**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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#### **FORM10-Q**

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**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

# **For the quarterly period endedMarch 31, 2007**

**or**

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

# **For the transition period from            to            **

**000-31321**

**(CommissionFile No.)**

**RIGHTNOWTECHNOLOGIES, INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

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

 

**136Enterprise Boulevard**

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

(Address ofPrincipal Executive Offices) (Zip Code)

**(406)522-4200**

 (Registrant’s Telephone Number, Including AreaCode)

**N/A**

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

 

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o    Nox

The number of sharesoutstanding of the registrant’s common stock, $0.001 par value, as of April 30,2007 was 32,964,123.

 

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**RightNowTechnologies, Inc.**

**QuarterlyReport on Form 10-Q**

**Forthe Quarterly Period Ended March 31, 2007**

**INDEX**
|                                                                                                      | **Page**                   |
|------------------------------------------------------------------------------------------------------|----------------------------|
| **Part I.**                                                                                          | **FINANCIAL  INFORMATION** | **1** |
| Item 1. Financial  Statements                                                                        | 1                          |
|                                                                                                 | a)                         | Condensed  consolidated balance sheets (unaudited) | 1 |
|                                                                                                 | b)                         | Condensed  consolidated statements of operations (unaudited) | 2 |
|                                                                                                 | c)                         | Condensed  consolidated statements of cash flows (unaudited) | 3 |
|                                                                                                 | d)                         | Notes to condensed  consolidated financial statements (unaudited) | 4 |
|                                                                                                 |                       |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 12                         |
|                                                                                                 |                       |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                  | 24                         |
|                                                                                                 |                       |   |   |
| Item 4. Controls  and Procedures                                                                     | 24                         |
|                                                                                                 |                       |   |   |
| **Part II.**                                                                                         | **OTHER INFORMATION**      | **26** |
| Item 1. Legal  Proceedings                                                                           | 26                         |
|                                                                                                 |                       |   |   |
| Item  1A. Risk Factors                                                                               | 26                         |
|                                                                                                 |                       |   |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 | 40                         |
|                                                                                                 |                       |   |   |
| Item 3.  Defaults Upon Senior Securities                                                             | 40                         |
|                                                                                                 |                       |   |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         | 40                         |
|                                                                                                 |                       |   |   |
| Item 5.  Other Information                                                                           | 41                         |
|                                                                                                 |                       |   |   |
| Item 6.  Exhibits                                                                                    | 42                         |
|                                                                                                 |                       |   |   |
| **SIGNATURES**                                                                                       | 43                         |
|                                                                                                      |                            |  |  |  |

 

i

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**Part I.  FINANCIAL INFORMATION**

##### **Item1.  Financial Statements**

**RightNow Technologies, Inc.**

**CondensedConsolidated Balance Sheets**

(In thousands)(Unaudited)
| ** **                                           | ** ** | **December  31, 2006** | ** ** | **March  31, 2007** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                           |       |                        |       |                     |       |
| Cash and cash  equivalents                           |       | $                           | 39,208     |                     | $          | 44,899 |   |
| Short-term investments                               |       | 39,127                      |       | 37,578                   |       |
| Accounts receivable                                  |       | 32,021                      |       | 25,050                   |       |
| Term receivables,  current                           |       | 23,806                      |       | 20,555                   |       |
| Allowance for doubtful  accounts                     |       | (2,621                      | )          | (2,273                   | )          |
| Receivables, net                                     |       | 53,206                      |       | 43,332                   |       |
| Prepaid & other  current assets                  |       | 2,498                       |       | 3,676                    |       |
| Total current assets                                 |       | 134,039                     |       | 129,485                  |       |
|                                                 |       |                        |       |                     |       |
| Property and equipment,  net                         |       | 10,073                      |       | 10,715                   |       |
| Term receivables,  non-current                       |       | 24,805                      |       | 19,349                   |       |
| Intangible assets, net                               |       | 8,836                       |       | 8,538                    |       |
| Other                                                |       | 489                         |       | 842                      |       |
| **Total Assets**                                     |       | $                           | 178,242    |                     | $          | 168,929 |   |
|                                                 |       |                        |       |                     |       |
| **Liabilities and Stockholders’  Equity**       | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Accounts payable                                     |       | $                           | 4,417      |                     | $          | 3,286 |   |
| Commissions and bonuses  payable                     |       | 4,069                       |       | 2,902                    |       |
| Other accrued  liabilities                           |       | 7,588                       |       | 10,532                   |       |
| Current portion of  long-term debt                   |       | 31                          |       | 32                       |       |
| Current portion of  deferred revenue                 |       | 67,560                      |       | 67,444                   |       |
| Total current  liabilities                           |       | 83,665                      |       | 84,196                   |       |
|                                                 |       |                        |       |                     |       |
| Long-term debt, less  current portion                |       | 85                          |       | 77                       |       |
| Deferred revenue, net  of current portion            |       | 47,018                      |       | 41,241                   |       |
|                                                 |       |                        |       |                     |       |
| Stockholders’ equity:                           |       |                        |       |                     |       |
| Common stock                                         |       | 33                          |       | 33                       |       |
| Additional  paid-in capital                          |       | 86,069                      |       | 88,064                   |       |
| Accumulated  other comprehensive loss                |       | (332                        | )          | (384                     | )          |
| Accumulated  deficit                                 |       | (38,296                     | )          | (44,298                  | )          |
| Total  stockholders’ equity                     |       | 47,474                      |       | 43,415                   |       |
| **Total Liabilities and  Stockholders’ Equity** |       | $                           | 178,242    |                     | $          | 168,929 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

1

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**RightNow Technologies, Inc.**

**CondensedConsolidated Statements of Operations**

(In thousands, except pershare amounts) (Unaudited)
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Revenue:                              |       |                                             |       |   |   |
| Software, hosting and support         |       | $                                                | 19,310     |   | $ | 19,819 |   |
| Professional services                 |       | 5,321                                            |       | 5,883 |   |
| Total revenue                         |       | 24,631                                           |       | 25,702 |   |
|                                  |       |                                             |       |   |   |
| Cost of revenue:                      |       |                                             |       |   |   |
| Software, hosting and support         |       | 2,771                                            |       | 4,394 |   |
| Professional services                 |       | 4,104                                            |       | 5,171 |   |
| Total cost of revenue                 |       | 6,875                                            |       | 9,565 |   |
|                                  |       |                                             |       |   |   |
| Gross profit                          |       | 17,756                                           |       | 16,137 |   |
|                                  |       |                                             |       |   |   |
| Operating  expenses:                  |       |                                             |       |   |   |
| Sales and marketing                   |       | 13,726                                           |       | 15,727 |   |
| Research and development              |       | 3,130                                            |       | 4,296 |   |
| General and administrative            |       | 2,056                                            |       | 2,860 |   |
| Total operating expenses              |       | 18,912                                           |       | 22,883 |   |
|                                  |       |                                             |       |   |   |
| Loss from  operations                 |       | (1,156                                           | )          | (6,746 | ) |
|                                  |       |                                             |       |   |   |
| Interest and  other income, net       |       | 672                                              |       | 828 |   |
|                                  |       |                                             |       |   |   |
| Loss before  income taxes             |       | (484                                             | )          | (5,918 | ) |
| (Provision)  benefit for income taxes |       | 44                                               |       | (84 | ) |
| Net loss                              |       | $                                                | (440       | ) | $ | (6,002 | ) |
|                                  |       |                                             |       |   |   |
|                                  |       |                                             |       |   |   |
|                                  |       |                                             |       |   |   |
| Net loss per  share:                  |       |                                             |       |   |   |
| Basic                                 |       | $                                                | (0.01      | ) | $ | (0.18 | ) |
| Diluted                               |       | $                                                | (0.01      | ) | $ | (0.18 | ) |
|                                  |       |                                             |       |   |   |
| Shares used in  the computation:      |       |                                             |       |   |   |
| Basic                                 |       | 31,943                                           |       | 32,858 |   |
| Diluted                               |       | 31,943                                           |       | 32,858 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

2

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**RightNow Technologies, Inc.**

**CondensedConsolidated Statements of Cash Flows**

(In thousands)(Unaudited)
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| **Operating  activities:**                                           |       |                                             |       |   |   |
| Net loss                                                             |       | $                                                | (440       | ) | $ | (6,002 | ) |
| Non-cash  adjustments:                                               |       |                                             |       |   |   |
| Depreciation and amortization                                        |       | 1,105                                            |       | 1,675 |   |
| Recoveries of uncollectible accounts receivable                      |       | (248                                             | )          | (69 | ) |
| Stock-based compensation                                             |       | 783                                              |       | 1,302 |   |
| Changes in  operating accounts:                                      |       |                                             |       |   |   |
| Receivables                                                          |       | (9,798                                           | )          | 15,427 |   |
| Prepaid expenses                                                     |       | (167                                             | )          | (1,471 | ) |
| Accounts payable                                                     |       | 688                                              |       | (1,133 | ) |
| Commissions and bonuses payable                                      |       | 787                                              |       | (1,171 | ) |
| Other accrued liabilities                                            |       | 503                                              |       | 2,881 |   |
| Deferred revenue                                                     |       | 12,976                                           |       | (6,056 | ) |
| Other                                                                |       | (137                                             | )          | (23 | ) |
| Cash provided by operating activities                                |       | 6,052                                            |       | 5,360 |   |
|                                                                 |       |                                             |       |   |   |
| **Investing  activities:**                                           |       |                                             |       |   |   |
| Net change in  short-term investments                                |       | (3,749                                           | )          | 1,549 |   |
| Acquisition of  property and equipment                               |       | (1,140                                           | )          | (1,987 | ) |
| Other                                                                |       | (10                                              | )          | (29 | ) |
| Cash used in  investing activities                                   |       | (4,899                                           | )          | (467 | ) |
|                                                                 |       |                                             |       |   |   |
| **Financing  activities:**                                           |       |                                             |       |   |   |
| Proceeds from  issuance of common stock under employee benefit plans |       | 433                                              |       | 643 |   |
| Excess tax  benefits of stock options exercised                      |       | —                                           |       | 49 |   |
| Payments on  long-term debt                                          |       | (8                                               | )          | (7 | ) |
| Cash provided by  financing activities                               |       | 425                                              |       | 685 |   |
|                                                                 |       |                                             |       |   |   |
|                                                                 |       |                                             |       |   |   |
| Effect of  foreign exchange rates on cash and cash equivalents       |       | (8                                               | )          | 113 |   |
|                                                                 |       |                                             |       |   |   |
| Increase in cash  and cash equivalents                               |       | 1,570                                            |       | 5,691 |   |
|                                                                 |       |                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                    |       | 40,874                                           |       | 39,208 |   |
| Cash and cash  equivalents at end of period                          |       | $                                                | 42,444     |   | $ | 44,899 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

3

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**RightNow Technologies, Inc.**

**Notes toCondensed Consolidated Financial Statements**

(Unaudited)

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

***Business Description***

RightNow Technologies, Inc. (the “Company” or “RightNow”) providesindustry-leading software solutions that help companies improve customerexperiences while reducing operating costs. The Company’s solutions are designed to go beyond traditional customerrelationship management (“CRM”) solutions to support a business’s externalcustomer-facing channels as well as sales, marketing and customer serviceoperations.  Founded in 1995, RightNow is headquartered in Bozeman,Montana, with additional offices in the United States, Europe, Australia andJapan.  The Company operates in onesegment, which is the customer experience management market.

***Basis of Presentation***

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, 2006.

The accompanyinginterim condensed consolidated financial statements have been prepared inaccordance with United States generally accepted accounting principles.  In the opinion of management, the interimcondensed consolidated financial statements and notes have been prepared on thesame 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 March 31, 2007, and resultsof operations and cash flows for the three month periods ended March 31, 2006and 2007.  The interim period results arenot necessarily indicative of the results to be expected for the full year.

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

4

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

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

The Company’scustomers are worldwide with approximately 70% to 75% of sales in the UnitedStates.  No individual customer accountedfor more than 10% of the Company’s revenue in 2006 or the first three months of2007.  One customer represented 13% ofaccounts receivable at December 31, 2006 and one customer represented 12% ofaccounts receivable at March 31, 2007.

As of December 31,2006 and March 31, 2007, assets located outside the United States were 12% and13% of total assets, respectively.   Theloss from operations outside of the United States totaled $1.9 million and $2.5million for the three months ended March 31, 2006 and 2007, respectively.  Revenue by geographical region follows (inthousands):
|               | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
|          |       |                                             |       |   |   |
| United States |       | $                                                | 17,368     |   | $ | 18,472 |   |
| Europe        |       | 5,014                                            |       | 5,359 |   |
| Asia Pacific  |       | 2,249                                            |       | 1,871 |   |
|          |       | $                                                | 24,631     |   | $ | 25,702 |   |

 

***(3)Revenue Recognition***

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

The Company recognizesrevenue in accordance with the provisions of SEC Staff Accounting Bulletin No.104, *Revenue Recognition* and Emerging IssuesTask Force Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables* (“EITF 00-21”). Revenue is recognized when allof the following criteria are met: a) the Company has entered into alegally binding agreement with the customer; b) the software has been madeavailable or delivered to the customer; c) the Company’s fee for providingthe software and services is fixed and determinable; and d) collection ofthe Company’s fee is probable.

Subscriptions include accessto the Company’s software via its hosting services, technical support, andproduct upgrades when and if available, all for a bundled fee and revenue isrecognized ratably over the contractual term.

5

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Under EITF 00-21, value is assigned to eachdeliverable of an arrangement using prices established when the elements aresold stand-alone.  The arrangement fee isthen allocated to the individual elements based on their relative fair values.  Revenue for each element is recognized basedon the criteria above.  If fair value ofone or more undelivered elements does not exist, the revenue is recognized whendelivery of those elements occurs or when fair value can be established.

The Company applies EITF00-21 to its subscriptions as opposed to Statement of Position 97-2, *Software Revenue Recognition* (“SOP 97-2”) because, under theCompany’s subscription contracts, the customer does not have the right to takepossession of the software.  Inaccordance with Emerging Issues Task Force Issue No. 00-03, *Application of AICPA Statement of Position 97-2, Software RevenueRecognition, to Arrangements That Include the Right to Use Software Stored onAnother Entity’s Hardware* (“EITF 00-03”), such arrangements areconsidered service contracts and are not within the scope of SOP 97-2.

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

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

The Company’s policy is torecord revenue net of any applicable sales, use or excise taxes.

If an arrangement includes aright of acceptance or a right to cancel, revenue is recognized when acceptanceis received or the right to cancel has expired. If the fee for the license hasany payment term that is due in excess of the Company’s normal payment terms(over 90 days), the fee is considered to not be fixed or determinable, andthe amount of revenue recognized (a) for perpetual license arrangements islimited to the amount currently due from the customer, or (b) for termlicense or subscription arrangements is limited to the lesser of the amountcurrently due from the customer or a ratable portion of the arrangement fee.

Certain customers haveentered into agreements with us that require them to pay a minimum charge forfixed usage and excess usage charges if they exceed fixed minimums. Usage abovefixed minimums requires payment of additional fees if the Company’s software isused by

6

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more than a specified number of users or for morethan a specified number of interactions. Fixed minimums are recognized asrevenue ratably over the term of the arrangement. Usage fees above fixedminimums are recognized as revenue when such amounts are known and billed.

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

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

**(4)  Sales Incentives**

In conjunction with theCompany’s business model change, beginning in 2007 sales incentives paid forsubscriptions are deferred and charged to expense in proportion to the revenuerecognized.  Sales incentives paid forlicenses  are expensed when earned, whichis typically at the time the related sale is invoiced.  Sales incentive expense was $3.6 millionand $2.1 million for the three months ended March 31, 2006 and 2007,respectively.  Deferred commissions werezero and $1.1 million at March 31, 2006 and 2007, respectively.

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

***Areconciliation of the denominator used in the calculation of basic and dilutednet income (loss) per share is as follows (in thousands):***
|                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                          | ** ** | **2007** | ** ** |
|                                                                              |       |                              |       |   |   |
| Weighted average common  shares outstanding for basic net income (loss) per share |       | 31,943                            |       | 32,858 |   |
| Effect of dilutive  securities:                                                   |       |                              |       |   |   |
| Employee stock  options                                                           |       | —                            |       | — |   |
| Weighted average shares  outstanding for dilutive net income (loss) per share     |       | 31,943                            |       | 32,858 |   |

 

The followingcommon stock equivalents were excluded from the computation of diluted earningsper share because their impact was anti-dilutive (in thousands):
|                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **2006**                          | ** ** | **2007** | ** ** |
|                   |       |                              |       |   |   |
| Employee stock options |       | 4,052                             |       | 4,263 |   |

 

7

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

***Comprehensiveloss for the comparative periods was as follows (in thousands):***
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2006**                          | ** ** | **2007** | ** ** |
|                                       |       |                              |       |   |   |
| Net loss                                   |       | $(440                             | )          | $(6,002 | ) |
| Other comprehensive income (loss):         |       |                              |       |   |   |
| Unrealized gain on  short-term investments |       | 14                                |       | 16 |   |
| Foreign currency  translation adjustments  |       | (6                                | )          | (68 | ) |
| Comprehensive loss                         |       | $(432                             | )          | $(6,054 | ) |

 

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

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

The following table illustrates the stock-based compensationexpense resulting from stock-based awards included in the condensedconsolidated statement of operations (amounts in thousands):
|                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Stock-based  compensation expense:    |       |                                             |       |   |   |
| Cost of software, hosting and support |       | $                                                | 38         |   | $ | 58 |   |
| Cost of professional services         |       | 97                                               |       | 125 |   |
| Sales and marketing expenses          |       | 366                                              |       | 658 |   |
| Research and development expenses     |       | 159                                              |       | 226 |   |
| General and administrative expenses   |       | 123                                              |       | 235 |   |
| Stock-based  compensation expense     |       | $                                                | 783        |   | $ | 1,302 |   |

 

Nostock-based compensation expense was capitalized during the three months endedMarch 31, 2006 or 2007.

Unrecognizedcompensation expense of outstanding stock options at March 31, 2007 wasapproximately $18 million, which is expected to be recognized over a weightedaverage period of 2.8 years.

The estimatedweighted average fair value per share of stock options granted in the threemonths ended March 31, 2006 and 2007 was $9.59 and $7.95, respectively.  Assumptions used to obtain the estimated fairvalues were:  

8

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|                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2006**                          | ** ** | **2007** | ** ** |
| Weighted average risk  free rate |       | 4.4                               | %          | 4.7 | % |
| Expected term                    |       | 4.8 yrs                           |       | 4.3 yrs |   |
| Volatility                       |       | 57                                | %          | 53 | % |
| Dividend yield                   |       | 0                                 | %          | 0 | % |

 

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

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

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

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

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

Activityunder the Company’s stock option plans for the three months ended March 31,2007 was as follows (option shares in thousands):
| ** **                                    | ** ** | **Shares  available  for grant** | ** ** | **Outstanding  options** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Aggregate  intrinsic  value (in  thousands)** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Balance at  December 31, 2006                 |       | 3,029                                 |       | 3,913                    |       | $                                                      | 9.96       |                                                 |       |                                                                     |       |   |
| Annual reserve addition (1)                   |       | 1,000                                 |       | —                   |       | —                                                 |       |                                                 |       |                                                                     |       |
| Granted                                       |       | (595                                  | )          | 595                      |       | 16.61                                                  |       |                                                 |       |                                                                     |       |
| Exercised                                     |       | —                                |       | (151                     | )          | 4.26                                                   |       |                                                 |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled (2) |       | 86                                    |       | (94                      | )          | 13.60                                                  |       |                                                 |       |                                                                     |       |
| Balance at March  31, 2007                    |       | 3,520                                 |       | 4,263                    |       | $                                                      | 11.01      |                                                 | $          | 23,958                                                                   |       | 7.5 |   |
|                                          |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Vested or  expected to vest at March 31, 2007 |       |                                  |       | 3,394                    |       | $                                                      | 10.14      |                                                 | $          | 21,918                                                                   |       | 7.2 |   |
|                                          |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Exercisable at March  31, 2007                |       |                                  |       | 1,884                    |       | $                                                      | 7.06       |                                                 | $          | 17,798                                                                   |       | 5.9 |   |

 

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

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

Thetotal intrinsic value of options exercised during the three months ended March31, 2006 and 2007 was $2.1 million and $1.8 million, respectively.

Fromtime to time the Company may grant options to purchase stock toconsultants.  The Company accounts forconsultant stock options in accordance with SFAS 123 and Emerging

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Issues Task ForceConsensus Issue No. 96-18 (“EITF 96-18”), *Accountingfor Equity Instruments that are Issued to Other Than Employees for Acquiring,or in Conjunction With Selling, Goods or Services*.  Compensation expense for the grant of stockoptions to consultants is determined based on the estimated fair value of thestock options at the measurement date as defined in EITF 96-18 and isrecognized over the vesting period. There were no stock options granted to non-employees for the threemonths ended March 31, 2006 or 2007.

**(8)**                     Commitments and Contingencies

***Warranties and Indemnification***

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

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

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

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

***Litigation***

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

**(9)**                     Income Taxes

We adopted theFinancial Accounting Standard Board’s Interpretation No. 48, *Accounting for Income Tax Uncertainties* (“FIN 48”), onJanuary 1, 2007.  FIN 48 clarifies theaccounting for uncertain income tax positions recognized in financialstatements and requires the impact of a tax position to be recognized in thefinancial statements if that position is more likely than not of beingsustained by the taxing authority.  As ofDecember 31, 2006 and March 31, 2007, we had an insignificant amount ofunrecognized tax benefits, none of which would materially affect our effectivetax rate if recognized.  We do not expectthat the amount of unrecognized tax benefits will significantly increase ordecrease within the next twelve months. Our policy is to recognize

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interest and penalties onunrecognized tax benefits in provision for income taxes in the consolidatedstatements of operations.  The amount ofinterest and penalties for the three months ended March 31, 2007 wasinsignificant.  Tax years beginning in2003 are subject to examination by taxing authorities, although net operatingloss and credit carryforwards from all years are subject to examinations andadjustments for at least three years following the year in which the attributesare used.

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

***Cautionary Statement***

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

***Overview***

We are a leading provider of customer experience management softwaresolutions for companies of all sizes.  Our on demand software is designed to go beyond traditional customerrelationship management (“CRM”) solutions to help companies improve theircustomer experiences, while reducing operating costs.  Our software solutions support a business’sexternal customer-facing channels as well as sales, marketing and customerservice operations.

We released our initial version of RightNow Service in 1997.  This product addressed the new customerservice needs resulting from the increasing use of the Internet as a customerservice channel.  Since then, we havesignificantly enhanced product features and functionality to address customerservice needs across multiple communication channels, including web,interactive voice, email, chat, telephone and proactive outbound emailcommunications. We have also added several products that are complementary toour RightNow Service solution, including RightNow Marketing, RightNow Sales,and RightNow Feedback which automate aspects of marketing campaigns salesoperations, and customer monitoring.  InMay 2005, we purchased the assets of Convergent Voice, and added voiceenabled-CRM capabilities to our product portfolio.  In May 2006, we purchased Salesnet, Inc., aprovider of salesforce automation solutions. In February 2007, we released RightNow 8, our newest enterprise-classsolution for service, sales and marketing. To date, approximately 80% to 90% of our revenue has been generated bythe RightNow Service suite.

We have approximately 1,800 customers worldwide as of March 31, 2007,and our products served more than 350 million customer interactions, or uniquesessions hosted by our solutions, during the quarter ended March 31, 2007.  We distribute our solutions primarily throughdirect sales efforts and to a lesser extent through indirect channels.

***2007 Business Model Changes***

To better align with industry practice, we have changed the nature ofthe majority of our product offerings beginning in 2007 from software licensearrangements to subscription service arrangements (e.g. “subscriptions”).  As the industry and business models for “softwareas a service” or “on demand” have evolved, the standard form of arrangementsare service agreements

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ratherthan licenses of software that can be hosted. We believe providing offerings in this manner will ultimately increaseour market penetration.

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

Also beginning in 2007, we have begun to essentially discontinueselling perpetual software licenses, which represented 21% of our revenue in2006. Although we expect to ultimately increase the lifetime value of ourcustomer arrangements through sales of subscriptions, the substantialelimination of perpetual license sales will materially and adversely impact ouroperating results for 2007 when compared to 2006 as perpetual revenue hasgenerally been recognized in full upon delivery of the license.

Lastly, our policy for subscription contract acquisition costs, such assales commissions, is to recognize them in proportion to the revenue recognizedunder the subscription arrangement. Since we expect the majority of newbusiness to be subscriptions in 2007, we believe this policy will have amaterial and beneficial impact on our 2007 and 2008 operating results.  Commissions paid on sales of licenses in 2007will continue to be expensed when earned.

***Sources of Revenue***

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

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

License arrangements can be over time (a “term” license) orperpetual.  For term licenses, software,hosting and support revenue is recognized ratably over the length of theagreement.  Perpetual license revenue isrecorded in full upon delivery of the license, and the hosting and supportelements are recognized ratably over the contractual period.  Perpetual license revenue has ranged from 21%to 25% of our revenue during the past three years.  Due to the change in our business model notedabove, perpetual license revenue decreased from 22% of revenue in the quarterended March 31, 2006 to 2% of revenue in the quarter ended March 31, 2007.

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

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

Professional services are typically sold with initial salesarrangements and then periodically over the client engagement.  Our typical education courses are billed on aper person, per class basis.

Depending on the size and complexity of the client project, ourconsulting or development services contracts are either fixed price/fixed scopeor, less frequently, billed on a time and materials basis. We have determinedthat the professional services element of our software arrangements is notessential to the functionality of the software.

***Cost of Revenue andOperating Expenses***

*Cost of Revenue.*    Cost of revenue consists primarily ofsalaries and related expenses (such as employee benefits and payroll taxes) forour hosting, support and professional services organizations, third-party costsand equipment depreciation relating to our hosting services, third-party costsfor voice enabled CRM applications, travel expenses related to providingprofessional services to our clients, amortization of acquired intangibleassets and allocated overhead. We allocate most overhead expenses, such asoffice supplies, computer supplies, utilities, rent, depreciation for furnitureand equipment, payroll taxes and employee benefits, based on headcount. As aresult, overhead expenses are reflected in each cost of revenue and operatingexpense category.

*Sales and MarketingExpenses. *Salesand marketing expenses consist primarily of salaries and related expenses foremployees in sales and marketing, including commissions and bonuses,advertising, marketing events, corporate communications, product managementexpenses, travel costs and allocated overhead. For subscription arrangements,we expense the related sales commission in proportion to the revenuerecognized.  We expense our salescommissions on license arrangements when earned, which is typically at the timethe related sale is invoiced to the client. Since the majority of our historical revenue has been from license arrangementsrecognized over time, we have experienced a delay between increasing sales andmarketing expenses and the recognition of corresponding revenue. We expectsignificant additional increases in sales and marketing expenses in absolutedollars as we continue to hire additional sales and marketing personnel andincrease the level of marketing activities.

*Research andDevelopment Expenses. *Researchand development expenses consist primarily of salary and related expenses fordevelopment personnel and costs related to the development of new products,enhancement of existing products, translation fees, quality

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assurance, testing and allocated overhead. Todate, we have not capitalized any software development costs because the timingof the commercial releases of our products has substantially coincided with theattainment of technological feasibility. As a result, research and developmentcosts have been expensed as incurred. We intend to continue to expand andenhance our product offerings. To accomplish this, we plan to hire additionalpersonnel and, from time to time, contract with third parties. We expect thatresearch and development expenses will increase in absolute dollars as we seekto expand our technology and product offerings.

*General andAdministrative Expenses*.  General and administrative expenses consistprimarily of salary and related expenses for management, finance andaccounting, legal, information systems and human resources personnel,professional fees, other corporate expenses and allocated overhead. Weanticipate that we will incur additional employee salaries and relatedexpenses, professional service fees and insurance costs related to the growthof our business and operations.

***CriticalAccounting Policies and Estimates***

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

***Revenue Recognition***

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

Prior to 2007, we sold the majority of products under software licensearrangements (“licenses”), and accounted for them in accordance with SOP 97-2and SOP 98-9.  License arrangementsgenerally include multiple elements that are delivered up front or overtime.  For example, under a term license,we deliver the software up front and provide hosting and support services overtime.  Fair value for each element in alicense does not exist since none are sold separately, and consequently, thebundled revenue is recognized ratably over the length of the agreement.  Under a perpetual license, vendor specificobjective evidence of fair value of the hosting and support elements is basedon the price charged at renewal when sold separately, and therefore the licenseelement is recognized immediately into revenue upon delivery using the residualmethod, and the hosting and support elements are recognized ratably over thecontractual term.

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The application of these rules requires judgment, including theidentification of individual elements in multiple element arrangements, whetherthere is objective and reliable evidence of fair value, including vendorspecific objective evidence (“VSOE”) of fair value, for some or allelements.  Changes to the elements in oursales arrangements, or our ability to establish VSOE or fair value for thoseelements, may result in a material change to the amount of revenue recorded ina given period.

Fees charged for professional services are recognized whendelivered.  We believe the fees forprofessional services qualify for separate accounting because: a) the serviceshave value to the customer on a stand-alone basis; b) objective and reliableevidence of fair value exists for these services; and c) performance of theservices is considered probable and does not involve unique customer acceptancecriteria.

 Our standard payment terms arenet 30, although payment within 90 days is considered normal.  We provide extended payment terms in certaincircumstances.  In such cases, judgmentis required in determining whether our fee is fixed or determinable and theappropriate timing of revenue recognition. Changes to our practice of providing extended payment terms or providingconcessions following a sale, may result in a material change to the amount ofrevenue recorded in a given period.

***Allowance for doubtfulaccounts***

We regularly assess the collectibility of outstanding customer invoicesand, in so doing, we maintain an allowance for estimated losses resulting fromthe non-collection of customer receivables. In estimating this allowance, we consider factors such as: historicalcollection experience; a customer’s current creditworthiness; customerconcentration; age of the receivable balance; and general economic conditionsthat may affect a customer’s ability to pay. Actual customer collections could differ from our estimates and exceedour related loss allowance.

***Income Taxes***

We record income taxes under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled.  Theeffect of a change in tax rates on deferred tax assets and liabilities isrecognized in income in the period that includes the enactment date.  When applicable, a valuation allowance isestablished to reduce any deferred tax asset when it is determined that it ismore likely than not that some portion of the deferred tax asset will not berealized.

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

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***Share-Based Compensation***

We have adopted the provisions of Statement of Financial AccountingStandards No. 123(R), *Share Based Payment*,(“SFAS 123R”) beginning January 1, 2006 utilizing the modified prospectivemethod.  This statement requires the costof share-based payment arrangements to be recorded in the statement ofoperations.  Prior to 2006, the estimatedcost of share-based payment arrangements was disclosed in a footnote to thefinancial statements.  Share-based compensationamounts are affected by our stock price as well as our assumptions regardingthe expected volatility of our stock, our employee stock option exercisebehaviors, and the related income tax effects. Our assumptions are based primarily on our historical information, someof which was developed when we were a private company.

***Recently Issued AccountingStandards***

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

We adopted the Financial Accounting Standard Board’s Interpretation No.48, *Accounting for Income Tax Uncertainties*(“FIN 48”), on January 1, 2007.  FIN 48clarifies the accounting for uncertain income tax positions recognized infinancial statements and requires the impact of a tax position to be recognizedin the financial statements if that position is more likely than not of beingsustained by the taxing authority.  As ofDecember 31, 2006 and March 31, 2007, we had an insignificant amount ofunrecognized tax benefits, none of which would materially affect our effectivetax rate if recognized.  We do not expectthat the amount of unrecognized tax benefits will significantly increase ordecrease within the next twelve months. Our policy is to recognize interest and penalties on unrecognized taxbenefits in provision for income taxes in the consolidated statements ofoperations.  The amount of interest andpenalties for the three months ended March 31, 2007 was insignificant.  Tax years beginning in 2003 are subject toexamination by taxing authorities, although net operating loss and creditcarryforwards from all years are subject to examinations and adjustments for atleast three years following the year in which the attributes are used.

**Results of Operations**

The following table setsforth certain consolidated statements of operations data for each of theperiods indicated, expressed as a percentage of total revenue:

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|                                           | ** ** | **Three Months Ended  March 31,**                                 | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **      2006      ** | ** ** | **      2007      ** | ** ** |
| ** **                                | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| Revenue:                                  |       |                                                                             |       |   |   |
| Software, hosting and support             |       | 78                                                                               | %          | 77 | % |
| Professional services                     |       | 22                                                                               |       | 23 |   |
| Total revenue                             |       | 100                                                                              |       | 100 |   |
| Cost of revenue:                          |       |                                                                             |       |   |   |
| Software, hosting and support             |       | 11                                                                               |       | 17 |   |
| Professional services                     |       | 17                                                                               |       | 20 |   |
| Total cost of revenue                     |       | 28                                                                               |       | 37 |   |
| Gross profit                              |       | 72                                                                               |       | 63 |   |
| Operating  expenses:                      |       |                                                                             |       |   |   |
| Sales and marketing                       |       | 56                                                                               |       | 61 |   |
| Research and development                  |       | 13                                                                               |       | 17 |   |
| General and administrative                |       | 8                                                                                |       | 11 |   |
| Total operating expenses                  |       | 77                                                                               |       | 89 |   |
| Income (loss)  from operations            |       | (5                                                                               | )          | (26 | ) |
| Interest and  other income (expense), net |       | 3                                                                                |       | 3 |   |
| Income (loss)  before income taxes        |       | (2                                                                               | )          | (23 | ) |
| Provision for  income taxes               |       | —                                                                           |       | — |   |
| Net income (loss)                         |       | (2                                                                               | )%         | (23 | )% |

The following table sets forth our ondemand customer interactions and our revenue by type and geography expressed asa percentage of total revenue for each of the periods indicated.
|                                                                | ** ** | **Three Months Ended  March 31,**                                 | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **      2006      ** | ** ** | **      2007      ** | ** ** |
|                                                           |       |                                                                             |       |   |   |
| Customer  interactions (in millions)                           |       | 281                                                                              |       | 352 |   |
| Revenue by type:                                               |       |                                                                             |       |   |   |
| Recurring (subscriptions, term licenses, hosting and  support) |       | 57                                                                               | %          | 75 | % |
| Perpetual licenses                                             |       | 22                                                                               |       | 2 |   |
| Professional services                                          |       | 22                                                                               |       | 23 |   |
|                                                           |       |                                                                             |       |   |   |
| Revenue by  geography in:                                      |       |                                                                             |       |   |   |
| United States                                                  |       | 71                                                                               | %          | 72 | % |
| Europe                                                         |       | 20                                                                               |       | 21 |   |
| Asia Pacific                                                   |       | 9                                                                                |       | 7 |   |

*** ***

***Quarter Overview***

Total revenue for the first quarter of2007 increased 4% over the first quarter of 2006.  Within software, hosting and support, firstquarter 2007 recurring revenue increased 38% and perpetual revenue decreased89% when compared to the first quarter of 2006. Recurring revenue increased in the 2007 period due to growth in thenumber of customers and higher average revenue per customer.  The much lower perpetual license revenueresults from our business model change in early 2007 in which we essentiallyeliminated sales of new perpetual licenses.

During the quarter ended March 31, 2007,we continued to invest in our operations by adding capacity and a new datacenter for our hosting operations, sales and marketing personnel to focus onnew customer acquisition, professional services personnel to support oursolution offerings, and software developers to broaden and enhance our solutionofferings.  These investments increasedtotal expenses which, when combined with the much lower amount of perpetuallicense revenue, caused us to incur an operating loss of 26% of revenue in thequarter ended March 31, 2007 as compared to a 5% operating loss in the quarterended March 31, 2006.

For the quarter ended March 31, 2007, wegenerated $5.4 million of cash from operations compared to $6.1 million of cashfrom operations in the comparative 2006 quarter, and increased our cash andshort-term investment balances to $82.5 million at March 31, 2007 from $69.5million one year earlier.

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As of March 31, 2007, we had anaccumulated deficit of $44.3 million. This deficit and our historical operating losses were primarily theresult of costs incurred in the development, sales and marketing of our productsand for general and administrative purposes.

***ThreeMonths Ended March 31, 2006 and 2007***

***Revenue***

 
|                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                            |       |                                                 |       |   |   |   |   |
| Software,  hosting and support: |       |                                                 |       |   |   |   |   |
| Recurring                       |       | $                                                    | 13,977     |   | $ | 19,225 |   | 38 | % |
| Perpetual                       |       | 5,333                                                |       | 594 |   | (89 | ) |
| Professional  services          |       | 5,321                                                |       | 5,883 |   | 11 |   |
| Total revenue                   |       | $                                                    | 24,631     |   | $ | 25,702 |   | 4 | % |

 

Total revenue for the threemonths ended March 31, 2007 was $25.7 million, an increase of $1.1 million, or4%, over total revenue of $24.6 million for the three months ended March 31,2006.

Software, hosting andsupport revenue, consisting of recurring revenue and perpetual license revenue,for the three months ended March 31, 2007 increased $509,000, or 3%, over thethree months ended March 31, 2006. Recurring revenue, comprised of subscriptions, term licenses, hostingand support, increased 38% over the 2006 quarter primarily due to a 20%increase in the average number of customers and a 15% increase in average revenueper customer.  Total active customersincreased to approximately 1,800 at March 31, 2007 as compared to approximately1,500 at March 31, 2006, due in part to our acquisition of Salesnet, Inc. inMay 2006, and from our focus on new customer acquisition.   Average revenue per customer increased as aresult of sales of new products, capacity additions, and contractrenewals.  Customer interactions, ameasure of unique customer sessions hosted in our data centers and customerusage, exceeded 352 million in the quarter ended March 31, 2007 as compared to281 million in the quarter ended March 31, 2006.

Perpetual license revenuedecreased $4.7 million, or 89%, in the quarter ended March 31, 2007 as comparedto the quarter ended March 31, 2006, and decreased as a percentage of totalrevenue to 2% in the 2007 quarter from 22% in the 2006 quarter.  The mix of perpetual license revenue affectsour profitability in any given period since it is recorded in full into revenueupon delivery instead of being recorded ratably into revenue over time, as isthe case with subscriptions and term licenses. Beginning in 2007, weessentially eliminated new sales of perpetual licenses which caused thesignificant decrease in perpetual revenue from the prior year.

Professional servicesrevenue increased $562,000, or 11%, in the quarter ended March 31, 2007 overthe comparable 2006 quarter, due to customer growth.  As noted above, total average customers forthe quarter ended March 31, 2007 were approximately 20% more than the similarquarter in 2006. Customers generally purchase professional services withinitial license or subscription arrangements, and periodically over the life ofthe contract.

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The mix of professionalservices revenue affects our profitability from period-to-period due to thelower gross profit earned on professional services as compared to the grossprofit earned on software, hosting and support revenue.  Professional services revenue represented 23%and 22% of total revenue in the three months ended March 31, 2007 and 2006,respectively.  We expect professionalservices revenue to range between 20% and 25% of total revenue in the future.

Revenue from Europeancustomers grew slightly to represent 21% of total revenue in the quarter endedMarch 31, 2007 from 20% of total revenue in the quarter ended March 31, 2006,while revenue from Asia Pacific clients decreased to represent 7% of totalrevenue from 9% of total revenue for the similar periods.  Total revenue outside the United Statesremained relatively constant at 28% to 29% of revenue for the comparativeperiods.

***Cost of Revenue***
|                               | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| **(Amounts in thousands)**    | ** ** | **2006**                         | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                          |       |                             |       |   |   |   |   |
| Software, hosting and support |       | $                                | 2,771      |   | $ | 4,394 |   | 59 | % |
| Professional services         |       | 4,104                            |       | 5,171 |   | 26 |   |
| Total cost of revenue         |       | $                                | 6,875      |   | $ | 9,565 |   | 39 | % |

 

Totalcost of revenue for the quarter ended March 31, 2007 was $9.6 million, anincrease of $2.7 million, or 39%, over total cost of revenue of $6.9 millionfor the quarter ended March 31, 2006.

Costof software, hosting and support increased $1.6 million, or 59%, in the firstquarter ended March 31, 2007 over the first quarter of 2006 due to staffadditions in our hosting and technical support operations, capacity additionsto our hosting data centers, including new data centers in London, England, andChicago, Illinois, and increased voice and non-voice hosting volume.  Staff additions to our hosting and technicalsupport organizations increased salaries and related expenses (i.e. payrolltaxes, benefits, bonuses) by $600,000 in the quarter ended March 31, 2007 whencompared to the quarter ended March 31, 2006. Average employee count in our hosting and technical support operationswas 78 in the March 2007 quarter as compared to 59 in the March 2006quarter.  New data centers added sinceMarch of 2006 and growth in customer interactions increased third party hostingprovider costs by $568,000 in the quarter ended March 31, 2007 as compared tothe quarter ended March 31, 2006.  Capacityadditions to our data centers increased depreciation expense in the firstquarter of 2007 by $309,000 over the first quarter of 2006.  As a percent of the associated revenue,software, hosting and support costs were 22% in the quarter ended March 31,2007 as compared to 14% in the quarter ended March 31, 2006 mostly due to thelower revenue contribution from perpetual licenses combined with the costincreases noted above.

Costof professional services increased $1.1 million, or 26%, in the quarter endedMarch 31, 2007 over the quarter ended March 31, 2006 due to employee staffadditions.  Average employee count in ourprofessional services organization grew to 139 in the first quarter of 2007from 108 in the first quarter of 2006, which increased salaries and relatedexpenses by $1.3 million.  The increasein salaries and related expenses was partially offset by lower travel andentertainment expenses.  As a percent ofthe associated revenue, professional services costs increased to 88% in thequarter ended March 31, 2007 from 77% in the quarter ended March 31,

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2006.  Employee training and customer schedulingrequirements can cause the cost of professional services to fluctuate as apercentage of revenue.  We expectprofessional services costs to range between 80% and 85% of the associatedrevenue in 2007.

***Operating Expenses***
|                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                                 |       |   |   |   |   |
| Sales and  marketing                 |       | $                                                    | 13,726     |   | $ | 15,727 |   | 15 | % |
| Research and development             |       | 3,130                                                |       | 4,296 |   | 37 |   |
| General and  administrative          |       | 2,056                                                |       | 2,860 |   | 39 |   |
| Total operating  expenses            |       | $                                                    | 18,912     |   | $ | 22,883 |   | 21 | % |

 

## *Sales and Marketing Expenses*

Sales and marketing expensesof $15.7 million in the first quarter of 2007 were 15%, or $2.0 million,greater than expenses of $13.7 million in the first quarter of 2006.  Average employee count in our sales andmarketing organizations increased to 262 in the quarter ended March 31, 2007from 235 in the quarter ended March 31, 2006, which increased salaries andrelated expenses by $2.5 million.  Inaddition, stock-based compensation expenses increased by $292,000 in the 2007March quarter over the 2006 March quarter mostly due to growth in the fairmarket value of our stock price since our initial public offering in 2004, andadditional employee stock option grants.

As noted above under “2007Business Model Changes,” we changed the nature of our sales arrangements fromlicenses to subscriptions beginning in 2007. Under license arrangements, we expense sales incentives when earned,which is typically upon contract signing. Under subscription arrangements, we defer the related sales incentivecosts and expense them in proportion to the revenue recognized.  We deferred $1.1 million of sales incentivesearned on subscription sales in the first quarter of 2007, as compared to zerodeferred sales incentives in the comparative 2006 quarter.  Net sales incentive expense in the quarterending March 31, 2007 was $2.1 million as compared to $3.6 million in the quarterended March 31, 2006.

*Research and Development Expenses*

#### Research and development expenses of $4.3 millionin the three months ended March 31, 2007 were $1.2 million, or 37%, more thanresearch and development expenses of $3.1 million in the three months endedMarch 31, 2006, primarily due to employee staff additions.  Average employee count in our research anddevelopment organization increased to 133 in the first quarter ended March 31,2007 from 112 in the corresponding 2006 quarter, which increased salaries andrelated expenses by $856,000.  Inaddition, higher outside service costs of $206,000 were incurred in the quarterended March 31, 2007 principally related to language translations ofinstallation and operation manuals for our newest product, RightNow 8, whichwas made generally available to customers in February, 2007.

*General and AdministrativeExpenses*

Generaland administrative expenses increased $804,000, or 39%, in the first quarterended March 31, 2007 over the first quarter of 2006 mostly due to staffadditions and stock-

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compensationexpense.  Average employees in ourgeneral and administrative organization were 69 in the 2007 quarter as comparedto 52 in the 2006 quarter, which increased salaries and related expenses by$691,000.  Stock-based compensationexpense increased $112,000 in the 2007 March quarter over the 2006 Marchquarter mostly due to growth in the fair market value of our stock price sinceour initial public offering in 2004, and additional employee stock optiongrants.

*Stock-Based Compensation Expense*

Total stock-basedcompensation expense for the three months ended March 31, 2007 was $1.3 millionas compared to $0.8 million in the three months ended March 31, 2006.   For the full year 2007, stock-basedcompensation expense is expected to be approximately $6.6 million as comparedto $4.6 million for the full year 2006. The year-over-year increase in stock-based compensation expense resultsprimarily from growth in the fair market value of our stock since our initialpublic offering in 2004, which in turn drives growth in the estimated fairvalue of our stock options and the corresponding expense.

***Interest and Other Income (Expense), Net***
|                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**            | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                            |       |                                                 |       |   |   |   |   |
| Interest income                                 |       | $                                                    | 674        |   | $ | 886 |   | 31 | % |
| Interest expense                                |       | (2                                                   | )          | (2 | ) | — |   |
| Other income  (expense)                         |       | —                                               |       | (56 | ) | n/m |   |
| Total interest and  other income (expense), net |       | $                                                    | 672        |   | $ | 828 |   | 23 | % |

 

Interest income increased 31% in the first quarter of 2007 over thefirst quarter of 2006 due to growth in the average yield-to-maturity in ourinvestment portfolio, as well as growth in our cash and short-term investmentbalances.  Investment yields have risen alongwith the periodic increases in the federal funds rate.  Our investment portfolio consists primarilyof short-term, investment-grade government and corporate debt instruments.  Other income (expense) consists primarily ofgains or losses on asset sales and foreign currency transaction gains orlosses.

***Provision for Income Taxes***

The provision for incometaxes of $84,000 in the first quarter of 2007 consists primarily of the stateand foreign taxes payable.  Our effectivetax rate differs from the federal statutory rate primarily due to the utilizationof net operating loss carryforwards, tax credits, federal alternative minimumtaxes, foreign rate differentials, and non-deductible meal and entertainmentexpenses.  Our effective tax rate in 2007will depend on a number of factors, such as the amount and mix of stock-basedcompensation expense to be recorded under SFAS 123R, the level of business instate and foreign tax jurisdictions, management’s expectation of therealization of deferred tax assets and the associated valuation allowance, andother factors.

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**Liquidity and Capital Resources**
|                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|                                               |       |                                                 |       |   |   |   |   |
| Cash, cash  equivalents and short-term investments |       | $                                                    | 69,507     |   | $ | 82,477 |   | 19 | % |
| Cash provided by  operating activities             |       | 6,052                                                |       | 5,360 |   | (11 | ) |
|                                                    |            |                                                      |            |  |  |  |  |  |  |

 

At March 31, 2007, cash, cashequivalents, and short-term investments, totaled $82.5 million.  In addition to our cash and short-terminvestments, other sources of liquidity at March 31, 2007 included a $3.0 millionbank line of credit facility, under which there have been no borrowings.

Operating activities provided $5.4million of cash during the quarter ended March 31, 2007 as compared to $6.1million in the quarter ended March 31, 2006. Cash flow from operations can vary significantly from quarter-to-quarterfrom many reasons, including the timing of business in a given period, andcustomer payment preferences and patterns. We expect cash flow from operations in the second quarter ending June30, 2007 to be significantly less than the first quarter because of our lowerbeginning accounts receivable balance at March 31, 2007 as compared to thebalance at December 31, 2006.

Historically, we have generated cash fromoperations from increasing sales and the upfront billing of our salesarrangements, which is typically reflected in accounts receivable and deferredrevenue.  When customers chose to payover time, we recorded a term receivable to reflect the customer commitment.  Beginning in 2007, our change to subscriptionsfrom license arrangements requires that we no longer record additions to termreceivables, and consequently, we expect term receivables to graduallydisappear from our balance sheet.  Thischange in the recording of term receivables is not expected to affect cash flowfrom operations.

The allowance for uncollectible accountsreceivable represented approximately 5% of current accounts and termreceivables at March 31, 2007 and December 31, 2006, respectively.  We regularly assess the adequacy of theallowance for doubtful accounts.  Actualwrite-offs could exceed our estimates and adversely affect operating cash flowsin the future.

Investing activities used $467,000 in thethree months ended March 31, 2007, consisting of a $1.5 million source of cashfrom the liquidation of short-term investments, more than offset by $2.0million for capital expenditures. Capital asset additions consisted primarily ofequipment acquisitions for our hosting operations and employee growth, and areexpected to range between $9 million and $11 million for 2007.

Financing activities provided $685,000 inthe quarter ended March 31, 2007, mostly from the exercise of employee stockoptions under our equity incentive plans and the related excess tax benefits.

We believe our existing cash andshort-term investments, together with funds generated from operations, shouldbe sufficient to fund operating and investment requirements for at least****the next twelve months. Our future capitalrequirements will depend on many factors, including our rate of revenue growthand expansion of our sales and marketing activities, the possible acquisitionof complementary products or businesses, the timing and extent of spendingrequired

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for research and development efforts, and thecontinuing market acceptance of our products. To the extent that available funds are insufficient to fund our futureactivities, we may need to raise additional funds through public or privateequity or debt financings.  Additionalequity or debt financing may not be available on terms favorable to us or atall.

**Off-Balance Sheet Arrangements**

As of March 31, 2007, we did not have any significant off-balance-sheetarrangements, as defined in Item 303(a)(4)(ii) of Regulation S-Kpromulgated by the SEC.

# **Contractual Obligations and Commitments**

During the quarter ended March 31, 2007 we leased additional officespace of approximately 29,000 square feet located at 136 Enterprise Boulevardin Bozeman, Montana, for a term of ten years. The operating lease obligation is reflected in the “ContractualObligations” table appearing on our 2006 Annual Report on Form 10-K.

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

*Foreign Currency Exchange Risk*

Our results of operations and cash flows are subject to fluctuation dueto changes in foreign currency exchange rates, particularly changes in theEuro, British pound, Australian dollar and Japanese yen, because our contractsare frequently denominated in local currency. In the future, we may utilizeforeign currency forward and option contracts to manage currency exposures. Wedo not currently have any such contracts in place, nor did we enter into anysuch contracts during the quarters ended March 31, 2006 or March 31, 2007.

*Interest Rate Sensitivity*

Net proceeds from ourinitial public offering of common stock are invested in short-term,interest-bearing securities, which are subject to credit and interest raterisk.  Our portfolio is investment-gradeand diversified among issuers and security types to reduce credit risk.  We manage our interest rate risk bymaintaining a large portion of our investment portfolio in instruments withshort maturities or frequent interest rate resets.  We also manage interest rate risk bymaintaining sufficient cash and cash equivalents such that we are able to holdinvestments until maturity.  If marketinterest rates were to increase by 100 basis points from the level at March 31,2007, the fair value of our portfolio would decline by approximately $160,000.

**Item 4.  Controls and Procedures**

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

Our management, with the participation ofour Chief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of theend of the period covered by this report. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, our disclosure controls and procedures wereeffective in ensuring that information required to be

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disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is (i) recorded, processed,summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission and (ii) accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

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

Duringthe most recent completed fiscal quarter covered by this report, there has beenno change in our internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**Part II.  Other Information**

***Item 1.  Legal Proceedings***

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

**Item 1A.  Risk Factors**

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

*Before deciding to purchase, hold or sell our commonstock, you should carefully consider the risks described below, in addition tothe other cautionary statements and risks described elsewhere and the otherinformation contained in this Report and in our other filings with the SEC,including our reports on Forms 10-Q and 8-K. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business. If any of these known or unknown risks or uncertaintiesactually occurs with material adverse effects on RightNow, our business,financial condition and results of operations could be seriously harmed. Inthat event, the market price for our common stock could decline and you maylose all or part of your investment.*

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

We incurred a net loss of $6.0 million in thefirst quarter of 2007, and as of March 31, 2007, we had an accumulated deficitof $44.3 million. We expect to continue to incur significant sales andmarketing, research and development and general and administrative expenses aswe expand our operations and, as a result, we will need to generate significantrevenue to achieve profitability. Additionally, with our business model changebeginning in 2007 we expect to sell substantially less perpetual licenses thanin prior years, which will unfavorably impact revenue and earnings.  Even if we achieve profitability, we may notbe able to increase profitability on a quarterly or annual basis in the future,which may cause the price of our stock to decline.

***Our recently announced business model changes carry a number of riskswhich may be harmful to our business.***

In January 2007, we announced that we arechanging the nature of our product offerings from substantially all softwarelicense arrangements to substantially all subscription servicearrangements.  We expect the impact ofthis change will be to largely eliminate perpetual license revenue in 2007which will negatively and materially affect our operating results when comparedto 2006.  Increased operating losses in2007 could result in a significant decline in the price of our commonstock.  Additionally, customers maychoose to pay for their subscription agreements over time instead of upfront,or could choose to pay upfront for a shorter period of service, which couldreduce our cash flow from operations as compared to prior years.  A decline in cash flow from operations couldcause investors and market analysts to react negatively towards investing inour stock which could materially and adversely affect the price of ourstock.   In addition, our subscriptionstrategy caries a number of additional risks, including:

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·      we may incur declining demand for our products because certaincustomers may prefer license arrangements and select competitors’ productsinstead of ours;

·      ouraverage price per transaction could decline substantially;

·      we may see declining demand for our implementation services;

·      we may not achieve the expected level of market penetration under oursubscription strategy; and

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

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

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

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

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

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

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

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

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

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

·      changesin our pricing policies or those of our competitors;

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

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

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

·      thepurchasing and budgeting cycles of our clients; and

·      generaleconomic, industry and market conditions.

Because the sales cycle for the evaluation and implementationof our solutions typically ranges from 60 to 180 days, we may alsoexperience a delay between increasing operating expenses and the generation ofcorresponding revenue, if any. Moreover, because most of the revenue from newsales agreements is recognized over time, downturns or upturns in sales may notbe immediately reflected in our operating results. Most of our expenses, suchas salaries and third-party hosting co-location costs, are relatively fixed inthe short-term, and our expense levels

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

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

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

Approximately 80% to 90% of our revenue is derived fromRightNow Service, a suite of solutions used to optimize customer serviceoperations. If we are unable to successfully develop and sell new and enhancedversions of RightNow Service, or introduce new products and solutions for thecustomer service market, our financial performance will suffer. Although todate the majority of business has been focused on providing solutions forcustomer service operations, we have introduced sales, marketing, feedback andvoice-enabled applications to expand our solution offerings. Our efforts toexpand beyond the customer service market may not be successful because certainof our competitors have far greater experience and brand recognition in thebroader segments of the CRM market. In addition, our efforts to expand our ondemand software solutions beyond the customer service market may divert managementresources from our existing operations and require us to commit significantfinancial resources to a market where we are less proven, which may harm ourbusiness, financial condition and results of operations.

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

The market for CRM solutions is highly competitive andfragmented, and is subject to rapidly changing technology, shifting clientrequirements, frequent introductions of new products and services, andincreased marketing activities of other industry participants.  Competition has intensified with our mostrecent product releases.  Increasedcompetition could result in pricing pressure, reduced sales, lower margins orthe failure of our solutions to achieve or maintain broad market acceptance. Ifwe are unable to compete effectively, it will be difficult for us to add andretain clients, and our business, financial condition and results of operationswill be seriously harmed.

We face competitionfrom:

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

·      CRMsystems that are developed and maintained internally by businesses;

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

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

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

·      voicesystem integrators and voice-enabled IVR technology providers, such as Apptera,IBM, Intervoice, Microsoft, TuVox, Voxify, and Unveil Technologies.

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

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

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

The market for on demand application services is at an earlystage of development, and it is uncertain whether these application serviceswill achieve and sustain high levels of demand and market acceptance. Oursuccess will depend to a substantial extent on the willingness of companies toincrease their use of on demand application services in general and for ondemand customer relationship management applications in particular. Thewillingness of companies to increase their use of any on demand applicationservices is in part dependent on the actual and perceived reliability of hostedsolutions.  In addition, many companieshave invested substantial personnel and financial resources to integratetraditional enterprise software into their businesses, and therefore may bereluctant or unwilling to migrate to on demand application services. While wehave supported traditional on site deployment of our software applications,widespread market acceptance of our on demand software solutions is critical tothe success of our business. Other factors that may affect the marketacceptance of our solutions include:

·      on demandsecurity capabilities and reliability;

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

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

·      the levelof customization we offer;

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

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

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

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

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

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

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

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

Our solutions are generally sold pursuant to time-basedagreements that are typically subject to renewal every two years or less andour clients have no obligation to renew. Because our clients may elect not torenew, we may not be able to consistently and accurately predict future renewalrates. Our clients’ renewal rates may decline or fluctuate as a result of anumber of factors, including their level of satisfaction with our solutions,their ability to continue their operations or invest in customer service, theiracceptance of our intended change from a term license agreement to asubscription service agreement beginning in 2007, or the availability andpricing of competing products. If large numbers of existing clients do notrenew, or renew on terms less favorable to us, and if we cannot replace orsupplement those non-renewals with new agreements generating the same orgreater level of revenue, our business, financial condition and results ofoperations will be adversely affected.

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

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We have substantially expanded our overall business,headcount and operations in recent periods. We have increased our total numberof full-time employees to 682 at March 31, 2007 from 578 at March 31, 2006. Toachieve our business objectives, we will need to continue to expand ourbusiness at a rapid pace. This expansion has placed, and is expected tocontinue to place, a significant strain on our managerial, administrative,operational, financial and other resources. We anticipate that this expansionwill require substantial management effort and significant additional investmentin our infrastructure. If we are unable to successfully manage our growth, ourbusiness, financial condition and results of operations will be adverselyaffected.

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

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

As of March 31, 2007, approximately 86% of our clients wereusing our hosting services for deployment of our software applications. Wegenerally provide our hosting services for our non-voice applications throughcomputer hardware that we own and that is currently located in third-party webhosting co-location facilities maintained and operated in California, Illinois,Massachusetts, New Jersey and London, England. Our voice applications forseveral International customers are hosted by third parties who also own andoperate the hardware on which our applications reside.  We do not maintain long-term supply contractswith any of our hosting providers, and providers do not guarantee that ourclients’ access to hosted solutions will be uninterrupted, error-free orsecure. Our operations depend on our providers’ ability to protect their andour systems in their facilities against damage or interruption from natural disasters,power or telecommunications failures, criminal acts and similar events. Ourback-up computer hardware and systems have not been tested under actualdisaster conditions and may not have sufficient capacity to recover all dataand services in the event of an outage occurring simultaneously at all hostingfacilities. In the event that our hosting facility arrangements wereterminated, or there was a lapse of service or accidental or willful damage tosuch facilities, we could experience lengthy interruptions in our hostingservice as well as delays and/or additional expense in arranging new facilitiesand services. Any or all of these events could cause our clients to lose accessto their important data. In addition, the failure by our third-party hostingfacilities to meet our capacity requirements could result in interruptions inour service or impede our ability to scale our operations.

Design and mechanical errors, spikes in usage volume andfailure to follow system protocols and procedures could cause our systems tofail, resulting in interruptions in our clients’ service to their customers.Any interruptions or delays in our hosting services, whether as a result ofthird-party error, our own error, natural disasters or security breaches,whether accidental or willful, could harm our relationships with clients andour reputation. This in turn could reduce our revenue, subject us to liability,cause us to issue credits or pay penalties or cause clients to fail to

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renewtheir licenses, any of which could adversely affect our business, financialcondition and results of operations. In the event of damage or interruption,our insurance policies may not adequately compensate us for any losses that wemay incur.

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

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

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

International salescomprised 29% and 28% of our revenue for the quarters ended March 31, 2006 and2007, respectively. We intend to continue to pursue and expand ourinternational business activities. Adverse political and economic conditionscould make it difficult for us to increase our international sales or tooperate abroad. International operations are subject to many inherent risks,including:

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

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

·      fluctuationsin currency exchange rates;

·      longercollection periods and difficulties in collecting receivables from foreignentities;

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

·      reducedprotection for our intellectual property in some countries;

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

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

We believe that international sales will continue torepresent a significant portion of our revenue for the foreseeable future, andthat continued growth will require further expansion of our internationaloperations. A substantial percentage of our international sales are denominatedin the local currency. As a result, an increase in the relative value of thedollar could make our products more expensive and potentially less pricecompetitive in international markets. We have not entered into any transactionsdesigned to hedge against risks of loss due to foreign currency fluctuations.Any of these factors may adversely affect our future international sales and,consequently, affect our business, financial condition and results ofoperations.

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

The CRM industry is characterized by rapid technological advances,changes in client requirements, frequent new product and service introductionsand enhancements, changes in protocols and evolving industry standards. Ourhosted business model and the on demand CRM market are relatively new and mayevolve even more rapidly than the rest of the CRM market. Competing productsand services based on new technologies or new industry standards may performbetter or cost less than our solutions and could render our solutions lesscompetitive or obsolete. In addition, because our solutions are designed tooperate on a variety of network hardware and software platforms using astandard Internet web browser, we will need to continuously modify and enhanceour solutions to keep pace with changes in Internet-related hardware, software,communication, browser and database technologies and to integrate with ourclients’ systems as they change and evolve. Furthermore, uncertainties aboutthe timing and nature of new network platforms or technologies, ormodifications to existing platforms or technologies, could increase ourresearch and development expenses.

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

If we are unable to successfully develop and market new andenhanced solutions that respond in a timely manner to changing technology andevolving industry standards, and if we are unable to satisfy the diverse andevolving technology needs of our clients, our business, financial condition andresults of operations will suffer.

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

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

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Competitionfor these personnel is intense, especially for engineers with high levels ofexpertise in designing and developing 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 of protectionof intellectual property rights in other countries are uncertain and may affordlittle or no effective protection of our proprietary technology. Consequently,we may be unable to prevent our proprietary technology from being exploitedabroad, which could diminish international sales or require costly efforts toprotect our technology. Policing the unauthorized use of our products,trademarks and other proprietary rights is expensive, difficult and, in somecases, impossible. Litigation may be necessary in the future to enforce ordefend our intellectual property rights, to protect our trade secrets or todetermine the validity and scope of the proprietary rights of others. Suchlitigation could result in substantial costs and diversion of managementresources, either of which could harm our business. Accordingly, despite ourefforts,

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wemay not be able to prevent third parties from infringing upon ormisappropriating our intellectual property.

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

The software and Internet industries are characterized by theexistence of a large number of patents, trademarks and copyrights, and byfrequent litigation based upon allegations of infringement or other violationsof intellectual property rights. As we seek to extend our CRM product andservice offerings, we may be constrained by the intellectual property rights ofothers. We have in the past been named as a defendant in a lawsuit allegingintellectual property infringement, and we may again in the future have todefend against intellectual property lawsuits. We may not prevail in any futureintellectual property infringement litigation given the complex technicalissues and inherent uncertainties in litigation. Any claims, regardless oftheir merit, could be time-consuming and distracting to management, result incostly litigation or settlement, cause product development delays, or requireus to enter into royalty or licensing agreements. If any of our productsviolate third-party proprietary rights, we may be required to re-engineer ourproducts or seek to obtain licenses from third parties, which may not beavailable on reasonable terms or at all. Because our sales agreements typicallyrequire us to indemnify our clients from any claim or finding of intellectualproperty infringement, any such litigation or successful infringement claimscould adversely affect our business, financial condition and results ofoperations. Any efforts to re-engineer our products, obtain licenses from thirdparties on favorable terms or license a substitute technology may not besuccessful and, in any case, may substantially increase our costs and harm ourbusiness, financial condition and results of operations. Further, our softwareproducts contain open source software components that are licensed to us undervarious public domain licenses. While we believe we have complied with ourobligations under the various applicable licenses for open source software thatwe use, there is little or no legal precedent governing the interpretation ofmany of the terms of certain of these licenses and therefore the potentialimpact of such terms on our business is somewhat unknown. Use of open sourcestandards also may make us more vulnerable to competition because the publicavailability of open source software could make it easier for new marketentrants and existing competitors to introduce similar competing productsquickly and cheaply.

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

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

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

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

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

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

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

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

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

We cannot assure you that we will be able to identify orconsummate any future acquisitions on favorable terms, or at all. If we dopursue any future acquisitions, it is possible that we may not realize theanticipated benefits from the acquisitions or that the financial markets orinvestors will negatively view the acquisitions. Even if we successfullycomplete an acquisition, it could adversely affect our business, financialcondition and results of operations.

***Changes to financial accountingstandards may affect our results of operations and financial condition.***

Generally accepted accounting principles and accompanyingaccounting pronouncements, implementation guidelines and interpretations formany aspects of our business, such as software revenue recognition, accountingfor stock-based compensation, and income tax uncertainties, are complex andinvolve subjective judgments by management. Changes to generally accepted accounting principles, theirinterpretation, or changes in our products or business could significantlychange our reported earnings and financial condition and could add significantvolatility to those measures.  Forexample, since our inception in 1997, we have used stock options as afundamental component of our employee compensation programs.  New accounting requirements that beganJanuary 1, 2006 make the use of stock-based compensation much more expensiveand introduce additional volatility in our results of operations.

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

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

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

We may require additional capital to respond to businesschallenges, including the need to develop new solutions or enhance our existingsolutions, enhance our operating infrastructure, fund expansion, respond tocompetitive pressures and acquire complementary businesses, products andtechnologies. Absent sufficient cash flow from operations, we may need toengage in equity or debt financings to secure additional funds to meet ouroperating and capital needs. In addition, even though we may not needadditional funds, we may still elect to sell additional equity or debtsecurities or obtain credit facilities for other reasons. We may not be able tosecure

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

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

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

Federal, state or foreign government bodies or agencies havein the past adopted, and may in the future adopt, laws or regulations affectingdata privacy, the solicitation, collection, processing or use of personal orconsumer information, the use of the Internet as a commercial medium and theuse of email for marketing or other consumer communications. In addition,government agencies or private organizations may begin to impose taxes, fees orother charges for accessing the Internet or for sending commercial email. Theselaws or charges could limit the growth of Internet-related commerce orcommunications generally, result in a decline in the use of the Internet andthe viability of Internet-based services such as ours and reduce the demand forour products, particularly our RightNow Marketing solution.

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

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

Businesses using our solutions collect personal informationregarding their customers when those customers contact them with customerservice inquiries. A valuable component of our solutions is their ability toallow our clients to use and analyze their customers’ information to increasesales, marketing and up-sell or cross-sell opportunities. Federal, state andforeign government bodies and agencies, however, have adopted and areconsidering adopting laws and regulations regarding the collection, use and disclosureof personal information obtained from consumers. The costs of compliance with,and other burdens imposed by, such laws and

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regulationsthat are applicable to the businesses of our clients may limit the use andadoption of this component of our solutions and reduce overall demand for oursolutions. Furthermore, even where a client desires to make full use of thesefeatures in our solutions, privacy concerns may cause our clients’ customers toresist providing the personal data necessary to allow our clients to use oursolutions most effectively. Even the perception of privacy concerns, whether ornot valid, may inhibit market acceptance of our products.

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

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

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

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

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

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***General economicconditions could adversely affect our clients’ ability or willingness topurchase our products, which could materially and adversely affect our resultsof operations.***

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 national economic downturns, industry purchasing patterns,and other factors.   Our ability to growrevenues may be adversely affected by unfavorable economic conditions.

***The significant control overstockholder voting matters and our office leases that may be exercised by ourfounder and Chief Executive Officer will limit your ability to influencecorporate actions and may require us to find alternative office space to leaseor buy in the future.***

At March 31, 2007, Greg Gianforte, our founder and Chief ExecutiveOfficer, and his spouse, Susan Gianforte, together beneficially ownedapproximately 28% of our currently outstanding common stock and, together withour other officers and directors, beneficially owned approximately 44% of ourcurrently outstanding common stock. In addition, none of the shares of commonstock held by Mr. Gianforte and Mrs. Gianforte are subject to vestingrestrictions. As a result, Mr. Gianforte and Mrs. Gianforte, acting togetherwith some of our other officers and directors, may be able to control mattersrequiring stockholder approval, including the election of directors, managementchanges and approval of significant corporate transactions. This concentrationof ownership may have the effect of delaying, preventing or deterring a changein control of RightNow, could deprive our stockholders of an opportunity toreceive a premium for their common stock as part of a sale of RightNow andmight reduce the market price of our common stock.

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

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

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

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

·      authorizing the board to issue preferred stock;

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

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

·      prohibitingcertain transactions under certain circumstances with interested stockholders;

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

·      prohibitingstockholder action by written consent.

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

***Item 2.***          Unregistered Sales of Equity Securitiesand Use of Proceeds

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

None.

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

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

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

**(c)           Notapplicable.**

***Item3.***          Defaults UponSenior Securities.

None.

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

None.

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***Item 5.***          OtherInformation.

On March 7, 2007, the Company amended its employment offer letters withits Chief Executive Officer and its other executive officers to provide that ifsuch executive officer’s employment with the Company is terminated by theCompany without cause within twelve months following the date of a change incontrol of the Company, or such executive officer terminates his or her employmentwith the Company for good reason within twelve months following the date of achange in control of the Company, then such executive officer will receive: (i)acceleration of 100% of his or her then unvested stock options in connectionwith stock option awards made after the date of such letter, subject to theterms and conditions of each stock option agreement, and (ii) a minimum oftwelve months’ salary and bonus as severance in the form of salary continuationin the case of the Chief Executive Officer, and a minimum of six months’ salaryand bonus as severance in the form of salary continuation in the case of anyexecutive officer other than the Chief Executive Officer.  This amendment was made to incorporate asimilar policy that the Company’s board of directors had adopted in 2004.

On March 23, 2007, the term of a lease the Company signed with GenesisPartners, LLC on November 1, 2005 for approximately 29,148 square feet ofoffice space at 136 Enterprise Boulevard, Bozeman, Montana, commenced due tothe premises becoming available for occupancy on March 23, 2007.  Greg Gianforte, the Company’s Chairman, ChiefExecutive Officer and President, and Steve Daines, the Company’s Vice Presidentof Customer Delivery, beneficially own, directly or indirectly, 50% and 25%membership interests in Genesis Partners, respectively.  The remaining 25% of Genesis Partners isbeneficially owned by Mr. Daines’ father, Clair Daines, who is a commercialreal estate developer and builder.  The136 Enterprise Boulevard lease has a 120-month term that commenced on March 23,2007, with two options to extend each for an additional 60-month period, andthe right to terminate after 84 months of occupancy with 24 months priorwritten notice of termination.  TheCompany’s current rent is $35,220.50 per month for the 136 Enterprise Boulevardlease, including insurance, taxes and common area maintenance, but excludingutilities.  The Company believes that theterms of this lease is no less favorable to it than they would have been ifobtained from unaffiliated third parties.

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**Item 6.    Exhibits**

***Exhibits***

Theexhibits listed below are part of this Form 10-Q, unless otherwise indicated.
| Exhibit 3.1† |   | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                                                                           |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.2*      |   | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                  |
| Exhibit 10.19**   |   | Form of amended employment offer letter for  executive officers.                                                                                                                                                |
| Exhibit 10.25     |   | Lease agreement, dated November 1, 2005 and  commencing March 23, 2007, between RightNow Technologies, Inc. and Genesis  Partners, LLC for office space located at 136 Enterprise Boulevard, Bozeman,  Montana. |
| Exhibit 31.1      |   | Certification of Chief Executive Officer pursuant to  Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                        |
| Exhibit 31.2      |   | Certification of Chief Financial Officer pursuant to  Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                        |
| Exhibit 32.1      |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).          |

 

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

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

**          Denotesmanagement contract or compensatory plan or arrangement.

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| Dated: May 8, 2007               |                                          |   |
|----------------------------------|-----------------------------------------------|--------|
|                             |                                          |   |
| **RightNow  Technologies, Inc.** |                                          |   |
| (Registrant)                     |                                          |   |
|                             |
| By:                              | /s/ Susan J. Carstensen                       |   |   |
|                             | Susan J.  Carstensen                          |   |
|                             | Chief Financial  Officer, Vice President,     |   |
|                             | Treasurer and  Assistant Secretary            |   |
|                             | (Principal  Financial and Accounting Officer) |   |
|                                  |                                               |        |  |  |

 

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