**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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#### **FORM10-Q**

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** **
| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------|------------------------------------------------------------------------------------------------|
|       |                                                                                           |
| ** ** | **For the quarterly period ended  June 30, 2006**                                              |
|       |
| **or**     |
|       |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|       |                                                                                           |
| ** ** | **For the transition period  from        to**          |

###  

**000-31321**

**(CommissionFile No.)**

**RIGHTNOWTECHNOLOGIES, INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

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

 

**40Enterprise Boulevard**

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

 (Address of Principal Executive Offices) (ZipCode)

** (406) 522-4200**

 (Registrant’s Telephone Number, Including AreaCode)

**N/A**

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

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

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

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

 

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

The number of sharesoutstanding of the registrant’s common stock, $0.001 par value, as of July 31,2006 was 32,286,812.

 

 

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**RightNowTechnologies, Inc.Quarterly Report on Form 10-Q**

**Forthe Quarterly Period Ended June 30, 2006**

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

 

2

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**Part I.  FINANCIAL INFORMATION**

##### Item 1.  Financial Statements

**RightNowTechnologies, Inc.Condensed Consolidated Balance Sheets**(In thousands) (Unaudited)

 
| ** **                                           | ** ** | **December  31, 2005** | ** ** | **June  30, 2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Assets**                                           |       |                        |       |                    |       |
| Cash and cash  equivalents                           |       | $                           | 40,874     |                    | $          | 30,546 |   |
| Short-term investments                               |       | 23,314                      |       | 35,203                  |       |
| Accounts receivable                                  |       | 25,462                      |       | 26,250                  |       |
| Term receivables,  current                           |       | 15,376                      |       | 19,255                  |       |
| Allowance for doubtful  accounts                     |       | (2,209                      | )          | (2,331                  | )          |
| Receivables, net                                     |       | 38,629                      |       | 43,174                  |       |
| Prepaid & other  current assets                  |       | 1,993                       |       | 2,514                   |       |
| Total current assets                                 |       | 104,810                     |       | 111,437                 |       |
|                                                 |       |                        |       |                    |       |
| Property and equipment,  net                         |       | 6,451                       |       | 8,620                   |       |
| Term receivables,  non-current                       |       | 10,697                      |       | 15,765                  |       |
| Intangible assets, net                               |       | 1,487                       |       | 9,592                   |       |
| Other                                                |       | 231                         |       | 107                     |       |
| **Total Assets**                                     |       | $                           | 123,676    |                    | $          | 145,521 |   |
|                                                 |       |                        |       |                    |       |
| **Liabilities and Stockholders’  Equity**       | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Accounts payable                                     |       | $                           | 2,308      |                    | $          | 3,221 |   |
| Commissions and bonuses  payable                     |       | 2,910                       |       | 3,066                   |       |
| Other accrued  liabilities                           |       | 5,733                       |       | 5,749                   |       |
| Current portion of  long-term debt                   |       | 30                          |       | 35                      |       |
| Current portion of  deferred revenue                 |       | 48,673                      |       | 56,222                  |       |
| Total current  liabilities                           |       | 59,654                      |       | 68,293                  |       |
|                                                 |       |                        |       |                    |       |
| Long-term debt, less  current portion                |       | 117                         |       | 123                     |       |
| Deferred revenue, net  of current portion            |       | 19,250                      |       | 31,012                  |       |
|                                                 |       |                        |       |                    |       |
| Stockholders’ equity:                           |       |                        |       |                    |       |
|  Common stock                                   |       | 32                          |       | 32                      |       |
|  Additional paid-in capital                     |       | 78,312                      |       | 81,856                  |       |
|  Accumulated other comprehensive loss           |       | (401                        | )          | (312                    | )          |
|  Accumulated deficit                            |       | (33,288                     | )          | (35,483                 | )          |
|  Total stockholders’ equity                |       | 44,655                      |       | 46,093                  |       |
| **Total Liabilities and  Stockholders’ Equity** |       | $                           | 123,676    |                    | $          | 145,521 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

3

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**RightNow Technologies, Inc.Condensed Consolidated Statements of Operations**(In thousands, except per share amounts) (Unaudited)

 
| ** **                           | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                              | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenue:                             |       |                                                  |       |                                          |       |   |   |   |   |
|  Software,  hosting and support |       | $                                                     | 16,864     |                                          | $          | 20,636 |   | $ | 30,738 |   | $ | 39,946 |   |
|  Professional  services         |       | 4,214                                                 |       | 6,272                                         |       | 8,682 |   | 11,593 |   |
|  Total revenue                  |       | 21,078                                                |       | 26,908                                        |       | 39,420 |   | 51,539 |   |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Cost of revenue:                     |       |                                                  |       |                                          |       |   |   |   |   |
|  Software,  hosting and support |       | 2,276                                                 |       | 3,159                                         |       | 4,340 |   | 5,930 |   |
|  Professional  services         |       | 2,879                                                 |       | 4,941                                         |       | 5,575 |   | 9,045 |   |
|  Total cost of  revenue         |       | 5,155                                                 |       | 8,100                                         |       | 9,915 |   | 14,975 |   |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Gross profit                         |       | 15,923                                                |       | 18,808                                        |       | 29,505 |   | 36,564 |   |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Operating  expenses:                 |       |                                                  |       |                                          |       |   |   |   |   |
|  Sales and  marketing           |       | 10,557                                                |       | 14,852                                        |       | 20,014 |   | 28,578 |   |
|  Research and  development      |       | 2,426                                                 |       | 3,476                                         |       | 4,587 |   | 6,606 |   |
|  General and  administrative    |       | 1,586                                                 |       | 2,709                                         |       | 2,996 |   | 4,765 |   |
|  Total  operating expenses      |       | 14,569                                                |       | 21,037                                        |       | 27,597 |   | 39,949 |   |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Income (loss)  from operations       |       | 1,354                                                 |       | (2,229                                        | )          | 1,908 |   | (3,385 | ) |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Interest and  other income, net      |       | 331                                                   |       | 768                                           |       | 623 |   | 1,440 |   |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Income (loss)  before income taxes   |       | 1,685                                                 |       | (1,461                                        | )          | 2,531 |   | (1,945 | ) |
| Provision for  income taxes          |       | (126                                                  | )          | (294                                          | )          | (171 | ) | (250 | ) |
| Net income  (loss)                   |       | $                                                     | 1,559      |                                          | $          | (1,755 | ) | $ | 2,360 |   | $ | (2,195 | ) |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Net income  (loss) per share:        |       |                                                  |       |                                          |       |   |   |   |   |
|  Basic                          |       | $                                                     | 0.05       |                                          | $          | (0.05 | ) | $ | 0.08 |   | $ | (0.07 | ) |
|  Diluted                        |       | $                                                     | 0.05       |                                          | $          | (0.05 | ) | $ | 0.07 |   | $ | (0.07 | ) |
|                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Shares used in  the computation:     |       |                                                  |       |                                          |       |   |   |   |   |
|  Basic                          |       | 30,232                                                |       | 32,172                                        |       | 30,025 |   | 32,057 |   |
|  Diluted                        |       | 33,367                                                |       | 32,172                                        |       | 33,477 |   | 32,057 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

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**RightNowTechnologies, Inc.Condensed Consolidated Statements of Cash Flows**

(In thousands) (Unaudited)

 
| ** **                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                      | ** ** | **2006** | ** ** |
| **Operating  activities:**                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income  (loss)                                                   |       | $                                             | 2,360      |   | $ | (2,195 | ) |
| Non-cash  adjustments:                                               |       |                                          |       |   |   |
|  Depreciation  and amortization                                 |       | 1,570                                         |       | 2,442 |   |
|  Stock-based  compensation                                      |       | —                                        |       | 2,461 |   |
|  Provision  (recoveries) for uncollectible accounts receivable  |       | 44                                            |       | (241 | ) |
|  Deferred  income taxes                                         |       | 124                                           |       | — |   |
| Changes in  operating accounts, net of business acquisitions:        |       |                                          |       |   |   |
|  Receivables                                                    |       | (8,268                                        | )          | (8,412 | ) |
|  Prepaid  expenses and other current assets                     |       | 23                                            |       | (159 | ) |
|  Accounts  payable                                              |       | 778                                           |       | 744 |   |
|  Commissions  and bonuses payable                               |       | (75                                           | )          | 35 |   |
|  Other accrued  liabilities                                     |       | 579                                           |       | (191 | ) |
|  Deferred  revenue                                              |       | 8,760                                         |       | 18,325 |   |
|  Other                                                          |       | (92                                           | )          | 107 |   |
|  Cash provided  by operating activities                         |       | 5,803                                         |       | 12,916 |   |
|                                                                 |       |                                          |       |   |   |
| **Investing  activities:**                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net change in  short-term investments                                |       | 7,005                                         |       | (11,889 | ) |
| Acquisition of  property and equipment                               |       | (2,148                                        | )          | (3,910 | ) |
| Business  acquisitions, net of cash acquired                         |       | (1,012                                        | )          | (8,731 | ) |
| Other                                                                |       | —                                        |       | (10 | ) |
| Cash provided by  (used in) investing activities                     |       | 3,845                                         |       | (24,540 | ) |
|                                                                 |       |                                          |       |   |   |
| **Financing  activities:**                                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common stock under employee benefit plans |       | 1,805                                         |       | 999 |   |
| Payments on  long-term debt                                          |       | —                                        |       | (14 | ) |
| Cash provided by  financing activities                               |       | 1,805                                         |       | 985 |   |
|                                                                 |       |                                          |       |   |   |
| Effect of  foreign exchange rates on cash and cash equivalents       |       | (105                                          | )          | 311 |   |
|                                                                 |       |                                          |       |   |   |
| Increase  (decrease) in cash and cash equivalents                    |       | 11,348                                        |       | (10,328 | ) |
|                                                                 |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                    |       | 18,944                                        |       | 40,874 |   |
| Cash and cash  equivalents at end of period                          |       | $                                             | 30,292     |   | $ | 30,546 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**Notes toCondensed Consolidated Financial Statements**

(Unaudited)

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

***Business Description***

RightNow Technologies, Inc. (the “Company” or “RightNow”) providescustomer experience management software solutions for companies of allsizes.   The Company’s on demand softwareis designed to go beyond traditional customer relationship management (“CRM”)solutions to support a business’ external customer-facing channels as well assales, marketing and customer service operations.  Founded in1995, RightNow is headquartered in Bozeman, Montana, with additional offices inBoston, Massachusetts; Chicago, Illinois; Dallas, Texas; San Mateo, California;Princeton, New Jersey; Rochester, New York; London, England; Sydney, Australia;Munich, Germany; and Tokyo, Japan.  TheCompany operates in one segment, which is the customer experience managementmarket.

***Basis of Presentation***

The accompanyinginterim condensed consolidated financial statements are unaudited.  These condensed consolidated financialstatements 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 endedDecember 31, 2005.

The accompanyinginterim condensed consolidated financial statements have been prepared inaccordance with United States generally accepted accounting principles.  In the opinion of management, the interimconsolidated financial statements and notes have been prepared on the samebasis as the audited consolidated financial statements in the Annual Report onForm 10-K and include all adjustments necessary for the fair presentation ofthe Company’s financial position at June 30, 2006, and results of operationsand cash flows for the six month periods ended June 30, 2005 and 2006.  The interim period results are notnecessarily indicative of the results to be expected for the full year.

The preparation offinancial statements in conformity with United States generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and disclosures of contingent assets and liabilities.  Management evaluates these estimates andassumptions on an on-going basis. Significant estimates and assumptions made by management include theidentification and fair value of individual elements in multiple-element salesarrangements, whether the fees charged for our products and services are fixedand determinable, valuation allowances for trade receivables and deferredincome tax assets, and assumptions used in estimating the fair value of stockoptions granted for stock-based compensation.

6

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

The Company’srevenue is derived from the license, hosting and support of its softwareproducts and provision of related professional services.  The markets in which the Company competes arehighly competitive and rapidly changing. Significant technological changes, changes in customer requirements, orthe emergence of competitive products with new capabilities or technologiescould adversely affect the Company’s operating results.  The Company has historically derived amajority of its revenue from customer service software solutions.  These products are expected to continue toaccount for a significant portion of revenue for the foreseeable future.  As a result of this revenue concentration,the Company’s business could be harmed by a decline in demand for, or in theprices of, these products or as a result of, among other factors, any change inpricing model, a maturation in the markets for these products, increased pricecompetition or a failure by the Company to keep up with technological change.

The Company’scustomers are worldwide with approximately 70% to 75% of sales in the UnitedStates.  No individual customer accountedfor more than 10% of the Company’s revenue in 2005 or the first six months of2006.  No individual customer representedmore than 10% of receivables at June 30, 2006.

As of December 31,2005 and June 30, 2006, assets located outside the United States were 11% and10%, respectively, of total assets.   Theloss from operations outside of the United States totaled $3.5 million and $3.7million for the six months ended June 30, 2005 and 2006, respectively.  Revenue by geographical region follows (inthousands):

|               | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2005**                                              | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|          |       |                                                  |       |                                          |       |   |   |   |   |
| United States |       | $                                                     | 16,652     |                                          | $          | 20,072 |   | $ | 30,408 |   | $ | 37,440 |   |
| Europe        |       | 3,372                                                 |       | 5,335                                         |       | 6,124 |   | 10,349 |   |
| Asia Pacific  |       | 1,054                                                 |       | 1,501                                         |       | 2,888 |   | 3,750 |   |
|          |       | $                                                     | 21,078     |                                          | $          | 26,908 |   | $ | 39,420 |   | $ | 51,539 |   |

 

7

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

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

|                                                                            | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                              | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                       |       |                                                  |       |                                          |       |   |   |   |   |
| Weighted average  common shares outstanding for basic net income per share |       | 30,232                                                |       | 32,172                                        |       | 30,025 |   | 32,057 |   |
| Effect of  dilutive securities:                                            |       |                                                  |       |                                          |       |   |   |   |   |
| Employee stock options                                                     |       | 3,103                                                 |       | —                                        |       | 3,405 |   | — |   |
| Warrants                                                                   |       | 32                                                    |       | —                                        |       | 47 |   | — |   |
| Weighted average shares  outstanding for dilutive net income per share     |       | 33,367                                                |       | 32,172                                        |       | 33,477 |   | 32,057 |   |

 

The followingcommon stock equivalents were excluded from the computation of diluted earningsper share because their impact was anti-dilutive (in thousands):

|                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **             | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|                   |       |                                            |       |                                          |       |   |   |   |   |
| Employee stock options |       | 909                                             |       | 4,179                                         |       | 608 |   | 4,179 |   |

 

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

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

|                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss)                        |       | $                                               | 1,559      |                                          | $          | (1,755 | ) | $ | 2,360 |   | $ | (2,195 | ) |
| Other  comprehensive income (loss):       |       |                                            |       |                                          |       |   |   |   |   |
| Foreign currency translation adjustment   |       | 157                                             |       | 80                                            |       | 185 |   | 74 |   |
| Unrealized loss on short-term investments |       | 15                                              |       | 1                                             |       | (27 | ) | 15 |   |
| Comprehensive income  (loss)              |       | $                                               | 1,731      |                                          | $          | (1,674 | ) | $ | 2,518 |   | $ | (2,106 | ) |

 

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**(5)           Stock-Based Compensation**

***TheCompany’s 1998 Long-Term Incentive and Stock Option Plan, as amended, and the2004 Equity Incentive Plan (the “plans”) provide for stock options to begranted to employees, consultants, independent contractors, officers anddirectors.  The plans have been approvedby stockholders.  Except for directorautomatic grants, options are granted at the discretion of the Company’s boardof directors, at an exercise price and term determined by the board.  However, exercise prices are not less thanthe fair market value at the date of grant, and the term of the options is notgreater than ten years.  Optionsgenerally vest over a period of four years in eight equal increments.  The Company also has an employee stockpurchase plan (“ESPP”) that allows employees to purchase shares of common stockat a discount to the fair market value at the date of purchase.  Purchase periods under the ESPP areconsecutive six-month periods ending on the last day in June and December eachyear.  Shares issued to satisfy stockoption exercises and ESPP are newly issued. At June 30, 2006, the Company had approximately 3.9 million sharesavailable for future issuance under the plans and ESPP.***

On January 1, 2006, the Company adopted the provisionsof Statement of Financial Accounting Standards No. 123(R), *Share BasedPayment*, (“SFAS 123R”), for its stock-based compensation plans.  Under SFAS 123R, stock-based compensationcosts are recognized based on the estimated fair value at the grant date forall stock-based awards.  The Companyestimates grant date fair values using the Black-Scholes-Merton option pricingmodel, which requires assumptions of the life of the award and the stock pricevolatility over the term of the award. The Company records compensation cost of stock-based awards using thestraight line, single option method, which is recorded into earnings over thevesting period of the award.

The Company previously accounted for its stock-basedcompensation plans under the intrinsic value recognition and measurementprovisions of Accounting Principles Board Opinion No. 25 (“APB 25”), *Accounting for Stock Issued to Employees*, and relatedinterpretations, and adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards No. 123 (“SFAS 123”), *Accountingfor Stock-Based Compensation*, as amended by Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), *Accounting for Stock-BasedCompensation — Transition and Disclosures*.  Under APB 25, no compensation expense wasrecorded in earnings for the Company’s stock-based awards.  The pro forma effects on net income andearnings per share for stock-based awards were instead disclosed in thefootnotes to the consolidated financial statements in accordance with SFAS123R.

The Company has elected to use the modifiedprospective transition method as permitted under SFAS 123R and therefore hasnot restated its financial results for prior periods.  Under this transition method, compensationcost recorded in the three and six month periods ended June 30, 2006 includesthe cost for all stock-based awards granted prior to, but not yet vested as of,December 31, 2005, based on the grant-date fair value estimated in accordancewith the original provisions of SFAS 123. Compensation expense for all stock-based awards granted after December31, 2005 was based on the grant-date fair value estimated in accordance withthe provisions of SFAS 123R.

Compensation expense recognized in the statement ofoperations for the three and six month periods ended June 30, 2006 is based onawards ultimately expected to vest and reflects an estimate of awards that willbe forfeited.  SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.  Prior to the adoption of SFAS 123R,forfeitures were recorded as they occurred. 

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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  June 30, 2006** | ** ** | **Six Months   Ended  June 30, 2006** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Stock-based  compensation expense:                     |       |                                                        |       |                                                      |       |
| Cost of software, hosting and support                  |       | $                                                           | 55         |                                                      | $          | 93 |   |
| Cost of professional services                          |       | 137                                                         |       | 234                                                       |       |
| Sales and marketing                                    |       | 535                                                         |       | 901                                                       |       |
| Research and development                               |       | 233                                                         |       | 392                                                       |       |
| General and administrative                             |       | 718                                                         |       | 841                                                       |       |
| Stock-based compensation expense before income taxes   |       | 1,678                                                       |       | 2,461                                                     |       |
| Income tax provision (benefit)                         |       | —                                                      |       | —                                                    |       |
| Stock-based  compensation expense, net of income taxes |       | $                                                           | 1,678      |                                                      | $          | 2,461 |   |

 

Nostock-based compensation expense was capitalized during the three or six monthperiods ended June 30, 2006.

Thefollowing table presents the impact of our adoption of SFAS 123R on selectedline items from our condensed consolidated financial statements for the threemonth and six month periods ended June 30, 2006 (amounts in thousands, exceptper-share amounts):
| ** **                                       | ** ** | **Three Months Ended   June 30, 2006** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                       | ** ** | **As reported  under SFAS  123R**                     | ** ** | **If reported  under   APB 25**          | ** ** | **As reported  under SFAS  123R** | ** ** | **If reported  under  APB 25** | ** ** |
| Condensed  consolidated statement of operations: |       |                                                            |       |                                                    |       |   |   |   |   |
|  Loss from  operations                      |       | $                                                               | (2,229     | )                                                       | $          | (551 | ) | $ | (3,385 | ) | $ | (924 | ) |
|  Income (loss)  before income taxes         |       | (1,461                                                          | )          | 217                                                     |       | (1,945 | ) | 516 |   |
|  Net income  (loss)                         |       | (1,755                                                          | )          | (77                                                     | )          | (2,195 | ) | 266 |   |
|                                             |       |                                                            |       |                                                    |       |   |   |   |   |
|  Net income (loss) per share:               |       |                                                            |       |                                                    |       |   |   |   |   |
| Basic                                            |       | $                                                               | (0.05      | )                                                       | $          | (0.00 | ) | $ | (0.07 | ) | $ | 0.01 |   |
| Diluted                                          |       | (0.05                                                           | )          | (0.00                                                   | )          | (0.07 | ) | 0.01 |   |
|                                             |       |                                                            |       |                                                    |       |   |   |   |   |
| Condensed  consolidated statement of cash flows: |       |                                                            |       |                                                    |       |   |   |   |   |
|  Cash provided  by operating activities     |       | $                                                               | 6,864      |                                                    | $          | 6,864 |   | $ | 12,916 |   | $ | 12,916 |   |
|  Cash provided  by financing activities     |       | 560                                                             |       | 560                                                     |       | 985 |   | 985 |   |
|                                             |       |                                                            |       |                                                    |       |   |   |   |   |

 

Unrecognizedcompensation expense of outstanding stock options at June 30, 2006 wasapproximately $11 million, which is expected to be recognized over a weightedaverage period of 2.7 years.

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Thefollowing table illustrates the effect on reported net income and net incomeper share for the three and six month periods ended June 30, 2005 as if theCompany had applied the fair value recognition provisions of SFAS 123 tostock-based awards (in thousands, except per-share data):
| ** **                             | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                   |       |                                                  |       |                                                |       |
| Net income as  reported                |       | $                                                     | 1,559      |                                                | $          | 2,360 |   |
| Less stock-based  compensation expense |       | (1,393                                                | )          | (1,984                                              | )          |
| Pro forma net  income                  |       | $                                                     | 166        |                                                | $          | 376 |   |
|                                   |       |                                                  |       |                                                |       |
| Net income per  share:                 |       |                                                  |       |                                                |       |
| Basic                                  |       |                                                  |       |                                                |       |
|  As reported                      |       | $                                                     | 0.05       |                                                | $          | 0.08 |   |
|  Pro forma                        |       | 0.01                                                  |       | 0.01                                                |       |
| Diluted:                               |       |                                                  |       |                                                |       |
|  As reported                      |       | $                                                     | 0.05       |                                                | $          | 0.07 |   |
|  Diluted                          |       | 0.01                                                  |       | 0.01                                                |       |

The estimated weighted average fair value per share of stock optionsgranted in the three months ended June 30, 2005 and 2006 was $6.17 and $7.69, respectively,and for the six month periods ended June 30, 2005 and 2006 was $7.03 and $8.55,respectively.  The estimated fair valueof shares purchased under the ESPP for the six months ended June 30, 2005 was$5.79.  Assumptions used to obtain theestimated fair values were:  
| ** **                             | ** ** | **Three Months Ended June  30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Employee stock  options                |       |                                            |       |                                          |       |   |   |   |   |
|  Weighted  average risk free rate |       | 3.8                                             | %          | 5.0                                           | %          | 3.9 | % | 4.7 | % |
|  Weighted  average expected term  |       | 5.0 yrs                                         |       | 4.0 yrs                                       |       | 5.0 yrs |   | 4.4 yrs |   |
|  Weighted  average volatility     |       | 75                                              | %          | 57                                            | %          | 75 | % | 57 | % |
|  Dividend  yield                  |       | 0                                               | %          | 0                                             | %          | 0 | % | 0 | % |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Employee Stock  Purchase Plan          |       |                                            |       |                                          |       |   |   |   |   |
|  Risk free  rate                  |       | —                                          |       | —                                        |       | 2.9 | % | — |   |
|  Expected term                    |       | —                                          |       | —                                        |       | 0.5 yrs |   | — |   |
|  Volatility                       |       | —                                          |       | —                                        |       | 74 | % | — |   |
|  Dividend yield                   |       | —                                          |       | —                                        |       | 0 | % | — |   |

 

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

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

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

*Volatility*: The Company’s estimate of expected volatility isbased on a combination of the Company’s historical volatility and peer-companyvolatilities.  The Company has a limitedhistory of volatility, as well as limited traded options from which to deriveimplied volatility.  The Company believesthe combination of its historical and peer-company volatilities is morerepresentative of future stock price trends than its historical volatilityalone.

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

Activityunder the Company’s stock option plans for the six months ended June 30, 2006was 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, 2005                 |       | 3,007                                 |       | 3,898                    |       | $                                                      | 6.41       |                                                     |       |                                                                     |       |   |
| Annual reserve addition (1)                   |       | 1,000                                 |       | —                   |       | —                                                 |       |                                                     |       |                                                                     |       |
| Granted                                       |       | (771                                  | )          | 771                      |       | 17.01                                                  |       |                                                     |       |                                                                     |       |
| Exercised                                     |       | —                                |       | (374                     | )          | 2.38                                                   |       |                                                     |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled (2) |       | 88                                    |       | (116                     | )          | 12.03                                                  |       |                                                     |       |                                                                     |       |
| Balance at June  30, 2006                     |       | 3,324                                 |       | 4,179                    |       | $                                                      | 8.57       |                                                     | $          | 34,716                                                                   |       | 7.5 |   |
|                                          |       |                                  |       |                     |       |                                                   |       |                                                     |       |                                                                     |       |
| Vested or  expected to vest at June 30, 2006  |       |                                  |       | 3,865                    |       | $                                                      | 8.20       |                                                     | $          | 33,472                                                                   |       | 7.4 |   |
|                                          |       |                                  |       |                     |       |                                                   |       |                                                     |       |                                                                     |       |
| Exercisable at  June 30, 2006                 |       |                                  |       | 1,933                    |       | $                                                      | 5.16       |                                                     | $          | 22,307                                                                   |       | 6.2 |   |

 

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(1)          The 2004 Equity Incentive Plan provides for anautomatic, annual increase on the first of each year in an amount equal to thelesser of: a) 1,000,000 shares; b) 4% of the number of outstanding commonshares on the last day of the previous fiscal year; or c) such lesser amount asdetermined by the board of directors. The annual automatic increase has been approved by shareholders throughDecember 31, 2014.

(2)          Sharesforfeited, expired, exchanged or canceled under the 1998 Long-Term EquityIncentive and Stock Option Plan are not available for re-grant under the 2004Equity Incentive Plan.

Thetotal intrinsic value of options exercised during the six months ended June 30,2005 and 2006 was $16.9 million and $5.2 million, respectively.

Fromtime to time the Company may grant options to purchase stock toconsultants.  The Company accounts forconsultant stock options in accordance with SFAS 123 and Emerging Issues TaskForce Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued to Other ThanEmployees for Acquiring, or in Conjunction With Selling, Goods or Services*.  Compensation expense for the grant of stockoptions to consultants is determined based on the estimated fair value of thestock options at the measurement date as defined in EITF 96-18 and isrecognized over the vesting period. There were no stock options granted to non-employees for the six monthsended June 30, 2005 or 2006.

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***(6) ***Warranties and Indemnification

The Company’s ondemand application service is typically warranted to perform in accordance withits user documentation.

The Company’s arrangementsgenerally include certain provisions for indemnifying customers againstliabilities if its products or services infringe a third-party’s intellectualproperty rights.  To date, the Companyhas not incurred any material costs as a result of such indemnifications andhas not accrued any liabilities related to such obligations in the accompanyingconsolidated financial statements.

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

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

***Litigation***

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

**(7)           Acquisition**

On May 22, 2006, the Company acquired the outstandingcommon and preferred stock of Salesnet, Inc. (“Salesnet”), a provider of ondemand sales force automation solutions, for $8.7 million in net cash paid atclosing.  The acquisition is expected toaccelerate the product development of the Company’s sales force automationproduct set, increase the Company’s domain expertise in sales automation, andadd several hundred customers to the Company’s base.  The acquisition is being accounted for underthe purchase method of accounting and, accordingly, the results of Salesnet areincluded in the condensed consolidated financial statements since theacquisition date.

The Company has allocated the purchase price to theSalesnet assets acquired and liabilities assumed at estimated fair values,after considering a number of factors, including the use of an independentappraisal.  The purchase price, andpurchase price allocation are as follows (amounts in thousands):

| Cash consideration        |   | $   | 9,015  |   |
|---------------------------|--------|-----|--------|--------|
| Direct  acquisition costs |   | 182 |   |
| Total purchase  price     |   | $   | 9,197  |   |

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| Purchase price allocation:                |   |   |   |
|-------------------------------------------|--------|--------|--------|
| Cash and cash  equivalents                |   | $      | 466    |   |
| Accounts  receivable                      |   | 399    |   |
| Property and  equipment                   |   | 264    |   |
| Other assets                              |   | 216    |   |
| Intangible  assets                        |   | 8,445  |   |
| Accounts payable  and accrued liabilities |   | (315   | )      |
| Deferred revenue                          |   | (252   | )      |
| Capitalized  lease obligations            |   | (26    | )      |
| Total purchase  price                     |   | $      | 9,197  |   |

 

The purchase price and allocation are subject to revision; subsequentrevisions, if any, are not expected to be material.  Potential revisions may arise from thefinalization of direct acquisition costs and accrued liabilities. Net deferredtax assets arising from the acquisition are reserved in full by a valuationallowance.

Thecomponents of the intangible assets listed in the above table as of theacquisition date are as follows (amounts in thousands):

 

| Goodwill                   |   | $     | 4,315  |   |
|----------------------------|--------|-------|--------|--------|
| Customer  relationships    |   | 3,250 |   |
| Technology                 |   | 740   |   |
| Trade name and  trademarks |   | 140   |   |
| Intangible  assets         |   | $     | 8,445  |   |

 

The excess of the purchase price over the estimatedfair value of the net assets acquired of $4.3 million has been recorded asgoodwill, which is deemed to have an indefinite useful life and, accordingly,will not be amortized, but will be subject to periodic impairment testing infuture periods.  The customerrelationships and technology intangible assets will be amortized over a periodof four years using the straight-line method. The trade name and trademarks will be amortized over a period of threeyears using the straight-line method

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

***Cautionary Statement***

*The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with thefinancial statements and related notes in this report.  This discussion contains forward-lookingstatements that involve risks and uncertainties.  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 are subjectto change.  Forward-looking statementscan often be identified by words such as “anticipates,” “expects,” “intends,” “plans,”“predicts,” “believes,” “seeks,” “ estimates,” “may,” “will,” “should,” “would,”“could,” “potential,” “continue,” “ongoing,” similar expressions, andvariations or negatives of these words and include, but are not limited to,statements regarding projected results of operations and management’s futurestrategic plans. Our actual results could differ significantly from those projectedin the forward-looking statements as a result of factors, including thosediscussed under “Risk Factors” and elsewhere in this report.  We assume no obligation to update theforward-looking statements or such risk factors.*

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***Overview***

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

Wereleased our initial version of RightNow Service in 1997.  This product addressed the new customerservice needs resulting from the increasing use of the Internet as a customerservice channel.  Since then, we havesignificantly enhanced product features and functionality to address customerservice needs across multiple communication channels, including web,interactive voice, e-mail, chat, telephone and proactive outbound e-mail communications.We have also added several products that are complementary to our RightNowService solution, including RightNow Marketing and RightNow Sales, whichautomate aspects of marketing campaigns and sales operations.  In May 2005, we purchased the assets ofConvergent Voice, and added voice enabled-CRM capabilities to our productportfolio.  In May 2006, we purchasedSalesnet, Inc., a provider of salesforce automation services.  To date, approximately 90% of our revenue hasbeen generated by the RightNow Service suite.

Duringthe three months ended June 30, 2006, we acquired 70 new customers andapproximately 200 Salesnet customers, to bring our customer base to more than1,700. Our products served more than 223 million customer interactions, orunique sessions hosted by our solutions. Our solutions, whether sold pursuant to term or perpetual licenses, areavailable either on a hosted basis, where they are deployed in our co-locationfacilities and accessed on demand by our clients, or on a non-hosted basis,where our clients deploy them in their own facilities.  Approximately 86% of our clients have electedthe hosted option as of June 30, 2006. We distribute our solutions primarily through direct sales efforts andto a lesser extent through indirect channels.

***Sources of Revenue***

Ourrevenue is comprised of fees for term and perpetual licenses of our software,fees for hosting and support related to our licenses, and fees for professionalservices. Our term license agreements are generally two years in length, butcan range from six months to five years, and include our software and relatedupgrades, and hosting and support services over the term of the agreement. Themajority of our revenue in each of our last three years and the six monthsended June 30, 2006 was derived from two-year term license agreements, whichare paid in full at the beginning of the license period.  We also offer term agreements that may bepaid on a monthly or quarterly basis, which contain a minimum commitment periodand include our software and related upgrades, hosting and support.  Perpetual licenses are typically sold withannual maintenance contracts that include upgrades, hosting and support.

Oursoftware license agreements generally include capacity-based fees, which aremeasured primarily by web pages served, user seats, outgoing emailtransactions, or minutes used, and certain fixed fees.  A number of our agreements provide foradditional fees for usage above established levels, which are billed andrecognized into revenue when earned.

Hostingand support agreements provide maintenance and management of our software at athird party facility, technical support for our software products, andunspecified product upgrades on a when and if available basis.

Professionalservices revenue is comprised of revenue from consulting, education anddevelopment services, and reimbursement of related travel costs.  Consulting and education services includeimplementation and best practices consulting. Development services include customizations and integrations for aclient’s specific business application.

 

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Professionalservices are sold with initial license agreements and periodically over theclient engagement. The average deployment time for our clients is approximately50 days.  Our typical education coursesare billed on a per person, per class basis.

Dependingon the size and complexity of the client project, our consulting or developmentservices contracts are either fixed price/fixed scope or, less frequently,billed on a time and materials basis. We have determined that the professionalservices element of our software arrangements is not essential to thefunctionality of the software.  We havealso determined that our professional services: a) are available from othervendors; b) do not involve a significant degree of risk or unique acceptancecriteria; and c) qualify for separate accounting as we have sufficientexperience in providing such services.

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

*Costof Revenue.   *Cost ofrevenue consists primarily of salaries and related expenses (e.g. employeebenefits and payroll taxes) for our hosting, support and professional servicesorganizations, third-party costs and equipment depreciation relating to ourhosting services, third-party costs for voice enabled CRM applications, travelexpenses 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, depreciation for furniture and equipment, payroll taxes and employeebenefits, based on headcount. As a result, overhead expenses are reflected ineach cost of revenue and operating expense category.   Beginning January 1, 2006, cost of revenuealso includes stock-based compensation expense.

Ourhosting costs are affected by the percentage of clients who license ourproducts on a hosted basis and the number of times our clients and theircustomers use our solutions, which we refer to as customer interactions. As aresult of economies of scale in our hosting infrastructure and declines incomputer hardware and telecommunications costs, we were able to reduce hostingcosts as a percentage of total revenue in 2003, 2004 and 2005.  In 2006, we are investing in a Europeanhosting center and a voice hosting center which are expected to be in servicein the quarter ending September 30, 2006. 

Asour client base and solutions usage grows, we intend to continue to investadditional resources in our hosting services, technical support andprofessional services. We expect our professional services costs to increase inabsolute dollars as we increase our professional services as a percentage oftotal revenue. Because cost as a percentage of revenue is higher forprofessional services revenue than for software, hosting and support revenue,an increase in professional services as a percentage of total revenue reducesgross profit as a percentage of total revenue. 

*Sales and Marketing Expenses. *Sales and marketing expenses consistprimarily of salaries and related expenses for employees in sales andmarketing, including commissions and bonuses, advertising, marketing events,corporate communications, product management expenses, travel costs andallocated overhead. Beginning January 1, 2006, sales and marketing expensesalso include stock-based compensation expense. We expense our sales commissionswhen earned, which is typically at the time the related sale is invoiced to theclient, and we recognize the majority of our revenue from our agreementsratably over the terms of the licenses. Accordingly, we generally experience adelay between increasing sales and marketing expenses and the recognition ofcorresponding revenue. We expect significant additional increases in sales andmarketing expenses in absolute dollars as we continue to hire additional salesand marketing personnel and increase the level of marketing activities. 

*Research and Development Expenses. *Research and development expenses consistprimarily of salary and related expenses for development personnel and costs relatedto the development of new products, enhancement of existing products,translation fees, quality assurance, testing and allocated overhead. BeginningJanuary 1, 2006, research and development expenses also include stock-basedcompensation expense. To date, we have not capitalized any software developmentcosts because the timing of the commercial releases of our products hassubstantially coincided with the attainment of

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technological feasibility. As a result,research and development costs have been expensed as incurred. We intend tocontinue to expand and enhance our product offerings. To accomplish this, weplan to hire additional personnel and, from time to time, contract with thirdparties. We expect that research and development expenses will increase inabsolute dollars as we seek to expand our technology and product offerings. 

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

***Critical AccountingPolicies and Estimates***

Our financialstatements and accompanying notes are prepared in accordance with accountingprinciples generally accepted in the United States.  Preparing financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses. These assumptions are affected by management’s application of accountingpolicies.  Our critical accountingpolicies include: revenue recognition; valuation of receivables and deferredtax assets; and accounting for equity-based compensation.

We believe thefollowing critical accounting policies require us to make significant judgmentsand estimates in the preparation of our consolidated financial statements:

***Revenue Recognition***

We account for oursales arrangements in accordance with the American Institute of CertifiedPublic Accountants Statement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition*, and SOP 98-9, Modification of SOP 97-2, *Software Revenue Recognition With Respect to Certain Transactions*.  The application of these rules requiresjudgment, including the identification of individual elements in multipleelement arrangements, whether there is objective and reliable evidence of fairvalue up to and including vendor specific objective evidence (“VSOE”) of fairvalue for some or all elements.  Customersmay receive certain elements upon delivery or over time.  For example, under our sales arrangementscustomers typically receive the software license up front, and receive hostingand support services continuously over the length of the agreement.  Under our term arrangements, revenues for thesoftware, hosting and support elements are recognized ratably over the lengthof the agreement.  Under a perpetuallicense arrangement, VSOE of the hosting and support elements is based on theprice charged at renewal when sold separately, and therefore the licenseelement is recognized immediately into revenue upon delivery using the residualmethod, and the hosting and support elements are recognized ratably over thecontractual term.  

We acquiredSalesnet, Inc. in May, 2006 and we account for its sales arrangements underEmerging Issues Task Force Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables*.  Underthese arrangements, fees charged for software, hosting and support services arerecognized ratably over the length of the agreement, and fees charged forprofessional services are recognized when delivered.  We believe the fees for professional servicesqualify for separate accounting because: a) the services have value to thecustomer on a stand-alone basis; b) objective and reliable evidence of fairvalue exists for these services; c) performance of the services is consideredprobable and does not involve unique customer acceptance criteria.

Changes to theelements in our sales arrangements, or our ability to establish VSOE or fairvalue for those elements, may result in a material change to the amount ofrevenue recorded in a given period.  

Our standardpayment terms are net 30, although payment within 90 days is considerednormal.  We provide extended paymentterms in certain circumstances.  In suchcases, judgment is required in determining whether our fee is fixed anddeterminable and the appropriate timing of revenue recognition.

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Changes to our practiceof providing extended payment terms or providing concessions following a sale,may result in a material change to the amount of revenue recorded in a givenperiod.  

***Allowance for doubtful accounts***

We regularlyassess the collectibility of outstanding customer invoices and, in so doing, 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.  

***Income Taxes***

We record incometaxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect of achange in tax rates on deferred tax assets and liabilities is recognized inincome in the period that includes the enactment date.  When applicable, a valuation allowance isestablished to reduce any deferred tax asset when it is determined that it ismore likely than not that some portion of the deferred tax asset will not berealized.

We haveestablished a valuation allowance equal to our net deferred tax assets due touncertainties regarding the realization of our net operating losscarryforwards, tax credits, and deductible timing differences.  The uncertainty of realizing these benefitsis based primarily on our lack of taxable earnings.

***Equity-Based Compensation***

We have adoptedthe provisions of Statement of Financial Accounting Standards No. 123(R), *Share Based Payment*, (“SFAS 123R”) beginning January 1, 2006utilizing the modified prospective method. This statement requires the cost of share-based payment arrangements tobe recorded in the statement of operations. Prior to 2006, the estimated cost of share-based payment arrangementswas disclosed in a footnote to the financial statements.  Share-based compensation amounts are affectedby our stock price as well as our assumptions regarding the expected volatilityof our stock, our employee stock option exercise behaviors, and the relatedincome tax effects.  Our assumptions arebased primarily on our historical information, some of which was developed whenwe were a private company.  

***Recently Issued AccountingStandards***

In February 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 155, *Accounting for CertainHybrid Instruments*, which amends SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, and SFAS 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishment of Debt*.  Thenew standard allows an entity to remeasure at fair value a hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation from the host, if the holder irrevocably elects to account for thewhole instrument on a fair value basis. Subsequent changes in the fair value of the instrument would berecognized in earnings.  SFAS 155 iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006.  We do not believe the adoption of SFAS 155will have a material effect on our financial statements.

SFAS 156, *Accounting for Servicing of Financial Asset*, amends SFAS 140to address the recognition and measurement of separately recognized servicingassets and liabilities and to simplify efforts to obtain hedge-like (offset)accounting.  SFAS 156 is effective as ofthe beginning of the first fiscal year

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that begins afterSeptember 15, 2006, with earlier adoption permitted as of the beginning of anentity’s fiscal year, provided the entity has not yet issued interim financialstatements for that fiscal year.  We donot believe adoption of SFAS 156 will have a material effect on our financialstatements.

In July 2006, theFinancial Accounting Standard Board issued FASB Interpretation 48, *Accounting for Income Tax Uncertainties* (“FIN 48”).  FIN 48 defines the threshold for recognizingthe benefits of tax return positions in the financial statements as “more-likely-than-not”to be sustained by the taxing authority. The recently issued literature also provides guidance on thederecognition, measurement and classification of income tax uncertainties,along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income taxuncertainties in interim periods and increases the level of disclosuresassociated with any recorded income tax uncertainties.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  Thedifferences between the amounts recognized in the statements of financialposition prior to the adoption of FIN 48 and the amounts reported afteradoption will be accounted for as a cumulative-effect adjustment recorded tothe beginning balance of retained earnings. The Company is currently assessing the potential impact of FIN 48 on itsconsolidated financial position and results of operations.

In March 2006, theEmerging Issues Task Force issued EITF No. 06-3, *How TaxesCollected from Customers and Remitted to Government Authorities Should bePresented in the Income Statement (That is, Gross versus Net Presentation)*.  The issue addresses how nondiscretionaryamounts assessed by governmental authorities in connection with a transactionwith a customer, such as sales, use, value added, and some excise taxes, shouldbe presented in the financial statements. The tentative conclusion is that the presentation of taxes within thescope of this issue on either a gross (included in revenues and costs) or net(excluded from revenues) basis is an accounting policy decision.  The Company’s policy is to present revenue ona net basis.   

***Results of Operations***

Thefollowing table sets forth certain consolidated statement of operations dataexpressed as a percentage of total revenue for the periods indicated:  
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenue:                                  |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support             |       | 80                                              | %          | 77                                            | %          | 78 | % | 77 | % |
| Professional services                     |       | 20                                              |       | 23                                            |       | 22 |   | 23 |   |
| Total revenue                             |       | 100                                             |       | 100                                           |       | 100 |   | 100 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Cost of revenue:                          |       |                                            |       |                                          |       |   |   |   |   |
| Software, hosting and support             |       | 11                                              |       | 12                                            |       | 11 |   | 12 |   |
| Professional services                     |       | 14                                              |       | 18                                            |       | 14 |   | 17 |   |
| Total cost of revenue                     |       | 25                                              |       | 30                                            |       | 25 |   | 29 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Gross profit                              |       | 75                                              |       | 70                                            |       | 75 |   | 71 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                      |       |                                            |       |                                          |       |   |   |   |   |
| Sales and marketing                       |       | 50                                              |       | 55                                            |       | 51 |   | 55 |   |
| Research and development                  |       | 12                                              |       | 13                                            |       | 12 |   | 13 |   |
| General and administrative                |       | 7                                               |       | 10                                            |       | 7 |   | 9 |   |
| Total operating expenses                  |       | 69                                              |       | 78                                            |       | 70 |   | 78 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss)  from operations            |       | 6                                               |       | (8                                            | )          | 5 |   | (7 | ) |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Interest and  other income (expense), net |       | 2                                               |       | 3                                             |       | 2 |   | 3 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss)  before income taxes        |       | 8                                               |       | (5                                            | )          | 7 |   | (4 | ) |
| Provision for  income taxes               |       | (1                                              | )          | (1                                            | )          | (1 | ) | — |   |
| Net income                                |       | 7                                               | %          | (6                                            | )%         | 6 | % | (4 | )% |
|                                      |       |                                            |       |                                          |       |   |   |   |   |

 

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Thefollowing table sets forth our on demand customer interactions and percent ofclients hosting and our revenue by type and geography expressed as a percentageof total revenue for each of the periods indicated:  
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Customer  interactions (in millions)           |       | 176                                             |       | 223                                           |       | 342 |   | 504 |   |
| Percentage of  clients hosting                 |       | 86                                              | %          | 86                                            | %          | 86 | % | 86 | % |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Revenue by type:                               |       |                                            |       |                                          |       |   |   |   |   |
| Recurring (term licenses, hosting and support) |       | 51                                              | %          | 56                                            | %          | 54 | % | 56 | % |
| Perpetual licenses                             |       | 29                                              |       | 21                                            |       | 24 |   | 21 |   |
| Professional services                          |       | 20                                              |       | 23                                            |       | 22 |   | 23 |   |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Revenue by  geography:                         |       |                                            |       |                                          |       |   |   |   |   |
| United States                                  |       | 79                                              | %          | 74                                            | %          | 77 |   | 73 | % |
| Europe                                         |       | 16                                              |       | 20                                            |       | 16 |   | 20 |   |
| Asia Pacific                                   |       | 5                                               |       | 6                                             |       | 7 |   | 7 |   |

 

***Overview of Current Periodand Outlook***

Revenuefor the quarter ended June 30, 2006 of $26.9 million was 28% more than thesecond quarter of 2005, and represented our 34th consecutive quarter oftop-line growth.  Revenue growth has beendriven by new customer acquisitions, the release of new products, and customerpurchases of additional capacity.  Wesigned 70 new customers during the quarter ended June 30, 2006 and, whencombined with the Salesnet acquisition in May 2006, our total customer base nowexceeds 1,700.  Deferred revenues of$87.2 million at June 30, 2006 are 52% more than one year earlier.  Beginning January 1, 2006 we adopted theprovisions of the new accounting standard for stock-based compensation andrecorded $1.7 million and $2.5 million of stock-based compensation expenses inthe three month and six month periods ended June 30, 2006, respectively.  

Cashprovided by operating activities has grown more than 100% in the three monthand six month periods ended June 30, 2006 over the similar periods of2005.  Cash provided by operatingactivities was $6.9 million and $12.9 million in the three and six monthperiods ended June 30, 2006, respectively.  

Asof June 30, 2006, we had an accumulated deficit of $35.5 million.  This deficit resulted primarily from costsincurred in the development, sales and marketing of our products and forgeneral and administrative purposes.  Weintend to continue to invest in our sales and marketing activities, productdevelopment and business infrastructure. During periods of investment and growth, because the majority ofexpenses are recorded as incurred and the majority of revenue is deferred, weanticipate that any growth in revenue will be largely offset by an increase incost of revenue and operating expenses.

***Three Months and Six Months Ended June 30, 2005 and2006***

***Revenue***
|                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                            | ** ** | **2006**                                          | ** ** | **Percent  Change** | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Software,  hosting and support       |       | $                                                   | 16,864     |                                              | $          | 20,636 |   | 22 | % | $ | 30,738 |   | $ | 39,946 |   | 30 | % |
| Professional  services               |       | 4,214                                               |       | 6,272                                             |       | 49 |   | 8,682 |   | 11,593 |   | 34 |   |
| Total revenue                        |       | $                                                   | 21,078     |                                              | $          | 26,908 |   | 28 | % | $ | 39,420 |   | $ | 51,539 |   | 31 | % |

 

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*Software, hosting and support*

Forthe quarter ended June 30, 2006, software, hosting and support revenueincreased $3.8 million, or 22%, over the second quarter of 2005.  Recurring software, hosting and supportrevenue in the 2006 quarter increased $4.3 million, or 40%, while perpetualsoftware license revenue decreased $0.5 million, when compared to the secondquarter of 2005.  The growth in recurringsoftware, hosting and support revenue resulted primarily from a 17% increase inaverage number of customers combined with a 5% increase in average revenue perclient.  We added 70 new clients duringthe quarter ended June 30, 2006 primarily due to additional focus on new clientacquisition.  Average revenue per clienthas grown from additional usage capacity and upgrades and enhancementspurchased by clients.  The Salesnetacquisition is expected to add approximately $2.5 to $3.0 million of software,hosting and support revenue in the year ending December 31, 2006.

BeginningJanuary 1, 2006, average software, hosting and support revenue per clientincludes the value of certain tools that had been categorized as professionalservices revenue in prior periods.  Thischange in revenue categorization follows the transfer of ongoing developmentand support responsibility for these tools from the professional servicesorganization to the software, hosting and support organization effectiveJanuary 1, 2006.

Perpetuallicense fee revenue represented 21% of total revenue in the quarter ended June30, 2006 compared to 29% in the quarter ended June 30, 2005.  The mix of perpetual license revenue affectsour overall profitability in any given period since it is recorded into revenuein full upon delivery instead of being ratably recognized into revenue, as isthe case with term licenses.  Perpetuallicense revenue has ranged between 18% and 29% of total revenue over the pasteight quarters, but has been declining over the past five quarters.  We believe there are many factors that causeour perpetual license revenue to fluctuate as a percentage of total revenue,including client planning horizons, and client purchasing preferences andpatterns.  We expect perpetual licenserevenue to continue to fluctuate in future periods.

*Professional services*

For the quarterended June 30, 2006, professional services revenue increased $2.1 million, or49%, over the second quarter of 2005. Average professional services revenue per client increased 22% in thesecond quarter of 2006 compared to the second quarter of 2005, while averagenumber of clients increased 17%.  Theincrease in average professional services revenue per client in the secondquarter of 2006 resulted primarily from growth in the number of strategicconsulting engagements performed in 2006 when compared to 2005.  Average professional services revenue perclient in 2006 has been reduced because of a change in classification ofcertain tools from professional services revenue to software, hosting andsupport revenue.  These tools, consistingof connectors to other general-use software applications and customizationtools, had been created by our professional services organization and includedin professional services revenue in 2005. Effective January 1, 2006, we transferred the ongoing development andsupport responsibilities for these tools to our product group, and accordingly,the associated revenue is classified as software, hosting and support revenuebeginning in 2006.    

Themix of professional services revenue to total revenue will also affect ouroperating results from period-to-period, due to the lower gross profit earnedon professional services revenue as compared to software, hosting and supportrevenue.  We expect professional servicesrevenue to range between 20% and 25% of total revenue in future periods.

***Cost of Revenue***
|                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                            | ** ** | **2006**                                          | ** ** | **Percent  Change** | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Software,  hosting and support       |       | $                                                   | 2,276      |                                              | $          | 3,159 |   | 39 | % | $ | 4,340 |   | $ | 5,930 |   | 37 | % |
| Professional  services               |       | 2,879                                               |       | 4,941                                             |       | 72 |   | 5,575 |   | 9,045 |   | 62 |   |
| Total cost of revenue                |       | $                                                   | 5,155      |                                              | $          | 8,100 |   | 57 | % | $ | 9,915 |   | $ | 14,975 |   | 51 | % |

 

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*Software, hosting and support*  

Forthe quarter ended June 30, 2006, cost of software, hosting and support revenueincreased $883,000, or 39%, over the comparable 2005 quarter due to capacityadditions to our hosting centers, growth in the volume of customer interactionsserved, and staff additions.  Capitaladditions related to our new European and voice hosting centers, as well asnormal hosting capacity additions, increased depreciation expense by $379,000in the second quarter of 2006 over the second quarter of 2005.  This additional capacity, combined with 27%higher volume of customer interactions, increased third-party hosting fees,telecommunications expenses, and maintenance expenses by $188,000 in the secondquarter of 2006 over the second quarter of 2005.  Staff additions in our software, hosting andsupport organization increased salaries and related employee costs by $186,000in the second quarter of 2006 over the second quarter of 2005.  Stock-based compensation expense included inthe cost of software, hosting and support was $55,000 and zero in the secondquarter of 2006 and 2005, respectively. Average employee count in our hosting and support organization was 65 inthe second quarter of 2006 compared to 58 in the second quarter of 2005.  As a percent of the associated revenue, costof software, hosting and support increased slightly to 15% in the secondquarter of 2006 from 14% in the second quarter of 2005.   

*Professional services*  

Forthe quarter ended June 30, 2006, professional services costs increased $2.1million, or 49%, over the comparable 2005 quarter.  The growth in absolute dollars in the secondquarter of 2006 resulted primarily from staff additions, which increased salariesand related expenses by $1.1 million. Growth in the number of strategic consulting engagements increasedcontract services by $440,000 and increased travel and living expenses by$339,000 in the second quarter of 2006 over the second quarter of 2005.   Stock-based compensation expense in the costof professional services was $137,000 in the second quarter of 2006 as comparedto zero in the second quarter of 2005. Average employee count in our professional services group was 122 in thesecond quarter of 2006 compared to 88 in the second quarter of 2005.  As a percent of the associated revenue,professional services costs were 79% in the 2006 quarter as compared to 68% inthe 2005 quarter, due to the increased number of strategic consultingengagements, the 2006 reclassification noted above in the discussion underprofessional services revenue, and the addition of stock-based compensationcharges beginning in 2006.  We expect thecost of professional services to range between 68% and 78% of the associatedrevenue in the future. 

***Operating Expenses***
|                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                            | ** ** | **2006**                                          | ** ** | **Percent  Change** | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Sales and  marketing                 |       | $                                                   | 10,557     |                                              | $          | 14,852 |   | 41 | % | $ | 20,014 |   | $ | 28,578 |   | 43 | % |
| Research and  development            |       | 2,426                                               |       | 3,476                                             |       | 43 |   | 4,587 |   | 6,606 |   | 44 |   |
| General and  administrative          |       | 1,586                                               |       | 2,709                                             |       | 71 |   | 2,996 |   | 4,765 |   | 59 |   |
| Total operating  expenses            |       | $                                                   | 14,569     |                                              | $          | 21,037 |   | 44 | % | $ | 27,597 |   | $ | 39,949 |   | 45 | % |

*Sales and Marketing Expenses*  

Forthe quarter ended June 30, 2006, sales and marketing expense increased $4.3million, or 41%, over the comparable 2005 quarter due to the addition of salesrepresentatives, increased advertising expenditures, and increased salesincentive costs.  Average employee countin our sales and marketing organization increased to 255 in the second quarterof 2006 from 200 in the second quarter of 2005. The employee growth added $1.7 million in salaries and related expenses,$552,000 in travel and living expenses, and $134,000 in recruiting and employeerelations expenses.  Stock-basedcompensation expense in our sales and marketing organization was $535,000 inthe quarter ended June 30, 2006 as compared to zero in the quarter ended June30, 2005.  Advertising costs increased$571,000 in the June 2006 quarter over the June 2005 quarter due to a newcorporate positioning strategy in 2006. In addition, sales commissions increased $553,000 in the quarter endedJune 30, 2006 over the quarter ended June 30, 2005 due to growth in the valueof new customer contracts invoiced.  As apercent of total revenue, sales and

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marketingexpenses increased to 55% in the second quarter of 2006 from 50% in the secondquarter of 2005.

*Research and Development Expenses*  

Forthe quarter ended June 30, 2006, research and development expenses increased$1.1 million, or 43%, over the comparable 2005 quarter due to higher salariesand related costs of $814,000, and stock-based compensation expense of$233,000.  Average employee count in ourresearch and development organization grew to 121 employees in the secondquarter of 2006 from 94 employees in the second quarter of 2005.  

*General and Administrative Expenses*   

Forthe quarter ended June 30, 2006, general and administrative expenses increased$1.1 million, or 71%, over the second quarter of 2005 primarily due to theinclusion of stock-based compensation of $718,000 in the current quarter.  Stock-based compensation in the secondquarter of 2006 includes the expense of annual stock option grants to our independentdirectors on our board of directors, which vest immediately upon grant.  In addition, employee growth in our generaland administrative group increased salaries and related expenses by $284,000 inthe second quarter of 2006 over the second quarter of 2005.  Average employees in our general andadministrative organization were 57 in the second quarter of 2006 and 40 in thesecond quarter of 2005.

*Stock-based Compensation*

Weadopted the provisions of Statement of Financial Accounting Standards No. 123(R),Share Based Payment, using the modified prospective method, on January 1,2006.  Under the modified prospectivemethod, prior periods have not been restated to conform to the current periodaccounting treatment.  Adoption of thisaccounting standard required the recognition of $1.7 million and $2.5 millionof stock-based compensation expense in the three month and six month periodsended June 30, 2006, respectively. Amounts recorded to each cost and expense category have been noted inthe above discussion.  At June 30, 2006,we had approximately $11 million of deferred stock-based compensation expensethat is expected to be recorded into earnings over a weighted-average period of2.7 years.  Total stock-basedcompensation expense for the year ended December 31, 2006 is anticipated to beapproximately $5.3 million.  Thisestimate is based on assumptions regarding our stock price, the number andtiming of stock awards granted and forfeited, our stock price volatility, andemployee exercise behaviors.  Actualstock-based compensation expense could differ materially from ourestimates.  

***Interest and Other Income (Expenses), Net***** **
|                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2005**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                      |       | $                                               | 342        |                                          | $          | 723 |   | $ | 645 |   | $ | 1,397 |   |
| Interest expense                     |       | —                                          |       | (6                                            | )          | — |   | (8 | ) |
| Other income  (expense)              |       | (11                                             | )          | 51                                            |       | (22 | ) | 51 |   |
| Total other income  (expense)        |       | $                                               | 331        |                                          | $          | 768 |   | $ | 623 |   | $ | 1,440 |   |

Interestincome of $723,000 in the quarter ended June 30, 2006 increased 111% overinterest income of $342,000 in the quarter ended June 30, 2005 due to growth inthe average yield-to-maturity in our investment portfolio, as well as growth inour cash and short-term investment balances. Investment yields have risen along with the periodic increases in thefederal funds rate.  Our investmentportfolio consists primarily of investment-grade, short-term government andcorporate debt instruments.  Interestexpense in the 2006 periods resulted from certain capitalized leaseobligations.  Other income (expense)consists of gains or losses on equipment disposals and realized foreigncurrency exchange gains or losses.

***Provision for Income Taxes***** **

Theprovision for income taxes in the three month and six month periods ended June30, 2006 is based on our expectations for the full year results, and consistsprimarily of federal alternative minimum

23

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taxes.  Our income tax provision is dependent on manyfactors, including actual tax deductions for stock-based compensation ascompared to book deductions, the level of business conducted in state andforeign tax jurisdictions, management’s expectations of the realization ofdeferred tax assets and the associated valuation allowance, and otherfactors.  

AtJune 30, 2006, we had $27 million of net deferred income tax assets that havebeen reserved in full by a valuation allowance. Net deferred tax assets arising from the Salesnet acquisition arereserved in full by a valuation allowance. No amounts of goodwill are expectedto be deductible for tax purposes. In the future, if available evidenceindicates that it is more likely than not that we will be able to utilize someor all of our deferred tax assets, we will record an income tax benefit, acredit to additional paid-in capital, or a credit to goodwill or otherintangible assets of Salesnet, in the amount of the asset recognized.  At that time, we expect that our effectivetax rate would increase to more closely approximate the U.S. federal statutoryrate. 

***Liquidity and Capital Resources***

Informationregarding deferred revenue and cash provided by operating activities follows(in thousands):
| ** **                             | ** ** | **Quarter Ended**     | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **Jun 30, 2005** | ** ** | **Sep 30, 2005** | ** ** | **Dec 31, 2005** | ** ** | **Mar 31, 2006** | ** ** | **Jun 30, 2006** | ** ** |
|                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Deferred revenue                       |       | $                          | 57,368     |   | $ | 63,752 |   | $ | 67,923 |   | $ | 80,906 |   | $ | 87,234 |   |
| Cash provided by  operating activities |       | 2,564                      |       | 5,248 |   | 3,844 |   | 6,052 |   | 6,864 |   |
|                                        |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Wehave historically funded our operations with cash from operations, equityfinancings and debt borrowings.  InAugust 2004 we completed our initial public offering of 6.4 million shares ofcommon stock and received net proceeds of approximately $40 million.  Since that time we have utilizedapproximately $10 million of the net offering proceeds for businessacquisitions.  Remaining proceeds areinvested in short-term, investment-grade, interest-bearing securities.

AtJune 30, 2006, cash and cash equivalents, and short-term investments, totaled$65.7 million.   In addition to our cashand short-term investments, other sources of liquidity at June 30, 2006included a $3.0 million bank line of credit facility, under which there havebeen no borrowings to date.

Operatingactivities provided $6.9 million of cash during the three months ended June 30,2006, as compared to $2.6 million of cash from operations in the correspondingperiod of the prior year.  The majorityof our cash from operations in the second quarter of 2006 was from growth indeferred revenue and collections of accounts receivable.  We typically bill customers on net 30-dayterms at the beginning of the license period, which is reflected in accountsreceivable and deferred revenue.  Inperiods of increasing sales, we would expect growth in accounts receivable anddeferred revenue which, historically, has provided funding for operations.  Any change in our billing practice resultingin delayed payment terms could have a material adverse effect on cash providedfrom operations and growth in deferred revenue.

Theallowance for uncollectible accounts receivable represented 5% of currentaccounts and term receivables at June 30, 2006 and December 31, 2005.  We regularly assess the adequacy of theallowance for uncollectible accounts. Actual customer collections could differ from our estimates and exceedthe related loss allowance.

Weexpect to pay approximately $500,000 in cash income taxes in 2006, consistingof U.S. federal alternative minimum taxes and foreign tax withholdings.

Investingactivities used $19.6 million in cash during the three months ended June 30,2006, which consisted of $8.7 million for the acquisition of Salesnet, Inc. inMay 2006, $8.1 million for the net purchase of short-term investments duringthe quarter, and $2.8 million for capital additions.  Capital expenditures

24

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consistprimarily of capacity additions to our hosting operations and are expected tobe approximately $9 million for the full year 2006.

Financingactivities provided $0.6 million in the three months ended June 30, 2006 fromemployee purchases of Company stock.

Webelieve our existing cash and short-term investments, together with fundsgenerated from operations, should be sufficient to fund operating andinvestment requirements for at least****theforeseeable future.   Our future capitalrequirements will depend on many factors, including our rate of revenue growthand expansion of our sales and marketing activities, the possible acquisitionof complementary products or businesses, the timing and extent of spendingrequired for research and development efforts, and the continuing market acceptanceof our products.  To the extent thatavailable funds are insufficient to fund our future activities, we may need toraise additional funds 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 June 30, 2006, we did not have any significant off-balance-sheetarrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated bythe SEC.

***Contractual Obligations and Commitments***

Aspart of the acquisition of Salesnet, Inc. during the quarter ended June 30,2006, we incurred contractual obligations pertaining to operating and capitalleases of approximately $175,000 per year through the year 2010.

Therehave been no other significant changes to our contractual obligations sinceDecember 31, 2005.

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

***Foreign Currency Exchange Risk***

Ourresults of operations and cash flows are subject to fluctuations due to changesin foreign currency exchange rates, particularly changes in the Euro, Britishpound, Australian dollar, and Japanese yen, because our contracts arefrequently denominated in local currency. To date, we have not entered into any hedge transactions since exchangerate fluctuations have had little impact on our operating results and cashflows. In the future, we may utilize foreign currency forward and optioncontracts to manage currency exposures.

***Interest Rate Sensitivity***

Interestincome and expense are sensitive to changes in the general level of U.S.interest rates.  Net proceeds of ourinitial public offering of common stock are invested in short-term,interest-bearing securities, which are subject to credit and interest raterisk.   Our investment portfolio isinvestment-grade and diversified among issuers and types to reduce creditrisk.  The average maturity of ourinvestment portfolio is less than 90 days and we expect to hold the investmentsuntil maturity.  If market interest rateswere to increase by 100 basis points from the level at June 30, 2006, the fairvalue of our investment portfolio would decline by approximately $150,000.

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**Item 4.  Controls andProcedures**

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

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered by thisreport. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is (i) recorded, processed,summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission and (ii) accumulated 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)******                                 Changesto Internal 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 Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**Part II.  OtherInformation**

***Item 1.  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 the Company’s consolidatedfinancial position, results of operations or liquidity.

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

A restated description of the risk factors associated with our businessis set forth below.  This descriptionincludes any and all changes (whether or not material) to, and supercedes, thedescription of the risk factors associated with our business previouslydisclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the yearended December 31, 2005.

*Beforedeciding to purchase, hold or sell our common stock, you should carefullyconsider the risks described below, in addition to the other cautionarystatements and risks described elsewhere and the other information contained inthis report and in our other filings with the Securities and ExchangeCommission, including our reports on Forms 10-K, 10-Q  and 8-K. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks anduncertainties not presently known to us or that we currently deem immaterial mayalso 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 ableto achieve, sustain or increase profitability in the future.***

Prior to 2004, we incurred significant operating losses ofapproximately $4.1 million in 2003, $2.7 million in 2002 and $15.3 millionin 2001. We have incurred an operating loss of $2.2 million in the first halfof 2006.  As of June 30, 2006, we had anaccumulated deficit of approximately $35.5 million. We expect to continue toincur significant sales and marketing, research and development and general andadministrative expenses as we expand our operations and, as a result, we willneed to generate significant revenue to achieve profitability. Even if weachieve profitability, we may not be able to increase profitability on a quarterlyor annual basis in the future, which may cause the price of our stock todecline.

***Our quarterlyresults of operations may fluctuate in the future.***

Our quarterly revenue and results of operations may fluctuate as aresult of a variety of factors, many of which are outside of our control. Ifour quarterly revenue or results of operations fall below the expectations ofinvestors or securities analysts, the price of our common stock could declinesubstantially. Fluctuations in our results of operations may be due to a numberof factors, including, but not limited to, those listed below and identifiedthroughout this “Risk Factors” section:

·                  our ability toretain and increase sales to existing clients, attract new clients and satisfyour clients’ requirements;

·                  changes in thevolume and mix of term and perpetual licenses sold in a particular quarter,because perpetual license revenue is recorded into revenue upon deliverywhereas term licenses are recorded into revenue ratably over the period oflicense;

·                  our policy ofexpensing sales commissions when earned, which is typically at the time ofinvoice, while the majority of our revenue is recognized ratably over futureperiods;

·                  changes in themix of revenue between professional services and software, hosting and support,because the gross margin on professional services is typically lower than thegross margin on software, hosting and support;

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·                  changes in themix of voice self service applications sold and/or usage volume, because thegross margin on voice self service applications is typically lower than thegross margin on our sales, marketing and service applications;

·                  the timing andsuccess of new product introductions or upgrades by us or our competitors;

·                  changes in ourpricing policies or those of our competitors;

·                  the amount andtiming of expenditures related to expanding our operations;

·                  changes in thepayment terms for our products and services, including changes in the mix ofpayment options chosen by our customers;

·                  the purchasingand budgeting cycles of our clients; and

·                  generaleconomic, industry and market conditions.

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

Due tothe foregoing factors, and the other risks discussed in this report, you shouldnot rely on quarter-to-quarter comparisons of our results of operations as anindication of our future performance.

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

Approximately85% 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, and voice-enabled applications to expand oursolution offerings. Our efforts to expand beyond the customer service marketmay not be successful because certain of our competitors have far greaterexperience and brand recognition in the broader segments of the CRM market. Inaddition, our efforts to expand our on demand software solutions beyond thecustomer service market may divert management resources from our existingoperations and require us to commit significant financial resources to a marketwhere we are less proven, which may harm our business, financial condition andresults 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.***

Themarket for customer relationship management solutions is highly competitive andfragmented, and is subject to rapidly changing technology, shifting clientrequirements, frequent introductions of new products and services, andincreased marketing activities of other industry participants.  Competition has intensified with our mostrecent product releases.  Increasedcompetition could result in pricing pressure, reduced sales, lower margins orthe failure of our solutions to achieve or maintain broad market acceptance. Ifwe 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 facecompetition from:

·                  companiescurrently providing customer service solutions, some of whom offer hostedservices, including BMC Software Corporation, Inc., eGain CommunicationsCorporation, FrontRange Solutions, Inc., IBM Corporation, KanaSoftware, Inc., Microsoft Corporation, Netsuite, Oracle Corporation/SiebelSystems, SAP AG, salesforce.com, inc., and SSA Global;

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·                  CRM systems thatare developed and maintained internally by businesses;

·                  CRM products orservices that are developed, or bundled with other products or services, andinstalled on a client’s premises by software vendors;

·                  outsourcedcontact center providers who bundle solutions and agent labor in their serviceofferings;

·                  new companiesentering the CRM software market, the on demand applications market and the ondemand CRM market, or expanding from any one of these markets to the others;and

·                  voice systemintegrators and voice-enabled IVR technology providers, such as Edify, UnveilTechnologies, Apptera, Voxify, TuVox, Microsoft, IBM, and Intervoice.

 

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

Inaddition, many of our current and potential competitors have established or mayestablish business, financial or strategic relationships among themselves orwith existing or potential clients, alliance partners or other third parties,or may combine and consolidate to become more formidable competitors withbetter resources.  For example, inJanuary 2006, Oracle Corporation completed its acquisition of Siebel Systems,Inc.  We also expect that newcompetitors, such as enterprise software vendors and online service providersthat have traditionally focused on enterprise resource planning or back officeapplications, will continue to enter the on-demand CRM market with competingproducts as the on demand CRM market develops and matures. For example,Microsoft recently announced its intention to offer on-demand CRM applicationsto the small business market.  It ispossible that these new competitors could rapidly acquire significant marketshare.

***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.***

Themarket for on demand application services is at an early stage of development,and it is uncertain whether these application services will achieve and sustainhigh levels of demand and market acceptance. Our success will depend to asubstantial extent on the willingness of companies to increase their use of ondemand application services in general and for on demand customer relationshipmanagement applications in particular. The willingness of companies to increasetheir use of any on demand application services is in part dependent on theactual and perceived reliability of hosted solutions.  In addition, many companies have investedsubstantial personnel and financial resources to integrate traditionalenterprise software into their businesses, and therefore may be reluctant orunwilling to migrate to on demand application services. While we have supportedand continue to support traditional on site deployment of our softwareapplications, widespread market acceptance of our on demand software solutionsis critical to the success of our business. Other factors that may affect themarket acceptance of our solutions include:

·                  on demandsecurity capabilities and reliability;

·                  concerns withentrusting a third party to store and manage critical customer data;

·                  our ability tomeet the needs of broader segments of the CRM market or other on demandmarkets;

·                  the level ofcustomization we offer;

·                  our ability tocontinue to achieve and maintain high levels of client satisfaction;

·                  concerns withpurchasing critical CRM solutions from a company with a history of operatinglosses; and

·                  the price,performance and availability of competing 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

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slowly than we expect, either of which would adversely affect ourbusiness, financial condition and results of operations.

 

***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.***

Increasingour client base and achieving broader market acceptance of our solutions willdepend to a significant extent on our ability to expand our sales and marketingoperations. We plan to continue to expand our direct sales force and engageadditional third-party channel partners, both domestically and internationally.This expansion will require us to invest significant financial and otherresources. Our business will be seriously harmed if our efforts do not generatea corresponding significant increase in revenue. We may not achieve anticipatedrevenue growth from expanding our direct sales force if we are unable to hireand develop talented direct sales personnel, if our new direct sales personnelare unable to achieve desired productivity levels in a reasonable period oftime, or if we are unable to retain our existing direct sales personnel. Wealso may not achieve anticipated revenue growth from our third-party channelpartners if we are unable to attract and retain additional motivated channelpartners, if any existing or future channel partners fail to successfullymarket, resell, implement or support our solutions for their customers, or ifthey represent multiple providers and devote greater resources to market,resell, implement and support competing products and services.

***The majority of our solutions are soldpursuant to term license agreements, and if our existing clients elect not torenew their licenses or to renew their licenses on terms less favorable to us,our business, financial condition and results of operations will be adverselyaffected.***

The majorityof our solutions are sold pursuant to term license agreements that are subjectto renewal every two years or less and our clients have no obligation to renewtheir licenses. Because our clients may elect not to renew, we may not be ableto consistently and accurately predict future renewal rates. Our clients’renewal rates may decline or fluctuate as a result of a number of factors,including their level of satisfaction with our solutions, their ability tocontinue their operations or invest in customer service, or the availabilityand pricing of competing products. If large numbers of existing clients do notrenew their licenses, or renew their licenses on terms less favorable to us,and if we cannot replace or supplement those non-renewals with new licensesgenerating the same or greater level of revenue, our business, financialcondition and results of operations will be adversely affected.

***We have experienced 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.***

We havesubstantially expanded our overall business, headcount and operations in recentperiods. We have increased our total number of full-time employees to 649 atJune 30, 2006 from 530 at December 31, 2005. 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 ofthe challenge that we expect to face in the course of our expansion is tomaintain the high level of customer service to which our clients have 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 continueto maintain high levels of client service and satisfaction. If we are not ableto continue to provide high levels of client service, our reputation, as wellas our business, financial condition and results of operations, could beharmed.

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***Ifthere are interruptions or delays in our hosting services through third-partyerror, our own error or the occurrence of unforeseeable events, delivery of oursolutions could become impaired, which could harm our relationships withclients and subject us to liability.***

 

As ofJune 30, 2006, approximately 86% of our clients were using our hostingservices for deployment of our software applications. We provide our hostingservices for our non-voice applications through computer hardware that we ownand that is currently located in third-party web hosting co-location facilitiesmaintained and operated in California, Massachusetts and New Jersey. We providehosting services for our voice applications through a third-party hostingfacility based in Georgia, using hardware owned and operated by the thirdparty. We are in process of opening new hosting facilities in the UnitedKingdom and Georgia.  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 systemslocated in our Montana headquarters (non-voice) and in New York (voice) havenot been tested under actual disaster conditions and may not have sufficientcapacity to recover all data and services in the event of an outage occurringsimultaneously 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.

Designand mechanical errors, spikes in usage volume and failure to follow systemprotocols and procedures could cause our systems to fail, resulting ininterruptions in our clients’ service to their customers. Any interruptions ordelays in our hosting services, whether as a result of third-party error, our ownerror, natural disasters or security breaches, whether accidental or willful,could harm our relationships with clients and our reputation. This in turncould reduce our revenue, subject us to liability, cause us to issue credits orpay penalties or cause clients to fail to renew their licenses, any of whichcould adversely affect our business, financial condition and results ofoperations. In the event of damage or interruption, our insurance policies maynot adequately compensate 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.***

Ourhosting systems and our software store and transmit proprietary information andcritical data belonging to our clients and their customers. Any accidental orwillful security breaches or other unauthorized access could expose us to arisk of information loss, litigation and other possible liabilities. Ifsecurity measures 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 markets.***

Internationalsales comprised 26% and 21% of our revenue for the quarters ended June 30, 2006and 2005, respectively. We intend to continue to pursue and expand ourinternational business activities.

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Adverse political andeconomic conditions could make it difficult for us to increase ourinternational sales or to operate abroad. International operations are subjectto many inherent risks, including:

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

·                  adverse changesin tariffs and other protectionist laws and business practices that favor localcompetitors;

·                  fluctuations incurrency exchange rates;

·                  longercollection periods and difficulties in collecting receivables from foreignentities;

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

·                  reducedprotection for our intellectual property in some countries;

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

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

 

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

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

The CRMindustry is characterized by rapid technological advances, changes in clientrequirements, frequent new product and service introductions and enhancements,changes in protocols and evolving industry standards. Our hosted business modeland the on demand CRM market are relatively new and may evolve even morerapidly than the rest of the CRM market. Competing products and services basedon new technologies or new industry standards may perform better or cost lessthan our solutions and could render our solutions less competitive or obsolete.In addition, because our solutions are designed to operate on a variety ofnetwork hardware and software platforms using a standard Internet web browser,we will need to continuously modify and enhance our solutions to keep pace withchanges in Internet-related hardware, software, communication, browser anddatabase technologies and to integrate with our clients’ systems as they changeand evolve. Furthermore, uncertainties about the timing and nature of newnetwork platforms or technologies, or modifications to existing platforms ortechnologies, could increase our research and development expenses. If we areunable to successfully develop and market new and enhanced solutions thatrespond in a timely manner to changing technology and evolving industrystandards, and if we are unable to satisfy the diverse and evolving technologyneeds of our clients, our business, financial condition and results ofoperations 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 successand future growth depends to a significant degree upon the skills, experience,performance and continued service of our senior management, engineering, sales,marketing, service, support and other key personnel. Specifically, we believethat our future success is highly dependent on Greg Gianforte, our founder,Chairman and Chief Executive Officer. In addition, we do not have employmentagreements with any of our senior management or key personnel that require themto remain our employees and, therefore, they could terminate their employmentwith us at any time without penalty. If we lose the services ofMr. Gianforte or any of our other key personnel, our business will beseverely disrupted and we may be unable to operate effectively. We do notmaintain “key person” life insurance policies on any of our key employeesexcept Mr. Gianforte. This life insurance policy would not be

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sufficient to compensateus for the loss of his services. Our future success also depends in large partupon our ability to attract, train, integrate, motivate and retain highlyskilled employees, particularly sales, marketing and professional servicespersonnel, software engineers, product trainers, and senior personnel.Competition for these personnel is intense, especially for engineers with highlevels of expertise in designing and developing software and for senior salesexecutives.

***If our solutions fail 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.***

Oursoftware products may contain undetected errors or defects that may result inproduct failures, slow response times, or otherwise cause our products to failto perform in accordance with client expectations. Because our clients use ourproducts for important aspects of their business, any errors or defects in, orother performance problems with, our products could hurt our reputation and maydamage our clients’ businesses. If that occurs, we could lose future sales, orour existing clients could elect to not renew or to delay or withhold paymentto us, which could result in an increase in our provision for doubtful accountsand an increase in collection cycles for accounts receivable. Clients also maymake warranty claims against us, which could result in the expense and risk oflitigation. Product performance problems could result in loss of market share,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.

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

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

***Our product 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.***

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Thesoftware and Internet industries are characterized by the existence of a largenumber of patents, trademarks and copyrights, and by frequent litigation basedupon allegations of infringement or other violations of intellectual propertyrights. As we seek to extend our CRM product and service offerings, we may beconstrained by the intellectual property rights of others. We have in the pastbeen named as a defendant in a lawsuit alleging intellectual propertyinfringement, and we may again in the future have to defend againstintellectual property lawsuits. We may not prevail in any future intellectualproperty infringement litigation given the complex technical issues andinherent uncertainties in litigation. Any claims, regardless of their merit,could be time-consuming and distracting to management, result in costlylitigation or settlement, cause product development delays, or require us toenter into royalty or licensing agreements. If any of our products violatethird-party proprietary rights, we may be required to re-engineer our productsor seek to obtain licenses from third parties, which may not be available onreasonable terms or at all. Because our license agreements typically require usto indemnify our clients from any claim or finding of intellectual propertyinfringement, any such litigation or successful infringement claims couldadversely affect our business, financial condition and results of operations.Any efforts to re-engineer our products, obtain licenses from third parties onfavorable terms or license a substitute technology may not be successful and,in any case, may substantially increase our costs and harm our business,financial condition and results of operations. Further, our software productscontain open source software components that are licensed to us under variouspublic domain licenses. While we believe we have complied with our obligationsunder the various applicable licenses for open source software that we use,there is little or no legal precedent governing the interpretation of many ofthe terms of certain of these licenses and therefore the potential impact ofsuch terms on our business is somewhat unknown. Use of open source standardsalso may make us more vulnerable to competition because the public availabilityof open source software could make it easier for new market entrants andexisting competitors to introduce similar competing products quickly andcheaply.

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

Inorder to expand our addressable market, we may decide to acquire additionalbusinesses, products and technologies. In May 2006, we acquired Salesnet, Inc.,our second acquisition since becoming a public company.   Acquisitions could require significantcapital infusions and could involve many risks, including, but not limited to,the following:

·                                               anacquisition may negatively impact our results of operations because it mayrequire incurring large one-time charges, substantial debt or liabilities; itmay require the amortization or write down of amounts related to deferredcompensation, goodwill and other intangible assets; or it may cause adverse taxconsequences, substantial depreciation or deferred compensation charges;

·                                               wemay encounter difficulties in assimilating and integrating the business,technologies, products, personnel or operations of companies that we acquire,particularly if key personnel of the acquired company decide not to work forus;

·                                               ourexisting and potential clients and the customers of the acquired company maydelay purchases due to uncertainty related to an acquisition;

·                                               anacquisition may disrupt our ongoing business, divert resources, increase ourexpenses and distract our management;

·                                               theacquired businesses, products or technologies may not generate sufficientrevenue to offset acquisition costs;

·                                               wemay have to issue equity securities to complete an acquisition, which woulddilute our stockholders and could adversely affect the market price of ourcommon stock; and

·                                               acquisitionsmay involve the entry into a geographic or business market in which we havelittle or no prior experience.

 

Wecannot assure you that we will be able to identify or consummate any futureacquisitions on favorable terms, or at all. If we do pursue any futureacquisitions, it is possible that we may not realize the anticipated benefitsfrom the acquisitions or that the financial markets or investors will negativelyview the acquisitions. Even if we successfully complete an acquisition, itcould adversely affect our business, financial condition and results ofoperations.

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***Changes to financial accounting standardsmay affect our results of operations and financial condition.***

Generallyaccepted accounting principles and accompanying accounting pronouncements,implementation guidelines and interpretations for many aspects of our business,such as software revenue recognition and accounting for stock-based compensation,are complex and involve subjective judgments by management.  Changes to generally accepted accountingprinciples, their interpretation, or changes in our products or business couldsignificantly change our reported earnings and financial condition and couldadd significant volatility to those measures. For example, since our inception in 1997, we have used stock options asa fundamental component of our employee compensation programs.  New accounting requirements that beganJanuary 1, 2006 make the use of stock-based compensation much more expensiveand introduce additional volatility in our results of operations.  See Note 5 to the Condensed ConsolidatedFinancial Statements and *Management’s Discussionand Analysis of Financial Condition and Results of Operations — CriticalAccounting Policies* in this report for additional information onrecently enacted changes to generally accepted accounting principles.

***Volatility in the price of our common stock mayadversely affect our ability to predict the fair value of our stock awards andthe resulting stock-based compensation expense.***

Thefair value of stock awards under SFAS 123R is estimated using several factors,including the underlying price of the stock option, which is not known untilthe date of grant, and Company assumptions of expected stock price volatility,the expected term of the award, and other factors.  These factors can cause significantvariations in the estimated fair value of the awards, and therefore causesignificant fluctuations in our operating results.  For example, our stock price has rangedbetween $13.90 and $20.00 per share in the first six months of 2006.  Using the same assumptions for expected term,volatility, and risk-free rate, the fair value of an option granted at the lowend of the price range would have been $7.52 per share, and would have been$10.82 per share if granted at the high end of the range.  The volatility in the market value of ourstock could cause us to incur significantly higher or lower stock-based compensationexpense in future periods.  The tradingprice of our common stock depends in part on our ability to accurately forecastour results, and if we were to miss our forecasts, we may lose credibility withinvestors and research analysts, which in turn could cause the price of ourcommon stock to decline.

***The required adoption of SFAS 123R makes stockoptions a less attractive form of employee compensation, and our use ofalternative forms of employee compensation in response to SFAS 123R couldadversely affect our ability to attract and retain personnel.***

We havehistorically used stock options as a key component of our employee compensationbecause we believe it aligns employees’ interests with our stockholders’interest, encourages employee retention, and provides a competitive componentof our overall compensation program.  Dueto the required adoption of SFAS 123R, and the recording of stock optionexpense on our operating statements, we may determine that it is in our bestinterest to reduce the number or size of our stock-based awards, or change thetype of awards granted.  In doing so, wemay not be able to attract, retain and motivate our employees.

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

We mayrequire additional capital to respond to business challenges, including theneed to develop new solutions or enhance our existing solutions, enhance ouroperating infrastructure, fund expansion, respond to competitive pressures andacquire complementary businesses, products and technologies. Absent sufficientcash flow from operations, we may need to engage in equity or debt financingsto secure additional funds to meet our operating and capital needs. Inaddition, even though we may not need additional funds, we may still elect tosell additional equity or debt securities or obtain credit facilities for otherreasons. We may not be able to secure additional debt or equity financing onfavorable terms, or at all, at the time when we need such funding. If we raiseadditional funds through further issuances of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution intheir percentage

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ownership of ourcompany, and any new equity securities we issue could have rights, preferencesand privileges senior to those of holders of our common stock. Any debtfinancing secured by us in the future could involve restrictive covenantsrelating to our capital raising activities and other financial and operationalmatters, which may make it more difficult for us to obtain additional capital,to pay dividends and to pursue business opportunities, including potentialacquisitions. In addition, if we decide to raise funds through debt orconvertible debt financings, we may be unable to meet our interest or principalpayments.

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

Thefuture success of our products and our hosted business depends upon thecontinued and widespread adoption of the Internet as a primary medium forcommerce, communication and business applications. Our business growth would beimpeded if the performance or perception of the Internet, or companiesproviding hosted solutions, was harmed by security problems such as “viruses,” “worms”and other malicious programs, reliability issues arising from outages anddamage to Internet infrastructure, delays in development or adoption of newstandards and protocols to handle increased demands of Internet activity,increased costs, decreased accessibility and quality of service, or increasedgovernment regulation and taxation of Internet activity.

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

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

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

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

TheEuropean Union has also adopted a directive that requires member states toimpose restrictions on the collection and use of personal data that are farmore stringent, and impose more significant burdens on subject businesses, thancurrent privacy standards in the United States. All of these domestic andinternational legislative and regulatory initiatives may adversely affect ourclients’ ability to

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collect and/or usedemographic and personal information from their customers, which could reduce demandfor our solutions.

Inaddition to government activity, privacy advocacy groups and the technology anddirect marketing industries are considering various new, additional ordifferent self-regulatory standards that may place additional burdens on us. Ifthe gathering of profiling information were to be curtailed in this manner,customer service CRM solutions would be less effective, which would reducedemand for our solutions and harm our business.

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

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

OurRightNow Marketing solution specifically serves the market for massdistribution marketing and other e-mail communications. The increasingregulation of e-mail delivery, both domestically and internationally, and thespam filtering practices of Internet service providers and e-mail usersgenerally, will place significant additional burdens on our clients who haveoutbound communication programs, and may cause those clients to substantiallychange their outbound communications programs or abandon them altogether.  These factors may lead to a reduction insales of our RightNow Marketing solution, may make it necessary to redesign ourRightNow Marketing solution to make it easier for our clients to conform to therequirements of such laws and standards, which would increase our expenses, ormay make it necessary for us to redefine the market for and use of our RightNowMarketing solution, which could reduce our revenue.

***General economic conditions could adverselyaffect our clients’ ability or willingness to purchase our products, whichcould materially and adversely affect our results of operations.***

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

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***The significant control over stockholder voting matters andour office leases that may be exercised by our founder and Chief ExecutiveOfficer will limit your ability to influence corporate actions and may requireus to find alternative office space to lease or buy in the future.***

At June 30, 2006,Greg Gianforte, our founder and Chief Executive Officer, and his spouse, SusanGianforte, together beneficially owned approximately 33% of our currentlyoutstanding common stock and, together with our other officers and directors,beneficially owned approximately 49% of our currently outstanding common stock.In addition, none of the shares of common stock held by Mr. Gianforte and Mrs.Gianforte are subject to vesting restrictions. As a result, Mr. Gianforte andMrs. Gianforte, acting alone or together with some of our other officers anddirectors, will be able to control all matters requiring stockholder approval,including the election of directors, management changes and approval ofsignificant corporate transactions. This concentration of ownership may havethe effect of delaying, preventing or deterring a change in control ofRightNow, could deprive our stockholders of an opportunity to receive a premiumfor their common stock as part of a sale of RightNow and might reduce themarket price of our common stock.

In addition, Mr.Gianforte beneficially owns, directly or indirectly, a 50% membership interestin Genesis Partners, LLC, our landlord from whom we lease our principal officesin Bozeman, 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 charter documents andDelaware law could discourage, delay or prevent a change in control of ourcompany and may affect the trading price of our common stock.***

Provisions of ourcertificate of incorporation and bylaws and Delaware law may discourage, delayor prevent a merger or acquisition that a stockholder may consider favorableand may limit the market price of our common stock. These provisions includethe following:

·                  establishing aclassified board in which only a portion of the total board members will beelected at each annual meeting;

·                  authorizing theboard to issue preferred stock;

·                  providing theboard with sole authority to set the number of authorized directors and to fillvacancies on the board;

·                  limiting thepersons who may call special meetings of stockholders;

·                  prohibitingcertain transactions under certain circumstances with interested stockholders;

·                  requiringsupermajority approval to amend certain provisions of the certificate ofincorporation; and

·                  prohibitingstockholder action by written consent.

 

It is possiblethat the provisions contained in our certificate of incorporation and bylaws,the existence of super voting rights held by insiders and the ability of ourboard of directors to issue preferred stock without stockholder action may havethe effect of delaying, deferring or preventing a change in control of ourcompany without further action by the stockholders, may discourage bids for ourcommon stock at a premium over the market price of our common stock and mayadversely affect the market price of our common stock and the voting and otherrights of the holders of our common stock.

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

**(a)           Sales of Unregistered Securities**

 None.

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

On August 5, 2004,the Securities and Exchange Commission declared effective our RegistrationStatement on From S-1 (Reg. File No. 333-115331) under the Securities Act of1933, as amended, in connection with the initial public offering of our commonstock, par value $.0001 per share.  Ofthe 7,245,000 shares registered under the registration statement for anaggregate offering price of $50,715,000, we sold 6,416,961 shares, includingshares sold upon exercise of the underwriters’ over-allotment option, for anaggregate offering price of $44,918,727, and 321,945 shares, including sharessold upon exercise of the underwriters’ over-allotment option, were sold by aselling stockholder for an aggregate offering price of $2,253,615.  After deducting $3.3 million in underwritingdiscounts and commissions and $1.8 million in other offering costs, we receivednet proceeds from the offering of approximately $40 million.  None of the expenses and none of our netproceeds from the offering were paid directly or indirectly to any director,officer, general partner of RightNow or their associates, persons owning 10% ormore of any class of equity securities of RightNow, or an affiliate ofRightNow.

In May 2005, wespent $1 million of the offering proceeds for the acquisition of the assets ofConvergent Voice.  In May 2006, we spentapproximately $8.7 million of the offering proceeds to acquire Salesnet,Inc.  We currently intend to use theremaining proceeds for general corporate purposes as described in theprospectus for the offering.  Pendingthese uses, the net proceeds from the offering are invested in short-term,interest-bearing, investment-grade securities.

** (c)          Notapplicable.**

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

None.

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

The2006 annual meeting of stockholders was held May 31, 2006.  The following proposals were adopted asfollows:

1.               Toelect two directors to serve for a three-year term ending at the 2009 annualmeeting of stockholders or until their successors are duly elected andqualified or until their earlier resignation or removal:

 
|                     | ** ** | **For**    | ** ** | **Withheld** |
|---------------------|------------|------------|------------|--------------|
| Richard E. Allen    |       | 28,292,125 |       | 410,415      |
| Margaret L.  Taylor |       | 28,266,150 |       | 436,390      |

 

2.               To ratifythe appointment of KPMG LLP as our independent registered public accountingfirm for 2006:
| For     |   | 28,678,456 |
|---------|--------|------------|
| Against |   | 14,902     |
| Abstain |   | 9,182      |

 

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

None.

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**Item 6.  Exhibits**

***Exhibits***

Theexhibits listed below are part of this Form 10-Q, unless otherwise indicated.
| Exhibit 3.1† |   | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                                                                  |
|-------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.2*      |   | Amended and Restated Bylaws of the Registrant.                                                                                                                                                         |
| Exhibit 31.1      |   | Certification of Chief Executive Officer pursuant to  Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                               |
| Exhibit 31.2      |   | Certification of Chief Financial Officer pursuant to  Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                               |
| Exhibit 32.1      |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |

 

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

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

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**SIGNATURE**

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

Dated:  August 9, 2006

**RightNow Technologies, Inc.**

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

 

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