**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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

 

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

 

# **For the quarterly period ended September 30, 2005**

 

**or**

 

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

 

### **For thetransition period from             to**

 

**000-31321**

**(CommissionFile No.)**

 

**RIGHTNOWTECHNOLOGIES, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

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

 

**40Enterprise Boulevard**

**Bozeman, Montana 59718-9300**

(Address of Principal ExecutiveOffices) (Zip Code)

 

**(406)522-4200**

 (Registrant’s Telephone Number, Including AreaCode)

 

**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  ý   No     o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  ý

 

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

 

The number of shares outstanding of theregistrant’s common stock, $0.001 par value, as of October 31, 2005 was31,549,088.

 

 

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**RightNowTechnologies, Inc.**

**QuarterlyReport on Form 10-Q**

 

**Forthe Quarterly Period Ended September 30, 2005**

 

**INDEX**

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

 

2

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**Part I. FINANCIAL INFORMATION**

 

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

 

**RightNow Technologies, Inc.**

**Condensed Consolidated Balance Sheets**

(In thousands) (Unaudited)

 
| ** **                                          | ** ** | **December  31, 2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **Assets**                                          |       |                   |       |                    |       |
| Cash and  cash equivalents                          |       | $                      | 18,944     |                    | $          | 39,594 |   |
| Short-term  investments                             |       | 31,188                 |       | 20,883                  |       |
| Accounts  receivable                                |       | 16,939                 |       | 21,968                  |       |
| Term  receivables, current                          |       | 10,090                 |       | 14,105                  |       |
| Allowance  for doubtful accounts                    |       | (1,581                 | )          | (1,960                  | )          |
| Receivables,  net                                   |       | 25,448                 |       | 34,113                  |       |
| Prepaid  expenses                                   |       | 1,255                  |       | 1,771                   |       |
| Total  current assets                               |       | 76,835                 |       | 96,361                  |       |
|                                                |       |                   |       |                    |       |
| Property and  equipment, net                        |       | 4,393                  |       | 5,597                   |       |
| Term  receivables, non-current                      |       | 5,756                  |       | 10,801                  |       |
| Intangible  assets, net                             |       | 1,113                  |       | 1,631                   |       |
| Other                                               |       | 212                    |       | 261                     |       |
| **Total  Assets**                                   |       | $                      | 88,309     |                    | $          | 114,651 |   |
|                                                |       |                   |       |                    |       |
| **Liabilities and Stockholders’ Equity**       | ** ** | ** **             | ** ** | ** **              | ** ** |
| Accounts  payable                                   |       | $                      | 1,720      |                    | $          | 2,018 |   |
| Commissions  and bonuses payable                    |       | 2,648                  |       | 3,344                   |       |
| Other  accrued liabilities                          |       | 3,715                  |       | 5,617                   |       |
| Current  portion of long-term debt                  |       | —                 |       | 29                      |       |
| Current  portion of deferred revenue                |       | 36,020                 |       | 45,694                  |       |
| Total  current liabilities                          |       | 44,103                 |       | 56,702                  |       |
|                                                |       |                   |       |                    |       |
| Deferred  revenue, net of current portion           |       | 13,105                 |       | 18,058                  |       |
| Long-term  debt, net of current portion             |       | —                 |       | 125                     |       |
|                                                |       |                   |       |                    |       |
| Stockholders’  equity:                         |       |                   |       |                    |       |
| Common stock                                        |       | 29                     |       | 31                      |       |
| Warrants                                            |       | 291                    |       | 107                     |       |
| Additional  paid-in capital                         |       | 72,367                 |       | 76,339                  |       |
| Accumulated  other comprehensive loss               |       | (605                   | )          | (433                    | )          |
| Accumulated  deficit                                |       | (40,981                | )          | (36,278                 | )          |
| Total  stockholders’ equity                    |       | 31,101                 |       | 39,766                  |       |
| **Total Liabilities and Stockholders’ Equity** |       | $                      | 88,309     |                    | $          | 114,651 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements ofOperations**

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

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue:                                  |       |                                       |       |                                      |       |   |   |   |   |
| Software,  hosting and support            |       | $                                          | 12,976     |                                      | $          | 18,005 |   | $ | 35,405 |   | $ | 48,743 |   |
| Professional  services                    |       | 3,450                                      |       | 5,149                                     |       | 8,640 |   | 13,831 |   |
| Total  revenue                            |       | 16,426                                     |       | 23,154                                    |       | 44,045 |   | 62,574 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Cost of  revenue:                         |       |                                       |       |                                      |       |   |   |   |   |
| Software,  hosting and support            |       | 1,729                                      |       | 2,253                                     |       | 4,944 |   | 6,593 |   |
| Professional  services                    |       | 1,979                                      |       | 3,026                                     |       | 4,862 |   | 8,601 |   |
| Total cost  of revenue                    |       | 3,708                                      |       | 5,279                                     |       | 9,806 |   | 15,194 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Gross profit                              |       | 12,718                                     |       | 17,875                                    |       | 34,239 |   | 47,380 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Operating  expenses:                      |       |                                       |       |                                      |       |   |   |   |   |
| Sales and  marketing                      |       | 8,055                                      |       | 11,248                                    |       | 22,940 |   | 31,262 |   |
| Research and  development                 |       | 2,028                                      |       | 2,937                                     |       | 5,640 |   | 7,524 |   |
| General and  administrative               |       | 1,164                                      |       | 1,627                                     |       | 3,333 |   | 4,623 |   |
| Total  operating expenses                 |       | 11,247                                     |       | 15,812                                    |       | 31,913 |   | 43,409 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income from  operations                   |       | 1,471                                      |       | 2,063                                     |       | 2,326 |   | 3,971 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Interest and  other income (expense), net |       | 30                                         |       | 440                                       |       | (80 | ) | 1,063 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income  before income taxes               |       | 1,501                                      |       | 2,503                                     |       | 2,246 |   | 5,034 |   |
| Provision for  income taxes               |       | (61                                        | )          | (160                                      | )          | (92 | ) | (331 | ) |
| Net income                                |       | $                                          | 1,440      |                                      | $          | 2,343 |   | $ | 2,154 |   | $ | 4,703 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net income  per share:                    |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                     |       | $                                          | 0.06       |                                      | $          | 0.08 |   | $ | 0.12 |   | $ | 0.16 |   |
| Diluted                                   |       | $                                          | 0.05       |                                      | $          | 0.07 |   | $ | 0.08 |   | $ | 0.14 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Shares used  in the computation:          |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                     |       | 23,734                                     |       | 30,802                                    |       | 17,963 |   | 30,287 |   |
| Diluted                                   |       | 30,671                                     |       | 33,667                                    |       | 27,519 |   | 33,541 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements of CashFlows**

(In thousands) (Unaudited)

 
| ** **                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                  | ** ** | **2005** | ** ** |
| **Operating activities:**                                      |       |                                      |       |   |   |
| Net income                                                     |       | $                                         | 2,154      |   | $ | 4,703 |   |
| Non-cash  adjustments:                                         |       |                                      |       |   |   |
| Depreciation  and amortization                                 |       | 2,081                                     |       | 2,462 |   |
| Provisions  for losses on accounts receivable                  |       | 551                                       |       | 260 |   |
| Deferred  income taxes                                         |       | —                                    |       | 218 |   |
| Changes in  operating accounts:                                |       |                                      |       |   |   |
| Receivables                                                    |       | (11,094                                   | )          | (14,340 | ) |
| Prepaid  expenses                                              |       | (1,141                                    | )          | (586 | ) |
| Accounts  payable                                              |       | 367                                       |       | 405 |   |
| Commissions  and bonuses payable                               |       | 598                                       |       | 732 |   |
| Other  accrued liabilities                                     |       | 1,183                                     |       | 2,023 |   |
| Deferred  revenue                                              |       | 9,217                                     |       | 15,283 |   |
| Other                                                          |       | (498                                      | )          | (109 | ) |
| Cash  provided by operating activities                         |       | 3,418                                     |       | 11,051 |   |
|                                                           |       |                                      |       |   |   |
| **Investing activities:**                                      |       |                                      |       |   |   |
| Net change  in short-term investments                          |       | (25,943                                   | )          | 10,303 |   |
| Acquisition  of property and equipment                         |       | (2,623                                    | )          | (3,272 | ) |
| Acquisition  of intangible assets                              |       | (501                                      | )          | (1,035 | ) |
| Proceeds  from sale of property and equipment                  |       | 1                                         |       | 8 |   |
| Cash  provided by (used for) investing activities              |       | (29,066                                   | )          | 6,004 |   |
|                                                           |       |                                      |       |   |   |
| **Financing activities:**                                      |       |                                      |       |   |   |
| Proceeds  from long-term debt                                  |       | 1,675                                     |       | 162 |   |
| Proceeds  from issuance of common stock:                       |       |                                      |       |   |   |
| Initial  public offering, less offering costs                  |       | 40,687                                    |       | — |   |
| Employee  benefit plans                                        |       | 306                                       |       | 3,572 |   |
| Repurchase  of common stock                                    |       | (2                                        | )          | — |   |
| Payments on  long-term debt                                    |       | (3,573                                    | )          | (8 | ) |
| Cash  provided by financing activities                         |       | 39,093                                    |       | 3,726 |   |
|                                                           |       |                                      |       |   |   |
| Effect of  foreign exchange rates on cash and cash equivalents |       | 1                                         |       | (131 | ) |
|                                                           |       |                                      |       |   |   |
| Increase in  cash and cash equivalents                         |       | 13,446                                    |       | 20,650 |   |
|                                                           |       |                                      |       |   |   |
| Cash and  cash equivalents at beginning of period              |       | 8,360                                     |       | 18,944 |   |
| Cash and  cash equivalents at end of period                    |       | $                                         | 21,806     |   | $ | 39,594 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

5

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**RightNow Technologies, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

 

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

 

***BusinessDescription***

 

RightNowTechnologies, Inc. (the “Company” or “RightNow”) provides on-demandcustomer relationship management software solutions for companies of allsizes.  The Company’s on-demand softwaresupports multiple customer interaction points in a business’s customer service,marketing and sales operations.  Foundedin 1997, RightNow is headquartered in Bozeman, Montana, with additional officesin Chicago, Illinois; Dallas, Texas; San Mateo, California; Princeton, NewJersey; Rochester, New York; London, England; Sydney, Australia; Munich, Germany;and a liaison office in Tokyo, Japan. The Company operates in one segment, which is the customer relationshipmanagement market.

 

***Basis ofPresentation***

 

The accompanyinginterim condensed consolidated financial statements are unaudited.  These financial statements and notes shouldbe read in conjunction with the audited consolidated financial statements andrelated notes, together with management’s discussion and analysis of financialcondition and results of operations, contained in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2004.

 

The accompanyinginterim condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  In the opinion of management,the interim consolidated financial statements and notes have been prepared onthe same basis as the audited consolidated financial statements in the AnnualReport on Form 10-K and include all adjustments necessary for the fairpresentation of the Company’s financial position at September 30, 2005,and results of operations and cash flows for the three and nine month periodsended September 30, 2004 and 2005. The interim period results are not necessarily indicative of the resultsto be expected for the full year.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and disclosures of contingent assets and liabilities.  Management evaluates these estimates andassumptions on an on-going basis. Significant estimates and assumptions made by management includeestimates and assumptions regarding revenue recognition, valuation allowancesfor trade receivables and deferred income tax assets, and accounting forequity-based compensation.

 

6

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

 

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

 

The Company’scustomers are located worldwide with approximately 75% of sales in the UnitedStates.  One individual customerrepresented approximately 14% of the Company’s total revenue for the threemonth period ended September 30, 2005. No individual customer represented more than 10% or revenue for the ninemonth periods ended September 30, 2004 or 2005.  No individual customer represented more than10% of receivables at September 30, 2004 or 2005.

 

Assets locatedoutside the United States were 7% of total assets at December 31, 2004 and9% of total assets at September 30, 2005.  The loss from operations outside of the United States totaled $3.1million for the year ended December 31, 2004 and $5.3 million for the ninemonths ended September 30, 2005. Revenue by geographical region follows (in thousands):

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|           |       |                                       |       |                                      |       |   |   |   |   |
| United  States |       | $                                          | 12,421     |                                      | $          | 17,291 |   | $ | 32,564 |   | $ | 47,699 |   |
| Europe         |       | 3,188                                      |       | 3,752                                     |       | 9,184 |   | 9,876 |   |
| Asia Pacific   |       | 817                                        |       | 2,111                                     |       | 2,297 |   | 4,999 |   |
|           |       | $                                          | 16,426     |                                      | $          | 23,154 |   | $ | 44,045 |   | $ | 62,574 |   |

 

***(3)******                                ******RevenueRecognition***

 

Software, hosting and support revenue is comprisedof fees from term and perpetual licenses of the Company’s software, hosting andsupport. The Company recognizes revenue for the fees associated with termlicenses and the related hosting and support ratably over the term of thearrangement, generally two years, but can range between six months and fouryears. To date, the Company has not entered into an arrangement solely for thelicense of its products, and therefore, has not established vendor specificobjective evidence (VSOE) of fair value for the license element.  The Company has established VSOE for thehosting and support elements sold with perpetual licenses based on pricescharged upon renewal.  Accordingly,revenue is recognized for the fees associated with a perpetual license upondelivery if all other revenue recognition criteria are met using the residualmethod in accordance with Statement of Position (SOP) 98-9, *Modification of SOP 97-2, Software RevenueRecognition With Respect to Certain Transactions*.

 

7

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Hosting and support agreements provide maintenanceand management of our software at third party facilities, technical support forour software products, and unspecified product upgrades on a when and ifavailable basis. Basic hosting and support is included with the term licensepackage and the initial perpetual license support packages. Basic hosting andsupport services included in the initial perpetual license support package arerecognized ratably over the term provided in the arrangement.

 

Revenue is recognized when all of the followingcriteria at met: a) the Company has entered into a legally bindingagreement with the customer; b) the software has been delivered or madeavailable to the customer; c) the Company’s fee for providing the softwareand services is determinable; and d) the Company estimates that collectionof its fee is reasonably probable.

 

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.Accordingly, the amount of revenue recognized (a) for perpetual licensearrangements is limited to the amount due from the customer, or (b) forterm license arrangements is limited to the lesser of the amount due from thecustomer during each reporting period or a ratable portion of the totalunallocated arrangement fee.

 

License fee revenue from arrangements with resellersis recognized on a sell-through basis, which is when payment becomes due fromthe customer and delivery of the product has occurred, assuming no significantvendor obligations remain.

 

Certain customers have license agreements thatprovide for usage above fixed minimums. Usage above fixed minimums requirespayment of additional license fees if the Company’s software is used by morethan a specified number of users or for more than a specified number ofinteractions. Fixed minimums are recognized as revenue ratably over the term ofthe arrangement. Usage fees above fixed minimums are recognized as revenue whensuch amounts are reported to the Company and billed.

 

Professional services revenue is primarily comprisedof revenue from consulting services, education and development services.Consulting services include implementation, upgrade and best practices servicesconsulting. Education services include both group and individual courses.Development services include building of non-complex customizations andintegrations services for the customer’s specific application. Professionalservices revenue is recognized upon delivery. The Company has determined thatthe service elements of its software arrangements are not essential to thefunctionality of the software. The Company has also determined that its professionalservices (a) are available from other vendors, (b) do not involve asignificant degree of risk or unique acceptance criteria, and (c) qualifyfor separate accounting as the Company has sufficient experience in providingsuch services.

 

VSOE of fair value of services in multiple elementarrangements is based upon rates for consulting, education and developmentservices, which the Company has charged in stand-alone contracts for services.

 

The following table sets forth revenue by product orservice as a percentage of total revenue:

 

8

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| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                            |       |                                       |       |                                      |       |   |   |   |   |
| Revenue by  type:                               |       |                                       |       |                                      |       |   |   |   |   |
| Recurring  (term licenses, hosting and support) |       | 58                                         | %          | 51                                        | %          | 60 | % | 53 | % |
| Perpetual  licenses                             |       | 21                                         |       | 27                                        |       | 20 |   | 25 |   |
| Professional  services                          |       | 21                                         |       | 22                                        |       | 20 |   | 22 |   |

 

Deferred revenue represents amounts received or duefrom customers for which the revenue recognition criteria have not been met.The majority of deferred revenue is due to the ratable revenue recognition ofterm licenses and support contracts. Deferred revenue is recognized intorevenue when the Company provides its products and services, provided that allother revenue recognition criteria noted above are met. The Company does notprovide refunds for customer cancellations.

 

** (4) Net Income Per Share**

 

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

 
| ** **                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Weighted  average common shares outstanding for basic net income per share |       | 23,734                                     |       | 30,802                                    |       | 17,963 |   | 30,287 |   |
| Effect of  dilutive securities:                                            |       |                                       |       |                                      |       |   |   |   |   |
| Convertible  preferred stock                                               |       | 2,843                                      |       | —                                    |       | 5,781 |   | — |   |
| Employee  stock options                                                    |       | 4,036                                      |       | 2,840                                     |       | 3,746 |   | 3,214 |   |
| Warrants                                                                   |       | 58                                         |       | 25                                        |       | 29 |   | 40 |   |
| Weighted  average shares outstanding for dilutive net income per share     |       | 30,671                                     |       | 33,667                                    |       | 27,519 |   | 33,541 |   |

 

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

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                    |       |                                       |       |                                      |       |   |   |   |   |
| Employee  stock options |       | 243                                        |       | 537                                       |       | 681 |   | 550 |   |

 

**(5) ComprehensiveIncome**

 

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

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                       |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                 |       | $                                          | 1,440      |                                      | $          | 2,343 |   | $ | 2,154 |   | $ | 4,703 |   |
| Other  comprehensive income (loss):        |       |                                       |       |                                      |       |   |   |   |   |
| Foreign  currency translation adjustment   |       | (27                                        | )          | 39                                        |       | (460 | ) | 226 |   |
| Unrealized  loss on short-term investments |       | (3                                         | )          | (27                                       | )          | (3 | ) | (54 | ) |
| Comprehensive  income                      |       | $                                          | 1,110      |                                      | $          | 2,355 |   | $ | 1,691 |   | $ | 4,875 |   |

 

9

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**(6)****                                ****Equity-BasedCompensation**

 

***TheCompany has adopted the disclosure-only provisions of Statement of FinancialAccounting Standards No. 123 (“SFAS 123”),***Accounting for Stock-Based Compensation, and Statement of FinancialAccounting Standards No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure, but applies AccountingPrinciples Board Opinion No. 25 (“APB 25”) and related interpretations inaccounting for its stock plans. Under APB 25, when the exercise price of anemployee stock option equals the estimated market price of the underlying stockon the date of grant, no compensation expense is recognized.

 

Pro formainformation regarding results of operations has been determined as if theCompany had accounted for its stock options under the appropriate minimum valueor fair value method.  The Company usesthe Black-Scholes valuation model to estimate the value of stock optionsgranted under its equity incentive plans and stock purchased under the 2004Employee Stock Purchase Plan.  Theestimated weighted average fair value per share of stock options granted in thenine months ended September 30, 2004 and 2005 was $4.39 and $6.93,respectively.

 

Assumptions used to obtain the estimated fair values of stock optionswere:

 
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Employee  stock options          |       |                                       |       |                                      |       |   |   |   |   |
| Weighted  average risk free rate |       | 3.6                                        | %          | 4.2                                       | %          | 3.6 | % | 3.9 | % |
| Expected  term                   |       | 5 years                                    |       | 5 years                                   |       | 5 years |   | 5 years |   |
| Volatility                       |       | 99                                         | %          | 70                                        | %          | 73 | % | 74 | % |
| Dividend  yield                  |       | 0                                          | %          | 0                                         | %          | 0 | % | 0 | % |

 

The Company’s Employee Stock Purchase Plan provides for two six-monthpurchase periods each year, with purchases effected on June 30 and December 31.  The estimated value of shares purchased on June 30,2005 was $5.79, and is based on the following assumptions: weighted averagerisk free rate of 2.9%; expected term of 0.5 years; volatility of 74%; anddividend yield of 0%.  For the quarterended September 30, 2005, no pro forma compensation expense was recordedbecause the terms of the plan were revised, effective July 1, 2005, to removethe look-back option and reduce the employee discount, so that the plan isdeemed non-compensatory under SFAS 123.

 

Had the Companyrecorded compensation expense in accordance with SFAS No. 123, net incomewould have been (in thousands, except per share data):

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Net income  as reported         |       | $                                          | 1,440      |                                      | $          | 2,343 |   | $ | 2,154 |   | $ | 4,703 |   |
| Less  equity-based compensation |       | (205                                       | )          | (544                                      | )          | (624 | ) | (2,528 | ) |
| Pro forma  net income           |       | $                                          | 1,235      |                                      | $          | 1,799 |   | $ | 1,530 |   | $ | 2,175 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Net income  per share:          |       |                                       |       |                                      |       |   |   |   |   |
| Basic:                          |       |                                       |       |                                      |       |   |   |   |   |
| As reported                     |       | $                                          | 0.06       |                                      | $          | 0.08 |   | $ | 0.12 |   | $ | 0.16 |   |
| Pro forma                       |       | 0.05                                       |       | 0.06                                      |       | 0.09 |   | 0.07 |   |
| Diluted:                        |       |                                       |       |                                      |       |   |   |   |   |
| As reported                     |       | $                                          | 0.05       |                                      | $          | 0.07 |   | $ | 0.08 |   | $ | 0.14 |   |
| Pro forma                       |       | 0.04                                       |       | 0.05                                      |       | 0.06 |   | 0.07 |   |

 

10

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From time to timethe Company grants to certain of its consultants options to purchase stock. TheCompany accounts for consultant stock options in accordance with SFAS 123 andEmerging Issues Task Force Consensus Issue No. 96-18 (“EITF 96-18”), *Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling, Goods orServices*.  Compensationexpense for the grant of stock options to consultants is determined based onthe estimated fair value of the stock options at the measurement date asdefined in EITF 96-18 and is recognized over the vesting period.

 

In December 2004,the Financial Accounting Standards Board issued SFAS No. 123R (“123R”), *Share-Based Payment*, which replaces SFAS No. 123and supercedes APB 25.  Statement 123Rcovers a wide range of share-based compensation, including share options,restricted share plans, performance-based awards, share appreciation rights,and employee share purchase plans.  Thestatement requires the recognition of compensation cost related to share-basedpayment plans to be recognized in financial statements based on the fair valueof the equity or liability instruments issued. The Company expects that this accounting change will materially andadversely affect its reported results of operations because the stock-basedcompensation expense will be charged directly against earnings.  The Company expects to adopt the provisionsof 123R using the modified prospective method beginning January 1, 2006.

 

**(7)**                     Commitments and Contingencies

 

***Warranties andIndemnification***

 

The Company’son-demand application service is typically warranted to perform in accordancewith its user documentation.

 

The Company’sarrangements generally include certain provisions for indemnifying customersagainst liabilities if its products or services infringe a third-party’sintellectual property rights.  To date,the Company has not incurred any material costs as a result of suchindemnifications and has not accrued any liabilities related to suchobligations in the accompanying condensed consolidated financial statements.

 

The Company hasentered into service level agreements with a small number of its customerswarranting certain levels of uptime reliability and permitting those customersto receive credits or terminate their license agreements in the event that theCompany fails to meet those levels.  Todate, the Company has not provided any material credits, and no licenseagreements have been terminated, related to these service level agreements.

 

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

 

11

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***Litigation***

 

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

 

**(8)**                                 Acquisition of Convergent Voice Assets

 

**In May 2005,the Company purchased the intellectual property and other assets, and hiredcertain personnel, of Convergent Voice, Inc.  Convergent Voice has developed voice enabledautomation technologies that, when combined with the Company’s applications,enable: a) telephone queries of the Company’s knowledgebase; b) submission ofquestions over the phone that can be subsequently answered eitherelectronically or by a return phone call; and c) submission of queries thataccess back office systems, such as an order processing system, to obtainstatus of an order.  The Company hadpreviously licensed certain Convergent Voice technologies for more than twoyears.**

 

**Thepurchase price consisted of $1 million paid in cash on May 5, 2005 to theshareholders of Convergent Voice, and $15,000 of transaction costs.  Approximately $935,000 of the purchase pricewas allocated to identifiable intangible assets based on a discounted cash flowanalysis.  The identifiable intangibleassets consist primarily of developed software, and will be amortized toearnings over a period of five years. The remaining purchase price of approximately $80,000 was allocated toother tangible assets acquired based on their estimated net realizable value orreplacement cost.**

 

Pro forma resultsof the business combination have not been provided because the effect is notmaterial on an individual or aggregate basis.

 

**(9)**                                 Leases

 

In the firstquarter of 2005, the Company extended two office lease agreements, and enteredinto a new office lease agreement, with Genesis Partners, LLC.  Annual minimum payments under operatingleases are approximately $1.2 million in 2005 through 2009, approximately$750,000 in 2010, and approximately $150,000 thereafter.  One of the office agreements includes$162,000 of tenant improvements, which have been capitalized and will beamortized over their expected useful lives of seven years.  The Company’s Chief Executive Officer is a50% member, and the Company’s Vice President of Delivery is a 25% member, ofGenesis Partners, LLC.   The Companyexpects to renew two of the office leases upon their term expirations in fiveyears.

 

**(10)**                          Reclassifications

 

Certainreclassifications have been made to the prior year statement of cash flows toconform to the current year presentation. The reclassifications related to investments in auction rate securitiesat September 30, 2004 which are now classified as short-term investmentsand had been previously classified as cash and cash equivalents.  The amount reclassified from cash and cashequivalents to short-term investments at September 30, 2004 was$19,830,000.

 

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

 

***Cautionary Statement***

 

*The followingdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with the condensed consolidated financialstatements and related notes in this report. This discussion contains forward-looking statements that are notguarantees of future results and are subject to risks,  uncertainties, and assumptions that couldcause our actual results to differ materially and adversely from thoseexpressed in any forward-looking statement. Forward looking statements canoften be identified by words such as “anticipates,” “expects,” “intends,”“plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,”“would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, andvariations or negatives of these words and include but are not limited to,statements regarding projected results of operations and management’s futurestrategic plans.*

 

*The risks anduncertainties referred to above include, but are not limited to, risks associatedwith our business model, our past operating losses, possible fluctuations inour operating results and our rate of growth, interruptions or delays in ourhosting operations, breaches of our security measures, our ability to expand,retain and motivate our employees and manage our growth, and our plans for newproduct releases.  Further information onpotential risk factors that could affect our financial results is included inthis report on Form 10-Q under the heading “Risk Factors” and elsewhere inthis report.  We assume no obligation toupdate the forward-looking statements or such risk factors.*

 

***Overview***

 

We are a leading provider of on-demandsolutions for the customer relationship management (“CRM”) market.  We offer a broad suite of solutions to automatethe customer service, sales and marketing requirements of organizations acrossdiverse industries.

 

We released our initial version of RightNowService in 1997.  This product addressedthe new customer service needs resulting from the increasing use of theInternet as a customer service channel. Since then, we have significantly enhanced product features andfunctionality to address customer service needs across multiple communicationchannels, including web, interactive voice, e-mail, chat, telephone andproactive outbound e-mail communications. We have also added several productsthat are complementary to our RightNow Service solution, including RightNowMetrics and RightNow Locator.  In 2003,we introduced an e-mail marketing automation solution, RightNow Outbound.  In October 2004, we introduced RightNowCRM, which is comprised of three applications built on a common base:  RightNow Service, RightNow Sales and RightNowMarketing.  Each of these solutions isdesigned to automate organizations’ business operations.  In May 2005, we purchased theintellectual property and other assets, and hired certain employees, ofConvergent Voice, Inc., a developer of voice recognition software thatintegrates with RightNow solutions. To date, approximately 90% of our revenuehas been generated from sales of RightNow Service.

 

Our client base currently consists of morethan 1,400 active clients.  During thenine months ended September 30, 2005, our products served approximately530 million customer interactions, or unique sessions hosted by oursolutions.  Our solutions, whether soldpursuant to term or perpetual licenses, are available either on a hosted basis,where they are deployed in our co-location facilities and accessed on-demand byour clients, or on a non-hosted basis, where our clients deploy them in theirown facilities.  Approximately 87% of ourclients have elected the hosted option as of September 30, 2005.  We distribute our solutions primarily throughdirect sales efforts and to a lesser extent through indirect channels.

 

***Sources of Revenue***

 

Our revenue is comprised of fees for term andperpetual licenses of our software, fees for hosting and support related to ourlicenses, and fees for professional services. Our term license agreements,which are generally two years in length but can range from six months to fouryears, include our software and related upgrades, hosting and support for theterm of the agreement. The majority of our revenue in each of

 

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our last three years and the nine monthsended September 30, 2005 was derived from two-year term licenseagreements.  We also offer monthly termlicense agreements that contain a minimum commitment period of at least 12months and include our software and related upgrades, hosting and support.  Perpetual licenses are typically sold withannual contracts that include upgrades, hosting and support.

 

Hosting and support agreements providemanagement of our software at a third-party facility and technical support forour software products.  Unspecifiedproduct upgrades are provided on a when and if available basis.

 

Professional services revenue is comprised ofrevenue from consulting, education and development services, and reimbursementof related travel costs.  Consulting andeducation services include implementation and best practices servicesconsulting.  Development services includecustomizations and integrations for a client’s specific business application.

 

Our software license agreements generally providefor the purchase of a fixed amount of capacity, which is measured primarily byweb pages served, user seats, outgoing email transactions, or minutesused, and for certain other fixed fees. A number of our agreements provide for additional fees for usage aboveestablished levels, which are billed and recognized into revenue when earned.

 

Professional services, consisting ofconsulting, education and development services, are sold with initial licenseagreements and periodically over the client engagement. The average deploymenttime for our clients is approximately 50 to 60 days. We typically invoiceclients for the entire amount at the beginning of the agreement with paymentgenerally due within 30 days for our term and perpetual license agreements, ordue monthly for our monthly term agreements. Our typical education courses are billed on a per person, per classbasis.

 

Depending on the size and complexity of theclient project, our consulting or development services contracts are eitherfixed price/fixed scope or, less frequently, billed on a time and materialsbasis. We have determined that the professional services element of oursoftware arrangements is not essential to the functionality of thesoftware.  We have also determined thatour professional services: a) are available from other vendors; b) do notinvolve a significant degree of risk or unique acceptance criteria; and c)qualify for separate accounting as we have sufficient experience in providingsuch services.

 

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

 

*Cost of Revenue.   *Costof revenue consists primarily of salaries and related expenses for our hosting,support and professional services organizations, third-party costs andequipment depreciation relating to our hosting services, travel expensesrelated to providing professional services to our clients, amortization ofacquired intangible assets and allocated overhead.

 

We allocate most overhead expenses, such asoffice supplies, computer supplies, utilities, rent, depreciation for furnitureand equipment, payroll taxes and employee benefits, based on headcount. As aresult, overhead expenses are reflected in each cost of revenue and operatingexpense category.

 

Our hosting costs are affected by thepercentage of clients who license our products on a hosted basis and the numberof times our clients and their customers use our solutions, which we refer toas customer interactions. As a result of economies of scale in our hostinginfrastructure and declines in computer hardware and telecommunications costs,we have been able to reduce hosting costs as a percentage of total revenue in2003, 2004, and the first nine months of 2005, despitesignificant increases in the number of hosted clients and the level of customerinteractions

 

As our client base and solutions usage grows,we intend to continue to invest additional resources in our hosting services,technical support and professional services. We expect our professionalservices costs to increase in absolute dollars as we increase our professionalservices as a percentage of total

 

14

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revenue. Because cost as a percentage ofrevenue is higher for professional services revenue than for software, hostingand support revenue, an increase in professional services as a percentage oftotal revenue reduces gross profit as a percentage of total revenue. During thefirst nine months of 2005, gross profit as a percentage of total revenuedeclined to 76% from 78% in the comparable period in 2004 due to an increase inprofessional services as a percentage of total revenue, combined with higherprofessional services costs in 2005.

 

*Sales and MarketingExpenses. *Salesand marketing expenses consist primarily of salaries and relatedexpenses for employees in sales and marketing, including commissions andbonuses, advertising, marketing events, corporate communications, productmanagement expenses, travel costs and allocated overhead. We expense our salescommissions at the time the related sale is invoiced to the client and werecognize the majority of our revenue from our agreements ratably over theterms of the licenses. Accordingly, we generally experience a delay betweenincreasing sales and marketing expenses and the recognition of correspondingrevenue. We expect significant additional increases in sales and marketingexpenses in absolute dollars as we continue to hire additional sales andmarketing personnel and increase the level 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 and administrative expenses consist primarily of salary andrelated expenses for management, finance and accounting, legal, informationsystems and human resources personnel, professional fees, other corporateexpenses and allocated overhead. We anticipate that we will incur additionalemployee salaries and related expenses, professional service fees and insurancecosts related to the growth of our business and operations.

 

***Critical AccountingPolicies and Estimates***

 

Our financial statements and accompanyingnotes are prepared in accordance with accounting principles generally acceptedin the United States.  Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses.  These assumptions are affected by management’sapplication of accounting policies.  Ourcritical accounting policies include: revenue recognition; valuation ofreceivables and deferred tax assets; and accounting for equity-basedcompensation.

 

We believe the following critical accountingpolicies require us to make significant judgments and estimates in thepreparation of our consolidated financial statements:

 

***Revenue Recognition***

 

Software, hosting and support revenue iscomprised of fees from term and perpetual licenses of the Company’s software,hosting and support.  To date we have notentered into an arrangement solely for the license of products and, thereforewe have not demonstrated vendor specific objective evidence (VSOE) of fairvalue for the license element. Consequently, we recognize revenue for the fees associated with the termlicense and the related hosting and support ratably over the term of theagreement, which is generally two years, but can range between six months andfour years.  We have established VSOE forthe annual hosting and support elements sold with each perpetual license basedon the price paid when sold separately. Accordingly, we recognize revenue for each perpetual license using theresidual method in accordance with Statement of Position (SOP) 98-9, *Modification of SOP 97-2, Software RevenueRecognition With Respect*

 

15

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*to Certain Transactions*.  Amounts that have been invoiced to clientsare recorded to accounts or term receivables and deferred revenue.  Deferred revenue is then recognized intorevenue when earned.

 

We begin to recognize revenue from thelicensing, hosting and support of our products when all the following criteriaare met: a) we have entered into a legally binding agreement with the client;b) our products and services have been delivered or made available to theclient; c) our fee for providing the products and services is determinable; andd) we believe collection of our fee is reasonably probable.

 

VSOE of fair value of services in multipleelement arrangements is based upon rates for consulting, education anddevelopment services, which we charge in stand-alone contracts forservices.  We recognize revenue fromprofessional services when they are delivered.

 

***Valuation of Receivables***

 

We regularly assess the collectibility ofoutstanding customer invoices and, in so doing, we maintain an allowance forestimated losses resulting from the non-collection of customerreceivables.  In estimating thisallowance, we consider factors such as: historical collection experience; acustomer’s current creditworthiness; customer concentration; age of thereceivable balance; and general economic conditions that may affect a customer’sability to pay.  Actual customercollections could differ from our estimates and exceed our related lossallowance.

 

***Income Taxes***

 

We record income taxes under the asset andliability method.  Deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect of a change in tax rates on deferredtax assets and liabilities is recognized in income in the period that includesthe enactment date.  When applicable, avaluation allowance is established to reduce any deferred tax asset when it isdetermined that it is more likely than not that some portion of the deferredtax asset will not be realized.

 

We have established a valuation allowanceequal to our net deferred tax assets due to uncertainties regarding therealization of our net operating loss carryforwards, tax credits, anddeductible timing differences.  Theuncertainty of realizing these benefits is based primarily on our lack ofhistorical taxable earnings.

 

***Equity-Based Compensation***

 

We account for our employee stock-basedcompensation using the intrinsic value method in accordance with AccountingPrinciples Board Option (“APB”) No. 25, *Accountingfor Stock Issued to Employees*. We make disclosure regarding employee stock-based compensation using thefair value method in accordance with SFAS No. 123, *Accounting for Stock-Based Compensation*,and SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure*.  We have calculated the fair value of optionsgranted and have determined the pro forma impact on net income (loss).  We account for equity instruments issued tonon-employees in accordance with the provisions of SFAS No. 123 andEmerging Issues Task Force (“EITF”) No. 96-18, *Accounting for Instruments that are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling Goods or Services*.

 

In measuring the cost of equity-basedcompensation, we make assumptions regarding our stock price volatility and theaverage expected life of our outstanding stock options.  Our assumptions are based on our historicalinformation, some of which was developed when we were a private company, whichare then compared with other like companies for reasonableness.  Actual results could differ from ourestimates.

 

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***Recently IssuedAccounting Standards***

 

In December 2004, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards No. 123R(“SFAS 123R”), *Share-Based Payment*,which replaces SFAS 123 and supercedes APB No. 25.  The statement’s effective date was amended inApril 2005 to apply to certain public companies beginning with their firstfiscal year beginning after June 15, 2005. SFAS 123R covers a wide range of share-based compensation, includingshare options, restricted share plans, performance-based awards, shareappreciation rights, and employee share purchase plans.  The statement requires the recognition ofcompensation cost related to share-based payment plans to be recognized infinancial statements based on the fair value of the equity or liabilityinstruments issued.  We expect thatadoption of the provisions of SFAS 123R beginning January 1, 2006 willmaterially and adversely affect our reported results of operations because thestock-based compensation expense will be charged directly against reportedearnings.  We do not expect theaccounting change to materially affect our liquidity because stock-basedcompensation is a non-cash expense.

 

***Results of Operations***

 

The following table sets forth certainconsolidated statement of operations data expressed as a percentage of totalrevenue for the periods indicated:

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue:                                  |       |                                       |       |                                      |       |   |   |   |   |
| Software,  hosting and support            |       | 79                                         | %          | 78                                        | %          | 80 | % | 78 | % |
| Professional  services                    |       | 21                                         |       | 22                                        |       | 20 |   | 22 |   |
| Total revenue                             |       | 100                                        |       | 100                                       |       | 100 |   | 100 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Cost of  revenue:                         |       |                                       |       |                                      |       |   |   |   |   |
| Software,  hosting and support            |       | 11                                         |       | 10                                        |       | 11 |   | 10 |   |
| Professional  services                    |       | 12                                         |       | 13                                        |       | 11 |   | 14 |   |
| Total cost  of revenue                    |       | 23                                         |       | 23                                        |       | 22 |   | 24 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Gross profit                              |       | 77                                         |       | 77                                        |       | 78 |   | 76 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Operating  expenses:                      |       |                                       |       |                                      |       |   |   |   |   |
| Sales and  marketing                      |       | 49                                         |       | 48                                        |       | 52 |   | 51 |   |
| Research and  development                 |       | 12                                         |       | 13                                        |       | 13 |   | 12 |   |
| General and  administrative               |       | 7                                          |       | 7                                         |       | 8 |   | 7 |   |
| Total  operating expenses                 |       | 68                                         |       | 68                                        |       | 73 |   | 70 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income from  operations                   |       | 9                                          |       | 9                                         |       | 5 |   | 6 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Interest and  other income (expense), net |       | —                                     |       | 2                                         |       | — |   | 2 |   |
|                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income  before income taxes               |       | 9                                          |       | 11                                        |       | 5 |   | 8 |   |
| Provision  for income taxes               |       | —                                     |       | (1                                        | )          | — |   | (1 | ) |
| Net income                                |       | 9                                          | %          | 10                                        | %          | 5 | % | 7 | % |

 

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The following table sets forth our on-demandcustomer interactions and percent of clients hosting and our revenue by typeand geography expressed as a percentage of total revenue for each of theperiods indicated: 

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                            |       |                                       |       |                                      |       |   |   |   |   |
| Customer  interactions (in millions)            |       | 140                                        |       | 188                                       |       | 352 |   | 530 |   |
| Percentage  of clients hosting                  |       | 86                                         | %          | 87                                        | %          | 86 | % | 87 | % |
|                                            |       |                                       |       |                                      |       |   |   |   |   |
| Revenue by  type:                               |       |                                       |       |                                      |       |   |   |   |   |
| Recurring  (term licenses, hosting and support) |       | 58                                         | %          | 51                                        | %          | 60 | % | 53 | % |
| Perpetual  licenses                             |       | 21                                         |       | 27                                        |       | 20 |   | 25 |   |
| Professional  services                          |       | 21                                         |       | 22                                        |       | 20 |   | 22 |   |
|                                            |       |                                       |       |                                      |       |   |   |   |   |
| Revenue by  geography:                          |       |                                       |       |                                      |       |   |   |   |   |
| United  States                                  |       | 76                                         | %          | 75                                        | %          | 74 |   | 76 | % |
| Europe                                          |       | 19                                         |       | 16                                        |       | 21 |   | 16 |   |
| Asia Pacific                                    |       | 5                                          |       | 9                                         |       | 5 |   | 8 |   |

 

***Overview of Current Period***

 

The quarter ended September 30, 2005represented our 31st consecutive quarter of revenue growth. Total revenue forthe quarter ended September 30, 2005 increased 41% over the comparableperiod in 2004 from growth in our average number of customers and growth in ouraverage selling prices.  Gross profit asa percent of total revenue for the three months ended September 30, 2005was equal to the comparable 2004 quarter, as improved margins on software,hosting and support offset a higher mix of lower margin professionalservices.  Operating expenses for thethree months ended September 30, 2005, in total, increased 41% over thethree months ended September 30, 2004 due to our investment in personnelto support our overall growth.  Operatingincome for the comparative third quarter periods of 2005 and 2004 was 9% ofrevenue.

 

Our revenue growth in 2004 and the first ninemonths of 2005 resulted from the release of broader product offerings, acorresponding increase in service offerings, and the addition of salespersonnel focused on new client acquisition.  In the third quarter of 2005, we signed 92 new customers, bringing ourtotal active client base to more than 1,400.

 

For the three months ended September 30,2005, we generated $5.2 million of cash from operations compared to $1.1million of cash in the comparable 2004 quarter, and increased our deferredrevenue to $63.8 million at September 30, 2005 from $44.5 million one yearearlier.

 

As of September 30, 2005, we had anaccumulated deficit of $36.3 million. This deficit resulted primarily from costs incurred in the development,sales and marketing of our products and for general and administrativepurposes.  We intend to continue toinvest in our sales and marketing activities, product development and businessinfrastructure.  During periods ofinvestment and growth, because the majority of expenses are recorded asincurred and the majority of revenue is deferred, we anticipate that any growthin revenue will be largely offset by an increase in cost of revenue andoperating expenses.

 

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***Three and Nine Months Ended September 30, 2004and 2005***

 

***Revenue***

 
| ** **                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2004**                                  | ** ** | **2005**                                 | ** ** | **Percent  Change** | ** ** | **2004** | ** ** | **2005** | ** ** | **Percent  Change** | ** ** |
|                           |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Software,  hosting and support |       | $                                         | 12,976     |                                     | $          | 18,005 |   | 39 | % | $ | 35,405 |   | $ | 48,743 |   | 38 | % |
| Professional  services         |       | 3,450                                     |       | 5,149                                    |       | 49 |   | 8,640 |   | 13,831 |   | 60 |   |
| Total  revenue                 |       | $                                         | 16,426     |                                     | $          | 23,154 |   | 41 | % | $ | 44,045 |   | $ | 62,574 |   | 42 | % |

 

*Software, hostingand support*

 

For the quarter ended September 30,2005, software, hosting and support revenue increased $5 million, or 39%, overthe third quarter of 2004.  The increaseresulted primarily from a 19% increase in average revenue per client and a 17%increase in the average number of clients. Average revenue per client has grown from client purchases of additionalproducts and/or capacity.  The increasein the average number of clients was primarily due to the addition of salesrepresentatives focused on new client acquisition.  Recurring software, hosting and supportrevenue was $11.7 million in the quarter ended September 30, 2005, or 22%more than the comparable quarter in 2004.

 

Perpetual license fee revenue represented27% of total revenue in the quarter ended September 30, 2005 compared to21% in the quarter ended September 30, 2004.  One customer’s purchase of a perpetuallicense during the quarter ended September 30, 2005 representedapproximately 14% of total revenue for the quarter.  This is the first quarter that a singlecustomer has accounted for more than 10% of total revenue in any quarterlyperiod.  The mix of perpetual licenserevenue affects our overall profitability in any given period since it isrecorded into revenue upon delivery instead of being ratably recognized intorevenue, as is the case with term licenses. Over the previous eight quarters, perpetual license revenue has rangedbetween 15% and 29% of total revenue.  Webelieve there are many factors that cause our perpetual license revenue tofluctuate as a percentage of total revenue, including the strategic importanceof our products in client organizations, client planning horizons, and clientpurchasing preferences and patterns.  Weexpect perpetual license revenue to range between 20% and 25% of total revenuein future periods.

 

For the nine months ended September 30,2005, software, hosting and support revenue increased $13.3 million, or 38%,from the corresponding period in 2004. Average revenue per client increased 21% in the first nine months of2005 and average number of clients increased 14%.  Recurring software, hosting and supportrevenue increased $6.7 million, or 25%, in the first nine months of 2005compared to the first nine months of 2004. Perpetual license revenue increased $6.7 million, or 74%, in the firstnine months of 2005 as compared to the similar period in 2004.

 

*Professionalservices*

 

For the quarter ended September 30,2005, professional services revenue increased $1.7 million, or 49%, over thethird quarter of 2004.  Averageprofessional services revenue per client increased 28% in the third quarter of2005 compared to the third quarter of 2004, and average number of clientsincreased 17%.  Revenue per clientincreased from our focus on expanding service offerings provided in conjunctionwith our broader product offerings.  Weincreased our capacity to deliver professional services by increasing ouraverage employee count to 89 employees during the quarter ended September 30,2005 from 59 employees one year earlier.

 

Professional services revenue for thefirst nine months of 2005 increased $5.2 million, or 60%, over the comparableperiod in 2004 mostly due to growth in average number of clients and averageprofessional services revenue per client.

 

The mix of professional services revenueto total revenue also affects our operating results from period-to-period, dueto the lower gross profit earned on professional services revenue as comparedto

 

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software, hosting and support revenue.  The amount of professional services revenuein any quarter is primarily a function of the number and complexity ofconsultation and training engagements. During the past eight quarters, professional services revenue has rangedfrom 17% to 24% of total revenue.  Weexpect professional services revenue to range between 20% and 25% of totalrevenue in future periods.

 

Revenue from European and Asia Pacificcustomers increased $3.4 million, or 30%, in the first nine months of 2005compared to the first nine months of 2004. Total revenue outside the United States was 26% and 24% of consolidatedrevenue for the nine months ended September 30, 2004 and 2005,respectively.   We have invested inadditional sales representatives in continental Europe and the Asia Pacificregion in 2005 which, we believe is the primary driver of revenue growth inthose regions.

 

***Cost of Revenue***

 
| ** **                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**     | ** ** | **2004**                                  | ** ** | **2005**                                 | ** ** | **Percent  Change** | ** ** | **2004** | ** ** | **2005** | ** ** | **Percent  Change** | ** ** |
|                           |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Software,  hosting and support |       | $                                         | 1,729      |                                     | $          | 2,253 |   | 30 | % | $ | 4,944 |   | $ | 6,593 |   | 33 | % |
| Professional  services         |       | 1,979                                     |       | 3,026                                    |       | 53 |   | 4,862 |   | 8,601 |   | 77 |   |
| Total cost  of revenue         |       | $                                         | 3,708      |                                     | $          | 5,279 |   | 42 | % | $ | 9,806 |   | $ | 15,194 |   | 55 | % |

 

*Software, hostingand support*

 

For the quarter ended September 30,2005, cost of software, hosting and support revenue increased $524,000, or 30%,over the comparable 2004 quarter mostly due to the addition of staff to supportnew product offerings.  Staff additionsin our software, hosting and support organizations increased salaries andrelated employee costs by $401,000 in the third quarter of 2005 over the thirdquarter of 2004, and equipment depreciation expenses and amortization ofpurchased technologies increased $116,000. Average employee count in our hosting and support organization was 60 inthe third quarter of 2005 compared to 45 in the third quarter of 2004.  As a percent of the associated revenue, costof software, hosting and support remained constant at 13% in each of the thirdquarters of 2005 and 2004.

 

For the nine months ended September 30,2005, cost of software, hosting and support increased $1.6 million, or 33%,over the similar period in 2004 due to the staff additions and increaseddepreciation and amortization expenses noted above.   We acquired the intellectual property ofConvergent Voice, Inc. in May 2005 at a cost of approximately$935,000, which will be amortized to cost of software, hosting and support over5 years.

 

*Professionalservices*

 

For the quarter ended September 30,2005, professional services costs increased $1.0 million, or 53%, over thecomparable 2004 quarter.  The growth inabsolute dollars in the third quarter of 2005 resulted from staff additions andassociated travel and living expenses. Average employee count in our professional services group was 89 in thethird quarter of 2005 compared to 59 in the third quarter of 2004.  As a percent of the associated revenue,professional services costs were 59% in the 2005 quarter as compared to 57% inthe 2004 quarter.  Professional servicescosts have ranged between 52% and 70% of the associated revenue in the pastseven quarters, mostly due to changes in the volume of services provided andclient scheduling requirements.

 

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***Operating Expenses***

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**  | ** ** | **2004**                                  | ** ** | **2005**                                 | ** ** | **Percent  Change** | ** ** | **2004** | ** ** | **2005** | ** ** | **Percent  Change** | ** ** |
|                        |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Sales and  marketing        |       | $                                         | 8,055      |                                     | $          | 11,248 |   | 40 | % | $ | 22,940 |   | $ | 31,262 |   | 36 | % |
| Research and  development   |       | 2,028                                     |       | 2,937                                    |       | 45 |   | 5,640 |   | 7,524 |   | 33 |   |
| General and  administrative |       | 1,164                                     |       | 1,627                                    |       | 40 |   | 3,333 |   | 4,623 |   | 39 |   |
| Total  operating expenses   |       | $                                         | 11,247     |                                     | $          | 15,812 |   | 41 | % | $ | 31,913 |   | $ | 43,409 |   | 36 | % |

 

*Sales and MarketingExpenses*

 

For the quarter ended September 30,2005, sales and marketing expense increased $3.2 million, or 40%, over thecomparable 2004 quarter primarily due to the addition of employees to our salesand marketing group.  Average employeecount in our sales and marketing group was 197 for the third quarter of 2005compared to 151 for the third quarter of 2004, which increased salaries andrelated employee costs by approximately $1.5 million.  In addition, severance costs of $300,000 wereincurred in the third quarter of 2005 from the departure of our Vice Presidentof Marketing and Business Development. We also incurred incremental sales incentive costs of $927,000 in the2005 quarter due to growth in new contracts signed.  As a percent of total revenue, sales andmarketing expenses were constant at 49% in each of the third quarters of 2005and 2004.

 

For the nine months ended September 30,2005, sales and marketing expenses increased $8.3 million, or 36%, over thefirst nine months of 2004 due to increased staff and higher sales incentivecosts.  Staff additions in our sales andmarketing group added approximately $5.2 million in salaries and and employeerelated expenses in the first nine months of 2005 over the comparable 2004period, and growth in new contracts increased sales incentive costs by $2.0million.

 

*Research andDevelopment Expenses*

 

For the quarter ended September 30,2005, research and development expenses increased $909,000, or 45%, over thecomparable 2004 quarter mostly due to staff additions, including employeesacquired as part of the Convergent Voice transaction in May 2005.  Average employee count in our research anddevelopment organization grew to 106 employees in the third quarter of 2005from 88 employees in the third quarter of 2004, and the corresponding payrolland related expenses increased by approximately $766,000.

 

For the nine months ended September 30,2005, research and development expenses increased $1.9 million, or 33%, overthe comparable 2004 period due to the staff additions described above.

 

*General andAdministrative Expenses*

 

For the quarter ended September 30,2005, general and administrative expenses increased $463,000, or 40%, over thethird quarter of 2004 due to employee growth and incremental expenses of beinga public company.  Average employee countin our general and administrative organization was 42 in the third quarter of2005 and 33 in the third quarter of 2004, which increased payroll and relatedcosts by approximately $242,000.   Thirdquarter 2005 general and administrative expenses also include incrementalfinancial audit and Sarbanes-Oxley compliance costs of $138,000, and statefiling fee expenses of $65,000, which result from the reporting and compliancerequirements for public companies.

 

For the nine months ended September 30,2005, general and administrative expenses increased $1.3 million, or 39%, overthe comparable period in 2004 due to the staff additions, and incrementalfinancial audit, Sarbanes-Oxley and state filing fees noted above.

 

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***Interestand Other Income (Expenses), Net***

 
| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands)**    | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                          |       |                                       |       |                                      |       |   |   |   |   |
| Interest  income              |       | $                                          | 109        |                                      | $          | 437 |   | $ | 154 |   | $ | 1,082 |   |
| Interest  expense             |       | (81                                        | )          | (3                                        | )          | (238 | ) | (3 | ) |
| Other income  (expense)       |       | 2                                          |       | 6                                         |       | 4 |   | (16 | ) |
| Total other  income (expense) |       | $                                          | 30         |                                      | $          | 440 |   | $ | (80 | ) | $ | 1,063 |   |

 

Interest income of $437,000 in the quarterended September 30, 2005 consisted of earnings on our cash equivalent andshort-term investment portfolio.  In August 2004,we completed our initial public offering of common stock and received netproceeds of approximately $40 million, most of which was invested inshort-term, investment-grade, interest-bearing securities.  Interest expense in the first half of 2004consisted primarily of amounts paid or accrued under our outstanding long-termdebt at that time.  Other income andexpense consists primarily of currency exchange gains or losses and gains orlosses on equipment disposals.

 

***Provisionfor Income Taxes***

 

Our provision for income taxes wasapproximately 6% of pre-tax income for the three and nine months ended September 30,2005 as compared to 4% for the comparable 2004 periods.  The 2005 provision consists of the expenseassociated with the U.S. alternative minimum tax, and to a lesser extent,foreign withholdings for which net operating losses are not available.  Our provision for income taxes is less thanthe statutory rate mostly due to the generation of U.S. net operating losses inthe current period.

 

At September 30, 2005, we had $23.6million of net deferred income tax assets that have been reserved in full by avaluation allowance.  In the future, ifavailable evidence indicates that it is more likely than not that we will beable to utilize some or all of our deferred tax assets, we will record anincome tax benefit in the amount of the asset recognized, and our effective taxrate would likely increase at that time.

 

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***Liquidity and Capital Resources***

 

Information regarding deferred revenue andcash provided by operating activities follows (in thousands):

 
| ** **                             | ** ** | **Quarter Ended** | ** ** |
|----------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**             | ** ** | **Sep 30,  2004** | ** ** | **Dec 31,  2004** | ** ** | **Mar 31,  2005** | ** ** | **Jun 30,  2005** | ** ** | **Sep 30,  2005** | ** ** |
|                                   |       |              |       |   |   |   |   |   |   |   |   |
| Deferred  revenue                      |       | $                 | 44,491     |   | $ | 49,125 |   | $ | 52,810 |   | $ | 57,368 |   | $ | 63,752 |   |
| Cash  provided by operating activities |       | 1,063             |       | 3,320 |   | 3,239 |   | 2,564 |   | 5,248 |   |
|                                        |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We have historically funded ouroperations with cash from operations, equity financings and debtborrowings.  In August 2004, wecompleted our initial public offering of 6.4 million shares of common stock andreceived net proceeds of approximately $40 million.  The offering proceeds were invested in short-term,interest-bearing securities.  During thesecond half of 2004, we paid down all of our then outstanding long-termdebt.  At September 30, 2005 cashand cash equivalents, and short-term investments, totaled $60.5 million

 

Operating activities provided $11.1million of cash during the nine months ended September 30, 2005, ascompared to $3.4 million of cash from operations in the corresponding period ofthe prior year.  The majority of our cashfrom operations in the first nine months of 2005 was from growth in net incomeand deferred revenue, offset in part by growth in receivables.  We typically bill customers on net 30-dayterms at the beginning of the license period, which is reflected in accountsreceivable and deferred revenue.  Customers may elect a monthly payment option, or in certaincircumstances, installment payments, which are reflected in current andnon-current term receivables.  During thefirst nine months of 2005, the percentage of customers choosing the monthlypayment option has increased to approximately 20% of new business fromapproximately 15% in the first nine months of 2004. An increase in thepercentage of monthly payment terms may adversely affect near-term cashprovided by operations.  However, becauseour monthly payment option is a higher priced alternative to our net-30 paymentoption, we would expect an overall positive effect to earnings and cashprovided by operations over time.

 

Cash required for income taxes has notbeen historically significant due to our cumulative operating losses to date,and is not expected to be significant for the remainder of 2005.

 

Investing activities provided $6.0million in cash during the nine months ended September 30, 2005 due to theliquidation of short-term investments and re-investment of proceeds in cashequivalents.  Other investing activitiesincluded $3.3 million of equipment acquisitions for our hosting operations andemployee growth, and $1.0 million for the acquisition of the intellectual propertyand certain other assets of Convergent Voice, Inc. in May 2005.

 

Financing activities provided $3.7million in the nine months ended September 30, 2005 from the exercise ofstock options and shares purchased under the employee stock purchase plan.

 

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 capital requirements will dependon many factors, including our rate of revenue growth and expansion of oursales and marketing activities, the possible acquisition of complementaryproducts or businesses, the timing and extent of spending required for researchand development efforts, and the continuing market acceptance of ourproducts.  To the extent that availablefunds are insufficient to fund our future activities, we may need to raiseadditional funds through public or private equity or debt financings.  Additional equity or debt financing may notbe available on terms favorable to us or at all.

 

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***Contractual Obligations and Commitments***

 

In the first quarter of 2005, we entered intoa new office lease agreement, and extended two existing office leaseagreements, with Genesis Partners LLC. The new office lease agreement includes $162,000 of leaseholdimprovements, which have been capitalized and will be amortized over theirexpected lives of seven years.  TheCompany expects to renew the office leases upon their initial termexpiration.  These office leaseagreements will increase our contractual obligations under operating leases, asdisclosed in our most recent annual report on Form 10-K, by approximately$250,000 in 2005, and approximately $360,000 each year from 2006 through 2009.

 

We also plan to enter into a ten yearoperating lease with Genesis Partners LLC for approximately 29,100 square feetof additional office space in Bozeman, Montana. The space is expected to be available in approximately one year and thelease obligation is expected to be approximately $425,000 per year.  There have been no other material contractualobligations or commitments incurred in the current year.

 

**Risk Factors**

 

*Beforedeciding to purchase, hold or sell our common stock, you should carefullyconsider the risks described below, in addition to the other cautionarystatements and risks described elsewhere and the other information contained inthis report and in our other filings with the SEC, including our reports onForms 10-Q, 10-K and 8-K. The risks and uncertainties described below are notthe only ones we face. Additional risks and uncertainties not presently knownto us or that we currently deem immaterial may also affect our business. If anyof these known or unknown risks or uncertainties actually occurs with materialadverse effects on RightNow, our business, financial condition and results ofoperations could be seriously harmed. In that event, the market price for ourcommon stock could decline and you may lose all or part of your investment.*

 

**Risks Related to Our Business**

 

***We may not be able to sustain or increase ourprofitability in the future.***

 

We may not be able tosustain or increase our profitability in the future.  Prior to 2004, we incurred significantoperating losses of approximately $4.1 million in 2003, $2.7 millionin 2002 and $15.3 million in 2001. As of September 30, 2005, we hadan accumulated deficit of approximately $36.3 million. We expect to continue toincur significant sales and marketing, research and development and general andadministrative expenses as we expand our operations and, as a result, we willneed to generate significant revenue to maintain profitability. Even if wecontinue to achieve profitability, we may not be able to increase profitabilityon a quarterly or annual basis in the future, which may cause the price of ourstock to decline.

 

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

 

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

 

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

•  changesin the volume and mix of term and perpetual licenses sold in a particularquarter, because perpetual license revenue is recorded into revenue upondelivery whereas term licenses are recorded into revenue ratably over theperiod of license;

•  ourpolicy of expensing sales commissions at the time of invoice, while themajority of our revenue is recognized ratably over future periods;

 

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

•  changesin the mix of voice self service applications sold and/or usage volume;

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

•  changes in our pricing policies or those ofour competitors;

•  the amount and timing of expenditures relatedto expanding our operations;

•  changes in the payment terms for our productsand services, including changes in the mix of payment options chosen by ourcustomers;

•  the purchasing and budgeting cycles of ourclients; and

•  general economic, industry and marketconditions.

 

Because thesales cycle for the evaluation and implementation of our solutions typicallyranges from 60 to 180 days, we may also experience a delay betweenincreasing operating expenses and the generation of corresponding revenue, ifany. Moreover, because the majority of our clients purchase term licenses, andwe recognize revenue from these licenses over the term of the agreement,downturns or upturns in sales may not be immediately reflected in our operatingresults. 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 foregoingfactors, and the other risks discussed in this report, you should not rely onquarter-to-quarter comparisons of our results of operations as an indication ofour future performance.

 

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

 

Approximately 90% of our revenue is derived from RightNowService, a suite of solutions used to optimize customer service operations. Ifwe are unable to successfully develop and sell new and enhanced versions ofRightNow Service, or introduce new products and solutions for the customerservice market, our financial performance will suffer. Although to date themajority of business has been focused on providing solutions for customerservice operations, we recently introduced RightNow Sales, RightNow Marketing,and voice-enabled CRM 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 in the broader segments of the CRM market. In addition, our effortsto expand our on-demand software solutions beyond the customer service marketmay divert management resources from our existing operations and require us tocommit significant financial resources to a market where we are unproven, whichmay harm our business, financial condition and results 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 customer relationship management solutions ishighly competitive and fragmented, and is subject to rapidly changingtechnology, shifting client requirements, frequent introductions of newproducts and services, and increased marketing activities of other industryparticipants.  Competition hasintensified with our most recent product releases.  Increased competition could result in pricingpressure, reduced sales, lower margins or the failure of our solutions toachieve or maintain broad market acceptance. If we are unable to competeeffectively, it will be difficult for us to add and retain clients, and ourbusiness, financial condition and results of operations will be seriouslyharmed.

 

We face competition from:

•  companiescurrently providing customer service solutions, some of whom offer hostedservices, including Amdocs Limited, BMC Software Corporation, Inc., eGainCommunications Corporation, FrontRange Solutions, Inc., IBM Corporation,Kana Software, Inc., Microsoft

 

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Corporation, Oracle Corporation, SAP AG,salesforce.com, inc., SSA Global and Siebel Systems, Inc.;

•  CRMsystems that are developed and maintained internally by businesses;

•  CRMproducts or services that are developed, or bundled with other products orservices, and installed on a client’s premises by software vendors;

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

•  newcompanies entering the CRM software market, the on-demand applications marketand the on-demand CRM market, or expanding from any one of these markets to theothers; and

•  voicesystem integrators and telecommunication vendors, such as Avaya, Nortel, andIntervoice, that customize voice applications for CRM applications.

 

Many of our current andpotential competitors have longer operating histories and larger presence inthe general CRM market, greater name recognition, access to larger customerbases and substantially greater financial, technical, sales and marketing,management, service, support and other resources than we have. As a result,such competitors may be able to respond more quickly than we can to new or changingopportunities, technologies, standards or client requirements or devote greaterresources to the promotion and sale of their products and services than we can.To the extent our competitors have an existing relationship with a potentialclient, that client may be unwilling to switch vendors due to the time andfinancial commitments already made with our competitors.

 

In addition, many of our current and potential competitorshave established or may establish business, financial or strategic relationshipsamong themselves or with existing or potential clients, alliance partners orother third parties, or may combine and consolidate to become more formidablecompetitors with better resources.  Forexample, in September 2005 Oracle Corporation announced its intent toacquire Siebel Systems, Inc.  Wealso expect that new competitors, such as enterprise software vendors andonline service providers that have traditionally focused on enterprise resourceplanning or back office applications, will continue to enter the on-demand CRMmarket with competing products as the on-demand CRM market develops andmatures. It is possible that these new competitors could rapidly acquiresignificant market share.

 

***The market for ouron-demand application services is at an early stage of development, and if itdoes not develop or develops more slowly than we expect, our business will beharmed.***

 

The market for on-demand application services is at an earlystage of development, and it is uncertain whether these application serviceswill achieve and sustain high levels of demand and market acceptance. Oursuccess will depend to a substantial extent on the willingness of companies toincrease their use of on-demand application services in general and foron-demand customer relationship management applications in particular. Manycompanies have invested substantial personnel and financial resources tointegrate traditional enterprise software into their businesses, and thereforemay be reluctant or unwilling to migrate to on-demand application services.While we have supported and continue to support traditional on-site deploymentof our software applications, widespread market acceptance of our on-demandsoftware solutions is critical to the success of our business. Other factors thatmay affect the market acceptance of our solutions include:

 

•  on-demand security capabilities andreliability;

•  concerns with entrusting a third party tostore and manage critical customer data;

•  ourability to meet the needs of broader segments of the CRM market or otheron-demand markets;

•  the level of customization we offer;

•  our ability to continue to achieve andmaintain high levels of client satisfaction;

•  concernswith purchasing critical CRM solutions from a company with a history ofoperating losses that only recently turned profitable; and

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

 

If businesses do not perceive the benefits of our on-demandsolutions, then the market for these solutions may not develop further, or itmay develop more slowly than we expect, either of which would adversely affectour business, financial condition and results of operations.

 

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

 

***The majority of oursolutions are sold pursuant to term license agreements, and if our existingclients elect not to renew their licenses or to renew their licenses on termsless favorable to us, our business, financial condition and results ofoperations will be adversely affected.***

 

The majority of our solutions are sold pursuant to term licenseagreements that are subject to renewal every two years or less and our clientshave no obligation to renew their licenses. Because our clients may elect notto renew, we may not be able to consistently and accurately predict futurerenewal rates. Our clients’ renewal rates may decline or fluctuate as a resultof a number of factors, including their level of satisfaction with oursolutions, their ability to continue their operations or invest in customerservice, or the availability and pricing of competing products. If largenumbers of existing clients do not renew their licenses, or renew theirlicenses on terms less favorable to us, and if we cannot replace or supplementthose non-renewals with new licenses 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.***

 

We have substantially expanded our overall business,headcount and operations in recent periods. We have increased our total numberof full-time employees to 494 at September 30, 2005 from 403 at December 31,2004. To achieve our business objectives, we will need to continue to expandour business at a rapid pace. This expansion has placed, and is expected tocontinue to place, a significant strain on our managerial, administrative,operational, financial and other resources. We anticipate that this expansionwill require substantial management effort and significant additionalinvestment in our infrastructure. If we are unable to successfully manage ourgrowth, our business, financial condition and results of operations will beadversely affected.

 

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

 

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***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 September 30, 2005, 87% of our clients were using our hosting services fordeployment of our software applications. We provide our hosting servicesthrough computer hardware that we own and that is currently located inthird-party web hosting co-location facilities maintained and operated inCalifornia and New Jersey. We do not maintain long-term supply contracts witheither of our co-location providers, and neither provider guarantees that ourclients’ access to hosted solutions will be uninterrupted, error-free orsecure. Our operations depend on our co-location providers’ ability to protecttheir and our systems in their facilities against damage or interruption fromnatural disasters, power or telecommunications failures, criminal acts andsimilar events. Our back-up computer hardware and systems located in ourMontana headquarters have not been tested under actual disaster conditions andmay not have sufficient capacity to recover all data and services in the eventof an outage occurring simultaneously at both the California and New Jerseyco-location facilities. In the event that our co-location facility arrangements were terminated, or therewas a lapse of service or accidental or willful damage to such facilities, wecould experience lengthy interruptions in our hosting service as well as delaysand/or additional expense in arranging new facilities and services. Any or allof these events could cause our clients to lose access to their important data.In addition, the failure by our third-party co-location facilities to meet ourcapacity requirements could result in interruptions in our service or impedeour ability to scale our operations.

 

We architect the system infrastructure and procure and ownthe computer hardware used at our hosting co-location facilities. Design andmechanical errors, spikes in usage volume and failure to follow systemprotocols and procedures could cause our systems to fail, resulting ininterruptions in our clients’ service to their customers. Any interruptions ordelays in our hosting services, whether as a result of third-party error, ourown error, natural disasters or security breaches, whether accidental orwillful, could harm our relationships with clients and our reputation. This inturn could reduce our revenue, subject us to liability, cause us to issuecredits or pay penalties or cause clients to fail to renew their licenses, anyof which could adversely affect our business, financial condition and resultsof operations. In the event of damage or interruption, our insurance policiesmay not adequately compensate us for any losses that we may incur.

 

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

 

Our hosting systems andour software store and transmit proprietary information and critical databelonging to our clients and their customers. Any accidental or willfulsecurity breaches or other unauthorized access could expose us to a risk ofinformation loss, litigation and other possible liabilities. If security measuresare breached because of third-party action, employee error, malfeasance orotherwise, or if design flaws in our software are exposed and exploited, and,as a result, a third party obtains unauthorized access to any of our clients’data, our relationships with clients and our reputation will be damaged, ourbusiness may suffer and we could incur significant liability. Becausetechniques used to obtain unauthorized access or to sabotage systems changefrequently and generally are not recognized until launched against a target, weand our third-party hosting co-location facilities may be unable to anticipatethese techniques or to implement adequate preventative measures.

 

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

 

International sales comprised 24% of our revenue for the ninemonths ended September 30, 2005, and comprised 27% of our revenue in theyear ended December 31, 2004. We intend to continue to pursue and expandour international business activities. Adverse political and economicconditions could make it difficult for us to increase our international salesor to operate abroad. International operations are subject to many inherentrisks, including:

 

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

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

•  fluctuations in currency exchange rates;

•  longer collection periods and difficulties incollecting receivables from foreign entities;

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

•  reduced protection for our intellectualproperty in some countries;

•  expensesassociated with localizing products for foreign countries, including translationinto foreign languages; and

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

 

We believe that international sales will continue torepresent a significant portion of our revenue for the foreseeable future, andthat continued growth will require further expansion of our internationaloperations. A substantial percentage of our international sales are denominatedin the local currency. As a result, an increase in the relative value of thedollar could make our products more expensive and potentially less pricecompetitive in international markets. We typically do not engage in anytransactions as a hedge against risks of loss due to foreign currencyfluctuations. Any of these factors may adversely affect our futureinternational sales and, consequently, affect our business, financial conditionand 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 new industrystandards may perform better or cost less than our solutions and could renderour solutions less competitive or obsolete. In addition, because our solutionsare designed to operate on a variety of network hardware and software platformsusing a standard Internet web browser, we will need to continuously modify andenhance our solutions to keep pace with changes in Internet-related hardware,software, communication, browser and database technologies and to integratewith our clients’ systems as they change and evolve. Furthermore, uncertaintiesabout the timing and nature of new network platforms or technologies, ormodifications to existing platforms or technologies, could increase ourresearch and development expenses. If we are unable to successfully develop andmarket new and enhanced solutions that respond in a timely manner to changingtechnology and evolving industry standards, and if we are unable to satisfy thediverse and evolving technology needs of our clients, our business, financialcondition and results of operations will suffer.

 

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

 

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

 

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

 

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

 

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

 

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

 

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inthe future to enforce or defend our intellectual property rights, to protectour trade secrets or to determine the validity and scope of the proprietaryrights of others. Such litigation could result in substantial costs anddiversion of management resources, either of which could harm our business.Accordingly, despite our efforts, we may not be able to prevent third partiesfrom infringing upon or misappropriating 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 complex technicalissues and inherent uncertainties in litigation. Any claims, regardless oftheir merit, could be time-consuming and distracting to management, result incostly litigation or settlement, cause product development delays, or requireus to enter into royalty or licensing agreements. If any of our productsviolate third-party proprietary rights, we may be required to re-engineer ourproducts or seek to obtain licenses from third parties, which may not beavailable on reasonable terms or at all. Because many of our license agreementsrequire us to indemnify our clients from any claim or finding of intellectualproperty infringement, any such litigation or successful infringement claimscould adversely affect our business, financial condition and results ofoperations. Any efforts to re-engineer our products, obtain licenses from thirdparties on favorable terms or license a substitute technology may not besuccessful and, in any case, may substantially increase our costs and harm ourbusiness, financial condition and results of operations. Further, our softwareproducts contain open source software components that are licensed to us undervarious public domain licenses. While we believe we have complied with ourobligations under the various applicable licenses for open source software thatwe use, there is little or no legal precedent governing the interpretation ofmany of the terms of certain of these licenses and therefore the potentialimpact of such terms on our business is somewhat unknown. Use of open sourcestandards also may make us more vulnerable to competition because the publicavailability of open source software could make it easier for new marketentrants and existing competitors to introduce similar competing productsquickly and cheaply.

 

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

 

In order to expand our addressable market, we may decide toacquire additional businesses, products and technologies. In May 2005, weacquired the intellectual property and other assets of Convergent Voice, Inc.,our first acquisition since becoming a public company.   Acquisitions could require significantcapital infusions and could involve many risks, including, but not limited to,the following:

 

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

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

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

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

•  theacquired businesses, products or technologies may not generate sufficient revenueto offset acquisition costs;

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

 

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

 

We cannot assure you that we will be able to identify orconsummate any future acquisitions on favorable terms, or at all. If we dopursue any acquisitions, it is possible that we may not realize the anticipatedbenefits from 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 in the accountingtreatment of stock options will adversely affect our results of operations.***

 

The Financial Accounting Standards Board recently issuedStatement of Financial Accounting Standards No. 123R, *Share-Based Payment* (“SFAS 123R”).  The statement requires that the compensationcost relating to share-based payment transactions be recognized in financialstatement based on the fair value of the equity or liability instrumentsissued, and is effective for annual periods beginning after June 15,2005.  SFAS 123R replaces SFAS No. 123,Accounting for *Stock-Based Compensation*,and supercedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB25”).  SFAS 123R requires us to value ouremployee stock option grants, transactions under our Employee Stock PurchasePlan, and other possible equity-based transactions, pursuant to a fair valueformula, and then amortize that value against our reported earnings over thevesting period in effect for those transactions.  We currently account for stock-based awardsto employees in accordance with APB 25, and have adopted thedisclosure-only alternative of SFAS 123. This change in accounting treatment, beginning January 1, 2006,will materially and adversely affect our reported results of operations as thestock-based compensation expense would be charged directly against our reportedearnings.

 

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

 

We may require additional capital to respond to businesschallenges, including the need to develop new solutions or enhance our existingsolutions, enhance our operating infrastructure, fund expansion, respond tocompetitive pressures and acquire complementary businesses, products andtechnologies. Absent sufficient cash flow from operations, we may need toengage in equity or debt financings to secure additional funds to meet ouroperating and capital needs. In addition, even though we may not needadditional funds, we may still elect to sell additional equity or debtsecurities or obtain credit facilities for other reasons. We may not be able tosecure additional debt or equity financing on favorable terms, or at all, atthe time when we need such funding. If we raise additional funds throughfurther issuances of equity or convertible debt securities, our existingstockholders could suffer significant dilution in their percentage ownership ofour company, and any new equity securities we issue could have rights,preferences and privileges senior to those of holders of our common stock. Anydebt financing secured by us in the future could involve restrictive covenantsrelating to our capital raising activities and other financial and operationalmatters, which may make it more difficult for us to obtain additional capital,to pay dividends and to pursue business opportunities, including potentialacquisitions. In addition, if we decide to raise funds through debt orconvertible debt financings, we may be unable to meet our interest or principalpayments.

 

**Risks Related to Our Industry**

 

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

 

The future success of our products and our hosted businessdepends upon the continued and widespread adoption of the Internet as a primarymedium for commerce, communication and business applications. Our businessgrowth would be impeded if the performance or perception of the Internet, orcompanies providing hosted solutions, was harmed by security problems such as “viruses,”“worms” and other malicious programs, reliability issues arising from outagesand damage to Internet infrastructure, delays in development or adoption of newstandards and protocols to handle increased demands of Internet

 

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activity,increased costs, decreased accessibility and quality of service, or increasedgovernment regulation and taxation of Internet activity.

 

Federal, stateor foreign government bodies or agencies have in the past adopted, and may inthe future 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 e-mail for marketing orother consumer communications. In addition, government agencies or privateorganizations may begin to impose taxes, fees or other charges for accessingthe Internet or for sending commercial e-mail. These laws or chargescould limit the growth of Internet-related commerce or communicationsgenerally, result in a decline in the use of the Internet and the viability ofInternet- based services such as ours and reduce the demand for our products,particularly our RightNow Marketing solution.

 

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

 

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

 

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

 

The European Union has also adopted a directive that requiresmember states to impose restrictions on the collection and use of personal datathat are far more stringent, and impose more significant burdens on subjectbusinesses, than current privacy standards in the United States. All of thesedomestic and international legislative and regulatory initiatives may adverselyaffect our clients’ ability to collect and/or use demographic and personalinformation from their customers, which could reduce demand for our solutions.

 

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

 

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

 

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

 

Our RightNow Marketing solution specifically serves themarket for mass distribution marketing and other e-mail communications. Theincreasing regulation of e-mail delivery, both domestically andinternationally, and the spam filtering practices of Internet service providersand e-mail users generally, will place significant additional burdens on ourclients who have outbound communication programs, and may cause those clientsto substantially change their outbound communications programs or abandon themaltogether.  These factors may lead to areduction in sales of our RightNow Marketing solution, may make it necessary toredesign our RightNow Marketing solution to make it easier for our clients toconform to the requirements of such laws and standards, which would increaseour expenses, or may make it necessary for us to redefine the market for anduse of our RightNow Marketing solution, which could reduce our revenue.

 

***General economic conditionscould adversely affect our clients’ ability or willingness to purchase ourproducts, which could materially and adversely affect our results ofoperations.***

 

Our clients consist of large and small companies in nearlyall industry sectors and geographies. Potential new clients or existing clientscould defer purchases of our products because of unfavorable macroeconomicconditions, such as rising interest rates, fluctuations in currency exchangerates, industry or country economic downturns, industry purchasing patterns,and other factors.   Our ability to growrevenues may be adversely affected by unfavorable economic conditions.

 

**Risks Related to Ownership of Our CommonStock**

 

***Thesignificant control over stockholder voting matters and our office leases thatmay be exercised by our founder and Chief Executive Officer will limit yourability to influence corporate actions and may require us to find alternativeoffice space to lease or buy in the future.***

 

Greg Gianforte, our founder and ChiefExecutive Officer, and his spouse, Susan Gianforte, together beneficially ownapproximately 39% of our currently outstanding common stock and, together withour other officers and directors, beneficially own approximately 42% of ourcurrently outstanding common stock. In addition, none of the shares of commonstock held by Mr. Gianforte and Mrs. Gianforte are subject to vestingrestrictions. As a result, Mr. Gianforte and Mrs. Gianforte, actingalone or together with some of our other officers and directors, will be able tocontrol all matters requiring stockholder approval, including the election ofdirectors, management changes and approval of significant corporatetransactions. This concentration of ownership may have the effect of delaying,preventing or deterring a change in control of RightNow, could deprive ourstockholders of an opportunity to receive a premium for their common stock aspart of a sale of RightNow and might reduce the market price of our commonstock.

 

In addition, Mr. Gianforte beneficiallyowns, directly or indirectly, a 50% membership interest in Genesis Partners,LLC, our landlord from whom we lease our principal offices in Bozeman, Montana.Consequently, Mr. Gianforte has significant control over any decisions byGenesis Partners regarding renewal, modification or termination of our Bozeman,Montana leases. In the event that our current leases

 

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with Genesis Partners were terminated orotherwise could not be renewed, or came up for renewal on commerciallyunreasonable terms, we would be required to find alternative office space tolease or buy.

 

***Anti-takeoverprovisions in our charter documents and Delaware law could discourage, delay orprevent a change in control of our company and may affect the trading price ofour common stock.***

 

Provisions of our certificate ofincorporation and bylaws and Delaware law may discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable and may limitthe market price of our common stock. These provisions include the following:

 

•              establishinga classified board in which only a portion of the total board members will beelected at each annual meeting;

•              authorizingthe board to issue preferred stock;

•              providingthe board with sole authority to set the number of authorized directors and tofill vacancies on the board;

•              limitingthe persons who may call special meetings of stockholders;

•              prohibitingcertain transactions under certain circumstances with interested stockholders;

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

•              prohibitingstockholder action by written consent.

 

It is possible that the provisions containedin our certificate of incorporation and bylaws, the existence of super votingrights held by insiders and the ability of our board of directors to issuepreferred stock without stockholder action may have the effect of delaying,deferring or preventing a change in control of our company without furtheraction by the stockholders, may discourage bids for our common stock at apremium over the market price of our common stock and may adversely affect themarket price of our common stock and the voting and other rights of the holdersof our common stock.

 

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**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

***Foreign Currency Exchange Risk***

 

Our results of operations and cash flows aresubject to fluctuations due to changes in foreign currency exchange rates,particularly changes in the Euro, British pound, Australian dollar, andJapanese yen, because our contracts are frequently denominated in localcurrency.  To date, we have not enteredinto any hedge transactions since exchange rate fluctuations have not had asignificant impact on our operating results and cash flows. In the future, wemay utilize foreign currency forward and option contracts to manage currencyexposures.

 

***Interest Rate Sensitivity***

 

Interest income and expense are sensitive tochanges in the general level of U.S. interest rates.  The remaining proceeds of our initial publicoffering of common stock are invested in short-term, interest-bearingsecurities, which are subject to credit and interest rate risk.   Our investment portfolio is investment-gradeand diversified among issuers and types to reduce credit risk.  The average maturity of our investmentportfolio is less than 90 days.  Ifmarket interest rates were to increase by 100 basis points from the level at September 30,2005, the fair value of our investment portfolio would decline by approximately$136,000.

 

**Item 4.  Controls and Procedures**

 

***(a)******           Evaluation ofDisclosure Controls and Procedures***

 

Our management, with the participation of ourChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures were effectivein timely alerting them to the material information relating to us (or our consolidatedsubsidiaries) required to be included in the reports we file or submit underthe Securities Exchange Act of 1934.

 

***(b)******           Changes to InternalControl 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 control overfinancial reporting.

 

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**Part II. Other Information**

 

***Item 1.  LegalProceedings***

 

From time to time, we are involved in legalproceedings in the ordinary course of business. We believe that the resolution of these matters will not have a materialeffect on the Company’s consolidated financial position, results of operationsor liquidity.

 

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

 

**(a)****           Salesof Unregistered Securities**

 

None.

 

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

 

On August 5, 2004, the Securities and ExchangeCommission declared effective our Registration Statement on From S-1 (Reg. FileNo. 333-115331) under the Securities Act of 1933, as amended, in connectionwith the initial public offering of our common stock, par value $.0001 pershare.  Of the 7,245,000 sharesregistered under the registration statement for an aggregate offering price of$50,715,000, we sold 6,416,961 shares, including shares sold upon exercise ofthe underwriters’ over-allotment option, for an aggregate offering price of$44,918,727, and 321,945 shares, including shares sold upon exercise of theunderwriters’ over-allotment option, were sold by a selling stockholder for anaggregate offering price of $2,253,615. After deducting $3.3 million in underwriting discounts and commissionsand $1.8 million in other offering costs, we received net proceeds from theoffering of approximately $40 million. In May 2005, we used $1 million of the proceeds to purchase theassets of Convergent Voice, Inc.

 

We currently intend to use the remaining offeringnet proceeds for general corporate purposes as described in the prospectus forthe offering.  We are currently assessingthe specific uses and allocations for these net proceeds.  Pending these uses, the net proceeds from theoffering are invested in short-term, interest-bearing, investment-gradesecurities.  None of the expenses andnone of our net proceeds from the offering were paid directly or indirectly toany director, officer, general partner of RightNow or their associates, personsowning 10% or more of any class of equity securities of RightNow, or anaffiliate of RightNow.

 

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

 

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

 

None.

 

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***Item 5.  OtherInformation.***

 

None.

 

**Item 6. Exhibits**

 

***Exhibits***

 

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

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

 

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

*      Incorporated by reference to the exhibitof the same number from the Company’s registration statement of Form S-1(File No. 333-115331) initially filed with the Securities and ExchangeCommission on May 10, 2004, as amended.

 

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**SIGNATURE**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
| Dated:   November 8, 2005  |
|--------------------------------------|
|                                 |
| **RightNow Technologies, Inc.** |
| (Registrant)                         |
|                                 |   |
| By:                                  | /s/ Susan J. Carstensen |   |
|                                 | Susan J. Carstensen |
|                                 | Chief Financial Officer, Vice President, |
|                                 | Treasurer and Assistant Secretary |
|                                 | (Principal Financial and Accounting  Officer) |

 

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