**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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

#### ** **

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| **x******  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------|----------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                               |
| ** ** | **For the quarterly period ended  March 31, 2008**                                                  |
| ** ** | ** **                                                                                               |
| ** ** | **or**                                                                                                   |
| ** ** | ** **                                                                                               |
| **o**      | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** ** | ** **                                                                                               |
| ** ** | **For the transition period from         to**               |

### ** **

**000-31321**

(Commission File No.)

 

**RIGHTNOW TECHNOLOGIES, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

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

 

**136Enterprise Boulevard**

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

(Address of Principal ExecutiveOffices) (Zip Code)

 

**(406)522-4200**

(Registrant’s Telephone Number,Including Area Code)

 

**N/A**

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

 

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

 

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

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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

 

The number ofshares outstanding of the registrant’s common stock, $0.001 par value, as ofApril 30, 2008 was 33,574,361

 

 

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**RightNowTechnologies, Inc.**

**QuarterlyReport on Form 10-Q**

 

**Forthe Quarterly Period Ended March 31, 2008**

 

**INDEX**

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

 

2

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**Part I.FINANCIAL INFORMATION**

 

##### **Item 1. FinancialStatements**

##### ** **

**RightNow Technologies, Inc.**

**CondensedConsolidated Balance Sheets**

(In thousands) (Unaudited)

 
| ** **                                          | ** ** | **December  31, 2007** | ** ** | **March 31,  2008** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                          | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Cash and cash equivalents                           |       | $                           | 43,681     |                     | $          | 44,591 |   |
| Short-term investments                              |       | 52,644                      |       | 36,585                   |       |
| Accounts receivable                                 |       | 29,480                      |       | 27,503                   |       |
| Term receivables, current                           |       | 13,069                      |       | 9,616                    |       |
| Allowance for doubtful accounts                     |       | (1,918                      | )          | (2,056                   | )          |
| Receivables, net                                    |       | 40,631                      |       | 35,063                   |       |
| Deferred commissions                                |       | 3,336                       |       | 3,485                    |       |
| Prepaid & other current assets             |       | 2,643                       |       | 3,288                    |       |
| Total current assets                                |       | 142,935                     |       | 123,012                  |       |
|                                                |       |                        |       |                     |       |
| Long-term investments                               |       | —                      |       | 17,810                   |       |
| Property and equipment, net                         |       | 10,856                      |       | 10,807                   |       |
| Term receivables, non-current                       |       | 9,859                       |       | 8,059                    |       |
| Intangible assets, net                              |       | 7,996                       |       | 7,606                    |       |
| Deferred commissions, non-current                   |       | 1,680                       |       | 1,962                    |       |
| Other                                               |       | 460                         |       | 448                      |       |
| **Total Assets**                                    |       | $                           | 173,786    |                     | $          | 169,704 |   |
|                                                |       |                        |       |                     |       |
| **Liabilities and Stockholders’ Equity**       | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Accounts payable                                    |       | $                           | 4,386      |                     | $          | 6,148 |   |
| Commissions and bonuses payable                     |       | 5,044                       |       | 3,531                    |       |
| Other accrued liabilities                           |       | 11,404                      |       | 11,998                   |       |
| Current portion of long-term debt                   |       | 46                          |       | 44                       |       |
| Current portion of deferred revenue                 |       | 76,995                      |       | 73,575                   |       |
| Total current liabilities                           |       | 97,872                      |       | 95,296                   |       |
|                                                |       |                        |       |                     |       |
| Long-term debt, less current portion                |       | 68                          |       | 57                       |       |
| Deferred revenue, net of current portion            |       | 37,665                      |       | 38,079                   |       |
|                                                |       |                        |       |                     |       |
| Stockholders’ equity:                          |       |                        |       |                     |       |
| Common stock                                        |       | 33                          |       | 34                       |       |
| Additional paid-in capital                          |       | 95,377                      |       | 97,107                   |       |
| Accumulated other comprehensive loss                |       | (292                        | )          | (536                     | )          |
| Accumulated deficit                                 |       | (56,937                     | )          | (60,333                  | )          |
| Total stockholders’ equity                     |       | 38,181                      |       | 36,272                   |       |
| **Total Liabilities and Stockholders’ Equity** |       | $                           | 173,786    |                     | $          | 169,704 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**CondensedConsolidated Statements of Operations**

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

 
| ** **                      | ** ** | **Three Months Ended  March 31,** |       |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                         | ** ** | **2008** |   |
| Revenue:                        |       |                                             |       |   |   |
| Software, hosting and support   |       | $                                                | 19,819     |   | $ | 24,556 |   |
| Professional services           |       | 5,883                                            |       | 8,342 |   |
| Total revenue                   |       | 25,702                                           |       | 32,898 |   |
|                            |       |                                             |       |   |   |
| Cost of revenue:                |       |                                             |       |   |   |
| Software, hosting and support   |       | 4,394                                            |       | 5,035 |   |
| Professional services           |       | 5,171                                            |       | 7,285 |   |
| Total cost of revenue           |       | 9,565                                            |       | 12,320 |   |
|                            |       |                                             |       |   |   |
| Gross profit                    |       | 16,137                                           |       | 20,578 |   |
|                            |       |                                             |       |   |   |
| Operating expenses:             |       |                                             |       |   |   |
| Sales and marketing             |       | 15,727                                           |       | 16,818 |   |
| Research and development        |       | 4,296                                            |       | 4,486 |   |
| General and administrative      |       | 2,860                                            |       | 3,516 |   |
| Total operating expenses        |       | 22,883                                           |       | 24,820 |   |
|                            |       |                                             |       |   |   |
| Loss from operations            |       | (6,746                                           | )          | (4,242 | ) |
|                            |       |                                             |       |   |   |
| Interest and other income, net  |       | 828                                              |       | 938 |   |
|                            |       |                                             |       |   |   |
| Loss before income taxes        |       | (5,918                                           | )          | (3,304 | ) |
| Provision for income taxes      |       | (84                                              | )          | (92 | ) |
| Net loss                        |       | $                                                | (6,002     | ) | $ | (3,396 | ) |
|                            |       |                                             |       |   |   |
| Net loss per share:             |       |                                             |       |   |   |
| Basic                           |       | $                                                | (0.18      | ) | $ | (0.10 | ) |
| Diluted                         |       | $                                                | (0.18      | ) | $ | (0.10 | ) |
|                            |       |                                             |       |   |   |
| Shares used in the computation: |       |                                             |       |   |   |
| Basic                           |       | 32,858                                           |       | 33,532 |   |
| Diluted                         |       | 32,858                                           |       | 33,532 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**RightNow Technologies, Inc.**

**CondensedConsolidated Statements of Cash Flows**

(In thousands) (Unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** |       |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                         | ** ** | **2008** |   |
| **Operating activities:**                                            |       |                                             |       |   |   |
| Net loss                                                             |       | $                                                | (6,002     | ) | $ | (3,396 | ) |
| Non-cash adjustments:                                                |       |                                             |       |   |   |
| Depreciation and amortization                                        |       | 1,675                                            |       | 1,954 |   |
| Provisions (recoveries) of uncollectible  accounts receivable        |       | (69                                              | )          | 89 |   |
| Stock-based compensation                                             |       | 1,302                                            |       | 1,266 |   |
| Changes in operating accounts:                                       |       |                                             |       |   |   |
| Receivables                                                          |       | 15,427                                           |       | 7,447 |   |
| Prepaid expenses                                                     |       | (584                                             | )          | (448 | ) |
| Deferred commissions                                                 |       | (887                                             | )          | (404 | ) |
| Accounts payable                                                     |       | (1,133                                           | )          | 1,758 |   |
| Commissions and bonuses payable                                      |       | (1,171                                           | )          | (1,523 | ) |
| Other accrued liabilities                                            |       | 2,881                                            |       | 534 |   |
| Deferred revenue                                                     |       | (6,056                                           | )          | (3,434 | ) |
| Other                                                                |       | (23                                              | )          | (173 | ) |
| Cash provided by operating activities                                |       | 5,360                                            |       | 3,670 |   |
|                                                                 |       |                                             |       |   |   |
| **Investing activities:**                                            |       |                                             |       |   |   |
| Net change in investments                                            |       | 1,549                                            |       | (1,970 | ) |
| Acquisition of property and equipment                                |       | (1,987                                           | )          | (1,509 | ) |
| Other                                                                |       | (29                                              | )          | (13 | ) |
| Cash used in investing activities                                    |       | (467                                             | )          | (3,492 | ) |
|                                                                 |       |                                             |       |   |   |
| **Financing activities:**                                            |       |                                             |       |   |   |
| Proceeds from issuance of common stock  under employee benefit plans |       | 643                                              |       | 414 |   |
| Excess tax benefits of stock options  exercised                      |       | 49                                               |       | 51 |   |
| Payments on long-term debt                                           |       | (7                                               | )          | (11 | ) |
| Cash provided by financing activities                                |       | 685                                              |       | 454 |   |
|                                                                 |       |                                             |       |   |   |
| Effect of foreign exchange rates on cash  and cash equivalents       |       | 113                                              |       | 278 |   |
|                                                                 |       |                                             |       |   |   |
| Increase in cash and cash equivalents                                |       | 5,691                                            |       | 910 |   |
|                                                                 |       |                                             |       |   |   |
| Cash and cash equivalents at beginning of  period                    |       | 39,208                                           |       | 43,681 |   |
| Cash and cash equivalents at end of period                           |       | $                                                | 44,899     |   | $ | 44,591 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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** **

**RightNow Technologies, Inc.**

**Notes to CondensedConsolidated Financial Statements**

(Unaudited)

 

**(1)**         BusinessDescription and Basis of Presentation

** **

***Business Description***

*** ***

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

 

***Basis ofPresentation***

*** ***

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

 

The accompanyinginterim condensed consolidated financial statements have been prepared inaccordance with United States generally accepted accounting principles. In theopinion of management, the interim condensed consolidated financial statementsand notes have been prepared on the same basis as the audited consolidatedfinancial statements in the Annual Report on Form 10-K and include alladjustments necessary for the fair presentation of the Company’s financial positionat March 31, 2008, and results of operations and cash flows for the threemonth periods ended March 31, 2007 and 2008. The interim period resultsare not necessarily indicative of the results to be expected for the full year.

 

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

 

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*** ***

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

*** ***

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

 

Financial instruments subjecting the Company to concentrations ofcredit risk consist primarily of cash and cash equivalents, short and long-terminvestments, and accounts and term receivables. The Company maintains cash,cash equivalents, and short and long-term investments with various domestic andforeign financial institutions. From time to time, the Company’s cash balanceswith its financial institutions may exceed insurance limits. Short andlong-term investments are investment grade, interest-earning securities, andare diversified by type and industry. Our long-term investments consist ofapproximately $18.2 million par value auction rate securities as furtherdescribed in Note 7.

 

The Company’scustomers are worldwide with historical sales of approximately 70% to 75% inthe United States. No individual customer accounted for more than 10% of theCompany’s revenue in 2007 or the first three months of 2008. One customerrepresented 12% of term receivables at December 31, 2007 and one customerrepresented 14% of term receivables at March 31, 2008. No individualcustomer accounted for more than 10% of the Company’s accounts receivable at December 31,2007 and March 31, 2008.

 

As of December 31,2007 and March 31, 2008, assets located outside the United States were 14%and 13% of total assets, respectively. The loss from operations outside of theUnited States totaled $2.5 million and $4.3 million for the three months ended March 31,2007 and 2008, respectively. Revenue by geographical region follows (inthousands):

 
| ** **    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
|          |       |                                             |       |   |   |
| United States |       | $                                                | 18,472     |   | $ | 22,357 |   |
| Europe        |       | 5,359                                            |       | 8,066 |   |
| Asia Pacific  |       | 1,871                                            |       | 2,475 |   |
|          |       | $                                                | 25,702     |   | $ | 32,898 |   |

 

***(3) Revenue Recognition***

*** ***

The Company earnsits revenues from the delivery of software, hosting, and support services, andfrom the delivery of professional services. Software, hosting and supportservices are sold under subscription arrangements and license arrangements. In2007, the Company essentially discontinued sales of perpetual licenses. Hostingand support services involve the 

 

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remote management of the software,technical assistance, and unspecified product upgrades and enhancements on awhen and if available basis. Professional services include consulting, trainingand development services.

 

The Company recognizes revenue for subscriptions andlicenses when all of the following criteria are met: a) the Company hasentered into a legally binding agreement with the customer; b) thesoftware has been made available or delivered to the customer; c) theCompany’s fee for providing the software and services is fixed or determinable;and d) collection of the Company’s fee is probable.

 

 Subscriptions include access to the Company’ssoftware through its hosting services, technical support, and product upgradeswhen and if available, all for a bundled fee. The Company accounts forsubscriptions, in accordance with Emerging Issues Task Force Issue No. 00-21,*Revenue Arrangements with MultipleDeliverables* (“EITF 00-21”). Under EITF 00-21, value isallocated to each deliverable of an arrangement using prices established whenthe elements are sold stand-alone. Stand-alone sales of subscription agreementsare evidenced by subscription renewals and stand-alone sales of professionalservices are evidenced by rates charged for consulting, education, anddevelopment services in stand-alone transactions. The arrangement fee is thenallocated to the individual elements based on their relative fair values.Revenue for subscriptions are recognized ratably over the contractual periodand professional services are recognized as incurred provided the abovecriteria have been met.

 

Under the Company’s subscription contracts, theCompany applies EITF 00-21 to its subscriptions as opposed to Statement ofPosition 97-2, *Software Revenue Recognition*(“SOP 97-2”) as the customer does not have the right to take possession ofthe software without incurring a significant incremental penalty. In accordancewith Emerging Issues Task Force Issue No. 00-03, *Application of AICPA Statement of Position 97-2,Software Revenue Recognition, to Arrangements That Include the Right to UseSoftware Stored on Another Entity’s Hardware* (“EITF 00-03”),such arrangements are considered service contracts and are not within the scopeof SOP 97-2.

 

Prior to 2007, the majority of the Company’s revenues wereearned under license arrangements. Revenue under these arrangements isrecognized pursuant to the requirements of Statement of Position (SOP) 97-2, *Software Revenue Recognition*, andSOP 98-9, Modification of SOP 97-2, *SoftwareRevenue Recognition With Respect to Certain Transactions*, issued bythe American Institute of Certified Public Accountants. Licenses generallyinclude the same elements as subscriptions, plus the right to take possessionof the software for no additional fee and are sold for a period of time (a “term”license) or perpetually. Term contracts are non-cancelable, and generally covera period of two years, but can range from a period of six months to five years.For term contracts, the Company treats the software license, hosting andsupport services as a single element for purposes of allocating revenue. TheCompany has established vendor specific objective evidence of fair value forthe term license bundle based on stand-alone sales of the bundled items. Whensold with professional services, revenue is allocated between the softwarelicense, hosting and support element and the professional services elementusing the relative fair value method. Revenue for the term license element isrecognized ratably over the period of thearrangement and revenue for professional services in these arrangements isrecognized as performed.

 

Sales of perpetual software licenses include hostingand support services for a period of time, typically one year. The Company hasestablished vendor specific objective evidence for the 

 

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combinedelement of hosting and support elements of perpetual license sales, based onthe prices charged when sold separately. Accordingly, revenue for the perpetualsoftware license element is determined using the residual method and isrecognized upon delivery. Revenue for the hosting and support elements isrecognized ratably over the contractual time period.

 

The Company’s policy is to record revenue net of anyapplicable sales, use or excise taxes.

 

If an arrangement includes a right of acceptance ora right to cancel, revenue is recognized when acceptance is received or theright to cancel has expired. If the fee for the license has any payment termthat is due in excess of the Company’s normal payment terms (over90 days), the fee is considered to not be fixed or determinable, and theamount of revenue recognized (a) for perpetual license arrangements, islimited to the amount currently due from the customer, or (b) for termlicense or subscription arrangements, is limited to the lesser of the amountcurrently due from the customer or a ratable portion of the total unallocatedarrangement fee.

 

Certain customers have license agreements thatprovide for usage fees above fixed minimums. Usage of the Company’s softwarerequires additional fees if used by more than a specified number of users orfor more than a specified number of interactions. Fixed minimums are recognizedas revenue ratably over the term of the arrangement. Usage fees above fixed minimumsare recognized as revenue when such amounts are known and billed.

 

Separate contracts with the same customer that areentered into at or near the same time are generally presumed to have beennegotiated together and are combined and accounted for as a single arrangement.

 

Professional services revenue is recognized asperformed, based on hours incurred, unless sold in conjunction with a termlicense or subscription where objective and reliable evidence (including vendorspecific objective evidence) for the term or subscription element does notexist, in which case professional services revenue is recognized ratably overthe contractual period. The Company has determined that the professionalservice elements of its software arrangements are not essential to thefunctionality of the software. The Company has also determined that itsprofessional services (a) are available from other vendors, (b) donot involve a significant degree of risk or unique acceptance criteria, and (c) arenot required for the customer to use the software.

 

**(4)  Sales Commissions**

 

Beginning in 2007, in conjunction with the Company’sbusiness model change, sales incentives paid for subscriptions are deferred andcharged to expense in proportion to the revenue recognized. Sales incentivespaid for licenses are expensed when earned, which is typically at the time therelated sale is invoiced. Sales incentive expense was $2.1 million and$3.2 million for the three months ended March 31, 2007 and 2008,respectively. Deferred commissions were $5.0 million and $5.4 million at December 31,2007 and March 31, 2008, respectively.

 

** (5) 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):***

 

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| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Weighted average common shares outstanding  for basic net income (loss) per share |       | 32,858                                           |       | 33,532 |   |
| Effect of dilutive securities:                                                    |       |                                             |       |   |   |
| Employee stock options                                                            |       | —                                           |       | — |   |
| Weighted average shares outstanding for  dilutive net income (loss) per share     |       | 32,858                                           |       | 33,532 |   |

 

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

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
|                   |       |                                             |       |   |   |
| Employee stock options |       | 4,263                                            |       | 4,424 |   |

 

**(6) ComprehensiveIncome (Loss)**

 

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

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
|                                      |       |                                             |       |   |   |
| Net loss                                  |       | $                                                | (6,002     | ) | $ | (3,396 | ) |
| Other comprehensive income (loss):        |       |                                             |       |   |   |
| Unrealized gain on short-term investments |       | 16                                               |       | 196 |   |
| Unrealized loss on long-term investments  |       | —                                           |       | (415 | ) |
| Foreign currency translation adjustments  |       | (68                                              | )          | (25 | ) |
| Comprehensive loss                        |       | $                                                | (6,054     | ) | $ | (3,640 | ) |

 

**(7) Fair Value**

 

Effective January 1, 2008, the Company adoptedSFAS 157, *Fair Value Measurements (SFAS157).*In February 2008,the FASB issued Staff Position No. SFAS 157-2, “Effective Date of FASBStatement No. 157,” which provides a one year deferral of the effectivedate of SFAS 157 for non-financial assets and non-financial liabilities, exceptthose that are recognized or disclosed in the financial statements at fairvalue at least annually. Therefore, the Company has adopted the provisions ofSFAS 157 with respect to its financial assets and liabilities only. SFAS 157defines fair value, establishes a framework for measuring fair value inGAAP, and enhances disclosures about fair value measurements. Fair value isdefined under SFAS 157 as the exchange price that would be received for anasset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction betweenmarket participants on the measurement date. Valuation techniques used tomeasure fair value under SFAS 157 must maximize the use of observable inputsand minimize the use of unobservable inputs. The standard describes a fairvalue hierarchy based on three levels of inputs, of which the first two areconsidered observable and the last unobservable, that may be used to measurefair value which are the following:

 
| · |   | Level 1 – Quoted prices in active markets for identical assets or  liabilities. |
|--------|--------|--------------------------------------------------------------------------------------|

 

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| · |   | Level 2 – Inputs other than Level 1 that are observable, either  directly or indirectly, such as quoted prices for similar assets or  liabilities; quoted prices in markets that are not active; or other inputs that  are observable or can be corroborated by observable market data for  substantially the full term of the assets or liabilities. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| · |   | Level 3 – Unobservable inputs that are supported by little or no  market activity and that are significant to the fair value of the assets or  liabilities.                                                                                                                                                                                           |

 

The adoption of this statement did not have a material impact on theCompany’s consolidated results of operations and financial condition.

 

In accordance with SFAS 157, the following table represents the Company’sfair value hierarchy for its financial assets (cash equivalents andinvestments) measured at fair value on a recurring basis as of March 31,2008 (in thousands):

 
| ** **                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money Market funds                |       | $                | 7,745      |             |       |             |       |      | $          | 7,745 |   |
| Commercial paper                  |       |             |       | $                | 6,496      |             |       |      | 6,496      |   |
| Corporate notes and bonds         |       |             |       | 11,376           |       |             |       | 11,376    |       |
| U.S. Government agency securities |       |             |       | 27,721           |       |             |       | 27,721    |       |
| State and Municipal securities    |       |             |       | 8,639            |       | 4,785            |       | 13,424    |       |
| Auction rate preferred stocks     |       |             |       |             |       | 13,025           |       | 13,025    |       |
|                              |       | $                | 7,745      |             | $          | 54,232           |       | $         | 17,810     |   | $ | 79,787 |   |
|                                   |            |                  |            |                  |            |                  |            |           |            |  |  |  |  |

 

As of March 31, 2008, level 3 assets consist of approximately$18.2 million in par value auction rate securities with investment grades ofAAA or AA. Auction rate securities are long-term bonds or preferred stocks thatact like short-term debt, where interest rates reset in Dutch auctions helddaily, weekly or monthly and have historically provided liquidity for theseinvestments. Despite the long-term contractual maturities of the underlyingsecurities, all of these securities were considered available for sale and wereavailable to fund the Company’s current operations as of December 31, 2007.In February and March 2008, uncertainties in the credit marketscaused substantially all auctions of the Company’s securities to beunsuccessful. An unsuccessful auction is an event when there are fewersecurities bid for than are available for sale. Upon an unsuccessful auction,the interest rate is reset at a predetermined rate. Given that substantially allof the auctions were unsuccessful in the last two months of the currentquarter, we reclassified the investments from short-term to long-term due toilliquidity. Additionally, we recorded a temporary impairment of $415,000 inother comprehensive income due to our inability to liquidate these securitiesat par. Our determination of fair value was based upon broker statements,assumed risk premiums, and assumed work out periods, using a discounted cashflow model.

 

The Company’s management believes that the unrealized losses aretemporary, and it has the ability and intent to hold the investments until atleast substantially all of the cost of the investment is recovered.Additionally, we believe the impairment is temporary due primarily to thecredit quality of the underlying securities. Because failed auctions typicallyresult in above-market interest rates, we believe the issuers will re-financethe obligations at more attractive rates in the near future. Additionally, wehave been notified of the intention that certain of our auction rate securitieswill be purchased at par by the issuers beginning in the second quarter of 2008.To date, we have collected all

 

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interestpayable on all of our auction rate securities when due. If the auction ratesecurities continue to experience unsuccessful auctions, or if the creditrating of the auction rate securities deteriorates, we may be required torealize an impairment charge as “other than temporary.”  While the recent auction failures will limitour ability to liquidate these investments for some period of time, we do notbelieve the auction failures will materially impact our ability to fund ourworking capital needs, capital expenditures, or other business requirements. TheCompany will continue to monitor the state of the credit markets and itspotential impact, if any, on the fair value and classification of our portfolioof auction rate securities.

 

**(8) Stock-BasedCompensation**

 

On January 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandards No. 123(R), *Share Based Payment*,(“SFAS 123R”), for its stock-based compensation plans. Under SFAS 123R,stock-based compensation costs are recognized based on the estimated fair valueat the grant date for all stock-based awards. The Company estimates grant datefair values using the Black-Scholes-Merton option pricing model, which requiresassumptions of the life of the award and the stock price volatility over theterm of the award. The Company records compensation cost of stock-based awardsusing the straight line method, which is recorded into earnings over thevesting period of the award.

 

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

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
|                                        | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Stock-based compensation expense: | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cost of software, hosting and support       |       | $                                                | 58         |   | $ | 77 |   |
| Cost of professional services               |       | 125                                              |       | 153 |   |
| Sales and marketing expenses                |       | 658                                              |       | 538 |   |
| Research and development expenses           |       | 226                                              |       | 235 |   |
| General and administrative expenses         |       | 235                                              |       | 263 |   |
| Stock-based compensation expense            |       | $                                                | 1,302      |   | $ | 1,266 |   |

 

No stock-basedcompensation expense was capitalized during the three months ended March 31,2007 or 2008.

 

Unrecognizedcompensation expense of outstanding stock options at March 31, 2008 wasapproximately $15 million, which is expected to be recognized over a weightedaverage period of 2.9 years.

 

The estimatedweighted average fair value per share of stock options granted in the threemonths ended March 31, 2007 and 2008 was $7.95 and $5.27, respectively. Assumptionsused to obtain the estimated fair values were:

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| Weighted average risk free rate |       | 4.7%                                             |       | 2.6% |   |
| Expected term                   |       | 4.3 yrs                                          |       | 4.6 yrs |   |
| Volatility                      |       | 53%                                              |       | 55% |   |
| Dividend yield                  |       | 0%                                               |       | 0% |   |

 

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Key assumptionsused to estimate the fair value of stock awards are as follows:

 

*Risk FreeRate:* Therisk-free rate is determined by reference to the U.S. Treasury yield curve ineffect at or near the time of grant for the expected term of the award.

 

*ExpectedTerm*: Theexpected term represents the period that the Company’s stock-based awards areexpected to be outstanding and is determined based on historical experience ofsimilar awards, giving consideration to the contractual term of the awards,vesting schedules and expectations of employee exercise behavior.

 

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

 

*DividendYield:* Thedividend yield assumption is based on the Company’s history and expectation ofdividend payouts.

 

Activity under theCompany’s stock option plans for the three months ended March 31, 2008 wasas follows (option shares in thousands):

 

 
| ** **                                         | ** ** | **Shares  available  for grant** | ** ** | **Outstanding  options** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Aggregate intrinsic  value (in  thousands)** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Balance at December 31, 2007                  |       | 3,404                            |       | 3,874                    |       | $                                                 | 11.81      |                                           |       |                                                           |       |   |
| Annual reserve addition (1)                        |       | 1,000                            |       | —                   |       | —                                            |       |                                           |       |                                                           |       |
| Granted                                            |       | (776                             | )          | 776                      |       | 10.95                                             |       |                                           |       |                                                           |       |
| Exercised                                          |       | —                           |       | (116                     | )          | 3.55                                              |       |                                           |       |                                                           |       |
| Forfeited, expired, exchanged or canceled  (2)     |       | 109                              |       | (110                     | )          | 14.97                                             |       |                                           |       |                                                           |       |
| Balance at March 31, 2008                     |       | 3,737                            |       | 4,424                    |       | $                                                 | 11.80      |                                           | $          | 9,614                                                          |       | 7.5 |   |
|                                               |       |                             |       |                     |       |                                              |       |                                           |       |                                                           |       |
| Vested or expected to vest at  March 31, 2008 |       |                             |       | 4,083                    |       | $                                                 | 11.65      |                                           | $          | 9,453                                                          |       | 7.3 |   |
|                                               |       |                             |       |                     |       |                                              |       |                                           |       |                                                           |       |
| Exercisable at March 31, 2008                 |       |                             |       | 2,124                    |       | $                                                 | 9.57       |                                           | $          | 8,470                                                          |       | 6.0 |   |

 

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

 

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

 

The totalintrinsic value of options exercised during the three months ended March 31,2007 and 2008 was $2.1 million and $2.6 million, respectively.

 

From time to time theCompany may grant options to purchase stock to consultants. The Companyaccounts for consultant stock options in accordance with SFAS 123 and EmergingIssues Task Force Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling, Goods orServices*. Compensation expense for the grant of stock options toconsultants is determined based on the estimated fair value of the stockoptions at the measurement date as defined in EITF 96-18

 

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and is recognized overthe vesting period. There were no stock options granted to non-employees forthe three months ended March 31, 2007 or 2008.

 

**(9)  Commitments and Contingencies**

** **

***Warranties andIndemnification***

*** ***

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

 

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

 

The Company hasentered into service level agreements with a small number of its customerswarranting certain levels of uptime reliability and permitting those customersto receive credits or terminate their license agreements in the event that theCompany fails to meet those levels. To date, the Company has not provided anymaterial credits, or cancelled any agreements related to these service levelagreements.

 

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

 

***Litigation***

*** ***

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

 

**(10)  **Income Taxes

** **

As of December 31, 2007 and March 31, 2008, we had aninsignificant amount of unrecognized tax benefits, none of which wouldmaterially affect our effective tax rate if recognized. We do not expect thatthe amount of unrecognized tax benefits will significantly increase or decreasewithin the next twelve months. Our policy is to recognize interest andpenalties on unrecognized tax benefits as interest expense and other expense, respectively,in the Consolidated Statements of Operations. The amount of interest andpenalties for the three months ended March 31, 2008 was insignificant. Taxyears beginning in 2004 are subject to examination by taxing authorities,although net operating loss and credit carryforwards from all years are subjectto examinations and adjustments for at least three years following the year in whichthe attributes are used. The U.S. jurisdictions subject to examination includeMontana, California, New Jersey, Illinois and the foreign jurisdictions subjectto examination include the United Kingdom, Germany, Australia, Japan, Canada,and the Netherlands.

 

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

 

***Cautionary Statement***

*** ***

*Inthis report, the terms “RightNow Technologies,” “RightNow,” “Company,” “we,” “us”and “our” refer to RightNow Technologies, Inc. and its subsidiaries.*

 

*All statements included orincorporated by reference in this report, other than statements orcharacterizations of historical fact, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are based on our current expectations, estimates andprojections about our industry, management’s beliefs, and certain assumptionsmade by us, all of which are subject to change. Forward-looking statements canoften be identified by words such as “anticipates,” “expects,” “intends,” “plans,”“predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,”“could,” “potential,” “continue,” “ongoing,” similar expressions, andvariations or negatives of these words, and include, but are not limited to,statements regarding projected results of operations, market acceptance andperformance of our products, our ability to retain and hire key executives,sales and technical personnel and other employees in the numbers, with thecapabilities, and at the compensation levels needed to implement our businessand product plans, the competitive nature of and anticipated growth in ourmarkets, our accounting estimates, assumptions and judgments, and management’sfuture strategic plans. These forward-looking statements are not guarantees offuture results and are subject to risks, uncertainties and assumptions that aredifficult to predict and that could cause our actual results to differmaterially and adversely from those expressed in any forward-looking statement.The risks and uncertainties referred to above include, but are not limited to,our ability to develop or acquire, introduce, market and gain market acceptancefor new products and enhancements to existing products in a cost-effective andtimely manner; the ability to gain and retain key customers; competitivepressures and other similar factors such as the availability and pricing ofcompeting products and technologies and the resulting effects on sales andpricing of our products; the rate at which our present and future customersadopt our existing and future products and services; our ability to expandoperations; possible fluctuations in our operating results including ourrevenue mix and our rate of growth; the credit markets and potential impact onthe recoverability of our portfolio of auction rate securities;  fluctuations in our operating results fromthe impact of stock-based compensation expense; our ability to manage andexpand our partner relationships; interruptions or delays in our hostingoperations; breaches of our security measures; our ability to expand, retainand motivate our employees and manage our growth; the impact of potentialacquisitions, if any; and various other factors, some of which are describedunder the section below entitled “Risk Factors,” in Item 1A of thisreport. These forward-looking statements speak only as of the date of thisReport. We undertake no obligation to revise or update publicly anyforward-looking statement for any reason, except as otherwise required by law.*

 

***Overview***

*** ***

We are a leading provider of customer experiencemanagement software solutions for companies of all sizes. Our on demandsoftware is designed to go beyond traditional customer relationship management(“CRM”) solutions to help companies improve their customer experiences, whilereducing operating costs. Our software solutions support a business’s externalcustomer-facing channels as well as sales, marketing and customer serviceoperations.

 

We released our initial version of RightNow Servicein 1997. This product addressed the new customer service needs resulting fromthe increasing use of the Internet as a customer service channel. Since then,we have significantly enhanced product features and functionality to addresscustomer service needs across multiple communication channels, including web,interactive voice, email, chat, telephone and proactive outbound emailcommunications. We have also added

 

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severalproducts that are complementary to our RightNow Service solution, includingRightNow Marketing, RightNow Sales, and RightNow Feedback which automateaspects of marketing campaigns sales operations, and customer monitoring. In February 2007,we released RightNow 8, our newest enterprise-class solution for service, salesand marketing. To date, approximately 80% to 90% of our revenue has beengenerated by the RightNow Service suite.

 

We have approximately 1,800 customers worldwide asof March 31, 2008, and our products served more than 463 million customerinteractions, or unique sessions hosted by our solutions, during the quarterended March 31, 2008. We distribute our solutions primarily through directsales efforts and to a lesser extent through indirect channels.

 

***2007 Business Model Changes***

*** ***

To better align with industry practice, beginning in2007 we changed our product offerings from software license arrangements tosubscription service arrangements ( “subscriptions”). As the industry andbusiness models for “software as a service” or “on demand” have evolved, thestandard form of arrangements is service agreements rather than licenses ofsoftware that can be hosted. We believe providing offerings in this manner willultimately increase our market penetration.

 

Accordingly, our terms of sale have been revised toprovide a hosting service where the customer accesses the software and data viathe Internet. Our previous terms of sale provided the customer a softwarelicense, and for no additional fee, the customer could choose to have thesoftware hosted by us, by themselves or by someone else. Revenue recognitionfor service arrangements was not materially different from our previous termlicense arrangements, as revenue under either type of contract is generallyrecognized ratably over the period of the agreement. As a result of thischange, the amount of deferred revenue on the balance sheet under subscriptionarrangements decreased because only the amount currently due from the customeris recorded to accounts receivable and deferred revenue. Conversely, undersoftware license arrangements, the full customer commitment is recorded toreceivables and deferred revenue whether or not currently due because we havethe contractual right to collect the entire arrangement fee.

 

Also beginning in 2007, we essentially discontinuedselling perpetual software licenses, which represented 21% of our revenue in2006. Consequently, perpetual software licenses were 2% of revenue in 2007 andless than 1% for the period ending March 31, 2008.

 

Lastly, our policy for subscription contractacquisition costs, such as sales commissions, is to recognize them inproportion to the revenue recognized under the subscription arrangement.

 

***Sources of Revenue***

*** ***

Our revenue is comprised of fees for software,hosting and support, and fees for professional services. “Recurring revenue,”referred to in this report includes software, hosting and support revenue fromterm license and subscription agreements.

 

Software, hosting and support revenue includes feesearned under subscriptions and software license arrangements. Subscriptionarrangements include a bundled fee to access the software and data through ourhosting services, and support services. Subscription revenue is

 

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recordedratably over the length of the agreement. Our hosting services provide remotemanagement and maintenance of our software and customers’ data which isphysically located in third party facilities. Customers access “hosted”software and data through a secure Internet connection. Support servicesinclude technical assistance for our software products and unspecified productupgrades and enhancements on a when and if available basis.

 

License arrangements can be over time (a “term”license) or perpetual. For term licenses, software, hosting and support revenueis recognized ratably over the length of the agreement. Perpetual licenserevenue is generally recorded in full upon delivery of the license, and thehosting and support elements are recognized ratably over the contractualperiod. Perpetual license revenue ranged from 21% to 25% of our total revenuefrom 2004 through 2006. Due to the change in our business model noted above,perpetual license revenue decreased from 22% of revenue in the quarter ended March 31,2006 to 2% of revenue in the quarter ended March 31, 2007 to less than 1%of revenue in the quarter ended March 31, 2008.

 

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

 

Professional services revenue is comprised ofrevenue from consulting, education, development services, and reimbursement ofrelated travel costs. Consulting and education services include implementationand best practices consulting. Development services include customizations andintegrations for a client’s specific business application. Professional servicesrevenue was approximately 22% of total revenue in the past three annual periodsending in December.

 

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

 

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

 

***Cost of Revenue andOperating Expenses***

*** ***

*Cost of Revenue.*Cost of revenue consists primarily of salaries and related expenses(such as employee benefits and payroll taxes) for our hosting, support andprofessional services organizations, third-party costs and equipmentdepreciation relating to our hosting services, third-party costs for voiceenabled CRM applications, travel expenses related to providing professionalservices to our clients, amortization of acquired intangible assets andallocated overhead. We allocate most overhead expenses, such as officesupplies, computer supplies, utilities, rent, and depreciation for furnitureand equipment, based on headcount. As a result, overhead expenses are reflectedin each cost of revenue and operating expense category.

 

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*Sales and MarketingExpenses.*Sales andmarketing expenses consist primarily of salaries and related expenses foremployees in sales and marketing, including commissions and bonuses,advertising, marketing events, corporate communications, product managementexpenses, travel costs and allocated overhead. For subscription arrangements,we expense the related sales commission in proportion to the revenue recognized.We expense our sales commissions on license arrangements when earned, which istypically at the time the related sale is invoiced to the client. Since themajority of our revenue prior to 2007 was from license arrangements recognizedover time, we have experienced a delay between increasing sales and marketingexpenses and the recognition of corresponding revenue. We expect significantadditional increases in sales and marketing expenses in absolute dollars as wecontinue to hire additional sales and marketing personnel and increase thelevel of marketing activities.

 

*Research andDevelopment Expenses.*Research anddevelopment expenses consist primarily of salary and related expenses fordevelopment personnel and costs related to the development of new products,enhancement of existing products, translation fees, quality assurance, testingand allocated overhead. To date, we have not capitalized any softwaredevelopment costs because the timing of the commercial releases of our productshas substantially coincided with the attainment of technological feasibility.As a result, research and development costs have been expensed as incurred. Weintend to continue to expand and enhance our product offerings. To accomplishthis, we plan to hire additional personnel and, from time to time, contractwith third parties. We expect that research and development expenses willincrease in absolute dollars as we seek to expand our technology and productofferings.

 

*General andAdministrative Expenses*. General andadministrative expenses consist primarily of salary and related expenses formanagement, finance and accounting, legal, information systems and humanresources personnel, professional fees, other corporate expenses and allocatedoverhead. We anticipate that we will incur additional employee salaries andrelated expenses, professional service fees and insurance costs related to thegrowth of our business and operations.

 

***CriticalAccounting Policies and Estimates***

*** ***

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

 

***Revenue Recognition***

*** ***

Beginning in 2007, we changed the nature of oursales arrangements from license arrangements to subscription arrangements (“subscriptions”).For a bundled fee, subscriptions provide the customer with access to thesoftware and data over the Internet, or on demand, and provide technicalsupport services and software upgrades when and if available. Undersubscriptions, customers do not have the right to take possession of thesoftware and, in accordance with EITF 00-03, such arrangements areconsidered service contracts which are outside the scope of SOP 97-2.Accordingly, we account for sales of subscriptions under

 

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EITF 00-21and recognize subscription revenue ratably over the length of the agreement inaccordance with SAB 104.

 

Prior to 2007, we sold the majority of productsunder software license arrangements (“licenses”) and accounted for them inaccordance with SOP 97-2 and SOP 98-9. Licenses generally includemultiple elements that are delivered up front or over time. For example, undera term license, we deliver the software up front and provide hosting andsupport services over time. Fair value for each element in a license does notexist since none are sold separately, and consequently, the bundled revenue isrecognized ratably over the length of the agreement. Under a perpetual license,vendor specific objective evidence of fair value of the hosting and supportelements is based on the price charged at renewal when sold separately, andtherefore the license element is recognized immediately into revenue upondelivery using the residual method, and the hosting and support elements arerecognized ratably over the contractual term.

 

The application of these rules requiresjudgment, including the identification of individual elements in multipleelement arrangements, whether there is objective and reliable evidence of fairvalue, including vendor specific objective evidence (“VSOE”) of fair value, forsome or all elements. Changes to the elements in our sales arrangements, or ourability to establish VSOE or fair value for those elements, may result in amaterial change to the amount of revenue recorded in a given period.

 

Fees charged for professional services arerecognized 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 offair value exists for these services; and c) performance of the servicesis considered probable and does not involve unique customer acceptancecriteria.

 

Our standard payment terms are net 30, althoughpayment within 90 days is considered normal. We periodically provideextended payment terms and we consider any fees due beyond 90 days to notbe fixed and determinable. In such cases, judgment is required in determiningthe appropriate timing of revenue recognition. Changes to our practice ofproviding extended payment terms or providing concessions following a sale, mayresult in a material change to the amount of revenue recorded in a givenperiod.

 

***Allowance for doubtfulaccounts***

*** ***

We regularly assess the collectability of outstandingcustomer invoices and, in so doing, we maintain an allowance for estimatedlosses resulting from the non-collection of customer receivables. In estimatingthis allowance, we consider factors such as: historical collection experience;a customer’s current creditworthiness; customer concentration; age of thereceivable balance; and general economic conditions that may affect a customer’sability to pay. Actual customer collections could differ from our estimates andexceed our related loss allowance.

 

***Income Taxes***

*** ***

We record income taxes under the asset and liabilitymethod. 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 tax

 

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bases.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect of a change intax rates on deferred tax assets and liabilities is recognized in income in theperiod that includes the enactment date. When applicable, a valuation allowanceis established to reduce any deferred tax asset when it is determined that itis more likely than not that some portion of the deferred tax asset will not berealized.

 

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

 

Effective January 1, 2007, the Company adoptedFinancial Accounting Standards Board (FASB) Interpretation No. 48, *Accounting for Uncertainties in Income Taxes, anInterpretation of FASB Statement No. 109* (FIN 48) and itdid not have a significant impact on our financial position or results ofoperations. FIN 48 requires judgment when evaluating tax positions. Theultimate resolution of tax issues may result in a significant change to ourrecorded tax assets and liabilities.

 

***Share-Based Compensation***

*** ***

We have adopted the provisions of Statement ofFinancial Accounting Standards No. 123(R), *Share BasedPayment*, (“SFAS 123R”) beginning January 1, 2006 utilizing themodified prospective method. This statement requires the cost of share-basedpayment arrangements to be recorded in the statement of operations. Prior to2006, the estimated cost of share-based payment arrangements was disclosed in afootnote to the financial statements. Share-based compensation amounts areaffected by our stock price as well as our assumptions regarding the expectedvolatility of our stock, our employee stock option exercise forfeitures, andthe related income tax effects. Our assumptions are based primarily on ourhistorical information, some of which was developed when we were a privatecompany.

 

***Recently Issued Accounting Standards***

*** ***

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159).*SFAS 159 allows an entity the irrevocable option toelect fair value for the initial and subsequent measurement for specifiedfinancial assets and liabilities on a contract-by-contract basis. The Companydid not elect to adopt the fair value option under this statement for any itemsthat are not already required to be measured at fair value in accordance withU.S. generally accepted accounting procedures.

 

InDecember 2007, the Financial Accounting Standards Board issued Statement No. 141(revised 2007), *Business Combinations*(SFAS 141R). SFAS 141R requires the use of “full fair value” torecord all the identifiable assets, liabilities, noncontrolling interests andgoodwill acquired in a business combination. SFAS 141R is effective forfiscal years beginning on or after December 15, 2008. The requirements areeffective for the Company beginning in the first quarter of fiscal 2009. We donot believe adoption of SFAS 141R will have a material effect on ourfinancial statements.

 

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In December 2007, the Financial AccountingStandards Board issued Statement No. 160, *NoncontrollingInterests in Consolidated Financial Statements* (SFAS 160).SFAS 160 requires the noncontrolling interests (minority interests) to berecorded at fair value and reported as a component of equity. SFAS 160 iseffective for fiscal years beginning on or after December 15, 2008. Therequirements are effective for the Company beginning in the first quarter offiscal 2009. We do not believe adoption of SFAS 160 will have a materialeffect on our financial statements.

 

**Results of Operations**

 

The following table sets forth certain consolidatedstatements of operations data for each of the periods indicated, expressed as apercentage of total revenue:

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2007**                               | ** ** | **2008** | ** ** |
| ** **                               | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Revenue:                                 |       |                                   |       |   |   |
| Software, hosting and support            |       | 77                                     | %          | 75 | % |
| Professional services                    |       | 23                                     |       | 25 |   |
| Total revenue                            |       | 100                                    |       | 100 |   |
| Cost of revenue:                         |       |                                   |       |   |   |
| Software, hosting and support            |       | 17                                     |       | 15 |   |
| Professional services                    |       | 20                                     |       | 22 |   |
| Total cost of revenue                    |       | 37                                     |       | 37 |   |
| Gross profit                             |       | 63                                     |       | 63 |   |
| Operating expenses:                      |       |                                   |       |   |   |
| Sales and marketing                      |       | 61                                     |       | 51 |   |
| Research and development                 |       | 17                                     |       | 14 |   |
| General and administrative               |       | 11                                     |       | 11 |   |
| Total operating expenses                 |       | 89                                     |       | 76 |   |
| Loss from operations                     |       | (26                                    | )          | (13 | ) |
| Interest and other income (expense), net |       | 3                                      |       | 3 |   |
| Loss before income taxes                 |       | (23                                    | )          | (10 | ) |
| Provision for income taxes               |       | —                                 |       | — |   |
| Net loss                                 |       | (23                                    | )%         | (10 | )% |

 

The following table sets forth our ondemand customer interactions and our revenue by type and geography expressed asa percentage of total revenue for each of the periods indicated.

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                               | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Customer interactions (in millions)                            |       | 352                                    |       | 463 |   |
| Revenue by type:                                               |       |                                   |       |   |   |
| Recurring (subscriptions, term licenses,  hosting and support) |       | 75                                     | %          | 75 | % |
| Perpetual licenses                                             |       | 2                                      |       | — |   |
| Professional services                                          |       | 23                                     |       | 25 |   |
| Revenue by geography in:                                       |       |                                   |       |   |   |
| United States                                                  |       | 72                                     | %          | 67 | % |
| Europe                                                         |       | 21                                     |       | 25 |   |
| Asia Pacific                                                   |       | 7                                      |       | 8 |   |

 

21

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***Quarter Overview***

*** ***

Total revenue for the first quarter of2008 increased 28% over the first quarter of 2007. Within software, hosting andsupport, during the first quarter of 2008 recurring revenue increased 27% andperpetual revenue decreased 76% compared to the first quarter of 2007. Recurringrevenue increased in the first quarter of 2008 due to growth in the number ofcustomers and higher average revenue per customer. The much lower perpetuallicense revenue resulted from our business model change in early 2007 in whichwe essentially eliminated sales of new perpetual licenses.

 

During the quarter ended March 31,2008, we increased salaries through our annual merit process effective January 1,2008, continued to invest in our operations by adding professional servicepersonnel and partners to support our solution offerings, added sales andmarketing personnel to focus on new customer acquisition, and  promoted a new Chief Financial Officer andcreated a new Chief Operating Officer position. These investments increasedtotal expenses in absolute dollars, but represented a 13% decrease as apercentage of revenue during the quarter ended March 31, 2008 compared tothe quarter ended March 31, 2007, and improved our operating loss as apercentage of revenue to 13% during the quarter ended March 31, 2008compared to 26% during the quarter ended March 31, 2007.

 

For the quarter ended March 31, 2008,we generated $3.7 million of cash from operations compared to $5.4 million ofcash from operations in the quarter ended March 31, 2007. We increased ourcash and investment balances to $98.9 million at March 31, 2008 from $82.5million one year earlier. During the current quarter, we reclassifiedapproximately $18.2 million par value auction rate securities to long-terminvestments due to liquidity concerns as further described in Note 7.

 

As of March 31, 2008, we had anaccumulated deficit of $60.3 million. This deficit and our historical operatinglosses were primarily the result of costs incurred in the development, salesand marketing of our products and for general and administrative purposes.

 

***Three Months Ended March 31,2008 and 2007***

 

***Revenue***

 
| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2007**                              | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
|                           |       |                                  |       |   |   |   |   |
| Software, hosting and support: |       |                                  |       |   |   |   |   |
| Recurring                      |       | $                                     | 19,225     |   | $ | 24,412 |   | 27 | % |
| Perpetual                      |       | 594                                   |       | 144 |   | (76 | ) |
| Professional services          |       | 5,883                                 |       | 8,342 |   | 42 |   |
| Total revenue                  |       | $                                     | 25,702     |   | $ | 32,898 |   | 28 | % |

 

22

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Total revenue for the three months ended March 31,2008 was $32.9 million, an increase of $7.2 million, or 28%, over total revenueof $25.7 million for the three months ended March 31, 2007.

 

Software, hosting and support revenue, consisting ofrecurring revenue and perpetual license revenue, for the three months ended March 31,2008 increased $4.7 million, or 24%, over the three months ended March 31,2007. Recurring revenue comprised of subscriptions, term licenses, hosting andsupport, increased 27% over the 2007 quarter primarily due to a 27% increase inthe average revenue per customer. We believe our latest product, RightNow 8,appeals to large customers because of its robust performance characteristics,which in turn has driven larger average purchase volumes and higher averageselling prices per customer. Average revenue per customer increased as a resultof sales of capacity additions, contract renewals and new products. Customerinteractions, a measure of unique customer sessions hosted in our data centersand customer usage, exceeded 463 million in the quarter ended March 31,2008 as compared to 352 million in the quarter ended March 31, 2007.

 

Perpetual license revenue decreased $0.5 million, or76%, in the quarter ended March 31, 2008 compared to the quarter ended March 31,2007, and decreased as a percentage of total revenue to less than 1% in thefirst quarter of 2008 from 2% in the first quarter of 2007. Beginning January 2007,we virtually eliminated the sale of perpetual arrangements.

 

Professional services revenue increased $2.5million, or 42%, in the quarter ended March 31, 2008 over the comparable2007 quarter, due to improved billable utilizations and increased professionalservice revenue per customer. In addition, many customers have purchasedprofessional services as part of their plans to upgrade to RightNow 8. Customersgenerally purchase professional services with initial license or subscriptionarrangements, and periodically over the life of the contract.

 

The mix of professional services revenue affects ourprofitability from period-to-period due to the lower gross profit earned onprofessional services as compared to the gross profit earned on software,hosting and support revenue. Professional services revenue represented 25% and 23%of total revenue in the three months ended March 31, 2008 and 2007,respectively. We expect professional services revenue to range between 20% and25% of total revenue in the future.

 

Revenue from European customers grew to represent25% of total revenue in the quarter ended March 31, 2008 from 21% of totalrevenue in the quarter ended March 31, 2007, while revenue from AsiaPacific clients increased to represent 8% of total revenue in the quarter endedMarch 31, 2008 from 7% of total revenue in the quarter ended March 31,2007. Total revenue outside the United States increased to represent 33% oftotal revenue in the quarter ended March 31, 2008 from 28% in the quarterended March 31, 2007, due to our focus of increasing sales penetration inglobal markets.

 

***Cost of Revenue***

 
| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2007**                              | ** ** | **2008** | ** ** | **Percent   Change** | ** ** |
| Software,  hosting and support |       | $                                     | 4,394      |   | $ | 5,035 |   | 15 | % |
| Professional  services         |       | 5,171                                 |       | 7,285 |   | 41 |   |
| Total cost  of revenue         |       | $                                     | 9,565      |   | $ | 12,320 |   | 29 | % |

 

23

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Total cost of revenue forthe quarter ended March 31, 2008 was $12.3 million, an increase of $2.8million, or 29%, over total cost of revenue of $9.6 million for the quarterended March 31, 2007.

 

Cost of software, hostingand support increased $641,000, or 15%, in the first quarter of 2008 over thefirst quarter of 2007 due to increased voice and non-voice hosting volume,increased depreciation expense, staff additions in our hosting and technical supportoperations and increased annual salaries. Adding increased bandwidth to assistwith voice and non-voice hosting volume increased costs $333,000 in the quarterended March 31, 2008 compared to the quarter ended March 31, 2007. Capacityadditions to our data centers, which occurred in 2007, combined withdevelopment of new language packages, increased depreciation expense in thefirst quarter of 2008 by $143,000 over the first quarter of 2007. Averageemployee count in our hosting and technical support operations was 84 duringthe first quarter of 2008 quarter as compared to 78 during the first quarter of2007, which increased salaries and related expenses by $58,000. As a percent ofthe associated revenue, software, hosting and support costs were 21% in thequarter ended March 31, 2008 compared to 22% in the quarter ended March 31,2007.

 

Cost of professionalservices increased $2.1 million, or 41%, in the quarter ended March 31,2008 over the quarter ended March 31, 2007 due to employee staff additionsand annual merit increase in salaries. Average employee count in ourprofessional services organization grew to 153 during the first quarter of 2008from 139 during the first quarter of 2007, which increased salaries and bonusexpenses by $1.0 million. Increased utilization of third-party partners used toassist in the deployment of professional services increased by $512,000. Also,we incurred expense of $304,000 associated with international recruitment andshort-term incentive program created for delivery of previously purchasedservice. As a percent of the associated revenue, professional services costsremained relatively constant at 87% in the quarter ended March 31, 2008compared to 88% in the quarter ended March 31, 2007. Employee and/orpartner training and customer scheduling requirements can cause the cost ofprofessional services to fluctuate as a percentage of revenue. We expectprofessional services costs to range between 80% and 85% of the associatedrevenue in 2008.

 

***Operating Expenses***

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| **(Amounts in thousands)**  | ** ** | **2007**                              | ** ** | **2008** | ** ** | **Percent   Change** | ** ** |
|                        |       |                                  |       |   |   |   |   |
| Sales and  marketing        |       | $                                     | 15,727     |   | $ | 16,818 |   | 7 | % |
| Research and  development   |       | 4,296                                 |       | 4,486 |   | 4 |   |
| General and  administrative |       | 2,860                                 |       | 3,516 |   | 23 |   |
| Total  operating expenses   |       | $                                     | 22,883     |   | $ | 24,820 |   | 8 | % |

 

## ***Sales andMarketing Expenses***

 

Sales and marketing expenses of $16.8 million in thefirst quarter of 2008 were 7%, or $1.1 million, greater than sales andmarketing expenses of $15.7 million in the first quarter of 2007. Salesincentives increased $1.1 million in the first quarter of 2008 due to the 27%increase in recurring revenue compared to the first quarter of 2007. Annualmerit salary increases resulted in $472,000 of higher salaries for our salesand marketing professionals, despite average

 

24

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employeecount in our sales and marketing organizations remaining relatively constant at264 during the quarter ended March 31, 2008 compared to 262 in the quarterended March 31, 2007. These costs were partially offset by a reduction indirect marketing and advertising costs of $403,000 in the quarter ended March 31,2008 compared to the quarter ended March 31, 2007.

 

As noted above under “2007 Business Model Changes,”we changed the nature of our sales arrangements from licenses to subscriptionsbeginning in 2007. Under license arrangements, we expense sales incentives whenearned, which is typically upon contract signing. Under subscriptionarrangements, we defer the related sales incentive costs and expense them inproportion to the revenue recognized. We deferred $1.6 million of salesincentives earned on subscription sales in the first quarter of 2008, ascompared to $1.1 million of deferred sales incentives in the first quarter of2007. Net sales incentive expense in the quarter ending March 31, 2008 was$3.2 million compared to $2.1 million in the quarter ended March 31, 2007.

 

*Research and Development Expenses*

#### ** **

#### **Researchand development expenses of $4.5 million in the three months ended March 31,2008 were $200,000, or 4%, more than research and development expenses of $4.3million in the three months ended March 31, 2007, primarily due to annualmerit salary increases. Average employee count in our research and developmentorganization remained relatively constant at 132 during the first quarter of2008 compared to 133 during the first quarter of 2007.**

#### ** **

*General and Administrative Expenses*

 

General andadministrative expenses increased $656,000, or 23%, in the first quarter of2008 over the first quarter of 2007, due to the annual merit salary increases combinedwith the creation of a new Chief Operating Officer position, increased outsideservices pertaining to certain information technology investments and legalservices. Average employees in our general and administrative organization were71 during the first quarter of 2008 compared to 69 during the first quarter of2007, which combined with the creation of the new Chief Operating Officerposition increased salaries and related expenses by $233,000. In additionoutside services pertaining to certain information technology investmentsincreased general and administrative expenses by $132,000 and legal servicesincreased $129,000.

 

*Stock-Based Compensation Expense*

 

Total stock-based compensation expense for the threemonths ended March 31, 2008 and 2007 was $1.3 million. For the full year2008, stock-based compensation expense is expected to be approximately $6.6million compared to $5.5 million for the full year 2007. The year-over-yearincrease in stock-based compensation expense results primarily from growth inthe fair market value of our stock since our initial public offering in 2004,which in turn drives growth in the estimated fair value of our stock optionsand the corresponding expense.

 

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

 
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| **(Amounts in thousands)**                      | ** ** | **2007**                              | ** ** | **2008** | ** ** | **Percent   Change** | ** ** |
|                                            |       |                                  |       |   |   |   |   |
| Interest income                                 |       | $                                     | 886        |   | $ | 924 |   | 4 | % |
| Interest expense                                |       | (2                                    | )          | (4 | ) | n/m |   |
| Other income (expense)                          |       | (56                                   | )          | 18 |   | n/m |   |
| Total interest and other income (expense),  net |       | $                                     | 828        |   | $ | 938 |   | 13 | % |

 

25

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Interest income increased 4% in the first quarter of2008 over the first quarter of 2007 due to growth in our cash and investmentbalances. Despite the growth in these balances investment yields have declinedalong with the periodic decreases in the federal funds rate. Our investmentportfolio consists primarily of investment-grade government and corporate debtinstruments. Other income (expense) consists primarily of gains or losses onasset sales and foreign currency transaction gains or losses.

 

***Provision for Income Taxes***

 

Theprovision for income taxes of $92,000 in the first quarter of 2008 consistsprimarily of the state and foreign taxes payable. Our effective tax ratediffers from the federal statutory rate primarily due to the utilization of netoperating loss carryforwards, tax credits, federal alternative minimum taxes,foreign rate differentials, and non-deductible meal and entertainment expenses.Our effective tax rate in 2008 will depend on a number of factors, such as theamount and mix of stock-based compensation expense to be recorded under SFAS123R, the level of business in state and foreign tax jurisdictions, management’sexpectation of the realization of deferred tax assets and the associatedvaluation allowance, and other factors.

 

**Liquidity and Capital Resources**

** **
| ** **                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| **(Amounts in thousands)**                         | ** ** | **2007**                              | ** ** | **2008** | ** ** | **Percent   Change** | ** ** |
| Cash, cash  equivalents and short-term investments |       | $                                     | 82,477     |   | $ | 81,176 |   | (2 | )% |
| Long-term  investments                             |       | —                                |       | 17,810 |   | 100 | % |
| Cash  provided by operating activities             |       | 5,360                                 |       | 3,670 |   | (32 | )% |
|                                                    |            |                                       |            |  |  |  |  |  |  |

 

At March 31, 2008, cash, cashequivalents, and short-term investments, totaled $81.2 million. In addition toour cash and short-term investments, other sources of liquidity at March 31,2008 included a $3.0 million bank line of credit facility, under which therehave been no borrowings.

 

Operating activities provided $3.7million of cash during the quarter ended March 31, 2008 compared to $5.4million in the quarter ended March 31, 2007. Cash flow from operations canvary significantly from quarter-to-quarter for many reasons, including thetiming of business in a given period, and customer payment preferences andpatterns. Operating activities provided $7.4 million from collection ofreceivables, $2.3 million from an increase in accounts payable and accruedliabilities, and $3.2 million from depreciation, amortization, and stock-basedcompensation, offset by a $3.4 million reduction in deferred revenue a $1.5million payment of commissions and bonuses, and $900,000 reduction in prepaidand other current assets. These sources and uses of operating cash flows andthe $3.4 million net loss incurred as of March 31, 2008, were the primaryfactors resulting in the decrease in cash provided by operating activities inthe quarter ended March 31, 2008 compared to the quarter ended March 31,2007.

 

26

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We have generated cash from operationsfrom increasing sales and the upfront billing of our sales arrangements, whichis typically reflected in accounts receivable and deferred revenue. Beginningin 2007, our change to subscriptions from license arrangements requires that weno longer record additions to term receivables, and consequently, we expectterm receivables to gradually decline on our balance sheet.

 

The allowance for uncollectible accountsreceivable represented approximately 6% of current accounts and term receivablesat March 31, 2008 and 5% at December 31, 2007, respectively. Weregularly assess the adequacy of the allowance for doubtful accounts. Actualwrite-offs could exceed our estimates and adversely affect operating cash flowsin the future.

 

Investing activities used $3.5 million inthe three months ended March 31, 2008, consisting of a $2.0 millionpurchase of short-term investments, and $1.5 million of capital assetadditions, which consisted primarily of equipment acquisitions for our hostingoperations and employee growth. Capital asset additions are expected to rangebetween $7 million and $8 million for 2008.

 

Financing activities provided $456,000 inthe quarter ended March 31, 2008, mostly from the exercise of employeestock options under our equity incentive plans and the excess tax benefitsassociated with stock option deductions.

 

As of March 31, 2008, level 3 assets consist of approximately$18.2 million in par value auction rate securities with investment grades ofAAA or AA. Auction rate securities are long-term bonds or preferred stocks thatact like short-term debt, where interest rates reset in Dutch auctions helddaily, weekly or monthly and have historically provided liquidity for theseinvestments. Despite the long-term contractual maturities of the underlyingsecurities, all of these securities were considered available for sale and wereavailable to fund the Company’s current operations as of December 31, 2007.In February and March 2008, uncertainties in the credit marketscaused substantially all auctions of the Company’s securities to beunsuccessful. An unsuccessful auction is an event when there are fewersecurities bid for than are available for sale. Upon an unsuccessful auction,the interest rate is reset at a predetermined rate. Given that substantially allof the auctions were unsuccessful in the last two months of the currentquarter, we reclassified the investments from short-term to long-term due toilliquidity. Additionally, we recorded a temporary impairment of $415,000 in othercomprehensive income due to our inability to liquidate these securities at par.Our determination of fair value was based upon broker statements, assumed riskpremiums, and assumed work out periods, using a discounted cash flow model.

 

The Company’s management believes thatthe unrealized losses are temporary, and it has the ability and intent to holdthe investments until at least substantially all of the cost of the investmentis recovered. Additionally, we believe the impairment is temporary due primarilyto the credit quality of the underlying securities. Because failed auctionstypically result in above-market interest rates, we believe the issues willre-finance the obligations at more attractive rates in the near future. Additionally,we have been notified of the intention that certain of our auction ratesecurities will be purchased at par by the issuers beginning in the secondquarter of 2008. To date, we have collected all interest payable on all of ourauction rate securities when due. If the auction rate securities continue toexperience unsuccessful auctions, or if the credit rating of the auction ratesecurities deteriorates, we may be required to realize an impairment charge as “otherthan temporary.”  While the recentauction failures will limit our ability to liquidate these investments for someperiod of time, we do not believe the auction failures will materially impactour ability to fund our working capital needs, capital expenditures, or otherbusiness requirements. The Company

 

27

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will continueto monitor the state of the credit markets and its potential impact, if any, onthe fair value and classification of our portfolio of auction rate securities.

 

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

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2008, we did not have anysignificant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K promulgated by the SEC.

 

# **Contractual Obligations and Commitments**

# ** **

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

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

*Foreign Currency Exchange Risk*

 

Our results of operations and cash flows are subjectto fluctuation due to changes in foreign currency exchange rates, particularlychanges in the Euro, British pound, Australian dollar and Japanese yen, becauseour contracts are frequently denominated in local currency. In the future, wemay utilize foreign currency forward and option contracts to manage currencyexposures. We do not currently have any such contracts in place, nor did weenter into any such contracts during the quarters ended March 31, 2007 or March 31,2008.

 

*Interest Rate Sensitivity*

* *

Our investments consist of short-term and long-terminterest-bearing securities, which are subject to credit and interest rate risk.Our portfolio is investment-grade and diversified among issuers and securitytypes to reduce credit risk. We manage our interest rate risk by maintaining alarge portion of our investment portfolio in instruments with short maturitiesor frequent interest rate resets. We also manage interest rate risk bymaintaining sufficient cash and cash equivalents such that we are able to holdinvestments until maturity. If market interest rates were to increase by 100basis points from the level at March 31, 2008, the fair value of ourportfolio would decline by approximately $395,000.

 

28

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* *

*Liquidation and Valuation Risk*

 

Our long-term investments consist of approximately$18.2 million in par value auction rate securities with investment gradesof AAA or AA, as of December 31, 2007. Despite the long-term contractualmaturities of the auction rate securities, all of these securities areavailable for sale. In February and March 2008 uncertainties in thecredit markets caused substantially all auctions of the Company’s securities tobe unsuccessful. As a consequence we recorded a temporary impairment of$415,000 as of March 31, 2008. If auctions continue to be unsuccessful orif credit ratings deteriorate, we may be required to record a permanentimpairment charge on these investments. Based on the Company’s expectedoperating cash flows, and other sources and uses of cash, the Company does notanticipate that the lack of liquidity on these investments will affect itsability to execute its current business plan. The Company will continue tomonitor the state of the credit markets and its potential impact, if any, onthe recoverability of our portfolio of auction rate securities.

 

**Item 4. Controls andProcedures**

 

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

 

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

 

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

 

During the most recent completed fiscalquarter covered by this report, there has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

29

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**Part II. OtherInformation**

 

***Item 1. Legal Proceedings***

*** ***

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

 

**Item1A. Risk Factors**

** **

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

 

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

 

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

 

We incurred a net loss of$3.4 million in the first quarter of 2008, and as of March 31, 2008, wehad an accumulated deficit of $60.3 million. We expect to continue to incursignificant professional services, sales and marketing, research anddevelopment and general and administrative expenses as we expand our operationsand, as a result, we will need to generate significant revenue to achieveprofitability. In 2007 we changed our business model to substantially eliminatesales of perpetual licenses, which materially and adversely affected ouroperating margin. Although we improved first quarter operating margins in 2008compared to each of the quarters in 2007, we may not be able to continue toimprove our operating results at the rate that has occurred in the past. Evenif we achieve profitability, we may not be able to increase profitability on aquarterly or annual basis in the future, which may cause the price of our stockto decline.

 

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

 

 Approximately 80% to 90% of our revenue isderived from RightNow Service, a suite of solutions used to optimize customerservice operations. If we are unable to successfully develop and sell new andenhanced versions of RightNow Service, or introduce new products and solutionsfor the customer service market, our financial performance will suffer.Although to date the majority of business has been focused on providingsolutions for customer service operations, we have introduced sales, marketing,feedback and voice-enabled applications to expand our solution offerings. Ourefforts to expand beyond the customer service market may not be successfulbecause certain of our competitors have far greater experience and brandrecognition

 

30

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in the broader segments of the CRM market. Inaddition, our efforts to expand our on demand software solutions beyond thecustomer service market may divert management resources from our existingoperations and require us to commit significant financial resources to a marketwhere we are less proven, which may harm our business, financial condition andresults of operations.

 

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

 

The market for CRM solutions is highly competitive andfragmented, and is subject to rapidly changing technology, shifting clientrequirements, frequent introductions of new products and services, andincreased marketing activities of other industry participants. Increasedcompetition could result in commodization, pricing pressure, reduced sales,lower margins or the failure of our solutions to achieve or maintain broadmarket acceptance. If we are unable to compete effectively, it will bedifficult for us to add and retain clients, and our business, financialcondition and results of operations will be seriously harmed.

 

We face competition from:

 
|       |                                                                                                                                                      | · Companies currently providing customer  service solutions, some of whom offer hosted services, including BMC Software  Corporation, Inc., eGain Communications Corporation, FrontRange  Solutions, Inc., Kana Software, Inc., Microsoft Corporation,  Netsuite, Oracle Corporation, SAP AG, salesforce.com, and Talisma; |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                      |
| ·     |  CRM systems that are developed  and maintained internally by businesses;                                                                            |
|       |                                                                                                                                                      |
| ·     | CRM products or services  that are developed, or bundled with other products or services, and installed  on a client’s premises by software vendors; |
|       |                                                                                                                                                      |
| ·     | CRM products or services  that are developed, or bundled with other products or services, and installed  on a client’s premises by software vendors; |
|       |                                                                                                                                                      |
| ·     | CRM products or services  that are developed, or bundled with other products or services, and installed  on a client’s premises by software vendors; |
|       |                                                                                                                                                      |
| **·** | voice system integrators  and voice-enabled IVR technology providers, such as Apptera, Intervoice,  Microsoft, TuVox, Voxify, and Unveil Technologies.    |
|            |                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                     |  |

 

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

 

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

 

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

 

The market for on demandapplication services is at an early stage of development, and it is uncertainwhether these application services will achieve and sustain high levels ofdemand and market acceptance. Our success will depend to a substantial extenton the willingness of companies to increase their use of on demand applicationservices in general and for on demand customer relationship managementapplications in particular. The willingness of companies to increase their useof any on demand application services is in part dependent on the actual andperceived reliability of hosted solutions. In addition, many companies haveinvested substantial 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 supportedtraditional on site deployment of our software applications, widespread marketacceptance of our on demand software solutions is critical to the success ofour business. Other factors that may affect the market acceptance of our solutionsinclude:

 

 
| · | on demand security capabilities and reliability;                                                    |
|--------|-----------------------------------------------------------------------------------------------------|
|   |                                                                                                |
| · | concerns with entrusting a third party to store and manage critical  customer data;                 |
|   |                                                                                                |
| · | our ability to meet the  needs of broader segments of the CRM market or other on demand markets;    |
|   |                                                                                                |
| · | the level of customization we offer;                                                                |
|   |                                                                                                |
| · | our ability to continue to achieve and maintain high levels of client  satisfaction;                |
|   |                                                                                                |
| · | concerns with purchasing  critical CRM solutions from a company with a history of operating losses; |
|   |                                                                                                |
| · | customer acceptance of our  subscription sales arrangements beginning in 2007; and                  |
|   |                                                                                                |
| · | the price, performance and availability of competing products and  services.                        |

 

If businesses do notperceive the benefits of on demand solutions in general, or our on demand solutionsin particular, then the market for these solutions may not develop further, orit may develop more slowly than we expect, either of which would adverselyaffect our business, financial condition and results of operations.

 

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*** ***

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

 

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

 

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

 

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

 

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

 

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

 

· the timing and success of new productintroductions or upgrades by us or our competitors;

 

·the timing of professional service sales and our ability to appropriately staffand train professional service resources without negatively impactingprofessional service margins changes in our pricing policies or those of ourcompetitors;

 

·the amount and timing of expenditures related to expanding our operations;

 

·changes in our assumptions of stock price volatility, employee exercisebehaviors, and option of forfeiture rates, or changes in the number of stockoptions granted and vesting requirements in any particular period, whicheffects the amount of stock-based compensation expense;

 

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

 

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

 

·general economic, industry and market conditions.

 

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

 

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

 

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

 

Increasing our client base and achieving broader marketacceptance of our solutions will depend to a significant extent on our abilityto expand our sales and marketing operations. We plan to continue to expand oursales and marketing resources and engage additional third-party channelpartners, both domestically and internationally. This expansion will require usto invest significant financial and other resources. Our business will beseriously harmed if our efforts do not generate a corresponding significantincrease in revenue. We may not achieve anticipated revenue growth fromexpanding our sales and marketing resources if we are unable to hire anddevelop talented sales and marketing personnel, if our new sales personnel areunable to achieve desired productivity levels in a reasonable period of time,or if we are unable to retain our existing sales and marketing personnel. Wealso may not achieve anticipated revenue growth from our third-party channelpartners if we are unable to attract and retain additional motivated channelpartners, if any existing or future channel partners fail to successfullymarket, resell, implement or support our solutions for their customers, or ifthey represent multiple providers and devote greater resources to market,resell, implement and support competing products and services.

 

***The majority of oursolutions are sold pursuant to time-based agreements, and if our existingclients elect not to renew or to renew on terms less favorable to us, ourbusiness, financial condition and results of operations will be adverselyaffected.***

 

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

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 2008, approximately 90% of our clientswere using our hosting services for deployment of our software applications. Wegenerally provide our hosting services for our non-voice applications throughcomputer hardware that we own and that is currently located in third-party webhosting co-location facilities maintained and operated in California, Illinois,Massachusetts, New Jersey and London, England. Our voice applications forseveral international customers are hosted by third parties who also own andoperate the hardware on which our applications reside. We do not maintainlong-term supply contracts with any of our hosting providers, and providers donot guarantee that our clients’ access to hosted solutions will beuninterrupted, error-free or secure. Our operations depend on our providers’ability to protect their and our systems in their facilities against damage orinterruption from natural disasters, power or telecommunications failures,criminal acts and similar events. Our back-up computer hardware and systemshave not been tested under actual disaster conditions and may not havesufficient capacity to recover all data and services in the event of an outageoccurring simultaneously at all hosting facilities. In the event that ourhosting facility arrangements were terminated, or there was a lapse of serviceor accidental or willful damage to such facilities, we could experience lengthyinterruptions in our hosting service as well as delays and/or additionalexpense in arranging new facilities and services. Any or all of these eventscould cause our clients to lose access to their important data. In addition,the failure by our third-party hosting facilities to meet our capacity 

 

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

 

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

 

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

 

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

 

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

 

International sales comprised 28% and 33% of our revenue forthe quarters ended March 31, 2007 and 2008, respectively. We intend tocontinue to pursue and expand our international business activities. Adversepolitical and economic conditions could make it difficult for us to increaseour international sales or to operate abroad. International operations aresubject to many inherent risks, including:

 

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

 

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

 

· fluctuations in currency exchange rates;

 

· longer collection periods and difficultiesin collecting receivables from foreign entities;

 

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

 

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· reduced protection for our intellectualproperty in some countries;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Product liability claims could require us to spendsignificant time and money in litigation or to pay significant settlements ordamages. Although we maintain general liability insurance, including coveragefor errors and omissions, this coverage may not be sufficient to cover liabilitiesresulting from such product liability claims. Also, our insurer may disclaimcoverage. Our liability insurance also may not continue to be available to uson reasonable terms, in sufficient amounts, or at all. Any product liabilityclaims successfully brought against us would cause our business to suffer.

 

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

 

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

 

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

 

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

 

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complextechnical issues and inherent uncertainties in litigation. Any claims,regardless of their merit, could be time-consuming and distracting tomanagement, result in costly litigation or settlement, cause productdevelopment delays, or require us to enter into royalty or licensingagreements. If any of our products violate third-party proprietary rights, wemay be required to re-engineer our products or seek to obtain licenses fromthird parties, which may not be available on reasonable terms or at all.Because our sales agreements typically require us to indemnify our clients fromany claim or finding of intellectual property infringement, any such litigationor successful infringement claims could adversely affect our business, financialcondition and results of operations. Any efforts to re-engineer our products,obtain licenses from third parties on favorable terms or license a substitutetechnology may not be successful and, in any case, may substantially increaseour costs and harm our business, financial condition and results of operations.Further, our software products contain open source software components that arelicensed to us under various public domain licenses. While we believe we havecomplied with our obligations under the various applicable licenses for opensource software that we use, there is little or no legal precedent governingthe interpretation of many of the terms of certain of these licenses andtherefore the potential impact of such terms on our business is somewhatunknown. Use of open source standards also may make us more vulnerable tocompetition because the public availability of open source software could makeit easier for new market entrants and existing competitors to introduce similarcompeting products quickly and cheaply.

 

 ***Future acquisitions could disruptour business and harm our financial condition and results of operations.***

 

In order to expand our addressable market, we may decide toacquire additional businesses, products and technologies. In May 2005, weacquired the assets of Convergent Voice and in May 2006, we acquiredSalesnet, Inc. Acquisitions could require significant capital infusionsand could involve many risks, including, but not limited to, the following:

 
| · | an acquisition may negatively  impact our results of operations because it may require incurring large  one-time charges, substantial debt or liabilities; it may require the  amortization or write down of amounts related to deferred compensation,  goodwill and other intangible assets; or it may cause adverse tax  consequences, substantial depreciation or deferred compensation charges; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| · | we may 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 for us;                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| · | our existing and potential  clients and the customers of the acquired company may delay purchases due to  uncertainty related to an acquisition;                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| · | an acquisition may disrupt  our ongoing business, divert resources, increase our expenses and distract  our management;                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| · | the acquired businesses,  products or technologies may not generate sufficient revenue to offset  acquisition costs;                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| · | we may have to issue  equity securities to complete an acquisition, which would dilute our  stockholders and could adversely affect the market price of our common stock;  and                                                                                                                                                                                                                      |

 

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| · | acquisitions may involve  the entry into a geographic or business market in which we have little or no  prior experience. |
|--------|---------------------------------------------------------------------------------------------------------------------------|

 

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

 

***Changes to 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, accounting for stock-based compensation,and income tax uncertainties, 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 began January 1,2006 make the use of stock-based compensation much more expensive and introduceadditional volatility in our results of operations.  See *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.

 

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

 

We have historicallyused stock options as a key component of our employee compensation because webelieve it aligns employees’ interests with our stockholders’ interest,encourages employee retention, and provides a competitive component of ouroverall compensation program.  Due to therequired adoption of SFAS 123R, and the recording of stock option expense onour operating statements, we may determine that it is in our best interest toreduce the number or size of our stock-based awards, or change the type ofawards granted.  In doing so, we may notbe able to attract, retain and motivate our employees.

 

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

 

We invest our cash and cash equivalents and short-term investmentspursuant to our investment policy in cash, auction-rate securities, moneymarket funds, commercial paper, corporate bonds and government agencysecurities, which are of investment grade quality. Certain of these investmentsare subject to general credit, liquidity, market and interest rate risks, whichmay be exacerbated by U.S. sub-prime mortgage defaults that have affectedvarious sectors of the financial markets and caused credit and liquidityissues. To date, we believe that any declines in the market value of ourinvestments have been temporary. There could be future declines in the value ofthese investments, however, which we may determine to be other-than-temporary.These market risks associated with our investment portfolio may have a materialadverse effect on our results of operations, liquidity and financial condition.

 

At December 31, 2007 and March 31, 2008, we had approximately $18.3million and $18.2 million, respectively, in par value auction rate securitieswith investment grades of AAA or AA.  InFebruary and March 2008, uncertainties in the credit market causedsubstantially all auctions of the auction rate securities we hold to fail.  An auction failure means that the partieswishing to sell securities could not. Given the recent failures in theauctions, we reclassified these investments from short-term to long-term due toilliquidity.  Additionally, we recorded atemporary charge of $415,000 in other comprehensive income due to our inabilityto liquidate these securities at par.  Ifthe issuers of these securities are unable to successfully close futureauctions and their credit ratings deteriorate, we may in the future be requiredto record an other-than temporary impairment charge on these investments. If werecord an other-than-temporary impairment charge, we will record a loss in ourstatement of operations, which could have a material impact on our operating resultsin the period it is recognized. Determining whether there has been an other-than-temporary impairment ofour short-term investments requires significant judgment. With the recentvolatility in the capital markets, the funds associated with these investmentsmay not be accessible for in excess of twelve months and there is a risk thatwe could suffer a loss of principal and suffer a reduction in our interest orreturn on these and other investments, which could result in a permanentimpairment charge and harm our operating results and financial condition. 

 

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

 

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

 

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funding. If we raiseadditional funds through further issuances of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution intheir percentage ownership of our company, and any new equity securities weissue could have rights, preferences and privileges senior to those of holdersof our common stock. Any debt financing secured by us in the future couldinvolve restrictive covenants relating to our capital raising activities andother financial and operational matters, which may make it more difficult forus to obtain additional capital, to pay dividends and to pursue businessopportunities, including potential acquisitions. In addition, if we decide toraise funds through debt or convertible debt financings, we may be unable tomeet our interest or principal payments.

 

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

 

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

 

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

 

The Internet hasexperienced, and is expected to continue to experience, significant user andtraffic growth, which has, at times, caused user frustration with slow accessand download times. If Internet activity grows faster than Internet infrastructureor if the Internet infrastructure is otherwise unable to support the demandsplaced on it, or if hosting capacity becomes scarce, our business growth may beadversely affected.

 

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

 

Businesses using oursolutions collect personal information regarding their customers when thosecustomers contact them with customer service inquiries. A valuable component ofour solutions is their ability to allow our clients to use and analyze theircustomers’ information to increase sales, marketing and up-sell or cross-sellopportunities. Federal, state and foreign government bodies and agencies,however, have adopted and are considering adopting laws and regulationsregarding the collection, use and disclosure of personal information obtainedfrom 

 

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consumers. The costs ofcompliance with, and other burdens imposed by, such laws and regulations thatare applicable to the businesses of our clients may limit the use and adoptionof this component of our solutions and reduce overall demand for our solutions.Furthermore, even where a client desires to make full use of these features inour solutions, privacy concerns may cause our clients’ customers to resistproviding the personal data necessary to allow our clients to use our solutionsmost effectively. Even the perception of privacy concerns, whether or notvalid, may inhibit market acceptance of our products.

 

EuropeanUnion members have imposed restrictions on the collection and use of personaldata that are far more stringent, and impose more significant burdens onsubject businesses, than current privacy standards in the United States. All ofthese domestic and international legislative and regulatory initiatives mayadversely affect our clients’ ability to collect and/or use demographic andpersonal information from their customers, which could reduce demand for oursolutions.

 

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

 

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

 

In January 2004,the federal Controlling the Assault of Non-Solicited Pornography and MarketingAct of 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Act regulates thetransmission and content of commercial emails and, among other things,obligates the sender of such emails to provide recipients with the ability toopt-out of receiving future emails from the sender, and establishes penalties forthe transmission of email messages which are intended to deceive the recipientas to source or content. Many state legislatures also have adopted laws thatimpact the delivery of commercial email, and laws that regulate commercialemail practices have been enacted in many of the international jurisdictions inwhich we do business, including Europe, Australia, and Canada. In addition,Internet service providers and licensors of software products have introduced avariety of systems and products to filter out certain types of commercialemail, without any common protocol to determine whether the recipient desiredto receive the email being blocked. As a result, it is difficult for us todetermine in advance whether or not emails generated by our clients using oursolutions will be permitted by spam filters to reach the intended recipients.

 

Our RightNow Marketingsolution specifically serves the market for mass distribution marketing andother email communications. The increasing regulation of email delivery, bothdomestically and internationally, and the spam filtering practices of Internetservice providers and email users generally, will place significant additionalburdens on our clients who have outbound communication programs, and may causethose clients to substantially change their outbound communications programs orabandon them altogether.  These factorsmay lead to a reduction in sales of our RightNow Marketing solution, may makeit necessary to redesign our RightNow Marketing solution to make it easier forour clients to conform to the requirements of such laws and standards, whichwould increase our expenses, or may make it necessary for us to redefine themarket for and use of our RightNow Marketing solution, which could reduce ourrevenue.

 

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

 

Our clients consist of largeand small companies in nearly all industry sectors and geographies. Potentialnew clients or existing clients could defer purchases of our products becauseof unfavorable macroeconomic conditions, such as rising interest rates,fluctuations in currency exchange rates, industry or national economicdownturns, industry purchasing patterns, and other factors.   Our ability to grow revenues may beadversely affected by unfavorable economic conditions.

 

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

 

AtMarch 31, 2008, Greg Gianforte, our founder and Chief Executive Officer,and his spouse, Susan Gianforte, have voting power over approximately 23.3% ofour outstanding common stock and, together with other officers and directors,have voting power over approximately 27.6% of our outstanding common stock. Inaddition, none of the shares of common stock over which Mr. Gianforte and Mrs. Gianfortehave voting power are subject to vesting restrictions. As a result, Mr. Gianforteand Mrs. Gianforte, acting together with some of our other officers anddirectors, may be able to control matters requiring stockholder approval,including the election of directors, management changes and approval ofsignificant corporate transactions. This concentration of voting power may havethe effect of delaying, preventing or deterring a change in control ofRightNow, could deprive our stockholders of an opportunity to receive a premiumfor their common stock as part of a sale of RightNow and might reduce themarket price of our common stock.

 

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

 

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

 

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

 

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

 

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·      authorizing the board to issue preferred stock;

 

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

 

·      limiting the persons who may call specialmeetings of stockholders;

 

·      prohibiting certain transactions undercertain circumstances with interested stockholders;

 

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

 

·      prohibiting stockholder action by writtenconsent.

 

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

 

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

** **

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

 

None.

 

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

 

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

 

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

 

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

 

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***Item 3.***         Defaults UponSenior Securities.

 

None.

*** ***

***Item 4.***         Submission ofMatters to a Vote of Security Holders.

 

None.

 

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

 

None.

 

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**Item 6.  Exhibits**

 

***Exhibits***

 

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

 
| Exhibit 3.1     |   | Amended and Restated Certificate of  Incorporation of the Registrant. (1)                                                                                                                                         |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.2     |   | Amended and Restated Bylaws of the  Registrant. (2)                                                                                                                                                               |
| Exhibit 10.31** |   | Form of Executive Officer Offer Letter  and Schedule of Material Differences thereto for Jeff Davison and Susan  Carstensen (3)                                                                              |
| Exhibit 31.1    |   | Certification of Chief Executive Officer  pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
| Exhibit 31.2    |   | Certification of Chief Financial Officer  pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
| Exhibit 32.1    |   | Certifications of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith). |

 

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| (1)    |   | Incorporated by reference to  Exhibit 4.2 to the Company’s registration statement on Form S-8  (File No. 333-118515) filed with                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | the Securities and Exchange Commission on  August 24, 2004.                                                                                                                                               |
| (2)    |   | Incorporated by reference to  Exhibit 3.1 of the Company’s Current Report on Form 8-K (File  No. 000-31321) filed with the Securities and Exchange Commission on  January 25, 2006.   |
| (3)    |   | Incorporated by reference to  Exhibit 10.31 of the Company’s Current Report on Form 8-K (File  No. 000-31321) filed with the Securities and Exchange Commission on  January 30, 2008. |
| **     |   | Denotes management contract or compensatory  plan or arrangement.                                                                                                                                              |

 

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**SIGNATURE**

 

 

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

 

Dated:  May 9, 2008

 

**RightNow Technologies, Inc.**

(Registrant)

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

 

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