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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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

#### ** **

#### ****

 
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2008**

 

**or**

 
| **£** | **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   Incorporation or Organization) |       | (I.R.S. Employer   Identification No.) |

 

**136 Enterprise Boulevard**

###### **Bozeman, Montana 59718-9300**

(Address of Principal Executive Offices) (Zip Code)

 

**(406) 522-4200**

(Registrant’s Telephone Number, Including Area Code)

 

**N/A**

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

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.      Yes x          No o

 

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

 

Large accelerated filer o                    Acceleratedfiler x

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

 

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

 

The number of shares outstanding of the registrant’s common stock,$0.001 par value, as of October  31, 2008was 33,504,041

 

 

 

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**RightNow Technologies, Inc.Quarterly Report on Form 10-Q**

 

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

 

**INDEX**

 
| ** **                                                                                                 | **Page**                   |
|------------------------------------------------------------------------------------------------------------|----------------------------|
| **Part I.**                                                                                           | **FINANCIAL  INFORMATION** | 3 |
| Item  1.  Financial Statements                                                                   | 3                          |
|                                                                                                       | a)                         | Condensed consolidated  balance sheets (unaudited) | 3 |
|                                                                                                       | b)                         | Condensed consolidated  statements of operations (unaudited) | 4 |
|                                                                                                       | c)                         | Condensed consolidated  statements of cash flows (unaudited) | 5 |
|                                                                                                       | d)                         | Notes to  condensed consolidated financial statements (unaudited) | 6 |
|                                                                                                       |                       |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations | 17                         |
|                                                                                                       |                       |
| Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                  | 32                         |
|                                                                                                       |                       |
| Item 4. Controls and Procedures                                                                            | 33                         |
|                                                                                                       |                       |
| **Part II.**                                                                                          | **OTHER  INFORMATION**     | 34 |
| Item  1.  Legal Proceedings                                                                           | 34                         |
|                                                                                                       |                       |
| Item  1A.  Risk Factors                                                                               | 34                         |
|                                                                                                       |                       |
| Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                 | 51                         |
|                                                                                                       |                       |
| Item  3.  Defaults Upon Senior Securities                                                             | 52                         |
|                                                                                                       |                       |
| Item 4.   Submission of Matters to a Vote of Security Holders                                         | 52                         |
|                                                                                                       |                       |
| Item  5.  Other Information                                                                           | 52                         |
|                                                                                                       |                       |
| Item 6.  Exhibits                                                                                          | 53                         |
|                                                                                                       |                       |
| **SIGNATURES**                                                                                             | 54                         |

 

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**Part I.  FINANCIAL INFORMATION**

 

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

##### ** **

**RightNow Technologies, Inc.**

**Condensed Consolidated Balance Sheets**

(In thousands) (Unaudited)

 
| ** **                                           | ** ** | **December  31, 2007** | ** ** | **September  30, 2008** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **Assets**                                           | ** ** | ** **             | ** ** | ** **              | ** ** |
| Cash and cash equivalents                            |       | $                      | 43,681     |                    | $          | 51,145 |   |
| Short-term investments                               |       | 52,644                 |       | 46,444                  |       |
| Accounts receivable                                  |       | 29,480                 |       | 27,820                  |       |
| Term receivables, current                            |       | 13,069                 |       | 6,875                   |       |
| Allowance for doubtful accounts                      |       | (1,918                 | )          | (2,148                  | )          |
| Receivables, net                                     |       | 40,631                 |       | 32,547                  |       |
| Deferred commissions                                 |       | 3,336                  |       | 4,493                   |       |
| Prepaid and other current assets                     |       | 2,643                  |       | 3,004                   |       |
| Total current assets                                 |       | 142,935                |       | 137,633                 |       |
|                                                 |       |                   |       |                    |       |
| Long-term investments                                |       | —                 |       | 4,612                   |       |
| Property and equipment, net                          |       | 10,856                 |       | 10,377                  |       |
| Term receivables, non-current                        |       | 9,859                  |       | 4,420                   |       |
| Intangible assets, net                               |       | 7,996                  |       | 6,803                   |       |
| Deferred commissions, non-current                    |       | 1,680                  |       | 2,557                   |       |
| Other                                                |       | 460                    |       | 908                     |       |
| **Total Assets**                                     |       | $                      | 173,786    |                    | $          | 167,310 |   |
|                                                 |       |                   |       |                    |       |
| **Liabilities and Stockholders’  Equity**       | ** ** | ** **             | ** ** | ** **              | ** ** |
| Accounts payable                                     |       | $                      | 4,386      |                    | $          | 5,329 |   |
| Commissions and bonuses payable                      |       | 5,044                  |       | 4,351                   |       |
| Other accrued liabilities                            |       | 11,404                 |       | 12,076                  |       |
| Current portion of long-term debt                    |       | 43                     |       | 45                      |       |
| Current portion of deferred revenue                  |       | 76,995                 |       | 72,008                  |       |
| Total current liabilities                            |       | 97,872                 |       | 93,809                  |       |
|                                                 |       |                   |       |                    |       |
| Long-term debt, less current portion                 |       | 68                     |       | 34                      |       |
| Deferred revenue, net of current portion             |       | 37,665                 |       | 37,201                  |       |
|                                                 |       |                   |       |                    |       |
| Stockholders’ equity:                           |       |                   |       |                    |       |
| Common stock                                         |       | 33                     |       | 34                      |       |
| Additional paid-in capital                           |       | 95,377                 |       | 101,337                 |       |
| Accumulated other comprehensive loss                 |       | (292                   | )          | (193                    | )          |
| Accumulated deficit                                  |       | (56,937                | )          | (64,912                 | )          |
| Total stockholders’ equity                      |       | 38,181                 |       | 36,266                  |       |
| **Total Liabilities and  Stockholders’ Equity** |       | $                      | 173,786    |                    | $          | 167,310 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements of Operations**

(Inthousands, except per share amounts) (Unaudited)

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                   | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue:                        |       |                                       |       |                                      |       |   |   |   |   |
| Software, hosting and support   |       | $                                          | 22,366     |                                      | $          | 25,956 |   | $ | 62,878 |   | $ | 76,085 |   |
| Professional services           |       | 6,880                                      |       | 10,281                                    |       | 18,535 |   | 28,271 |   |
| Total revenue                   |       | 29,246                                     |       | 36,237                                    |       | 81,413 |   | 104,356 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Cost of revenue:                |       |                                       |       |                                      |       |   |   |   |   |
| Software, hosting and support   |       | 4,604                                      |       | 5,305                                     |       | 13,563 |   | 15,383 |   |
| Professional services           |       | 5,667                                      |       | 8,133                                     |       | 15,874 |   | 23,228 |   |
| Total cost of revenue           |       | 10,271                                     |       | 13,438                                    |       | 29,437 |   | 38,611 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Gross profit                    |       | 18,975                                     |       | 22,799                                    |       | 51,976 |   | 65,745 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Operating expenses:             |       |                                       |       |                                      |       |   |   |   |   |
| Sales and marketing             |       | 16,516                                     |       | 16,889                                    |       | 48,031 |   | 51,334 |   |
| Research and development        |       | 4,308                                      |       | 4,671                                     |       | 12,947 |   | 13,664 |   |
| General and administrative      |       | 2,680                                      |       | 3,215                                     |       | 8,718 |   | 10,621 |   |
| Total operating expenses        |       | 23,504                                     |       | 24,775                                    |       | 69,696 |   | 75,619 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Loss from operations            |       | (4,529                                     | )          | (1,976                                    | )          | (17,720 | ) | (9,874 | ) |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Interest and other income, net  |       | 1,004                                      |       | 552                                       |       | 2,717 |   | 2,009 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Loss before income taxes        |       | (3,525                                     | )          | (1,424                                    | )          | (15,003 | ) | (7,865 | ) |
| Provision for income taxes      |       | (59                                        | )          | (23                                       | )          | (324 | ) | (110 | ) |
| Net loss                        |       | $                                          | (3,584     | )                                         | $          | (1,447 | ) | $ | (15,327 | ) | $ | (7,975 | ) |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Net loss per share:             |       |                                       |       |                                      |       |   |   |   |   |
| Basic                           |       | $                                          | (0.11      | )                                         | $          | (0.04 | ) | $ | (0.46 | ) | $ | (0.24 | ) |
| Diluted                         |       | $                                          | (0.11      | )                                         | $          | (0.04 | ) | $ | (0.46 | ) | $ | (0.24 | ) |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Shares used in the computation: |       |                                       |       |                                      |       |   |   |   |   |
| Basic                           |       | 33,094                                     |       | 33,640                                    |       | 32,979 |   | 33,585 |   |
| Diluted                         |       | 33,094                                     |       | 33,640                                    |       | 32,979 |   | 33,585 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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** **

**RightNow Technologies, Inc.**

**Condensed Consolidated Statements of Cash Flows**

(Inthousands) (Unaudited)

 
| ** **                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                  | ** ** | **2008** | ** ** |
| **Operating activities:**                                            | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net loss                                                             |       | $                                         | (15,327    | ) | $ | (7,975 | ) |
| Non-cash adjustments:                                                |       |                                      |       |   |   |
| Depreciation and amortization                                        |       | 5,424                                     |       | 5,866 |   |
| Provision for losses on accounts receivable                          |       | 345                                       |       | 179 |   |
| Stock-based compensation                                             |       | 4,501                                     |       | 4,695 |   |
| Changes in operating accounts:                                       |       |                                      |       |   |   |
| Receivables                                                          |       | 30,584                                    |       | 12,652 |   |
| Prepaid expenses                                                     |       | (999                                      | )          | (654 | ) |
| Deferred commissions                                                 |       | (2,887                                    | )          | (2,170 | ) |
| Accounts payable                                                     |       | (192                                      | )          | 1,061 |   |
| Commissions and bonuses payable                                      |       | (1,219                                    | )          | (615 | ) |
| Other accrued liabilities                                            |       | 2,839                                     |       | 1,016 |   |
| Deferred revenue                                                     |       | (9,013                                    | )          | (2,999 | ) |
| Other                                                                |       | (140                                      | )          | (142 | ) |
| Cash provided by operating activities                                |       | 13,916                                    |       | 10,914 |   |
|                                                                 |       |                                      |       |   |   |
| **Investing activities:**                                            | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net change in investments                                            |       | (17,696                                   | )          | 996 |   |
| Acquisition of property and equipment                                |       | (4,764                                    | )          | (4,344 | ) |
| Other                                                                |       | (60                                       | )          | (25 | ) |
| Cash used in investing activities                                    |       | (22,520                                   | )          | (3,373 | ) |
|                                                                 |       |                                      |       |   |   |
| **Financing activities:**                                            | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock under  employee benefit plans |       | 1,688                                     |       | 1,266 |   |
| Excess tax benefits of stock options exercised                       |       | 228                                       |       | — |   |
| Payments on long-term debt                                           |       | (25                                       | )          | (33 | ) |
| Cash provided by financing activities                                |       | 1,891                                     |       | 1,233 |   |
|                                                                 |       |                                      |       |   |   |
| Effect of foreign exchange rates on cash and cash  equivalents       |       | 614                                       |       | (1,310 | ) |
|                                                                 |       |                                      |       |   |   |
| Increase (decrease) in cash and cash equivalents                     |       | (6,099                                    | )          | 7,464 |   |
|                                                                 |       |                                      |       |   |   |
| Cash and cash equivalents at beginning of period                     |       | 39,208                                    |       | 43,681 |   |
| Cash and cash equivalents at end of period                           |       | $                                         | 33,109     |   | $ | 51,145 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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** **

**RightNow Technologies, Inc.**

**Notes to Condensed Consolidated Financial Statements**

(Unaudited)

 

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

** **

***Business Description***

*** ***

RightNowTechnologies, Inc. (the “Company” or “RightNow”) provides customer experiencemanagement software solutions for companies of all sizes. The Company’s ondemand software is designed to help companies improve their customerexperiences while reducing operating costs. RightNow’s solutions go beyondtraditional customer relationship management (“CRM”) solutions to support abusiness’ external customer-facing channels as well as sales, marketing andcustomer service operations. Founded in 1997, RightNow is headquartered inBozeman, Montana, with additional offices in North America, Europe, Asia, andAustralia. The Company operates in one segment, which is the customerexperience management market.

 

***Basis of Presentation***

*** ***

The accompanyingcondensed interim consolidated financial statements are unaudited. Thesefinancial statements and notes should be read in conjunction with the auditedconsolidated financial statements and related notes, together with management’sdiscussion and analysis of financial condition and results of operations,contained in the Company’s Annual Report on Form 10-K for the year ended December 31,2007.

 

The accompanying interimcondensed consolidated financial statements have been prepared in accordancewith United States generally accepted accounting principles. In the opinion ofmanagement, the interim condensed consolidated financial statements and noteshave been prepared on the same basis as the audited consolidated financialstatements in the Annual Report on Form 10-K necessary for the fairpresentation of the Company’s financial position at September 30, 2008,and results of operations for the three and nine month periods ended September 30,2007 and 2008, and cash flows for the nine month period ended September 30,2007 and 2008. This includes all adjustments (consisting of only normalrecurring adjustments) necessary for the fair presentation of the Company’sfinancial position. The interim period results are not necessarilyindicative of the results to be expected for the full year

 

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

 

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***(2) CertainRisks and Concentrations***

*** ***

TheCompany’s revenue is derived from the subscription, license, hosting andsupport of its software products and provision of related professionalservices. The markets in which the Company competes are highly competitive andrapidly changing. Significant technological changes, changes in customerrequirements, or the emergence of competitive products with new capabilities ortechnologies could adversely affect the Company’s operating results. TheCompany has historically derived a majority of its revenue from customerservice software solutions. These products are expected to continue to accountfor a significant portion of revenue for the foreseeable future. As a result ofthis revenue concentration, the Company’s business could be harmed by a declinein demand for, or in the prices of, these products or as a result of, amongother factors, any change in pricing model, a maturation in the markets forthese products, increased price competition or a failure by the Company to keepup with technological change.

 

Financialinstruments subjecting the Company to concentrations of credit risk consistprimarily of cash and cash equivalents, short and long-term investments, andaccounts and term receivables. The Company maintains cash, cash equivalents,and short and long-term investments with various domestic and foreign financialinstitutions. From time to time, the Company’s cash balances with its financialinstitutions may exceed deposit insurance limits. Short and long-terminvestments are investment grade, interest-earning securities, and arediversified by type and industry. A portion of short and the entire long-terminvestments consist of approximately $12.1 million par value auction ratesecurities as further described in Note 7.

 

The Company’s customersare worldwide with historical sales of approximately 70% to 75% in the UnitedStates, 20% to 25% in Europe and 5% to 8% in Asia Pacific. No individualcustomer accounted for more than 10% of the Company’s revenue in 2007 or thethree and nine months ended September 30, 2008. One customer represented12% of term receivables at December 31, 2007 and the same one customerrepresented 19% of term receivables at September 30, 2008. No individualcustomer accounted for more than 10% of the Company’s accounts receivable at December 31,2007 and September 30, 2008.

 

As of December 31,2007 and September 30, 2008, assets located outside the United States were14% and 13% of total assets, respectively. The loss from operations outside ofthe United States totaled $8.6 million and $1.1 million for the nine monthsended September 30, 2007 and 2008, respectively. Revenue by geographicalregion follows (in thousands):

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2007**                                   | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2008** | ** ** |
|           |       |                                       |       |                                      |       |   |   |   |   |
| United  States |       | $                                          | 20,687     |                                      | $          | 25,187 |   | $ | 58,067 |   | $ | 70,928 |   |
| Europe         |       | 5,958                                      |       | 8,082                                     |       | 16,638 |   | 25,024 |   |
| Asia  Pacific  |       | 2,601                                      |       | 2,968                                     |       | 6,708 |   | 8,404 |   |
|           |       | $                                          | 29,246     |                                      | $          | 36,237 |   | $ | 81,413 |   | $ | 104,356 |   |

 

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***(3) RevenueRecognition***

*** ***

TheCompany earns its revenues from the delivery of software, hosting, and supportservices, and from the delivery of professional services. Software, hosting andsupport services are sold under subscription arrangements and licensearrangements. In 2007, the Company essentially discontinued sales of perpetuallicenses. Hosting and support services involve the remote management ofsoftware, technical assistance, and unspecified product upgrades andenhancements on a when and if available basis. Professional services includeconsulting, training and development services.

 

TheCompany recognizes revenue for subscriptions and licenses when all of thefollowing 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 customer; c) the Company’s fee for providingthe software and services is fixed or determinable; and d) collection ofthe Company’s fee is probable.

 

Subscriptionsinclude access to the Company’s software through its hosting services,technical support, and product upgrades when and if available, all for abundled fee. The Company accounts for subscriptions in accordance with EmergingIssues Task Force Issue No. 00-21, *RevenueArrangements with Multiple Deliverables* (“EITF 00-21”). UnderEITF 00-21, value is allocated to each deliverable of an arrangement usingprices established when the elements are sold stand-alone. Stand-alone salesare evidenced by subscription renewals and by rates charged for consulting,education, and development services in stand-alone transactions. Thearrangement fee is then allocated to the individual elements based on theirrelative fair values. Revenue for subscriptions are recognized ratably over thecontractual period and professional services are recognized as incurredprovided the above criteria have been met.

 

Underthe Company’s subscription contracts, the Company applies EITF 00-21 asopposed to Statement of Position 97-2, *SoftwareRevenue Recognition* (“SOP 97-2”) as the customer does not havethe right to take possession of the software without incurring a significantincremental penalty. In accordance with Emerging Issues Task Force Issue No. 00-03,*Application of AICPA Statement ofPosition 97-2, Software Revenue Recognition, to Arrangements That Includethe Right to Use Software Stored on Another Entity’s Hardware* (“EITF 00-03”),such arrangements are considered service contracts and are not within the scopeof SOP 97-2.

 

Priorto 2007, the majority of the Company’s revenues were earned under licensearrangements. Revenue under these arrangements is recognized pursuant to therequirements of Statement of Position (SOP) 97-2, *Software Revenue Recognition*, and SOP 98-9,Modification of SOP 97-2, *SoftwareRevenue Recognition With Respect to Certain Transactions*, issued bythe American Institute of Certified Public Accountants. Licenses generallyinclude the same elements as subscriptions, plus the right to take possessionof the software for no additional fee and are sold for a period of time (a “term”license) or perpetually. Term contracts are non-cancelable, and generally covera period of two years, but can range from a period of six months to five years.For term contracts, the Company treats the software license, hosting andsupport services as a single element (“term license bundle”) for purposes ofallocating revenue. The Company has established vendor specific objectiveevidence of fair value for the term license bundle based on stand-alone salesof the bundled items. When sold with professional services, revenue isallocated between the software license, hosting and support element and theprofessional services element using the relative fair value method. Revenue forthe term license element is recognized ratably over the

 

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period of the arrangement andrevenue for professional services in these arrangements is recognized asperformed.

 

Salesof perpetual software licenses include hosting and support services for aperiod of time, typically one year. The Company has established vendor specificobjective evidence for the combined element of hosting and support elements ofperpetual license sales, based on the prices charged when sold separately.Accordingly, revenue for the perpetual software license element is determinedusing the residual method and is recognized upon delivery. Revenue for thehosting and support elements is recognized ratably over the contractual timeperiod.

 

TheCompany’s policy is to record revenue net of any applicable sales, use orexcise taxes.

 

Ifan arrangement includes a right of acceptance or a right to cancel, revenue isrecognized when acceptance is received or the right to cancel has expired. Ifthe fee for the license has any payment term that is due in excess of theCompany’s normal payment terms (over 90 days), the fee is considered tonot be fixed or determinable, and the amount of revenue recognized (a) forperpetual license arrangements, is limited to the amount currently due from thecustomer, or (b) for term license or subscription arrangements, is limitedto the lesser of the amount currently due from the customer or a ratableportion of the total unallocated arrangement fee.

 

Certaincustomers have license agreements that provide for usage fees above fixedminimums. Usage of the Company’s software requires additional fees if used bymore than a specified number of users or for more than a specified number ofinteractions. Fixed minimums are recognized as revenue ratably over the term ofthe arrangement. Usage fees above fixed minimums are recognized as revenue whensuch amounts are known and billed.

 

Separatecontracts with the same customer that are entered into at or near the same timeare generally presumed to have been negotiated together and are combined andaccounted for as a single arrangement.

 

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

 

**(4)  Sales Commissions**

 

Beginningin 2007, in conjunction with the Company’s business model change, salescommissions paid for subscriptions are deferred and charged to expense inproportion to the revenue recognized. Sales incentives paid for licenses andprofessional services are expensed when earned, which is typically at the timethe related sale is invoiced. Sales incentive expense was $2.8 million for thethree months ended September 30, 2007 and 2008, respectively.  The Company recorded a $260,000 deferred salescommission adjustment that resulted in a decrease in commission expense for thethree months ended September 30, 2008. The adjustment should have been recordedduring the quarters ended March 31, 2008 and June 30, 2008 and does not impactthe results of operations for the nine months ended September 30, 2008. TheCompany believes the amount to be immaterial to both the current quarter andprevious two quarters.  Sales incentiveexpense was $7.0 million and $9.8 million for the nine months ended September 30,2007 and 2008, respectively. Deferred commissions were $5.0 million and $7.1million at December 31, 2007 and September 30, 2008, respectively.

 

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**(5) Net Loss Per Share**

 

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

 
| ** **                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                   | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average common shares outstanding for  basic net loss per share |       | 33,094                                     |       | 33,640                                    |       | 32,979 |   | 33,585 |   |
| Effect of dilutive securities:                                           |       |                                       |       |                                      |       |   |   |   |   |
| Employee stock options                                                   |       | —                                     |       | —                                    |       | — |   | — |   |
| Weighted average shares outstanding for dilutive  net loss per share     |       | 33,094                                     |       | 33,640                                    |       | 32,979 |   | 33,585 |   |

 

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

 
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **             | ** ** | **2007**                                   | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2008** | ** ** |
|                   |       |                                       |       |                                      |       |   |   |   |   |
| Employee stock options |       | 4,002                                      |       | 4,559                                     |       | 4,002 |   | 4,559 |   |

 

**(6) Comprehensive Loss**

 

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

 
| ** **                                        | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                              |       |                                        |       |                                       |       |   |   |   |   |
| Net  loss                                         |       | $                                           | (3,584     | )                                          | $          | (1,447 | ) | $ | (15,327 | ) | $ | (7,975 | ) |
| Other  comprehensive income (loss):               |       |                                        |       |                                       |       |   |   |   |   |
| Unrealized  gain (loss) on short-term investments |       | 57                                          |       | (227                                       | )          | 60 |   | (201 | ) |
| Unrealized  gain (loss) on long-term investments  |       | —                                      |       | 35                                         |       | — |   | (390 | ) |
| Foreign  currency translation adjustments         |       | (101                                        | )          | 785                                        |       | (279 | ) | 690 |   |
| Comprehensive  loss                               |       | $                                           | (3,628     | )                                          | $          | (854 | ) | $ | (15,546 | ) | $ | (7,877 | ) |

 

**(7)  Fair Value**

 

EffectiveJanuary 1, 2008, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 157, *FairValue Measurements*(“SFAS157”).**In February 2008, theFinancial Accounting Standards Board (FASB) issued Staff Position No. SFAS157-2, “Effective Date of FASB Statement No. 157,” which provides a oneyear deferral of the effective date of

 

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SFAS 157 for non-financial assets and non-financialliabilities, except those that are recognized or disclosed in the financialstatements at fair value at least annually. Therefore, the Company has adoptedthe provisions of SFAS 157 with respect to its financial assets and liabilitiesonly. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, andenhances disclosures about fair value measurements. Fair value is defined underSFAS 157 as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Valuation techniques used to measure fairvalue under SFAS 157 must maximize the use of observable inputs and minimizethe use of unobservable inputs. The standard describes a fair value hierarchybased on three levels of inputs, of which the first two are consideredobservable and the last unobservable, that may be used to measure fair value,which are the following:

 

·                  Level 1 – Quoted prices in active markets foridentical assets or liabilities.

 

·                  Level 2 – Inputs other than Level 1 that areobservable, either directly or indirectly, such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

·                  Level 3 – Unobservable inputs that aresupported by little or no market activity and that are significant to the fairvalue of the assets or liabilities.

 

Theadoption of this statement did not have a material impact on the Company’sconsolidated results of operations and financial condition.

 

Inaccordance with SFAS 157, the following table represents the Company’s fairvalue hierarchy for its financial assets (cash equivalents and investments)measured at fair value on a recurring basis as of September 30, 2008 (inthousands):

 
| ** **                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Money Market funds                |       | $           | 15,146     |        |       |        |       |      | $          | 15,146 |   |
| Commercial paper                  |       |        |       | $           | 11,971     |        |       |      | $          | 11,971 |   |
| Corporate notes and bonds         |       |        |       | 9,113       |       |        |       | $         | 9,113      |   |
| U.S. Government agency securities |       |        |       | 26,225      |       |        |       | $         | 26,225     |   |
| State and Municipal securities    |       |        |       | 6,730       |       | 4,612       |       | $         | 11,342     |   |
| Auction rate preferred stocks     |       |        |       |        |       | 7,100       |       | $         | 7,100      |   |
|                              |       | $           | 15,146     |        | $          | 54,039      |       | $         | 11,712     |   | $ | 80,897 |   |
|                                   |            |             |            |             |            |             |            |           |            |  |  |  |  |

 

Note: The Company has$21,304 of cash as of September 30, 2008, which was not classified as aLevel as prescribed within SFAS 157.

 

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Thefollowing table illustrates the activity of “level 3” assets from June 30,2008 to September 30, 2008 (in thousands):

 
| Fair  Value at June 30, 2008      |   | $    | 11,925 |   |
|----------------------------------------|--------|------|--------|--------|
| Unrealized  Loss adjustment            |   | 35   |   |
| Redemptions                            |   | (248 | )      |
| Fair  Value at September 30, 2008 |   | $    | 11,712 |   |

 

Asof September 30, 2008, assets characterized as “level 3” for fair valuepurposes consist of approximately $12.1 million in par value auction rate stateand municipal securities and auction rate preferred stocks with investmentgrades of AAA or AA. The auction rate state and municipal securities arecomprised of federally insured student loan bonds, and the auction ratepreferred securities are comprised of preferred shares of closed end mutualfunds.

 

Auctionrate securities are long-term bonds or preferred stocks that act likeshort-term debt, where interest rates reset in Dutch auctions held daily,weekly, or monthly and have historically provided liquidity for theseinvestments. Despite the long-term contractual maturities of the underlyingsecurities, all of these securities were considered available for sale and wereavailable to fund the Company’s current operations as of December 31,2007. Since February 2008, uncertainties in the credit markets causedsubstantially all auctions of these securities held by the Company to beunsuccessful. An unsuccessful auction is an event when there are fewersecurities bid for than are available for sale. Upon an unsuccessful auction,the interest rate is reset at a predetermined rate. Given that substantiallyall of the auctions have been unsuccessful since February 2008, theCompany reclassified the investments from short-term to long-term, and recordeda temporary impairment valuation adjustment of approximately $390,000 inaccumulated other comprehensive loss at September 30, 2008. Ourdetermination of fair value was based upon broker statements, assumed riskpremiums, and assumed work out periods, using a discounted cash flow model.

 

TheCompany’s management believes that the unrealized losses are temporary, and ithas the ability and intent to hold the investments until substantially all ofthe cost of the investment is recovered. The Company believes the impairment istemporary due primarily to the following:

 

·                  The credit quality of the underlyingsecurities.

 

·                  $5.85 million and $248,000 of the auctionrate securities held by the Company were redeemed at par by the issuers in thesecond quarter and third quarter of 2008, respectively.

 

·                  During the third quarter of 2008, the Companywas notified by its brokers that its auction rate securities will be redeemedat par. The notification indicates that $7.1 million of auction rate preferredstocks are scheduled to be redeemed at par in the fourth quarter of 2008. Dueto the notification of redemption these auction rate preferred stocks werereclassified from long-term to short-term as of September 30, 2008. Theremaining redemption schedule is expected to span from June 30, 2010 to July 2,2012.

 

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Todate, the Company has collected all interest payments on all of the auctionrate securities when due.  If the auctionrate securities continue to experience unsuccessful auctions, if the creditrating of the auction rate securities deteriorates, or if the brokerage housesdeclare redemption default, the Company may be required to realize animpairment charge as “other than temporary.” While the recent auction failures will limit the Company’s ability toliquidate the remainder of these investments for some period of time, theCompany does not believe the auction failures will materially impact itsability to fund its working capital needs, capital expenditures, or otherbusiness requirements. The Company will continue to monitor the state of thecredit markets and its potential impact, if any, on the fair value andclassification of its portfolio of auction rate securities.

 

**(8) Stock-Based Compensation**

 

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 table illustrates the stock-basedcompensation expense resulting from stock-based awards included in thecondensed consolidated statement of operations (amounts in thousands):

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Stock-based compensation expense: |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of software, hosting and support       |       | $                                                    | 84         |                                                | $          | 87 |   | $ | 221 |   | $ | 243 |   |
| Cost of professional services               |       | 217                                                  |       | 158                                                 |       | 491 |   | 476 |   |
| Sales and marketing expenses                |       | 542                                                  |       | 738                                                 |       | 1,931 |   | 1,871 |   |
| Research and development expenses           |       | 166                                                  |       | 252                                                 |       | 681 |   | 729 |   |
| General and administrative expenses         |       | 199                                                  |       | 297                                                 |       | 1,177 |   | 1,376 |   |
| Stock-based compensation expense            |       | $                                                    | 1,208      |                                                | $          | 1,532 |   | $ | 4,501 |   | $ | 4,695 |   |

 

No stock-basedcompensation expense was capitalized during the three or nine months ended September 30,2007 or 2008.

 

Unrecognized compensationexpense of outstanding stock options at September 30, 2008 wasapproximately $13.4 million, which is expected to be recognized over a weightedaverage 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:

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **           | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Fair value per share |       | $                                                    | 6.22       |                                                | $          | 6.57 |   | $ | 7.33 |   | $ | 5.62 |   |
| Risk free rate       |       | 4.3                                                  | %          | 2.78                                                | %          | 4.7 | % | 2.69 | % |
| Expected term        |       | 4.5 yrs                                              |       | 4.3 yrs                                             |       | 4.1 yrs |   | 4.5 yrs |   |
| Volatility           |       | 51                                                   | %          | 54                                                  | %          | 53 | % | 55 | % |
| Dividend yield       |       | 0                                                    | %          | 0                                                   | %          | 0 | % | 0 | % |
|                      |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

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

 

*Volatility*: The Company’s estimate of expectedvolatility is based on a combination of the Company’s historical volatility andpeer-company volatilities. The Company believes the combined data points aremore representative of future stock price trends than its historical volatilityalone.

 

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

 

Activity under theCompany’s stock option plans for the nine months ended September 30, 2008was as follows (option shares in thousands):

 
| ** **                                             | ** ** | **Shares  available  for grant** | ** ** | **Outstanding  options** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Aggregate  intrinsic  value (in  thousands)** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Balance at December 31, 2007                      |       | 3,404                                 |       | 3,874                    |       | $                                                      | 11.81      |                                                 |       |                                                                     |       |   |
| Annual reserve addition (1)                            |       | 1,000                                 |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Granted                                                |       | (1,234                                | )          | 1,234                    |       | 11.97                                                  |       |                                                 |       |                                                                     |       |
| Exercised                                              |       | —                                |       | (203                     | )          | 5.66                                                   |       |                                                 |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled  (2)         |       | 343                                   |       | (345                     | )          | 14.49                                                  |       |                                                 |       |                                                                     |       |
| Balance at September 30, 2008                     |       | 3,513                                 |       | 4,559                    |       | $                                                      | 11.93      |                                                 | $          | 10,680                                                                   |       | 7.14 |   |
|                                                   |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Vested or expected to vest at  September 30, 2008 |       |                                  |       | 4,272                    |       | $                                                      | 11.82      |                                                 | $          | 10,473                                                                   |       | 7.01 |   |
|                                                   |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Exercisable at September 30, 2008                 |       |                                  |       | 2,535                    |       | $                                                      | 10.40      |                                                 | $          | 9,309                                                                    |       | 5.87 |   |

 

----

| (1)    |   | The 2004 Equity Incentive Plan provides for  an automatic, annual increase on the first of each year in an amount equal to  the lesser of: a) 1,000,000 shares; b) 4% of the number of outstanding 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  been approved by shareholders through December 31, 2014. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (2)    |   | Shares forfeited, expired, exchanged or  canceled under the 1998 Long-Term Equity Incentive and Stock Option Plan are  not available for re-grant under the 2004 Equity Incentive Plan.                                                                                                                                                                                                                                            |

 

The total intrinsic valueof options exercised during the nine months ended September 30, 2007 and2008 was $5.0 million and $1.6 million, respectively.

 

From time to time, theCompany may grant options to purchase stock to consultants.  The Company accounts for consultant stockoptions in accordance with SFAS 123 and Emerging

 

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Issues Task ForceConsensus Issue No. 96-18 (“EITF 96-18”), *Accountingfor Equity Instruments that are Issued to Other Than Employees for Acquiring,or in Conjunction With Selling, Goods or Services*.  Compensation expense for the grant of stockoptions to consultants is determined based on the estimated fair value of thestock options at the measurement date as defined in EITF 96-18 and isrecognized over the vesting period. There were no stock options granted to non-employees for the nine monthsended September 30, 2007 or 2008.

 

**(9)**                     Commitments and Contingencies

** **

***Warranties and Indemnification***

*** ***

The Company’s on demand application service istypically warranted to perform in accordance with its user documentation.

 

The Company’s arrangements generally include certainprovisions for indemnifying customers against liabilities if its products orservices infringe a third-party’s intellectual property rights.  To date, the Company has not incurred anymaterial costs as a result of such indemnifications and has not accrued anyliabilities related to such obligations in the accompanying consolidatedfinancial statements.

 

The Company has entered into service level agreementswith a number of its customers warranting certain levels of uptime reliabilityand permitting those customers to receive credits or terminate their licenseagreements in the event that the Company fails to meet those levels.  To date, the Company has not provided anymaterial credits, or cancelled any agreements related to these service levelagreements.

 

The Company has also agreed to indemnify its directorsand executive officers for costs associated with any fees, expenses, judgments,fines and settlement amounts incurred by any of these persons in any action orproceeding to which any of those persons is, or is threatened to be, made aparty by reason of the person’s service as a director or officer, including anyaction by the Company, arising out of that person’s services as the Company’sdirector or officer or that person’s services provided to any other company orenterprise at the Company’s request.

 

***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.

 

**(10)**              Income Taxes

** **

As of December 31, 2007and September 30, 2008, the Company had an insignificant amount ofunrecognized tax benefits, none of which would materially affect its effectivetax rate if recognized.  The Company doesnot expect that the amount of unrecognized tax benefits will significantlyincrease or decrease within the next twelve months.  The Company’s policy is to recognize interestand penalties on unrecognized tax benefits as interest expense and otherexpense, respectively, in its Consolidated Statements of Operations.  The amount of interest and penalties for thethree and nine months ended September 30, 2008 was insignificant.  Tax years beginning in 2004 are subject toexamination by taxing authorities, although net operating loss

 

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and credit carryforwards fromall years are subject to examinations and adjustments for at least three yearsfollowing the year in which the attributes are used. The jurisdictions thatremain subject to examination include the U.S., Montana, California, NewJersey, Illinois, United Kingdom, Germany, Australia, Japan, Canada, and theNetherlands.

 

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

 

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

 

***Cautionary Statement***

 

*All statements included or incorporated by reference in thisreport, other than statements or characterizations of historical fact, areforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements are based onour current expectations, estimates and projections about our industry,management’s beliefs, and certain assumptions made by us, all of which aresubject to change. Forward-looking statements can often be identified by wordssuch as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,”“estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,”“ongoing,” similar expressions, and variations or negatives of these words, andinclude, but are not limited to, statements regarding projected results ofoperations, market acceptance and performance of our products, our ability toretain and hire key executives, sales and technical personnel and otheremployees in the numbers, with the capabilities, and at the compensation levelsneeded to implement our business and product plans, the competitive nature ofand anticipated growth in our markets, our accounting estimates, assumptionsand judgments, and management’s future strategic plans. These forward-lookingstatements are not guarantees of future results and are subject to risks,uncertainties and assumptions that are difficult to predict and that couldcause our actual results to differ materially and adversely from thoseexpressed in any forward-looking statement. The risks and uncertaintiesreferred to above include, but are not limited to, our business model; ourability to develop or acquire, introduce, market and gain market acceptance fornew products and enhancements to existing products in a cost-effective andtimely manner; the ability to gain and retain key customers; competitivepressures and other similar factors such as the availability and pricing ofcompeting products and technologies and the resulting effects on sales andpricing of our products; the rate at which our present and future customersadopt our existing and future products and services; our ability to expand orcontract operations; possible fluctuations in our operating results includingour revenue mix and our rate of growth; the credit markets and potential impacton the recoverability of our portfolio of auction rate securities; anyunanticipated ambiguities in fair value accounting standards; fluctuations inforeign currency exchange; fluctuations in our operating results from the impactof stock-based compensation expense; our ability to manage and expand ourpartner relationships; the amount and timing of any stock repurchases under ourstock repurchase program; interruptions or delays in our hosting operations;breaches of our security measures; our ability to hire, retain and motivate ouremployees and manage our growth; general economic conditions; the impact ofpotential acquisitions, if any; and various other factors, some of which aredescribed under the section below entitled “Risk Factors,” in Part II,Item 1A of this report. These forward-looking statements speak only as ofthe date of this report. We undertake no obligation to revise or updatepublicly any forward-looking statement for any reason, except as otherwiserequired by law.*

 

***Overview***

*** ***

We are a leading provider ofcustomer experience management software solutions for companies of allsizes.   Our on demand software isdesigned to go beyond traditional customer relationship management (“CRM”)solutions to help companies improve their customer experiences, while reducingoperating costs.  Our software solutionssupport a business’s external customer-facing channels as well as sales,marketing and customer service operations.

 

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We released our initialversion of RightNow Service TM in 1997. This product addressed the new customer service needs resulting from theincreasing use of the Internet as a customer service channel.  Since then, we have significantly enhancedproduct features and functionality to address customer service needs acrossmultiple communication channels, including web, interactive voice, email, chat,telephone and proactive outbound email communications. We have also addedseveral products that are complementary to our RightNow Service solution,including RightNow Marketing TM, RightNow Sales TM and RightNow Feedback TM whichautomate aspects of marketing campaigns, sales operations, and customermonitoring.  In February 2007, wereleased RightNow 8, our newest enterprise-class solution for service, salesand marketing.  To date, approximately80% to 90% of our revenue has been generated by the RightNow Service suite.

 

We have approximately 1,900customers worldwide as of September 30, 2008, and our products served morethan 576 and 1,516 million customer interactions, or unique sessions hosted byour solutions, during the three and nine months ended September 30, 2008,respectively.  We distribute oursolutions primarily through direct sales efforts and to a lesser extent throughindirect channels.

 

***2007 Business Model Changes***

*** ***

To better align withindustry practice, beginning in 2007 we changed our product offerings fromsoftware license arrangements to subscription service arrangements.  As the industry and business models for “softwareas a service” or “on demand” have evolved, the standard form of arrangements issubscription service arrangements that can be hosted rather than licenses ofsoftware.  We believe providing offeringsin this manner will ultimately increase our market penetration.

 

Accordingly, our terms ofsale have been revised to provide a hosting service where the customer accessesthe software and data via the Internet. Our previous terms of sale provided the customer a software license,and, for no additional fee, the customer could choose to have the softwarehosted by us, by themselves or by someone else. Revenue recognition for oursubscription service arrangements is not materially different from our previousterm license arrangements, as revenue under either type of contract isgenerally recognized ratably over the period of the agreement. As a result ofthis change, the amount of deferred revenue on the balance sheet undersubscription arrangements decreased because only the amount currently due fromthe customer is recorded to accounts receivable and deferred revenue.Conversely, under software license arrangements, 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.

 

Also beginning in 2007, weessentially discontinued selling perpetual software licenses, which hadrepresented 21% of our revenue in 2006. Consequently, perpetual software licenses were 2% of revenue in 2007 andless than 1% for the three and nine months ended September 30, 2008.

 

Our policy for subscriptioncontract acquisition costs, such as sales commissions, is to recognize them inproportion to the revenue recognized under the subscription arrangement.  Sales incentives paid for licenses and professionalservices are expensed when earned, which is typically at the time the relatedsale is invoiced.

 

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***Sources of Revenue***

*** ***

Our revenue is comprised offees for software, hosting and support, and fees for professionalservices.  “Recurring revenue” referredto in this report includes software, hosting and support revenue from termlicense and subscription agreements.

 

Software, hosting andsupport revenue includes fees earned under subscriptions and software licensearrangements. Subscription arrangements include a bundled fee to access thesoftware and data through our hosting services, and support services. Subscriptionrevenue is recorded ratably over the length of the agreement. Our hostingservices provide remote management and maintenance of our software andcustomers’ data which is physically located in third party facilities.Customers’ access “hosted” software and data through a secure Internetconnection. Support services include technical assistance for our softwareproducts and unspecified product upgrades and enhancements on a when and ifavailable basis.

 

License arrangements can beover time (a “term” license) or perpetual. For term licenses, software, hostingand support revenue is recognized ratably over the length of the agreement.Perpetual license revenue is generally recorded in full upon delivery of thelicense, and the hosting and support elements are recognized ratably over thecontractual period. Perpetual license revenue ranged from 21% to 25% of ourtotal revenue from 2004 through 2006. Due to the change in our business modelnoted above, perpetual license revenue decreased from 22% of revenue in thequarter ended September 30, 2006 to 2% of revenue in the quarter ended September 30, 2007 to less than 1% of revenue in the quarter ended September 30,2008.

 

Our sales arrangementsgenerally provide customers with the right to use our software up to a maximumnumber of users or transactions. A number of our arrangements provide foradditional fees for usage above the maximum, which are billed and recognizedinto revenue when determinable and earned.

 

Professional servicesrevenue is comprised of revenue from consulting, education, developmentservices, and reimbursement of related travel costs. Consulting and educationservices include implementation and best practices consulting. Developmentservices include customizations and integrations for a client’s specificbusiness application. Professional services revenue was approximately 22% oftotal revenue in each of the past three years ended December 31,2007.  Professional services revenueincreased from 23% of total revenue in the three and nine months ended September 30,2007 to 28% and 27% of total revenue in the three and nine months ended September 30,2008, respectively.

 

Professional services aretypically sold with initial sales arrangements and then periodically over theclient engagement. Our typical education courses are billed on a per person,per class basis.

 

Depending on the size andcomplexity of the client project, our consulting or development servicescontracts are either fixed price/fixed scope or, more frequently, billed on atime and materials basis. We have determined that the professional serviceselement of our software and subscription arrangements is not essential to thefunctionality of the software.

 

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

*** ***

*Cost of Revenue.*  Costof revenue consists primarily of salaries and related expenses (such asemployee benefits and payroll taxes) for our hosting, support and professionalservices organizations, third-party costs and equipment depreciation relatingto our hosting services, third-party costs for voice enabled CRM applications,travel expenses related to providing professional services to our clients,amortization of acquired intangible assets and allocated overhead. We allocatemost overhead expenses, such as office supplies, computer supplies, utilities,rent, and depreciation for furniture and equipment, based on headcount. As aresult, overhead expenses are reflected in each cost of revenue and operatingexpense category.

 

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

 

*Research and DevelopmentExpenses. *Researchand development expenses consist primarily of salary and related expenses for developmentpersonnel and costs related to the development of new products, enhancement ofexisting products, translation fees, quality assurance, testing and allocatedoverhead. To date, we have not capitalized any software development costsbecause the timing of the commercial releases of our products has substantiallycoincided with the attainment of technological feasibility. As a result,research and development costs have been expensed as incurred.

 

*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.

 

***Critical Accounting Policies and Estimates***

*** ***

Ourfinancial statements and accompanying notes are prepared in accordance withU.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses.  These assumptions areaffected by management’s application of accounting policies.  Our critical accounting policies includerevenue recognition, valuation of receivables and deferred tax assets, andaccounting for share-based compensation.

 

***Revenue Recognition***

*** ***

Beginning in 2007, wechanged the nature of our sales arrangements from license arrangements tosubscription arrangements (“subscriptions”). For a bundled fee, subscriptionsprovide the customer with access to the software and data over the Internet, oron demand, and

 

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providetechnical support services and software upgrades when and if available. Undersubscriptions, customers do not have the right to take possession of thesoftware and, in accordance with EITF 00-03, such arrangements areconsidered service contracts which 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 inaccordance with SAB 104.

 

Prior to 2007, we sold themajority of products under software license arrangements (“licenses”) andaccounted for them in accordance with SOP 97-2 and SOP 98-9. Licensesgenerally include multiple elements that are delivered up front or over time.For example, under a term license, we deliver the software up front and providehosting and support services over time. Fair value for each element in alicense does not exist since none are sold separately, and consequently, thebundled revenue is recognized ratably over the length of the agreement. Under aperpetual 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 requiresjudgment, including the identification of individual elements in multipleelement arrangements, whether there is objective and reliable evidence of fairvalue, including vendor specific objective evidence (“VSOE”) of fair value, forsome or all elements. Changes to the elements in our sales arrangements, or ourability to establish VSOE or fair value for those elements, may result in amaterial change to the amount of revenue recorded in a given period.

 

Fees charged forprofessional services are recognized when delivered. We believe the fees forprofessional services qualify for separate accounting because: a) theservices have value to the customer on a stand-alone basis; b) objectiveand reliable evidence of fair value exists for these services; andc) performance of the services is considered probable and does not involveunique customer acceptance criteria.

 

Our standard payment termsare net 30, although payment within 90 days is considered normal. Weperiodically provide extended payment terms and we consider any fees due beyond90 days to not be fixed or determinable. In such cases, judgment is required in determining the appropriatetiming 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***

*** ***

Weregularly assess the collectability of outstanding customer invoices and wemaintain an allowance for estimated losses resulting from the non-collection ofcustomer receivables.  In estimating thisallowance, we consider factors such as: historical collection experience; acustomer’s current creditworthiness; customer concentration; age of thereceivable balance; and general economic conditions that may affect a customer’sability to pay.  Actual customercollections could differ from our estimates and exceed our related lossallowance.

 

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***Income Taxes***

*** ***

We record income taxes underthe asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect of a change in tax rates on deferred tax assets and liabilities is recognizedin income in the period that includes the enactment date. When applicable, avaluation allowance is established to reduce any deferred tax asset when it isdetermined that it is more likely than not that some portion of the deferredtax asset will not be realized.

 

We have established avaluation allowance equal to our net deferred tax assets due to uncertaintiesregarding the realization of our net operating loss carryforwards, tax credits,and deductible timing differences. The uncertainty of realizing these benefitsis based primarily on our lack of taxable earnings.

 

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

 

***Share-Based Compensation***

*** ***

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

 

***Recently Issued Accounting Standards***

*** ***

In December 2007, theFinancial Accounting Standards Board issued Statement No. 141 (revised2007), *Business Combinations*(SFAS 141R). SFAS 141R requires the use of “full fair value” torecord all the identifiable assets, liabilities, noncontrolling interests andgoodwill acquired in a business combination. SFAS 141R is effective forfiscal years beginning on or after December 15, 2008. The requirements areeffective for us beginning in the first quarter of 2009. We do not believeadoption of SFAS 141R will have a material effect on our financialstatements.

 

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

 

In May 2008, theFinancial Accounting Standards Board issued Statement No. 162, *The Hierarchy of Generally Accepted Accounting Principles*(SFAS162).  SFAS 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (the GAAPhierarchy).  SFAS 162 will becomeeffective 60 days following SEC approval of the Public Company AccountingOversight Board amendments to AU Section 411, “The Meaning of PresentFairly in Conformity with Generally Accepted Accounting Principles.”  We do not believe adoption of SFAS 160will have a material effect on our financial statements.

 

**Results of Operations**

 

Thefollowing table sets forth certain consolidated statements of operations datafor each of the periods indicated, expressed as a percentage of total revenue:

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                           | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                             |       |                                                 |       |                                                |       |   |   |   |   |
| Software, hosting and support        |       | 77                                                   | %          | 72                                                  | %          | 77 | % | 73 | % |
| Professional services                |       | 23                                                   |       | 28                                                  |       | 23 |   | 27 |   |
| Total revenue                        |       | 100                                                  |       | 100                                                 |       | 100 |   | 100 |   |
| Cost of revenue:                     |       |                                                 |       |                                                |       |   |   |   |   |
| Software, hosting and support        |       | 16                                                   |       | 15                                                  |       | 17 |   | 15 |   |
| Professional services                |       | 19                                                   |       | 22                                                  |       | 19 |   | 22 |   |
| Total cost of revenue                |       | 35                                                   |       | 37                                                  |       | 36 |   | 37 |   |
| Gross profit                         |       | 65                                                   |       | 63                                                  |       | 64 |   | 63 |   |
| Operating expenses:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Sales and marketing                  |       | 56                                                   |       | 47                                                  |       | 59 |   | 49 |   |
| Research and development             |       | 15                                                   |       | 13                                                  |       | 16 |   | 13 |   |
| General and administrative           |       | 9                                                    |       | 9                                                   |       | 11 |   | 10 |   |
| Total operating expenses             |       | 80                                                   |       | 69                                                  |       | 86 |   | 72 |   |
| Loss from operations                 |       | (15                                                  | )          | (6                                                  | )          | (22 | ) | (9 | ) |
| Interest and other income, net       |       | 3                                                    |       | 2                                                   |       | 3 |   | 2 |   |
| Loss before income taxes             |       | (12                                                  | )          | (4                                                  | )          | (19 | ) | (7 | ) |
| (Provision) benefit for income taxes |       | —                                               |       | —                                              |       | — |   | — |   |
| Net loss                             |       | (12                                                  | )%         | (4                                                  | )%         | (19 | )% | (7 | )% |

 

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.

 

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| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer interactions (in millions)                            |       | 347                                                  |       | 576                                                 |       | 1,031 |   | 1,516 |   |
| Revenue by type:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Recurring (subscriptions, term licenses,  hosting and support) |       | 75                                                   | %          | 72                                                  | %          | 75 | % | 73 | % |
| Perpetual licenses                                             |       | 2                                                    |       | —                                              |       | 2 |   | — |   |
| Professional services                                          |       | 23                                                   |       | 28                                                  |       | 23 |   | 27 |   |
| Revenue by geography in:                                       |       |                                                 |       |                                                |       |   |   |   |   |
| United States                                                  |       | 71                                                   | %          | 70                                                  | %          | 72 | % | 68 | % |
| Europe                                                         |       | 20                                                   |       | 22                                                  |       | 20 |   | 24 |   |
| Asia Pacific                                                   |       | 9                                                    |       | 8                                                   |       | 8 |   | 8 |   |

 

***QuarterOverview***

*** ***

Totalrevenue for the third quarter of 2008 increased 24% over the third quarter of2007.  Within software, hosting andsupport, during the third quarter of 2008 recurring revenue increased 19% and perpetualrevenue decreased 93% compared to the third quarter of 2007.  Recurring revenue increased in the thirdquarter of 2008 due to higher average revenue per customer and growth in thenumber of customers.  The much lowerperpetual license revenue resulted from our business model change in early 2007in which we essentially eliminated sales of new perpetual licenses.  Professional services revenue increased 49%over the third quarter of 2007, due to capacity growth and improved billableutilizations.

 

Duringthe quarter ended September 30, 2008, we continued to invest in ouroperations by adding professional service personnel and partners to support oursolution offerings, and added capacity to our hosting, and technical supportorganizations to broaden and enhance our solution offerings.  Additionally, we recorded severance withinsales and marketing due to thetermination of the former General Manager of the Americas, and other personnel.   These investments and severance costs increasedtotal expenses in absolute dollars, but decreased as a percentage of revenueduring the quarter ended September 30, 2008 compared to the quarter ended September 30,2007. Consequently, our operating loss as a percentage of revenue improved to (6) %during the quarter ended September 30, 2008 compared to (15)% during thequarter ended September 30, 2007.

 

Duringthe quarter ended September 30, 2008, and particularly in September 2008,the dollar strengthened significantly compared to the Euro, British pound,Australian dollar and Japanese yen.  Theimpact in the current quarter negatively impacted revenue by approximately$500,000 and deferred revenue by approximately $3.2 million.

 

Forthe quarter ended September 30, 2008, we used $1.3 million of cash fromoperations compared to generating $3.8 million of cash from operations in thequarter ended September 30, 2007. Our cash and investment balances increased to $102.2 million at September 30,2008 from $89.9 million one year earlier.

 

OnOctober 20, 2008, we announced a share repurchase program under which theboard of directors authorized the repurchase of up to $15.0 million overthe next two years.  The shares may bepurchased from time to time at prevailing prices in the open market, in blocktransactions, in privately negotiated transactions, and/or in accelerated sharerepurchase programs, in accordance with Rule 10b-18 of the Securities andExchange Commission.  . Any sharesrepurchased will be retired.  As of September 30,2008, we had not repurchased any common 

 

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stockunder this program because it did not exist as of such date.  There can be no assurance as to the amount orfrequency of repurchase we may make under this program.

 

Asof September 30, 2008, we had an accumulated deficit of $64.9million.  This deficit and our historicaloperating losses were primarily the result of costs incurred in thedevelopment, sales and marketing of our products and for general andadministrative purposes.

 

***Three and Nine Months Ended September 30,2008 and 2007***

 

***Revenue***

 
| ** **                           | ** ** | **Three Months Ended September  30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                                             | ** ** | **2008**                                                | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |
| Software, hosting and support:       |       |                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |
| Recurring                            |       | $                                                    | 21,813     |                                                    | $          | 25,917 |   | 19 | % | $ | 61,379 |   | $ | 75,788 |   | 23 | % |
| Perpetual                            |       | 553                                                  |       | 39                                                      |       | (93 | ) | 1,499 |   | 297 |   | (80 | ) |
| Professional services                |       | 6,880                                                |       | 10,281                                                  |       | 49 |   | 18,535 |   | 28,271 |   | 53 |   |
| Total revenue                        |       | $                                                    | 29,246     |                                                    | $          | 36,237 |   | 24 | % | $ | 81,413 |   | $ | 104,356 |   | 28 | % |

 

Totalrevenue for the three months ended September 30, 2008 was $36.2 million,an increase of $7.0 million, or 24%, over total revenue of $29.2 million forthe three months ended September 30, 2007. Total revenue for the nine months ended September 30, 2008 was$104.4 million, an increase of $23.0 million, or 28%, over total revenue of$81.4 million for the nine months ended September 30, 2007.

 

Software,hosting and support revenue, consisting of recurring revenue and perpetuallicense revenue, for the three months ended September 30, 2008 increased$3.6 million, or 16%, over the three months ended September 30, 2007.  For the nine months ended September 30,2008, software, hosting and support revenue increased $13.2 million, or 21%,over the comparable 2007 period. Recurring revenue, comprised of subscriptions, term licenses, hostingand support, for the three and nine month periods ended September 30, 2008increased 19% and 23% over the comparable 2007 three and nine month periods,respectively, primarily due to expansion within the current install base, andnew customer acquisitions over the comparable period.  We believe our latest product, RightNow 8,appeals to large customers because of its robust performance characteristics,which in turn has driven larger average purchase volumes and higher averageselling prices per customer.  Averagerevenue per customer increased as a result of sales of capacity additions,contract renewals and new products. Customer interactions, a measure of unique customer sessions hosted inour data centers and customer usage, exceeded 576 million in the quarter ended September 30,2008 as compared to 347 million in the quarter ended September 30, 2007.

 

Perpetuallicense revenue decreased $0.5 million, or 93%, in the quarter ended September 30,2008 compared to the quarter ended September 30, 2007, and decreased as apercentage of total revenue to less than 1% in the third quarter of 2008 from2% in the third quarter of 2007. For the nine months ended September 30,2008, perpetual license revenue decreased $1.2, or 80%, over the comparable2007 period.  Beginning January 2007,we substantially eliminated the sale of new perpetual arrangements.

 

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Professionalservices revenue increased $3.4 million, or 49%, in the quarter ended September 30,2008 over the comparable 2007 quarter, due to capacity growth and improvedbillable utilizations.  Consequently, wehave increased professional service revenue per customer.  In addition, many customers have purchasedprofessional services as part of their plans to automate call-centers whileupgrading to RightNow 8.  Professionalservices revenue for the nine months ended September 30, 2008 increased$9.7 million, or 53%, over the nine months ended September 30, 2007.  Customers generally purchase professionalservices with initial subscription or license arrangements, and periodicallyover the life of the contract.

 

Themix of professional services revenue affects our profitability fromperiod-to-period due to the lower gross profit earned on professional servicesas compared to the gross profit earned on software, hosting and supportrevenue.  Professional services revenuerepresented 28% and 23% of total revenue in the three months ended September 30,2008 and 2007, respectively.

 

Revenuefrom European customers grew to represent 22% of total revenue in the quarterended September 30, 2008 from 20% of total revenue in the quarter ended September 30,2007, while revenue from Asia Pacific clients represented 8% of total revenuein the quarter ended September 30, 2008 compared to 9% of total revenue inthe quarter ended September 30, 2007. Total revenue outside the United States increased to represent 30% and32% of revenue in the three and nine months ended September 30, 2008,respectively, as compared to 29% for the comparative three month and nine monthperiods ended September 30, 2007, due to our focus of increasing salespenetration in global markets.

 

***Cost of Revenue***

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Software, hosting and support        |       | $                                                    | 4,604      |                                                | $          | 5,305 |   | 15 | % | $ | 13,563 |   | $ | 15,383 |   | 13 | % |
| Professional services                |       | 5,667                                                |       | 8,133                                               |       | 44 |   | 15,874 |   | 23,228 |   | 46 |   |
| Total cost of revenue                |       | 10,271                                               |       | 13,438                                              |       | 31 | % | $ | 29,437 |   | $ | 38,611 |   | 31 | % |
|                                      |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total cost of revenue for the quarter ended September 30,2008 was $13.4 million, an increase of $3.2 million, or 31%, over total cost ofrevenue of $10.3 million for the quarter ended September 30, 2007. Totalcost of revenue for the nine months ended September 30, 2008 was $38.6million, or 31% over total cost of revenue of $29.4 million for the nine monthsended September 30, 2007.

 

Cost of software, hosting and support increased$0.7 million, or 15%, in the third quarter of 2008 over the third quarter of2007 due to increased voice and non-voice hosting volume, and staff additionsin our hosting and technical support operations.  For the nine months ended September 30, 2008, cost of software,hosting and support increased $1.8 million, or 13%, over the comparable 2007period.  Adding increased capacity to assist with voice and non-voice

 

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hosting volume increased third-party hosting costs$255,000 in the quarter ended September 30, 2008 compared to the quarterended September 30, 2007.    Averageemployee count in our hosting and technical support operations was 96 duringthe third quarter of 2008 as compared to 82 during the third quarter of 2007,which increased salaries and related expenses (i.e. salaries, bonuses, andstock-based compensation) by $183,000 and increased common expense allocation(i.e. payroll taxes, benefits, office rent, supplies and other overheadexpenses) by $50,000 during the third quarter of 2008.  As a percent of the associated revenue,software, hosting and support costs were 20% in both the three months and ninemonths ended September 30, 2008 as compared to 21% and 22% of associatedrevenue in the three months and nine months ended September 30, 2007,respectively.

 

Cost of professional services increased $2.5million, or 44%, in the quarter ended September 30, 2008 over the quarterended September 30, 2007 due primarily to employee staff additions,increased utilization of third-party partners, and higher travel and mealsexpenses.  For the nine months ended September 30,2008, cost of professional services increased $7.4 million, or 46%, over thecomparable 2007 period.  Average employee count in our professionalservices organization grew to 180 during the third quarter of 2008 from 143during the third quarter of 2007, which increased salaries and related expensesby $1.2 million and increased common expense allocation by $393,000 during thethird quarter of 2008.  Increasedutilization of third-party partners used to assist in the deployment ofprofessional services increased by $839,000 during the third quarter of2008.  Travel and meal expensesassociated with professional service deployments increased by $121,000 duringthe third quarter of 2008.  As a percentof the associated revenue, professional services costs were 79% and 82% in thethree and nine months ended September 30, 2008, respectively, as comparedto 82% and 86% in the three and nine months ended September 30, 2007,respectively.  Customer schedulingrequirements and  employee training cancause fluctuation in professional service costs as a percentage of revenue.

 

***Operating Expenses***

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Sales and marketing                  |       | $                                                    | 16,516     |                                                | $          | 16,889 |   | 2 | % | $ | 48,031 |   | $ | 51,334 |   | 7 | % |
| Research and development             |       | 4,308                                                |       | 4,671                                               |       | 8 |   | 12,947 |   | 13,664 |   | 6 |   |
| General and administrative           |       | 2,680                                                |       | 3,215                                               |       | 20 |   | 8,718 |   | 10,621 |   | 22 |   |
| Total operating expenses             |       | $                                                    | 23,504     |                                                | $          | 24,775 |   | 5 | % | $ | 69,696 |   | $ | 75,619 |   | 8 | % |

 

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

 

Salesand marketing expenses were $16.9 million in the third quarter of 2008, anincrease of $0.4 million, or 2%, over sales and marketing expenses of $16.5million in the third quarter of 2007.  Average employee count in our sales andmarketing organization grew to 277 during the third quarter of 2008 from 268during the third quarter of 2007, and severance associated with the formerGeneral Manager of the Americas, and other personnel increased salaries andrelated expense by $781,000 during the third quarter of 2008.    Additionally, we had increased expense of$301,000 associated with sales award programs, foreign employee related costsand general recruiting efforts.

 

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Salesincentives remained relatively constant in the third quarter of 2008,representing an increase of $62,000 primarily due to higher sales in 2008 over2007 offset by a deferred sales commission adjustment of $260,000 in thecurrent quarter for amounts that should have been recorded during the quarter(s) endedMarch 31, 2008 and June 30, 2008. The adjustment does not and doesnot impact the results of operation for the nine months ended September 30,2008.  These costs were partially offsetby timing of the Company’s annual Users Conference, which will occur in thefourth quarter of 2008. The 2007 Users Conference occurred in the third quarterof 2007. Additionally, there was a planned reduction in direct marketing andadvertising costs. The difference in timing of the Users Conference and plannedreduction in direct marketing and advertising decreased costs $758,000 in thequarter ended September 30, 2008 compared to the quarter ended September 30,2008.

 

Salesand marketing expenses were $51.3 million for the nine months ended September 30,2008, an increase of $3.3 million, or 7%, over sales and marketing expenses of$48 million for the nine months ended September 30, 2007, primarily due to$2.4 million of sales incentive increase associated with a 23% increase inrecurring revenue for the nine months ended September 30, 2008.  Employee growth increased salaries andrelated expenses by $1.5 million andincreased common expense allocation by $781,000, which was partiallyoffset by a reduction in direct marketing and advertising costs of $1.2 millionfor the nine months ended September 30, 2008 compared to the nine monthsended September 30, 2007.

 

Asnoted above under “2007 Business Model Changes,” we changed the nature of oursales arrangements from licenses to subscriptions beginning in 2007.  Under license arrangements, we expense salesincentives when earned, which is typically upon contract signing.  Under subscription arrangements, we defer therelated sales incentive costs and expense them in proportion to the revenuerecognized.    Net sales incentiveexpense was $2.8 million in both the quarter ended September 30, 2008 and2007. Net sales incentive expense for the nine months ended September 30,2008 was $9.8 million as compared to $7.0 million in the nine months ended September 30,2007.

 

*Research and Development Expenses*

 

#### **Research and development expenses were $4.7 million in thethree months ended September 30, 2008, an increase of $0.4 million, or 8%,over research and development expenses of $4.3 million in the three monthsended September 30, 2007, primarily due to annual salary increases andgrowth in headcount.  Average employeecount in our research and development organization was 146 during the thirdquarter of 2008 compared to 133 during the third quarter of 2007. Research anddevelopment expenses for the nine months ended September 30, 2008 were$13.7 million, or 6%, over the comparable 2007 period primarily due to the annualsalary increases and headcount growth.**

#### ** **

*General and Administrative Expenses*

 

General and administrative expenses increased $0.5million, or 20%, in the third quarter of 2008 over the third quarter of 2007mostly due to staff additions.  Averageemployees in our general and administrative organization were 79 during thethird quarter of 2008 compared to 69 during the third quarter of 2007.  The growth in headcount attributed to anincrease of $383,000 of personnel related expenses, which include salaries,bonuses and stock-based compensation.   General and administrative expenses for the nine months ended September 30,2008 were $10.6 million, or 22%, over the comparable 2007 period primarily dueto employee growth, which increased salaries and related expense by $1.1million during the nine months ended September 30, 2008.  In addition charitable contributions andother expenses increased $316,000 and legal 

 

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and other third-party service expenses increased$200,000 during the nine months ended September 30, 2008.

 

*Stock-Based Compensation Expense*

 

Totalstock-based compensation expense for the three months ended September 30,2008 was $1.5 million as compared to $1.2 million in the three months ended September 30,2007.  Stock-based compensation was $4.7million for the nine months ended September 30, 2008 as compared to $4.5million for the nine months ended September 30, 2007.  Stock-based compensation increased for thethree and nine months ended September 30, 2008 over the comparable September 30,2007 periods, primarily due to an increase of stock option grants.

 

***Interest and OtherIncome (Expense), Net***

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)**            | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                            |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest income                                 |       | $                                                    | 1,055      |                                                | $          | 714 |   | (32 | )% | $ | 2,859 |   | $ | 2,366 |   | (17 | )% |
| Interest expense                                |       | (2                                                   | )          | (3                                                  | )          | n/m |   | (5 | ) | (8 | ) | n/m |   |
| Other income (expense)                          |       | (49                                                  | )          | (159                                                | )          | n/m |   | (137 | ) | (349 | ) | n/m |   |
| Total interest and other income (expense),  net |       | $                                                    | 1,004      |                                                | $          | 552 |   | (45 | )% | $ | 2,717 |   | $ | 2,009 |   | (26 | )% |

 

Interestincome decreased 32% in the third quarter of 2008 from the third quarter of2007 due to declining investment yields driven by the periodic decreases in thefederal funds rate. For the nine months ended September 30, 2008, interestincome decreased $0.5 million, or 17%, from the comparable 2007 period.  Our investment portfolio consists primarily ofinvestment-grade government, corporate debt instruments, and auction-ratesecurities.  Other income (expense)consists primarily of losses on the remeasurement of non-monetary liabilitiesdenominated in non-functional currencies.

 

***Provision for Income Taxes***

 

The provision for incometaxes of $110,000 in the nine months ended September 30, 2008, consistsprimarily of state minimum taxes and foreign taxes withheld.  Our effective tax rate differs fromthe federal statutory rate primarily due to the utilization of net operatingloss carryforwards, foreign rate differentials, and non-deductible meal andentertainment expenses.  Our effective tax rate in 2008 will depend ona number of factors, such as the amount and mix of stock-based compensationexpense to be recorded under SFAS 123R, the level of business in state andforeign tax jurisdictions, management’s expectation of the realization ofdeferred tax assets and the associated valuation allowance, and other factors.

 

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**Liquidity and Capital Resources**

** **
| ** **                                         | ** ** | **Three Months Ended September  30,** | ** ** | **Nine Months Ended September  30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **Percent  Change** | ** ** | **2007** | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                                               |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term  investments |       | $                                                    | 89,932     |                                                | $          | 97,589 |   | 9 | % | $ | 89,932 |   | $ | 97,589 |   | 9 | % |
| Long-term investments                              |       | —                                               |       | 4,612                                               |       | 100 | % | — |   | 4,612 |   | 100 | % |
| Cash provided by (used in) operating  activities   |       | 3,793                                                |       | (1,330                                              | )          | 135 | % | 13,916 |   | 10,914 |   | 22 | % |
|                                                    |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

AtSeptember 30, 2008, cash, cash equivalents, and short-term investmentstotaled $97.6 million.  In addition toour cash and short-term investments, other sources of liquidity at September 30,2008 included a $3.0 million bank line of credit facility, under which therehave been no borrowings.

 

Operatingactivities used $1.3 million and provided $10.9 million of cash during thethree and nine months ended September 30, 2008, respectively, as comparedto providing $3.8 and $13.9 million of cash during the three and nine monthsended September 30, 2007.  Cash flowfrom operations can vary significantly from quarter-to-quarter for manyreasons, including the timing of business in a given period, and customerpayment preferences and patterns.  Slowercash collections and a lengthening of payment terms were the primary drivers inthe cash used in operating activities during the quarter ended September 30,2008.

 

Wehave generated cash from operations from increasing sales and the upfrontbilling of our sales arrangements, which is typically reflected in accountsreceivable and deferred revenue.   Beginning in 2007, our change to subscriptions from license arrangementsrequires that we no longer record additions to term receivables, andconsequently, we expect term receivables to gradually decline on our balancesheet.

 

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

 

Investingactivities generated $0.9 million and used $3.4 million in the three and ninemonths ended September 30, 2008, respectively. Third quarter 2008investing activities consisted of net sales of short-term investments of $2.2million and $1.3 million of purchased capital expenditures. Capital assetadditions consisted primarily of equipment acquisitions for our hostingoperations and employee growth.

 

Financingactivities provided $0.6 and $1.2 million in the three and nine months ended September 30,2008, respectively, from employee purchases of RightNow common stock under ourequity incentive plans.  On October 20,2008, we announced a share repurchase program under which the board ofdirectors authorized the repurchase of up to $15.0 million of our commonstock over the next two years.  Theshares may be purchased from time to time at prevailing prices in the openmarket, in block transactions, in privately negotiated transactions, and/or inaccelerated share repurchase programs, in accordance with Rule 10b-18 ofthe Securities and Exchange Commission. Any shares repurchased will be retired. As of September 30, 2008, we had not repurchased any common stockunder this program because it did not exist as of such date.  There can be no assurance as to the amount orfrequency of repurchases we make under this program.

 

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As of September 30, 2008,we held approximately $12.1 million in par value auction rate securities withinvestment grades of AAA or AA.  Theauction rate state and municipal securities are comprised of federally insuredstudent loan bonds, and the auction rate preferred securities are comprised ofpreferred shares of closed end mutual funds.

 

To date, we have collectedall interest payments on all of the auction rate securities held by us whendue.  During the third quarter of 2008,we were notified by our brokers that the auction rate securities will beredeemed at par.  The notificationindicates that notification $7.1 million of auction rate preferred stocks arescheduled to be redeemed at par in the fourth quarter of 2008.  The remaining redemption schedule is expectedto span from June 30, 2010 to July 2, 2012.  However, if the auction rate securitiescontinue to experience unsuccessful auctions, if the credit rating of theauction rate securities deteriorates, or if our brokerage houses declareredemption default, we may be required to realize an impairment charge as “otherthan temporary.”  While the recentauction failures will limit our ability to liquidate the remainder of theinvestments for some period of time, our management does not believe theauction failures will materially impact its ability to fund its working capitalneeds, capital expenditures, or other business requirements. We will continueto monitor the state of the credit markets and its potential impact, if any, onthe fair value and classification of its portfolio of auction ratesecurities.   See Note 7 to ourConsolidated Financial Statements for further information.

 

Webelieve our existing cash and short-term investments, together with fundsgenerated from operations, should be sufficient to fund operating andinvestment requirements, including any repurchases under our stock repurchaseprogram, for at least****the nexttwelve months. Our future capital requirements will depend on many factors,including our rate of revenue growth and expansion of our sales and marketingactivities, the possible acquisition of complementary products or businesses,the timing and extent of spending required for research and developmentefforts, and the continuing market acceptance of our products.  To the extent that available funds areinsufficient to fund our future activities, we may need to raise additionalfunds through public or private equity or debt financings.  Additional equity or debt financing may notbe available on terms favorable to us or at all.

 

**Off-Balance Sheet Arrangements**

 

Asof September 30, 2008, we did not have any significant off-balance-sheetarrangements, as defined in Item 303(a)(4)(ii) of Regulation S-Kpromulgated by the SEC.

 

# **ContractualObligations and Commitments**

# ** **

During the third quarter of 2008, we entered into anoperating lease in Tokyo, Japan.  Thelease term is 60 months from September 1, 2008 through August 31,2013.  Monthly commitments areapproximately $35,000.

 

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

 

*ForeignCurrency Exchange Risk*

 

Ourresults of operations and cash flows are subject to fluctuation due to changesin foreign currency exchange rates, particularly changes in the Euro, Britishpound, Australian dollar and Japanese yen, because our contracts are frequentlydenominated in local currency. In the future, we may utilize foreign currencyforward and option contracts to manage currency exposures. We do not currentlyhave any such contracts in place, nor did we enter into any such contractsduring the quarters ended September 30, 2007 or September 30, 2008.

 

During the quarter ended September 30,2008, and particularly in September 2008, the dollar strengthenedsignificantly compared to the Euro, British pound, Australian dollar andJapanese yen.  The impact in the currentquarter negatively impacted revenue by approximately $500,000 and deferredrevenue by approximately $3.2 million. If the dollar continues to strengthen in the future we may experiencefurther impact.

 

*Interest Rate Sensitivity*

* *

Our investments consist ofshort-term and long-term interest-bearing securities, which are subject tocredit and interest rate risk.  Ourportfolio is investment-grade and diversified among issuers and security typesto reduce credit risk.  We manage ourinterest rate risk by maintaining a large portion of our investment portfolioin instruments with short maturities or frequent interest rate resets.  We also manage interest rate risk bymaintaining sufficient cash and cash equivalents such that we are able to holdinvestments until maturity.  If marketinterest rates were to increase by 100 basis points from the level at September 30,2008, the fair value of our portfolio would decline by approximately $293,000.

 

*Liquidationand Valuation Risk*

 

A portion of short and ourentire long-term investments consist of approximately $12.1 million in parvalue auction rate securities with investment grades of AAA or AA, as of September 30,2008. Despite the long-term contractual maturities of the auction ratesecurities, all of these securities are considered available for sale. Since February 2008,uncertainties in the credit markets caused substantially all auctions of thesesecurities held by us to be unsuccessful. As a result, we recorded a temporaryimpairment on these securities of approximately $390,000 as of September 30,2008.  If auctions continue to beunsuccessful, or if credit ratings deteriorate, we may be required to record apermanent impairment charge on these investments. Based on our expectedoperating cash flows, and other sources and uses of cash, we do not anticipatethat the lack of liquidity on these investments will affect our ability toexecute our current business plan. We will continue to monitor the state of thecredit markets and its potential impact, if any, on the recoverability of ourportfolio of auction rate securities.

 

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**Item 4.  Controls and Procedures**

 

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

 

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures were effectivein ensuring that information required to be disclosed by us in the reports thatwe file or submit under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission and (ii) accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

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

 

Duringthe most recent completed fiscal quarter covered by this report, there has beenno change in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**Part II.  Other Information**

 

***Item1.  Legal Proceedings***

*** ***

Fromtime to time, we are involved in legal proceedings in the ordinary course ofbusiness.  We believe that the resolutionof these matters will not have a material effect on our consolidated financialposition, results of operations or liquidity.

 

**Item 1A.  Risk Factors**

** **

A restated description of the risk factorsassociated 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, Item1A of our Annual Report on Form 10-K for the year ended December 31,2007.

 

*Before deciding to purchase, hold or sell our common stock,you should carefully consider the risks described below, in addition to theother cautionary statements and risks described elsewhere and the otherinformation contained in this Report and in our other filings with the SEC,including our reports on Forms 10-Q and 8-K. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business. If any of these known or unknown risks oruncertainties 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 $8.0 million in the first nine months of 2008, and as ofSeptember 30, 2008, we had an accumulated deficit of $64.9 million. Weexpect to continue to incur significant professional services, sales andmarketing, research and development and general and administrative expenses aswe expand our operations and, as a result, we will need to generate significantrevenue to achieve profitability. In 2007, we changed our business model tosubstantially eliminate sales of perpetual licenses, which materially andadversely affected our operating margin. Although we improved third quarteroperating margins in 2008 compared to each of the quarters in 2007, we may notbe able to continue to improve our operating results at the rate that hasoccurred in the past. Even if we achieve profitability, we may not be able toincrease profitability on a quarterly or annual basis in the future, which maycause the price of our stock to decline.

 

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

 

Approximately80% to 90% of our revenue is derived from RightNow Service, a suite ofsolutions used to optimize customer service operations. If we are unable tosuccessfully develop and sell new and enhanced versions of RightNow Service, orintroduce new products and solutions for the customer service market, ourfinancial performance will suffer. Although to date the majority of businesshas been focused on providing solutions for customer service operations, wehave introduced sales, marketing, feedback and voice-enabled applications toexpand our solution offerings. Our efforts to expand beyond the customerservice market may not be successful because certain of our competitors havefar greater experience and brand recognition

 

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inthe broader segments of the CRM market. In addition, our efforts to expand ouron demand software solutions beyond the customer service market may divertmanagement resources from our existing operations and require us to commitsignificant financial resources to a market where we are less proven, which mayharm our business, financial condition and results of operations.

 

***We face intense competition, and ourfailure to compete successfully could make it difficult for us to add andretain clients and could reduce or impede the growth of our business.***

 

The market for CRMsolutions is highly competitive and fragmented, and is subject to rapidlychanging technology, shifting client requirements, frequent introductions ofnew products and services, and increased marketing activities of other industryparticipants.  Increased competitioncould result in commoditization, pricing pressure, reduced sales, lower marginsor the failure of our solutions to achieve or maintain broad market acceptance.If we are unable to compete effectively, it will be difficult for us to add andretain clients, and our business, financial condition and results of operationswill be seriously harmed.

 

We face competitionfrom:

 

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

 

·   CRM systemsthat are developed and maintained internally by businesses;

 

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

 

·   outsourced contact center providers whobundle solutions and agent labor in their service offerings;

 

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

 

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

 

Many of our current andpotential competitors have longer operating histories and larger presence inthe general CRM market, greater name recognition, access to larger customerbases and substantially greater financial, technical, sales and marketing,management, service, support and other resources than we have. As a result,such competitors may be able to respond more quickly than we can to new orchanging opportunities, technologies, standards or client requirements ordevote greater resources to the promotion and sale of their products andservices than we can. To the extent our competitors have an existingrelationship with a potential client, that client may be unwilling to switchvendors due to the time and financial commitments already made with ourcompetitors.

 

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Inaddition, many of our current and potential competitors have established or mayestablish business, financial or strategic relationships among themselves orwith existing or potential clients, alliance partners or other third parties,or may combine and consolidate to become more formidable competitors withbetter resources.  For example, in January 2006,Oracle Corporation completed its acquisition of Siebel Systems, Inc.  We also expect that new competitors, such asenterprise software vendors and online service providers that have traditionallyfocused on enterprise resource planning or back office applications, willcontinue to enter the on demand CRM market with competing products as the ondemand CRM market develops and matures.

 

***The market for our on demand applicationservices is at an early stage of development, and if it does not develop ordevelops more slowly than we expect, our business will be harmed.***

 

The market for on demandapplication services is at an early stage of development, and it is uncertainwhether these application services will achieve and sustain high levels ofdemand and market acceptance. Our success will depend to a substantial extenton the willingness of companies to increase their use of on demand applicationservices in general and for on demand customer relationship managementapplications in particular. The willingness of companies to increase their useof any on demand application services is in part dependent on the actual andperceived reliability of hosted solutions. In addition, many companies have invested substantial personnel andfinancial resources to integrate traditional enterprise software into theirbusinesses, and therefore may be reluctant or unwilling to migrate to on demandapplication services. While we have supported traditional on site deployment ofour software applications, widespread market acceptance of our on demandsoftware solutions is critical to the success of our business. Other factorsthat may affect the market acceptance of our solutions include:

 

·   on demandsecurity capabilities and reliability;

 

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

 

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

 

·   the level ofcustomization we offer;

 

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

 

·   concerns with purchasing critical CRMsolutions from a company with a history of operating losses;

 

·   customer acceptance of our subscription salesarrangements beginning in 2007; and

 

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

 

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

 

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***Our quarterly results of operations mayfluctuate in the future.***

 

Ourquarterly revenue and results of operations may fluctuate as a result of avariety of factors, many of which are outside of our control. If our quarterlyrevenue or results of operations fall below the expectations of investors orsecurities analysts, the price of our common stock could decline substantially.Fluctuations in our results of operations may be due to a number of factors,including, but not limited to, those listed below and identified throughoutthis “Risk Factors” section:

 

·   our ability to retain and increase sales toexisting clients, attract new clients and satisfy our clients’ requirements;

 

·   the mix of revenue between licensearrangements, professional services and subscription arrangements as salescommissions are generally expensed when invoiced for license arrangements andprofessional services, and expensed ratably over the term of an agreement forsubscription services;

 

·   changes in the mix of revenue betweenprofessional services and software, hosting and support, because the grossmargin on professional services is typically lower than the gross margin onsoftware, hosting and support;

 

·   changes in the mix of voice self serviceapplications sold and/or usage volume, because the gross margin on voice selfservice applications is typically lower than the gross margin on our sales,marketing, feedback and service applications;

 

·   the timingand success of new product introductions or upgrades by us or our competitors;

 

·   the timingof professional service sales and our ability to appropriately staff and trainprofessional service resources without negatively impacting professionalservice margins changes in our pricing policies or those of our competitors;

 

·   the amountand timing of expenditures related to expanding our operations;

 

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

 

·   changes inthe payment terms for our products and services, including changes in the mixof payment options chosen by our customers;

 

·   thepurchasing and budgeting cycles of our clients changes in the mix ofsubscription and perpetual licenses sold in a particular quarter, becauseperpetual license revenue is recorded into revenue upon delivery whereassubscriptions are recorded into revenue ratably over the contractual period;

 

·   changes incredit market conditions associated with auction rate securities, which couldpermanently impair the recoverability of these investments; and

 

·   generaleconomic, industry and market conditions.

 

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Because the sales cyclefor the evaluation and implementation of our solutions typically ranges from 60to 180 days, we may also experience a delay between increasing operatingexpenses and the generation of corresponding revenue, if any. Moreover, becausemost of the revenue from new sales agreements is recognized over time,downturns or upturns in sales may not be immediately reflected in our operatingresults. Additionally, our professional service margins may be negativelyimpacted by training requirements for new professional service resources and/orcustomer scheduling issues.  Most of ourexpenses, such as salaries and third-party hosting co-location costs, arerelatively fixed in the short-term, and our expense levels are based in part onour expectations regarding future revenue levels. As a result, if revenue for aparticular quarter is below our expectations, we may not be able toproportionally reduce operating expenses for that quarter, causing adisproportionate effect on our expected results of operations for that quarter.

 

Due to the foregoingfactors, and the other risks discussed in this report, you should not rely onquarter-to-quarter comparisons of our results of operations as an indication ofour future performance.

 

***Failure to effectively develop and expandour sales and marketing capabilities could harm our ability to increase ourclient base and achieve broader market acceptance of our solutions.***

 

Increasing our clientbase and achieving broader market acceptance of our solutions will depend to asignificant extent on our ability to expand our sales and marketingoperations.  Any expansion will requireus to 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 our solutions are soldpursuant to time-based agreements, and if our existing clients elect not torenew or to renew on terms less favorable to us, our business, financialcondition and results of operations will be adversely affected.***

 

Our solutions aregenerally sold pursuant to time-based agreements that are typically subject torenewal every two years or less and our clients have no obligation to renew.Because our clients may elect not to renew, we may not be able to consistentlyand accurately predict future renewal rates. Our clients’ renewal rates maydecline or fluctuate as a result of a number of factors, including their levelof satisfaction with our solutions, their ability to continue their operationsor invest in customer service, their acceptance of a change from term licenseagreements to subscription service agreements, or the availability and pricingof competing products. If large numbers of existing clients do not renew, or renewon terms less favorable to

 

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us, and if we cannotreplace or supplement those non-renewals with new agreements generating thesame or greater level of revenue, our business, financial condition and resultsof operations will be adversely affected.

 

***We have experienced rapid growth in recentperiods. If we fail to manage our growth effectively, we may be unable toexecute our business plan, maintain high levels of service or adequatelyaddress competitive challenges.***

 

To achieve our businessobjectives, we will need to continue to expand our business at a rapid pace.This expansion has placed, and is expected to continue to place, a significantstrain on our managerial, administrative, operational, financial and otherresources. We anticipate that this expansion will require substantialmanagement effort and significant additional investment in our infrastructure.If we are unable to successfully manage our growth, our business, financialcondition and results of operations will be adversely affected.

 

Part of thechallenge that we expect to face in the course of our expansion is to maintainthe high level of customer service to which our clients have become accustomed.To date, we have focused on providing personalized account management andcustomer service on a frequent basis to ensure our clients are effectivelyleveraging the capabilities of our solution. We believe that much of oursuccess to date has been the result of high client satisfaction, attributablein part to this focus on client service. To the extent our client base grows,we will need to expand our account management, client service and otherpersonnel, and third-party channel partners, in order to enable us to continue tomaintain high levels of client service and satisfaction. If we are not able tocontinue to provide high levels of client service, our reputation, as well asour business, financial condition and results of operations, could be harmed.

 

***If there are interruptions or delays in ourhosting services through third-party error, our own error or the occurrence ofunforeseeable events, delivery of our solutions could become impaired, whichcould harm our relationships with clients and subject us to liability.***

 

As of September 30,2008, approximately 90% of our clients were using our hosting services fordeployment of our software applications. We generally provide our hostingservices for our non-voice applications through computer hardware that we ownand that is currently located in third-party web hosting co-location facilitiesmaintained and operated in California, Illinois, Massachusetts, New Jersey andLondon, England. Our voice applications for several international customers arehosted by third parties who also own and operate the hardware on which ourapplications reside.  We do not maintainlong-term supply contracts with any of our hosting providers, and providers donot guarantee that our clients’ access to hosted solutions will beuninterrupted, error-free or secure. Our operations depend on our providers’ability to protect their and our systems in their facilities against damage orinterruption from natural disasters, power or telecommunications failures,criminal acts and similar events. Our back-up computer hardware and systemshave not been tested under actual disaster conditions and may not havesufficient capacity to recover all data and services in the event of an outageoccurring simultaneously at all hosting facilities. In the event that our hostingfacility arrangements were terminated, or there was a lapse of service oraccidental 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.

 

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Design and mechanicalerrors, spikes in usage volume and failure to follow system protocols andprocedures could cause our systems to fail, resulting in interruptions in ourclients’ service to their customers. Any interruptions or delays in our hostingservices, whether as a result of third-party error, our own error, naturaldisasters or security breaches, whether accidental or willful, could harm ourrelationships with clients and our reputation. This in turn could reduce ourrevenue, subject us to liability, cause us to issue credits or pay penalties orcause clients to fail to renew their licenses, any of which could adverselyaffect our business, financial condition and results of operations. In theevent of damage or interruption, our insurance policies may not adequatelycompensate us for any losses that we may incur.

 

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

 

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

 

***We have significant international sales andare subject to risks associated with operating in international marketsincluding the risk of foreign currency exchange rate fluctuations.***

 

International salescomprised 29% and 30% of our revenue for the quarters ended September 30,2007 and 2008, respectively. We intend to continue to pursue and expand ourinternational business activities. Adverse political and economic conditionscould make it difficult for us to increase our international sales or tooperate abroad. International operations are subject to many inherent risks,including:

 

·   fluctuations in foreign currency exchangerates;

 

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

 

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

 

·   longercollection periods and difficulties in collecting receivables from foreignentities;

 

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

 

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·   reducedprotection for our intellectual property in some countries;

 

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

 

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

 

We believe thatinternational sales will continue to represent a significant portion of ourrevenue for the foreseeable future, and that continued growth will requirefurther expansion of our international operations. A substantial percentage ofour international sales are denominated in the local currency. As a result, anincrease in the relative value of the dollar could make our products moreexpensive and potentially less price competitive in international markets.

 

Margins on sales of our products and services in foreigncountries, and on sales of products and services that include costs fromforeign based employees or foreign suppliers, could be materially adverselyaffected by foreign currency exchange rate fluctuations.  During the quarter ended September 30, 2008, andparticularly in September 2008, the dollar strengthened significantlycompared to the Euro, British pound, Australian dollar and Japanese yen.  The impact in the current quarter negativelyimpacted revenue by approximately $500,000 and deferred revenue byapproximately $3.2 million.  The Company’sprimary exposure to movements in foreign currency exchange rates relate tonon-U.S. dollar denominated sales in EMEA, and Asia-Pacific and non-U.S. dollardenominated operating expenses incurred in these respective regions.   These foreign currency exposures may make itdifficult to compare our financial statements for the current period withfinancial statements from earlier periods.

 

We have not historicallyentered into transactions designed to hedge against risks of loss due toforeign currency fluctuations; but if we were to enter into any transactions wecannot guarantee that any such transactions would be effective.  Any of these factors may adversely affect ourfuture international sales and, consequently, affect our business, financialcondition and results of operations.

 

***If we fail to respond effectively torapidly changing technology and evolving industry standards, particularly inthe on demand CRM industry, our solutions may become less competitive orobsolete.***

 

The CRM industry ischaracterized by rapid technological advances, changes in client requirements,frequent new product and service introductions and enhancements, changes inprotocols and evolving industry standards. Our hosted business model and the ondemand CRM market are relatively new and may evolve even more rapidly than therest of the CRM market. Competing products and services based on newtechnologies or new industry standards may perform better or cost less than oursolutions and could render our solutions less competitive or obsolete. Inaddition, because our solutions are designed to operate on a variety of networkhardware and software platforms using a standard Internet web browser, we willneed to continuously modify and enhance our solutions to keep pace with changesin Internet-related hardware, software, communication, browser and databasetechnologies and to integrate with our clients’ systems as they change andevolve. Furthermore, uncertainties about the timing and nature of new networkplatforms or technologies, or modifications to existing platforms ortechnologies, could increase our research and development expenses.

 

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Our softwareincorporates use of Microsoft’s .NET Framework, and its Smart Clientmethodology.  The .NET Framework is corefunctionality that Microsoft incorporates into operating systems, while theSmart Client methodology enables development and deployment of softwareapplications using the .NET Framework. We believe that the .NET Framework and Smart Client enable us to provideusers with a richer experience and better functionality than would be possibleusing a pure Web-based application. However, the .NET Framework has not been universally adopted.  If software users do not adopt the .NETFramework or if the .NET Framework is superseded, the potential market for oursolutions will be reduced and we may need to develop an alternative architecture.

 

If we are unable tosuccessfully develop and market new and enhanced solutions that respond in atimely manner to changing technology and evolving industry standards, and if weare unable to satisfy the diverse and evolving technology needs of our clients,our business, financial condition and results of operations will suffer.

 

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

 

Our success and futuregrowth depends to a significant degree upon the skills, experience, performanceand continued service of our senior management, engineering, sales, marketing,service, support and other key personnel. Specifically, we believe that ourfuture success is highly dependent on Greg Gianforte, our founder, Chairman andChief Executive Officer. In addition, we do not have employment agreements withany of our senior management or key personnel that require them to remain ouremployees and, therefore, they could terminate their employment with us at anytime without penalty. If we lose the services of Mr. Gianforte or any ofour other key personnel, our business will be severely disrupted and we may beunable to operate effectively. We do not maintain “key person” life insurancepolicies on any of our key employees except Mr. Gianforte. This lifeinsurance policy would not be sufficient to compensate us for the loss of hisservices. Our future success also depends in large part upon our ability toattract, train, integrate, motivate and retain highly skilled employees,particularly sales, marketing and professional services personnel, softwareengineers, product trainers, and senior personnel. Competition for thesepersonnel is intense, especially for engineers with high levels of expertise indesigning and developing software and for senior sales executives.

 

***Our failure to attract, manage, support andretain qualified partners may prevent us from effectively deploying product andprofessional services.***

 

Our success and futuregrowth depends in part upon the skills, experience, performance and continuedservice of our partners. We engage with partners in a number of ways, includingto assist us to identify prospective customers, to distribute our solutions, todevelop complementary solutions, and to help us to fulfill professionalservices engagements. We believe that our future success depends in part uponour ability to develop strategic, long term and profitable partnerships. If wedo not acquire and retain the right partners, our products might becomeuncompetitive, we may be unable to take full advantage of the potential demandfor our solutions, or our ability to rapidly deliver our solutions may beimpaired. The use of partners to fulfill customer requirements may impact ournormal margins, and affect the profitability of customer transactions.

 

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***If our solutions fail to perform properlyor if they contain technical defects, our reputation will be harmed, our marketshare would decline and we could be subject to product liability claims.***

 

Our software productsmay contain undetected errors or defects that may result in product failures,slow response times, or otherwise cause our products to fail to perform inaccordance with client expectations. Because our clients use our products forimportant aspects of their business, any errors or defects in, or otherperformance problems with, our products could hurt our reputation and maydamage our clients’ businesses. If that occurs, we could lose future sales, or ourexisting clients could elect to not renew or to delay or withhold payment tous, which could result in an increase in our provision for doubtful accountsand an increase in collection cycles for accounts receivable. Clients also maymake warranty or other claims against us, which could result in the expense andrisk of litigation. Product performance problems could result in loss of marketshare, failure to achieve market acceptance and the diversion of developmentresources. If one or more of our products fails to perform or contains atechnical defect, a client may assert a claim against us for substantialdamages, whether or not we are responsible for the product failure or defect.We do not currently maintain any warranty reserves.

 

Product liability claimscould require us to spend significant time and money in litigation or to paysignificant settlements or damages. Although we maintain general liabilityinsurance, including coverage for errors and omissions, this coverage may notbe sufficient to cover liabilities resulting from such product liabilityclaims. Also, our insurer may disclaim coverage. Our liability insurance alsomay not continue to be available to us on reasonable terms, in sufficientamounts, or at all. Any product liability claims successfully brought againstus would cause our business to suffer.

 

***If we are unable to protect ourintellectual property rights, our competitive position could be harmed or wecould be required to incur significant expenses to enforce our rights.***

 

Our success depends to asignificant degree upon the protection of our software and other proprietarytechnology rights. We rely on trade secret, copyright and trademark laws,patents and confidentiality agreements with employees and third parties, all ofwhich offer only limited protection. The steps we have taken to protect ourintellectual property may not prevent misappropriation of our proprietaryrights or the reverse engineering of our solutions. We may not be able toobtain any further patents or trademarks, and our pending applications may notresult in the issuance of patents or trademarks. Any of our issued patents maynot be broad enough to protect our proprietary rights or could be successfullychallenged by one or more third parties, which could result in our loss of theright to prevent others from exploiting the inventions claimed in thosepatents. Furthermore, legal standards relating to the validity, enforceabilityand scope of protection of intellectual property rights in other countries areuncertain and may afford little or no effective protection of our proprietarytechnology. Consequently, we may be unable to prevent our proprietarytechnology from being exploited abroad, which could diminish internationalsales or require costly efforts to protect our technology. Policing theunauthorized use of our products, trademarks and other proprietary rights isexpensive, difficult and, in some cases, impossible. Litigation may benecessary in the future to enforce or defend our intellectual property rights,to protect our trade secrets or to determine the validity and scope of theproprietary rights of others. Such litigation could result in substantial costsand diversion of management resources, either of which could harm our business.Accordingly, despite our efforts, 

 

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we may not be able to preventthird parties from infringing upon or misappropriating our intellectualproperty.

 

***Our product development efforts may beconstrained by the intellectual property of others, and we may become subjectto claims of intellectual property infringement, which could be costly andtime-consuming.***

 

The software and Internetindustries are characterized by the existence of a large number of patents,trademarks and copyrights, and by frequent litigation based upon allegations ofinfringement or other violations of intellectual property rights. As we seek toextend our CRM product and service offerings, we may be constrained by theintellectual property rights of others. We have in the past been named as adefendant in a lawsuit alleging intellectual property infringement, and we mayagain in the future have to defend against intellectual property lawsuits. Wemay not prevail in any future intellectual property infringement litigationgiven the complex technical issues and inherent uncertainties in litigation.Any claims, regardless of their merit, could be time-consuming and distractingto management, result in costly litigation or settlement, cause productdevelopment delays, or require us to enter into royalty or licensingagreements. If any of our products violate third-party proprietary rights, wemay be required to re-engineer our products or seek to obtain licenses fromthird parties, which may not be available on reasonable terms or at all.Because our sales agreements typically require us to indemnify our clients fromany claim or finding of intellectual property infringement, any such litigationor successful infringement claims could adversely affect our business,financial condition and results of operations. Any efforts to re-engineer ourproducts, obtain licenses from third parties on favorable terms or license a substitutetechnology may not be successful and, in any case, may substantially increaseour costs and harm our business, financial condition and results of operations.Further, our software products contain open source software components that arelicensed to us under various public domain licenses. While we believe we havecomplied with our obligations under the various applicable licenses for opensource software that we use, there is little or no legal precedent governingthe interpretation of many of the terms of certain of these licenses andtherefore the potential impact of such terms on our business is somewhatunknown. Use of open source standards also may make us more vulnerable tocompetition because the public availability of open source software could makeit easier for new market entrants and existing competitors to introduce similarcompeting products quickly and cheaply.

 

***Future acquisitions could disrupt ourbusiness and harm our financial condition and results of operations.***

 

In order to expand ouraddressable market, we may decide to acquire additional businesses, productsand technologies. In May 2005, we acquired the assets of Convergent Voice andin May 2006, we acquired Salesnet, Inc. Acquisitions could require significantcapital infusions and could involve many risks, including, but not limited to,the following:

 

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

 

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

 

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

 

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

 

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

 

·                  we may have to issue equity securities to completean acquisition, which would dilute our stockholders and could adversely affectthe market price of our common stock; and

 

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

 

We cannot assure youthat we will be able to identify or consummate any future acquisitions onfavorable terms, or at all. If we do pursue any future acquisitions, it ispossible that we may not realize the anticipated benefits from the acquisitionsor that the financial markets or investors will negatively view theacquisitions. Even if we successfully complete an acquisition, it couldadversely affect our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

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***With the recent volatility in the capital markets, there is a risk thatwe could suffer a loss of principal in our cash and cash equivalents and shortterm investments and suffer a reduction in our interest or in our return oninvestments. Additionally funds associated with auction rate securities may beinaccessible in excess of 12 months, which may result in another-than-temporary decline in the value of these investments.***

 

We invest our cash and cash equivalents and short-terminvestments pursuant to our investment policy in cash, money market funds,commercial paper, corporate bonds and government agency securities, which areof investment grade quality. Prior to March 3, 2008 our investment policyallowed us to invest cash in auction-rate securities. Certain of theseinvestments are subject to general credit, liquidity, market, and interest raterisks, which may be exacerbated by U.S. sub-prime mortgage defaults that haveaffected various sectors of the financial markets and caused credit andliquidity issues. Additionally, we received notification that the auction ratesecurities held by us will be redeemed at par by our brokers commencing in thefourth quarter 2008 through July 2012. As such, these investments may alsobe subject to brokerage house default. To date, we believe that any declines inthe market value of our investments have been temporary. There could be futuredeclines in the value of these investments, however, which we may determine tobe other-than-temporary. If we record an other-than-temporary impairmentcharge, we will record a loss in our statement of operations, which could havea material impact on our operating results in the period it is recognized.These market risks associated with our investment portfolio may have a materialadverse effect on our results of operations, liquidity, and financialcondition.

 

At December 31, 2007 and September 30, 2008, we hadapproximately $18.3 million and $12.1 million, respectively, in par valueauction rate securities with investment grades of AAA or AA. Recentuncertainties in the credit market caused substantially all auctions of theauction rate securities we hold to fail. An auction failure means that theparties wishing to sell securities could not. Given the recent failures in theauctions, we reclassified these investments from short-term investments tolong-term investments on the balance sheet due to illiquidity. Additionally, wehave recorded a temporary impairment charge of approximately $390,000 in othercomprehensive income due to our inability to liquidate these securities at par.If the issuers of these securities are unable to successfully close futureauctions and their credit ratings deteriorate, we may in the future be requiredto record an other-than temporary impairment charge on these investments.Determining whether there has been an other-than-temporary impairment of ourshort-term investments requires significant judgment. With the recentvolatility in the capital markets, the funds associated with these investmentsmay not be accessible for in excess of twelve months and there is a risk thatwe could suffer a loss of principal and suffer a reduction in our interest orin our return on these and other investments, which could result in a permanentimpairment charge and harm our operating results and financial condition.

 

***We may not be able to secure additionalfinancing on favorable terms, or at all, to meet our future capital needs.***

 

We may requireadditional capital to respond to business challenges, including the need todevelop new solutions or enhance our existing solutions, enhance our operatinginfrastructure, fund expansion, respond to competitive pressures and acquirecomplementary businesses, products and technologies. Absent sufficient cashflow from operations, we may need to engage in equity or debt financings tosecure additional funds to meet our operating and capital needs. In addition,even though we may not need additional funds, we may still elect to selladditional equity or debt securities or obtain credit facilities for otherreasons. We may not be able to secure 

 

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additionaldebt or equity financing on favorable terms, or at all, at the time when we needsuch funding. If we raise additional funds through further issuances of equityor convertible debt securities, our existing stockholders could suffersignificant dilution in their percentage ownership of our company, and any newequity securities we issue could have rights, preferences and privileges seniorto those of holders of our common stock. Any debt financing secured by us inthe future could involve restrictive covenants relating to our capital raisingactivities and other financial and operational matters, which may make it moredifficult for us to obtain additional capital, to pay dividends and to pursuebusiness opportunities, including potential acquisitions. In addition, if wedecide to raise funds through debt or convertible debt financings, we may beunable to meet our interest or principal payments.

 

***We cannot assure ourstockholders that our stock repurchase program will enhance long-termstockholder value and stock repurchases could increase the volatility of theprice of our common stock and will diminish our cash reserves.***

 

On October 20, 2008, we announced that our Board ofDirectors approved a stock repurchase program.  Under the program, we areauthorized to repurchase up to $15 million of our outstanding shares of commonstock from time to time at prevailing prices in the open market or otherwiseover the next two years. Any shares repurchased will be retired,  The timing and actual number of sharesrepurchased will depend on a variety of factors including the timing of opentrading windows, price, corporate and regulatory requirements, and other marketconditions. The program may be suspended or discontinued at any time withoutprior notice.  Any repurchases pursuant to our stock repurchase programcould affect our stock price and increase its volatility. The existence of astock repurchase program could also cause our stock price to be higher than itwould be in the absence of such a program and could potentially reduce themarket liquidity for our stock.  Additionally, our stock repurchaseprogram will diminish our cash reserves, which could impact our ability topursue strategic opportunities and acquisitions and could result in loweroverall returns on our cash balances.  There can be no assurance that anystock repurchases will enhance stockholder value because the market price ofour common stock may decline below the levels at which we repurchased shares ofstock. Although our stock repurchase program is intended to enhance long-termstockholder value, short-term stock price fluctuations could reduce the program’seffectiveness.

 

***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 ofour products and our hosted business depends upon the continued and widespreadadoption of the Internet as a primary medium for commerce, communication andbusiness applications. Our business growth would be impeded if the performanceor perception of the Internet, or companies providing hosted solutions, washarmed by security problems such as “viruses,” “worms” and other maliciousprograms, reliability issues arising from outages and damage to Internetinfrastructure, delays in development or adoption of new standards andprotocols to handle increased demands of Internet activity, increased costs,decreased 

 

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accessibility and quality ofservice, or increased government regulation and taxation of Internet activity.

 

Federal, state orforeign government bodies or agencies have in the past adopted, and may in thefuture adopt, laws or regulations affecting data privacy, the solicitation,collection, processing or use of personal or consumer information, the use ofthe Internet as a commercial medium and the use of email for marketing or otherconsumer communications. In addition, government agencies or privateorganizations may begin to impose taxes, fees or other charges for accessingthe Internet or for sending commercial email. These laws or charges could limitthe growth of Internet-related commerce or communications generally, result ina decline in the use of the Internet and the viability of Internet-basedservices such as ours and reduce the demand for our products, particularly ourRightNow Marketing solution.

 

The Internet hasexperienced, and is expected to continue to experience, significant user andtraffic growth, which has, at times, caused user frustration with slow accessand download times. If Internet activity grows faster than Internetinfrastructure or if the Internet infrastructure is otherwise unable to supportthe demands placed on it, or if hosting capacity becomes scarce, our businessgrowth may be adversely affected.

 

***Privacy concerns and laws or other domesticor foreign regulations may adversely affect our business or reduce sales of oursolutions.***

 

Businesses using oursolutions collect personal information regarding their customers when thosecustomers contact them with customer service inquiries. A valuable component ofour solutions is their ability to allow our clients to use and analyze theircustomers’ information to increase sales, marketing and up-sell or cross-sellopportunities. Federal, state and foreign government bodies and agencies,however, have adopted and are considering adopting laws and regulationsregarding the collection, use and disclosure of personal information obtainedfrom consumers. The costs of compliance with, and other burdens imposed by,such laws and regulations that are applicable to the businesses of our clientsmay limit the use and adoption of this component of our solutions and reduceoverall demand for our solutions. Furthermore, even where a client desires tomake full use of these features in our solutions, privacy concerns may causeour clients’ customers to resist providing the personal data necessary to allowour clients to use our solutions most effectively. Even the perception ofprivacy concerns, whether or not valid, may inhibit market acceptance of ourproducts.

 

European Union membershave imposed restrictions on the collection and use of personal data that arefar more stringent, and impose more significant burdens on subject businesses,than current privacy standards in the United States. All of these domestic andinternational legislative and regulatory initiatives may adversely affect ourclients’ ability to collect and/or use demographic and personal informationfrom their customers, which could reduce demand for our solutions.

 

In addition togovernment activity, privacy advocacy groups and the technology and directmarketing industries are considering various new, additional or differentself-regulatory standards that may place additional burdens on us. If thegathering of profiling information were to be curtailed in this manner,customer service CRM solutions would be less effective, which would reducedemand for our solutions and harm our business.

 

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***Non-solicitation concerns, laws orregulations may adversely affect our clients’ ability to perform outboundmarketing and other email communications, which could reduce sales of oursolutions.***

 

In January 2004,the federal Controlling the Assault of Non-Solicited Pornography and MarketingAct of 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Act regulates thetransmission and content of commercial emails and, among other things,obligates the sender of such emails to provide recipients with the ability toopt-out of receiving future emails from the sender, and establishes penaltiesfor the transmission of email messages which are intended to deceive therecipient as to source or content. Many state legislatures also have adoptedlaws that impact the delivery of commercial email, and laws that regulatecommercial email practices have been enacted in many of the internationaljurisdictions in which we do business. In addition, Internet service providersand licensors of software products have introduced a variety of systems andproducts to filter out certain types of commercial email, without any commonprotocol to determine whether the recipient desired to receive the email beingblocked. As a result, it is difficult for us to determine in advance whether ornot emails generated by our clients using our solutions will be permitted byspam filters to reach the intended recipients.

 

Our RightNow Marketingsolution specifically serves the market for mass distribution marketing andother email communications. The increasing regulation of email delivery, bothdomestically and internationally, and the spam filtering practices of Internetservice providers and email users generally, will place significant additionalburdens on our clients who have outbound communication programs, and may causethose clients to substantially change their outbound communications programs orabandon them altogether. These factors may lead to a reduction in sales of ourRightNow Marketing solution, may make it necessary to redesign our RightNowMarketing 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 economic conditions could adverselyaffect our clients’ ability or willingness to purchase our products, whichcould materially and adversely affect our results of operations.***

 

Our clients consist oflarge and small companies in nearly all industry sectors and geographies.Potential new clients or existing clients could defer purchases of our productsbecause of unfavorable macroeconomic conditions, such as rising interest rates,fluctuations in currency exchange rates, industry or national economicdownturns, industry purchasing patterns, and other factors. Our ability to growrevenues may be adversely affected by unfavorable economic conditions.

 

In recent months, therehas been deterioration in global economic conditions due to many factors,including the credit market crisis, reduced credit availability, bank failures,slower economic activity, bankruptcies, adverse business conditions, concernsabout inflation and fear of a recession. These conditions could lead to less salesof our products, longer sales cycles, customers requesting longer paymentterms, customers failing to pay amounts due, and slower collections of accountsreceivable. All of these factors could adversely impact our results ofoperations, cash flow from operations, and our financial position. In addition,we may be forced to respond to an economic downturn by contracting operations,which we may have difficulties managing or managing in a timely fashion.

 

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***The significant control over stockholdervoting matters and our office leases that may be exercised by our founder andChief Executive Officer will limit your ability to influence corporate actionsand may require us to find alternative office space to lease or buy in thefuture.***

 

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

 

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

 

***Anti-takeover provisions in our charterdocuments and Delaware law could discourage, delay or prevent a change incontrol of our company and may affect the trading price of our common stock.***

 

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

 

·         establishinga classified board in which only a portion of the total board members will beelected 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;

 

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

 

·         prohibiting stockholder action by written consent.

 

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

 

***Item 2. UnregisteredSales of Equity Securities and Use of Proceeds***

*** ***

**(a)****                                 ****Sales of UnregisteredSecurities**

 

 Not applicable.

 

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

 

OnAugust 5, 2004, the Securities and Exchange Commission declared effectiveour Registration Statement on From S-1 (Reg. File No. 333-115331) underthe Securities Act of 1933, as amended, in connection with the initial publicoffering of our common stock, par value $.0001 per share. We sold 6.4 millionshares, including shares sold upon exercise of the underwriters’ over-allotmentoption, for an aggregate offering price of $44.9 million, and 321,945 shares,including shares sold upon exercise of the underwriters’ over-allotment option,were sold by a selling stockholder for an aggregate offering price of $2.3million. After deducting $3.3 million in underwriting discounts and commissionsand $1.8 million in other offering costs, we received net proceeds from theoffering of approximately $40 million. None of the expenses and none of our netproceeds from the offering were paid directly or indirectly to any director,officer, general partner of RightNow or their associates, persons owning 10% ormore of any class of equity securities of RightNow, or an affiliate ofRightNow.

 

InMay 2005, we spent $1 million of the offering proceeds for the acquisitionof the assets of Convergent Voice. In May 2006, we spent $8.7 million ofthe offering proceeds to acquire Salesnet, Inc. We currently intend to usethe remaining proceeds for general corporate purposes as described in theprospectus for the offering, including for the repurchase of shares under ourshare repurchase program. Pending these uses, the net proceeds from theoffering are invested in short and long-term, interest-bearing,investment-grade securities.

 

**(c)           Purchasesof Equity Securities.**

 

OnOctober 20, 2008, we announced a share repurchase program under which theboard of directors authorized the repurchase of up to $15.0 million of ourcommon stock over the next two years. The shares may be purchased from time totime at prevailing prices in the open market, in block transactions, inprivately negotiated transactions, and/or in accelerated share repurchaseprograms, in accordance with Rule 10b-18 of the Securities and ExchangeCommission. Any shares repurchased will be retired. As of September 30,2008, we have not repurchased any common stock under this program because itdid not exist as of such date. There can be no assurance as to the amount orfrequency of repurchases we may make under this program.

 

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

*** ***

None.

 

***Item4. Submission of Matters to a Vote of Security Holders.***

*** ***

None

 

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

*** ***

None.

 

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Item 6. Exhibits

 

***Exhibits***

*** ***

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

 
| Exhibit 3.1  | Amended and Restated Certificate of  Incorporation of the Registrant. (1)                                                                                                                                         |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                              |
| Exhibit 3.2  | Amended and Restated Bylaws of the  Registrant. (2)                                                                                                                                                               |
|              |                                                                                                                                                                                                              |
| Exhibit 10.1 | Offer letter with Marcus Bragg, VP and GM  of the Americas                                                                                                                                                        |
|              |                                                                                                                                                                                                              |
| Exhibit 10.2 | Terms of understanding with Michael  Saracini, Former VP and GM of Americas                                                                                                                                       |
|              |                                                                                                                                                                                                              |
| Exhibit 31.1 | Certification of Chief Executive Officer  pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
|              |                                                                                                                                                                                                              |
| Exhibit 31.2 | Certification of Chief Financial Officer  pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
|              |                                                                                                                                                                                                              |
| Exhibit 32.1 | Certifications of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith). |

 

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| (1)    |   | Incorporated by reference to  Exhibit 4.2 to the Company’s registration statement on Form S-8  (File No. 333-118515) filed with the Securities and Exchange Commission  on August 24, 2004. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |
| (2)    |   | Incorporated by reference to  Exhibit 3.1 of the Company’s Current Report on Form 8-K (File  No. 000-31321) filed with the Securities and Exchange Commission on January 25,  2006.         |

 

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**SIGNATURE**

 

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

 

Dated:  November 7, 2008

 

**RightNow Technologies, Inc.**

(Registrant)

 
| By:    | /s/ Jeffrey C. Davison                        |   |
|--------|-----------------------------------------------|--------|
|   | Jeffrey  C. Davison                           |   |
|   | Chief  Financial Officer, Vice President and, |   |
|   | Treasurer                                     |   |
|   | (Principal Financial and Accounting Officer)  |   |

 

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