance problems with, our products couldhurt our reputation and may damage our clients’ businesses. If that occurs, wecould lose future sales, or our existing clients could elect to not renew or todelay or withhold payment to us, which could result in an increase in ourprovision for doubtful accounts and an increase in collection cycles foraccounts receivable. Clients also may make warranty claims against us, whichcould result in the expense and risk of litigation. Product performance problemscould result in loss of market share, failure to achieve market acceptance andthe diversion of development resources. If one or more of our products fails toperform or contains a technical defect, a client may assert a claim against usfor substantial damages, whether or not we are responsible for the productfailure or defect. We do not currently maintain any warranty reserves.

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.

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***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 complex technicalissues and inherent uncertainties in litigation. Any claims, regardless oftheir merit, could be time-consuming and distracting to management, result incostly litigation or settlement, cause product development delays, or requireus to enter into royalty or licensing agreements. If any of our productsviolate third-party proprietary rights, we may be required to re-engineer ourproducts or seek to obtain licenses from third parties, which may not beavailable on reasonable terms or at all. Because our sales agreements typicallyrequire us to indemnify our clients from any claim or finding of intellectualproperty infringement, any such litigation or successful infringement claimscould adversely affect our business, financial condition and results ofoperations. Any efforts to re-engineer our products, obtain licenses from thirdparties on favorable terms or license a substitute technology may not besuccessful and, in any case, may substantially increase our costs and harm ourbusiness, financial condition and results of operations. Further, our softwareproducts contain open source software components that are licensed to us undervarious public domain licenses. While we believe we have complied with ourobligations under the various applicable licenses for open source software thatwe use, there is little or no legal precedent governing the interpretation ofmany of the terms of certain of these licenses and therefore the potentialimpact of such terms on our business is somewhat unknown. Use of open sourcestandards also may make us more vulnerable to competition because the publicavailability of open source software could make it easier for new marketentrants and existing competitors to introduce similar competing productsquickly 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 acquired Salesnet,Inc.   Acquisitions could requiresignificant capital infusions and could involve many risks, including, but notlimited to, the following:

·  an acquisition may negatively impact our results of operations becauseit may require incurring large one-time charges, substantial debt orliabilities; it may require the amortization or write down of amounts relatedto deferred compensation, goodwill and other intangible assets; or it may causeadverse tax consequences, substantial depreciation or deferred compensationcharges;

·  we may encounter difficulties in assimilating and integrating thebusiness, technologies, products, personnel or operations of companies that weacquire, particularly if key personnel of the acquired company decide not towork for us;

·  our existing and potential clients and the customers of the acquiredcompany may delay purchases due to uncertainty related to an acquisition;

·  an acquisition may disrupt our ongoing business, divert resources,increase our expenses and distract our management;

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·  the acquired businesses, products or technologies may not generatesufficient revenue to offset acquisition costs;

·  we may have to issue equity securities to complete an acquisition,which would dilute our stockholders and could adversely affect the market priceof our common stock; and

·  acquisitionsmay involve the entry into a geographic or business market in which we havelittle 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 accepted accounting principles, theirinterpretation, or changes in our products or business could significantlychange our reported earnings and financial condition and could add significantvolatility to those measures.  Forexample, since our inception in 1997, we have used stock options as afundamental component of our employee compensation programs.  New accounting requirements that beganJanuary 1, 2006 make the use of stock-based compensation much more expensiveand introduce additional volatility in our results of operations.

***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 required adoption of SFAS 123R,and the recording of stock option expense on our operating statements, we maydetermine that it is in our best interest to reduce the number or size of ourstock-based awards, or change the type of awards granted.  In doing so, we may not be able to attract,retain and motivate our employees.

***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 ouroperating and capital needs. In addition, even though we may not needadditional funds, we may still elect to sell additional equity or debtsecurities or obtain credit facilities for other reasons. We may not be able tosecure additional debt or equity financing on favorable terms, or at all, atthe time when we need such funding. If we raise additional funds throughfurther issuances of equity or convertible debt

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securities,our existing stockholders could suffer significant dilution in their percentageownership of our company, and any new equity securities we issue could haverights, preferences and privileges senior to those of holders of our commonstock. Any debt financing secured by us in the future could involve restrictivecovenants relating to our capital raising activities and other financial andoperational matters, which may make it more difficult for us to obtainadditional capital, to pay dividends and to pursue business opportunities,including potential acquisitions. In addition, if we decide to raise fundsthrough debt or convertible debt financings, we may be unable to meet ourinterest or principal payments.

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

The future success of our products and our hosted businessdepends upon the continued and widespread adoption of the Internet as a primarymedium for commerce, communication and business applications. Our businessgrowth would be impeded if the performance or perception of the Internet, orcompanies providing hosted solutions, was harmed by security problems such as “viruses,”“worms” and other malicious programs, reliability issues arising from outagesand damage 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 havein the past adopted, and may in the future adopt, laws or regulations affectingdata privacy, the solicitation, collection, processing or use of personal orconsumer information, the use of the Internet as a commercial medium and theuse of email for marketing or other consumer communications. In addition,government agencies or private organizations may begin to impose taxes, fees orother charges for accessing the Internet or for sending commercial email. Theselaws or charges could limit the growth of Internet-related commerce orcommunications generally, result in a decline in the use of the Internet andthe viability of Internet-based services such as ours and reduce the demand forour products, particularly our RightNow Marketing solution.

The Internet has experienced, and is expected to continue toexperience, significant user and traffic growth, which has, at times, causeduser frustration with slow access and download times. If Internet activitygrows faster than Internet infrastructure or if the Internet infrastructure isotherwise unable to support the demands placed on it, or if hosting capacitybecomes scarce, our business growth may be adversely affected.

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

Businesses using our solutions collect personal informationregarding their customers when those customers contact them with customerservice inquiries. A valuable component of our solutions is their ability toallow our clients to use and analyze their customers’ information to increasesales, marketing and up-sell or cross-sell opportunities. Federal, state andforeign government bodies and agencies, however, have adopted and areconsidering adopting laws and regulations regarding the collection, use anddisclosure of personal information obtained from consumers. The costs ofcompliance with, and other burdens imposed by, such laws and regulations thatare applicable to the businesses of our clients may limit the use and adoptionof this component of our solutions and reduce overall demand for our solutions.Furthermore, even

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wherea client desires to make full use of these features in our solutions, privacyconcerns may cause our clients’ customers to resist providing the personal datanecessary to allow our clients to use our solutions most effectively. Even theperception of privacy concerns, whether or not valid, may inhibit marketacceptance of our products.

European Union members have imposed restrictions on thecollection and use of personal data that are far more stringent, and imposemore significant burdens on subject businesses, than current privacy standardsin the United States. All of these domestic and international legislative andregulatory initiatives may adversely affect our clients’ ability to collectand/or use demographic and personal information from their customers, whichcould reduce demand for our solutions.

In addition to government activity, privacy advocacy groupsand the technology and direct marketing industries are considering various new,additional or different self-regulatory standards that may place additionalburdens on us. If the gathering of profiling information were to be curtailedin this manner, customer service CRM solutions would be less effective, whichwould reduce demand 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.***

In January 2004, the federal Controlling the Assault ofNon-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, becameeffective. The CAN-SPAM Act regulates the transmission and content ofcommercial emails and, among other things, obligates the sender of such emailsto provide recipients with the ability to opt-out of receiving future emailsfrom the sender, and establishes penalties for the transmission of emailmessages which are intended to deceive the recipient as to source or content.Many state legislatures also have adopted laws that impact the delivery ofcommercial email, and laws that regulate commercial email practices have beenenacted in many of the international jurisdictions in which we do business,including Europe, Australia, and Canada. In addition, Internet serviceproviders and licensors of software products have introduced a variety ofsystems and products to filter out certain types of commercial email, withoutany common protocol to determine whether the recipient desired to receive theemail being blocked. As a result, it is difficult for us to determine inadvance whether or not emails generated by our clients using our solutions willbe permitted by spam filters to reach the intended recipients.

Our RightNow Marketing solution specifically serves themarket for mass distribution marketing and other email communications. Theincreasing regulation of email delivery, both domestically and internationally,and the spam 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.***

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

***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.***

At June 30, 2007, Greg Gianforte, our founder and Chief ExecutiveOfficer, and his spouse, Susan Gianforte, together beneficially ownedapproximately 27% of our currently outstanding common stock and, together withour other officers and directors, beneficially owned approximately 43% of ourcurrently outstanding common stock. In addition, none of the shares of commonstock held by Mr. Gianforte and Mrs. Gianforte are subject to vestingrestrictions. As a result, Mr. Gianforte and Mrs. Gianforte, acting togetherwith some of our other officers and directors, may be able to control mattersrequiring stockholder approval, including the election of directors, managementchanges and approval of significant corporate transactions. This concentrationof ownership may have the effect of delaying, preventing or deterring a changein control of RightNow, could deprive our stockholders of an opportunity toreceive a premium for their common stock as part of a sale of RightNow andmight reduce the market price of our common stock.

In addition, Mr. Gianforte beneficially owns, directly or indirectly, a50% membership interest in Genesis Partners, LLC, our landlord from whom welease our principal offices in Bozeman, Montana. Consequently, Mr. Gianfortehas significant control over any decisions by Genesis Partners regardingrenewal, modification or termination of our Bozeman, Montana leases. In theevent that our current leases with Genesis Partners were terminated orotherwise could not be renewed, or came up for renewal on commerciallyunreasonable terms, we would be required to find alternative office space tolease 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.***

Provisions of our certificate of incorporation and bylaws and Delawarelaw may discourage, delay or prevent a merger or acquisition that a stockholdermay consider favorable and may limit the market price of our common stock.These provisions include the following:

·  establishing a classified board in which only a portion of the totalboard members will be elected at each annual meeting;

·  authorizing the board to issue preferred stock;

·  providing the board with sole authority to set the number of authorizeddirectors and to fill vacancies on the board;

·  limiting the persons who may call special meetings of stockholders;

·  prohibiting certain transactions under certain circumstances withinterested stockholders;

·  requiring supermajority approval to amend certain provisions of thecertificate of incorporation; and

·  prohibiting stockholder action by written consent.

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It is possible that the provisions contained in our certificate ofincorporation and bylaws, the existence of super voting rights held by insidersand the ability of our board of directors to issue preferred stock withoutstockholder action may have the effect of delaying, deferring or preventing achange in control of our company without further action by the stockholders,may discourage bids for our common stock at a premium over the market price ofour common stock and may adversely affect the market price of our common stockand the voting and other rights of the holders of our common stock.

***Item 2. Unregistered Sales of Equity Securities and Use of Proceeds***

**(a)****          ****Sales of Unregistered Securities**

None.

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

On August 5, 2004, the Securities and Exchange Commission declaredeffective our Registration Statement on From S-1 (Reg. File No. 333-115331)under the Securities Act of 1933, as amended, in connection with the initialpublic offering of our common stock, par value $.0001 per share.  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.

In May 2005, we spent $1 million of the offering proceeds for theacquisition of the assets of Convergent Voice. In May 2006, we spent $8.7 million of the offering proceeds to acquireSalesnet, Inc. We currently intend to use the remaining proceeds for generalcorporate purposes as described in the prospectus for the offering.  Pending these uses, the net proceeds from theoffering are invested in short-term, interest-bearing, investment-gradesecurities.

**(c)****          ****Not applicable.**

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

None.

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

The 2007 annual meeting of shareholderswas held June 7, 2007.  The followingproposals were adopted as follows:

1.         Toelect three directors to serve for a three-year term ended at the 2010 annualmeeting of stockholders or until their successors are elected and qualified oruntil their earlier resignation and removal:

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|                   | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|
| Greg R. Gianforte |       | 31,069,494 |       | 403,911      |       |
| Gregory M. Avis   |       | 31,119,008 |       | 354,397      |       |
| Thomas W. Kendra  |       | 31,117,008 |       | 356,397      |       |

 

2.             To ratifythe appointment of KPMG LLP as the company’s independent registered publicaccounting firm for 2007:
| For     |   | 31,437,225 |
|---------|--------|------------|
| Against |   | 33,538     |
| Abstain |   | 2,642      |

 

3.             To approvean amendment to the 2004 Equity Incentive Plan to provide for an automaticannual option grant to the company’s lead director:
| For     |   | 18,698,774 |
|---------|--------|------------|
| Against |   | 9,519,401  |
| Abstain |   | 8,644      |

 

4.             To reapprovethe 2004 Equity Incentive Plan to preserve the company’s ability to deductcompensation that qualifies as performance-based compensation under Section162(M) of the Internal Revenue Code of 1986, as amended:
| For     |   | 28,053,258 |
|---------|--------|------------|
| Against |   | 163,047    |
| Abstain |   | 10,514     |

 

***Item 5.  OtherInformation.***

None.

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**Item 6.  Exhibits**

***Exhibits***

Theexhibits listed below are part of this Form 10-Q, unless otherwise indicated.
| Exhibit 3.1     | Amended and Restated Certificate of Incorporation of  the Registrant. Incorporated by reference to Exhibit 4.2                                                                                                                            |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            | to the Company’s registration statement of Form S-8  (File No. 333-118515) filed with the Securities and Exchange Commission on  August 24, 2004.                                                                                    |
| Exhibit 3.2     | Amended and Restated Bylaws of the Registrant.  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.   |
| Exhibit 10.26** | 2004 Equity Incentive Plan, as amended June 7, 2007.  Incorporated by reference to Exhibit 10.26 to the Company’s Current Report on  Form 8-K (File No. 000-31321) filed on June 13, 2007.                                           |
| Exhibit 10.27** | Forms of Notice of Grant of Stock Options and Stock  Option Agreements. Incorporated by reference to Exhibits 10.13, 10.14, and  10.15 to the Company’s Annual Report on Form 10-K (File No. 000-31321) filed  March 31, 2005.       |
| Exhibit 10.28** | Form of Incentive Stock Option Agreement.  Incorporated by reference to Exhibit 10.20 from the Company’s quarterly  report on Form 10-Q (File No. 000-31321) filed with the Securities and  Exchange Commission on May 10, 2006.     |
| Exhibit 10.29** | Form of Non-Incentive Stock Option Agreement.  Incorporated by reference to Exhibit 10.21 from the Company’s quarterly  report on Form 10-Q (File No. 000-31321) filed with the Securities and  Exchange Commission on May 10, 2006. |
| Exhibit 10.30** | Form of offer letter for Jason Mittelstaedt, Joseph  Brown, Steve Daines, and Michael Saracini, and schedule of omitted material  details thereto.                                                                                        |
| 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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**           Denotesmanagement contract or compensatory plan or arrangement.

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

Dated:  August 9, 2007

**RightNow Technologies, Inc.**

(Registrant)
| By:    |   | /s/ Susan J. Carstensen                      |   |
|--------|--------|----------------------------------------------|--------|
|   |   | Susan J. Carstensen                          |
|   |   | Chief Financial Officer, Vice President,     |
|   |   | Treasurer and Assistant Secretary            |
|   |   | (Principal Financial and Accounting Officer) |

 

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