** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(MarkOne)**

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

 

**Commission File No. 000-30901**

 

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**SUPPORTSOFT, INC.******(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                                                     | ** ** | **94-3282005**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**1900 Seaport Boulevard, 3rdFloor**

**Redwood City, CA 94063**

(Address ofPrincipal Executive Offices)

(Zip Code)

 

Registrant’s Telephone Number, Including AreaCode: **(650) 556-9440**

 

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

 

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

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

 

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

 

On April 30, 2008,46,268,888 shares of the Registrant’s Common Stock, $0.0001 par value, wereoutstanding.

 

 

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**SUPPORTSOFT, INC.**

**FORM 10-Q**

**QUARTERLY PERIOD ENDED MARCH 31,2008**

**INDEX**

 
|                                         | ** ** | ** **                                                                                                | ** ** | **Page** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I.  Financial Information** |       | 3                                                                                                         |
| Item 1.                            |       | Financial  Statements (Unaudited)                                                                         |       | 3        |
|                                    |       | Condensed  Consolidated Balance Sheets at March 31, 2008 and December 31, 2007                  |       | 3        |
|                                    |       | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2008 and 2007 |       | 4        |
|                                    |       | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2008 and 2007 |       | 5        |
|                                    |       | Notes to  Condensed Consolidated Financial Statements                                                     |       | 6        |
| Item 2.                            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |       | 17       |
| Item 3.                            |       | Quantitative  and Qualitative Disclosures About Market Risk                                               |       | 25       |
| Item 4.                            |       | Controls and  Procedures                                                                                  |       | 27       |
| **Part II. Other  Information**    |       | 27                                                                                                        |
| Item 1.                            |       | Legal Proceedings                                                                                         |       | 27       |
| Item 1A.                           |       | Risk Factors                                                                                              |       | 27       |
| Item 6.                            |       | Exhibits                                                                                                  |       | 40       |
| Signature                               |       |                                                                                                      |       | 41       |
| Exhibit Index                      |       | 42                                                                                                        |

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**SUPPORTSOFT, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                           | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **(Unaudited)**          | ** ** | **(1)**                     | ** ** |
| **ASSETS**                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                      |       |                     |       |                        |       |
| Cash and cash  equivalents                           |       | $                        | 43,174     |                        | $          | 12,926 |   |
| Marketable  securities, less long-term portion       |       | 40,253                   |       | 100,014                     |       |
| Accounts  receivable, net                            |       | 10,944                   |       | 10,087                      |       |
| Prepaid expenses  and other current assets           |       | 1,783                    |       | 2,531                       |       |
| Total current  assets                                |       | 96,154                   |       | 125,558                     |       |
| Marketable  securities, long term portion            |       | 23,934                   |       | —                      |       |
| Property and  equipment, net                         |       | 1,949                    |       | 2,086                       |       |
| Goodwill                                             |       | 9,792                    |       | 9,792                       |       |
| Intangible  assets, net                              |       | 1,685                    |       | 340                         |       |
| Other assets                                         |       | 753                      |       | 682                         |       |
|                                                 |       |                     |       |                        |       |
| **Total  assets**                                    |       | $                        | 134,267    |                        | $          | 138,458 |   |
|                                                 |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                |       |                     |       |                        |       |
| Accounts payable                                     |       | $                        | 256        |                        | $          | 461 |   |
| Accrued  compensation                                |       | 2,151                    |       | 2,320                       |       |
| Other accrued  liabilities                           |       | 3,584                    |       | 3,421                       |       |
| Deferred  revenue, less long-term portion            |       | 9,480                    |       | 10,076                      |       |
| Total current  liabilities                           |       | 15,471                   |       | 16,278                      |       |
| Deferred  revenue, long-term portion                 |       | 727                      |       | 426                         |       |
| Other long-term  liabilities                         |       | 937                      |       | 892                         |       |
| Total  Liabilities                                   |       | 17,135                   |       | 17,596                      |       |
| Commitments and  contingencies                       |       |                     |       |                        |       |
| Stockholders’  equity:                          |       |                     |       |                        |       |
| Common stock                                         |       | 5                        |       | 5                           |       |
| Additional paid-in  capital                          |       | 213,557                  |       | 212,188                     |       |
| Accumulated  other comprehensive loss                |       | (2,240                   | )          | (772                        | )          |
| Accumulated  deficit                                 |       | (94,190                  | )          | (90,559                     | )          |
| Total  stockholders’ equity                     |       | 117,132                  |       | 120,862                     |       |
|                                                 |       |                     |       |                        |       |
| **Total  liabilities and stockholders’ equity** |       | $                        | 134,267    |                        | $          | 138,458 |   |

 

(1).       Derived from the December 31,2007 audited Consolidated Financial Statements included in the Annual Report onForm10-K, as filed with the Securities and Exchange Commission on March 13,2008.

 

See accompanying notes.

 

3

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**SUPPORTSOFT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per shareamounts)(Unaudited)**

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Revenue:                                                                                                                                   |       |                                             |       |   |   |
| License                                                                                                                                    |       | $                                                | 2,974      |   | $ | 3,248 |   |
| Maintenance                                                                                                                                |       | 4,002                                            |       | 3,923 |   |
| Services                                                                                                                                   |       | 3,949                                            |       | 3,255 |   |
| Consumer                                                                                                                                   |       | 703                                              |       | — |   |
| Total revenue                                                                                                                              |       | 11,628                                           |       | 10,426 |   |
| Costs and  expenses:                                                                                                                       |       |                                             |       |   |   |
| Cost of license                                                                                                                            |       | 51                                               |       | 38 |   |
| Cost of  maintenance (including stock-based compensation of $19 and $16 for the three  months ended March 31, 2008 and 2007)          |       | 549                                              |       | 638 |   |
| Cost of services  (including stock-based compensation of $176 and $184 for the three months  ended March 31, 2008 and 2007)           |       | 3,753                                            |       | 4,518 |   |
| Cost of consumer  revenue (including stock-based compensation of $11 and $0 for the three  months ended March 31, 2008 and 2007)      |       | 1,240                                            |       | — |   |
| Amortization of intangible  assets                                                                                                         |       | 30                                               |       | 272 |   |
| Research and  development (including stock-based compensation of $145 and $116 for the  three months ended March 31, 2008 and 2007)   |       | 2,235                                            |       | 2,271 |   |
| Sales and  marketing (including stock-based compensation of $405 and $454 for the three  months ended March 31, 2008 and 2007)        |       | 6,386                                            |       | 7,406 |   |
| General and  administrative (including stock-based compensation of $418 and $414 for the  three months ended March 31, 2008 and 2007) |       | 2,356                                            |       | 2,543 |   |
| Total costs and  expenses                                                                                                                  |       | 16,600                                           |       | 17,686 |   |
| Loss from  operations                                                                                                                      |       | (4,972                                           | )          | (7,260 | ) |
| Interest income  and other, net                                                                                                            |       | 1,449                                            |       | 1,853 |   |
| Loss before  income taxes                                                                                                                  |       | (3,523                                           | )          | (5,407 | ) |
| Provision for  income taxes                                                                                                                |       | (108                                             | )          | (215 | ) |
| Net loss                                                                                                                                   |       | $                                                | (3,631     | ) | $ | (5,622 | ) |
|                                                                                                                                       |       |                                             |       |   |   |
| Basic and  diluted net loss per share                                                                                                      |       | $                                                | (0.08      | ) | $ | (0.13 | ) |
| Shares used in  computing basic and diluted net loss per share                                                                             |       | 46,150                                           |       | 44,930 |   |

 

See accompanying notes.

 

4

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**SUPPORTSOFT, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Operating  Activities:                                                                     |       |                                             |       |   |   |
| Net loss                                                                                   |       | $                                                | (3,631     | ) | $ | (5,622 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                             |       |   |   |
| Depreciation                                                                               |       | 274                                              |       | 233 |   |
| Amortization of  premiums and discounts on marketable securities                           |       | (279                                             | )          | (316 | ) |
| Amortization of  intangible assets                                                         |       | 30                                               |       | 272 |   |
| Stock-based  compensation                                                                  |       | 1,174                                            |       | 1,184 |   |
| Changes in  assets and liabilities:                                                        |       |                                             |       |   |   |
| Accounts  receivable, net                                                                  |       | (857                                             | )          | 4,616 |   |
| Prepaid expenses  and other current assets                                                 |       | 748                                              |       | 132 |   |
| Other long-term  assets                                                                    |       | (71                                              | )          | (8 | ) |
| Accounts payable                                                                           |       | (205                                             | )          | 433 |   |
| Accrued  compensation                                                                      |       | (169                                             | )          | (169 | ) |
| Other accrued liabilities                                                                  |       | 163                                              |       | (355 | ) |
| Other long-term  liabilities                                                               |       | 45                                               |       | 378 |   |
| Deferred revenue                                                                           |       | (295                                             | )          | (2,309 | ) |
| Other                                                                                      |       | (118                                             | )          | (23 | ) |
| Net cash used in  operating activities                                                     |       | (3,191                                           | )          | (1,554 | ) |
|                                                                                       |       |                                             |       |   |   |
| Investing  Activities:                                                                     |       |                                             |       |   |   |
| Purchases of  property and equipment                                                       |       | (137                                             | )          | (1,619 | ) |
| Acquired  technology                                                                       |       | (1,375                                           | )          | — |   |
| Purchases of  marketable securities                                                        |       | (20,126                                          | )          | (26,873 | ) |
| Sales of  marketable securities                                                            |       | 21,800                                           |       | 14,950 |   |
| Maturities of  marketable securities                                                       |       | 33,082                                           |       | 14,612 |   |
| Net cash  provided by investing activities                                                 |       | 33,244                                           |       | 1,070 |   |
|                                                                                       |       |                                             |       |   |   |
| Financing  Activities:                                                                     |       |                                             |       |   |   |
| Proceeds from  issuances of common stock                                                   |       | 195                                              |       | 2,027 |   |
| Net cash  provided by financing activities                                                 |       | 195                                              |       | 2,027 |   |
| Net increase in  cash and cash equivalents                                                 |       | 30,248                                           |       | 1,543 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 12,926                                           |       | 15,369 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                                | 43,174     |   | $ | 16,912 |   |
|                                                                                       |       |                                             |       |   |   |
| Supplemental  schedule of cash flow information:                                           |       |                                             |       |   |   |
| Income taxes  paid                                                                         |       | $                                                | 24         |   | $ | 42 |   |

 

See accompanying notes.

 

5

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** **

**SUPPORTSOFT, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.Significant Accounting Policies**

 

**Basis ofPresentation**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofSupportSoft, Inc. (the “Company” or “SupportSoft”) and its wholly-ownedsubsidiaries. All intercompany balances and transactions have been eliminated.The balance sheet as of March 31, 2008 and the statements of operationsfor the three months ended March 31, 2008 and 2007 and cash flows for thethree months ended March 31, 2008 and 2007 are unaudited. In the opinionof management, these unaudited interim condensed consolidated financialstatements reflect all adjustments (consisting of normal recurring adjustments)that are necessary for a fair presentation of the results for, and as of, theperiods shown. The results of operations for such periods are not necessarilyindicative of the results expected for the full fiscal year or for any futureperiod. The condensed consolidated financial statement information as of December 31,2007 is derived from audited financial statements as of that date. Theseunaudited interim condensed consolidated financial statements should be readwith the consolidated financial statements and related notes included in theCompany’s Annual Report on Form 10-K, filed with the Securities andExchange Commission on March 13, 2008.

 

**Use ofEstimates**

 

The preparation ofinterim condensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and the accompanying notes. Actual results could differmaterially from these estimates.

 

**Reclassifications**

 

Certain amounts in theconsolidated financial statements and accompanying notes for prior periods havebeen reclassified to conform to the current period presentation.

 

**RevenueRecognition**

 

We recognize revenue fromarrangements that contain a more than incidental software component inaccordance with the American Institute of Certified Public Accountants’ (AICPA)Statement of Position (“SOP”) 97-2, *“Software RevenueRecognition,”* as amended by SOP 98-4 and SOP 98-9. License revenueis recognized when all of the following criteria are met:

 

·                  Persuasiveevidence of an arrangement exists;

 

·                  Delivery hasoccurred;

 

·                  Collection isconsidered probable; and

 

·                  The fees arefixed or determinable.

 

SupportSoft considers allarrangements with payment terms longer than 90 days, not to be fixed or determinable.If the fee is determined not to be fixed or determinable, revenue is recognizedas payments become due from the customer. Revenue is recognized net of anyapplicable sales tax.

 

License revenue iscomprised of fees for perpetual and term licenses of our software. Perpetuallicense revenue is recognized using the residual method, in compliance with SOP98-9 for arrangements in which licenses are sold with multiple elements. Weallocate revenues on these licenses based upon the fair value of each undeliveredelement including undelivered maintenance, consulting and training. Thedetermination of fair value is based upon vendor specific objective evidence(VSOE). VSOE for maintenance is based upon separate renewals of maintenancefrom customers. VSOE for consulting or training is based upon separate sales ofthese services to customers. Assuming all other revenue recognition criteriaare met, the difference between the total arrangement fee and the amountdeferred for each undelivered element is recognized as license revenue.

 

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Term licenses are sold with maintenance for whichSupportSoft does not have VSOE of fair value for maintenance fees. As a result,license revenue for term licenses is recognized ratably over the duration ofthe agreement. License revenue in the accompanying financial statementsincludes maintenance for term licenses. We do not allocate maintenance revenuefrom term licenses to maintenance revenue, as we do not believe there is anallocation methodology that provides a meaningful and supportable allocationbetween license and maintenance revenues. Term license revenue was 3% and 4% oftotal revenue for three months ended March 31, 2008 and 2007,respectively.

 

We provide resellers with the right to distribute oursoftware to end user customers. Generally, we recognize revenue from ourarrangements with resellers when we receive persuasive evidence that thereseller has actually contracted to license the software to a named end user(sell-through), assuming all other criteria for revenue recognition have beenmet. The forms of sell-through acceptable to us include the following:  i) a copy of the agreement or license betweenthe reseller and the end user, ii) a purchase order from the end user to thereseller, iii) a written communication from the reseller specificallyidentifying the end user, or iv) delivery made directly by SupportSoft to theend user. Whether the license revenue is then recognized immediately or ratablydepends upon the terms of the arrangements with the reseller regarding thesublicense (i.e. perpetual license or term license). If a reseller is notdeemed creditworthy, revenue otherwise recognizable is deferred until cash isreceived.

 

Maintenance revenue is primarily comprised of revenuefrom post-contract technical support services, which includes software productupdates. Maintenance revenue is recognized ratably over the term of themaintenance period, which is generally one year. We invoice customers who electto renew their maintenance agreements. An equal amount is recorded as accounts receivable and deferred revenue.

 

Services revenue is primarily comprised of revenuefrom professional services such as consulting and training.  Arrangements are evaluated to determinewhether those services are essential to the functionality of other elements ofthe arrangement. In the event services are considered essential to thefunctionality of other elements of the arrangement, revenue under thearrangement is recognized using contract accounting. Non-essential consultingand training revenues, which form the majority of our services revenues, aregenerally recognized as the services are performed or project milestones areaccepted by the customer.

 

In connection with licensingarrangements we may also provide hosting of our own software, a service forwhich SupportSoft does not have VSOE. If hosting services are sold withperpetual licenses, license revenue is recognized ratably over the term of thehosting contract. Hosting revenue is also recognized ratably over the durationof the hosting contract.  Consultingservices sold in conjunction with arrangements that include licenses andhosting services are recognized ratably over the duration of the hosting term.

 

Revenue in our consumerbusiness is derived primarily from fees for technology support services on aper transaction basis. We provide these services through channel partners anddirect to consumers.  Channel partnersare generally invoiced monthly for services delivered during that period (i.e.a sale is made through to their customer). Fees from transactions directly fromconsumers are generally paid with a credit card at the time of delivery.  Revenue is recognized in the period theservices are delivered, net of any refunds. We also license certain of ourconsumer software products to partners who use our software to provide servicesto their customers. Partners are charged a per use fee for the software andrevenue is recognized in the period the product is used.

 

**Cash,Cash Equivalents and Marketable Securities**

 

All liquid instrumentswith an original maturity at the date of purchase of ninety days or less areclassified as cash equivalents. Cash equivalents and short-term marketablesecurities consist primarily of money market funds, commercial paper, corporatebonds and notes and securities issued by the United States government and itsagencies. Long-term marketable securities consist of auction rate debtsecurities.  Our cash equivalents andmarketable securities are classified as available-for-sale, and are reported atfair value with unrealized gains and losses included in accumulated othercomprehensive income within stockholders’ equity on the consolidated balancesheets. Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities are included in otherincome (expense), net in the consolidated statements of operations.  SupportSoft recorded net unrealized losses onmarketable securities of $1.3 million and $21,000 at March 31, 2008 and December 31,2007, respectively.

 

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We monitor ourinvestments for impairment on a quarterly basis and determine whether a declinein fair value is other-than-temporary by considering factors such as currenteconomic and market conditions, the credit rating of the security’s issuer, thelength of time an investment’s fair value has been below our carrying value,and our ability and intent to hold investments to maturity. If an investment’sdecline in fair value is deemed to be other-than-temporary, we reduce itscarrying value to its estimated fair value. Declines in value judged to beother-than-temporary, if any, are recorded in operations as incurred.

 

The following is a summaryof cash, cash equivalents and marketable securities at March 31, 2008 (inthousands):

 
| ** **                               | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| Cash                                     |       | $                   | 4,974      |                         | $          | —                        |       | $                   | —     |   | $ | 4,974 |   |
| Money market  funds                      |       | 38,202              |       | —                       |       | (2                            | )          | 38,200              |       |
| Commercial paper                         |       | 18,732              |       | 56                           |       | (7                            | )          | 18,781              |       |
| Federal agencies  securities             |       | 4,000               |       | 9                            |       | —                        |       | 4,009               |       |
| Corporate bonds                          |       | 17,484              |       | 24                           |       | (45                           | )          | 17,463              |       |
| Auction rate  securities                 |       | 25,300              |       | —                       |       | (1,366                        | )          | 23,934              |       |
|                                     |       | $                   | 108,692    |                         | $          | 89                            |       | $                   | (1,420     | ) | $ | 107,361 |   |
|                                     |       |                |       |                         |       |                          |       |                |       |
| Classified as:                           |       |                |       |                         |       |                          |       |                |       |
|                                     |       |                |       |                         |       |                          |       |                |       |
| Cash and cash  equivalents               |       | $                   | 43,176     |                         | $          | —                        |       | $                   | (2         | ) | $ | 43,174 |   |
| Marketable  securities – short term |       | 40,216              |       | 89                           |       | (52                           | )          | 40,253              |       |
| Marketable  securities – long term  |       | 25,300              |       | —                       |       | (1,366                        | )          | 23,934              |       |
|                                     |       | $                   | 108,692    |                         | $          | 89                            |       | $                   | (1,420     | ) | $ | 107,361 |   |

 

At March 31, 2008and December 31, 2007 we had investments in AAA-rated auction-rate debtsecurities with various state student loan authorities of $23.9 millionand $38.9 million, respectively. At the time of our initial investment andthrough the date of this Report, all of the securities we have invested in arerated AAA, the highest rating issued by a rating agency, and the student loansmade by these authorities are substantially guaranteed by the federal governmentthrough the Federal Family Education Loan Program (FFELP). Auction-ratesecurities are long-term variable rate bonds tied to short-term interest rates.After the initial issuance of the securities, the interest rate on thesecurities is reset periodically, at intervals established at the time ofissuance (e.g., every seven, twenty-eight, or thirty-five days; every sixmonths; etc.), based on market demand for a reset period. Auction-ratesecurities are bought and sold in the marketplace through a competitive biddingprocess often referred to as a “Dutch auction”. If there is insufficientinterest in the securities at the time of an auction, the auction may not becompleted and the rates may be reset to predetermined “penalty” or “maximum”rates. Following such a failed auction, we would not be able to access ourfunds that are invested in the corresponding auction-rate securities until afuture auction of these investments is successful, new buyers express interestin purchasing these securities in between reset dates, issuers establish adifferent form of financing to replace these securities, or final paymentsbecome due according to contractual maturities. Given the current negativeliquidity conditions in the global credit markets, in the months from February throughApril 2008 auctions failed for all of the of auction-rate securities weheld as of March 31, 2008, and as a result our ability to liquidate ourinvestment and fully recover the carrying value of our investment in the nearterm may be limited or not exist.

 

The fair value of ourauction rate securities at March 31, 2008 reflects an unrealized loss of$1.4 million.  Fair value for suchsecurities was based on a discounted cash flow valuation that takes intoaccount a number of factors including estimated duration, credit quality, andthe percentage of FFELP guarantee. We made assumptions about future cash flowsbased on maximum rate formulas and used estimates of market data, includingyields of trading securities that we believe to be similar or comparable. At March 31,2008, all auction rate securities were classified as Level 3 assets inaccordance with SFAS No. 157, “Fair Value Measurements” (SFAS No. 157)hierarchy.  Presently we have determinedthe decline in value to be temporary because i) we have the intent and abilityto hold these securities in the near term in order to recoup their par values,ii) through the date of this Report all of the securities have maintained theirAAA credit ratings, iii) loans made by the issuers are backed by the federalgovernment, and iv) we have noted no deterioration credit quality of theissuers.

 

8

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However if circumstanceschange in the future and we believe we will not hold these securities tomaturity, we may be required to record an other than temporary impairmentcharge on these investments. We may similarly be required to record other thantemporary impairment charges if the ratings on any of these securities arereduced or if any of the issuers default on their obligations. In addition toimpairment charges, any of these events could cause us to lose part or all ofour investment in these securities. Any of these events could materially affectour results of operations and our financial condition. We currently believethese securities are not significantly impaired, primarily due to the AAAcredit rating of the issuers and the government backing of the loans made bythe issuers; however, it could take until the final maturity of the underlyingnotes (up to 30 years) to realize our investments’ recorded value. Basedon our expected operating cash flows, and our other sources of cash, we do notanticipate the potential lack of liquidity on these investments will affect ourability to execute our current business plan.

 

**FairValue Measurements**

 

Effective January 1,2008, the Company adopted SFAS No. 157, “*Fair ValueMeasurements*” (“SFAS No 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles and enhances disclosures about fair value measurements.Fair value is defined under SFAS No. 157 as the exchange price that wouldbe received for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. Valuationtechniques used to measure fair value under SFAS No. 157 must maximize theuse of observable inputs and minimize the use of unobservable inputs. Thestandard describes a fair value hierarchy based on three levels of inputs, ofwhich the first two are considered observable and the last unobservable, thatmay be used to measure fair value which are the following:

 

·                  Level 1 - Quotedprices in active markets for identical assets or liabilities.

 

·                  Level 2 - Inputsother than Level 1 that are observable, either directly or indirectly, such asquoted prices for similar assets or liabilities; quoted prices in markets thatare not active; or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the assets orliabilities.

 

·                  Level 3 -Unobservable inputs that are supported by little or no market activity and thatare significant to the fair value of the assets or liabilities.

 

In accordance with SFAS No. 157,the following table represents the Company’s fair value hierarchy for itsfinancial assets (cash equivalents and marketable securities) measured at fairvalue on a recurring basis as of March 31, 2008 (in thousands):

 
| ** **                   | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market  funds          |       | $                | 38,200     |             | $          | —           |       | $         | —     |   | $ | 38,200 |   |
| Commercial paper             |       | —           |       | 18,781           |       | —           |       | 18,781    |       |
| Federal agencies  securities |       | —           |       | 4,009            |       | —           |       | 4,009     |       |
| Corporate bonds              |       | —           |       | 17,463           |       | —           |       | 17,463    |       |
| Auction-rate  securities     |       | —           |       | —           |       | 23,934           |       | 23,934    |       |
|                         |       | $                | 38,200     |             | $          | 40,253           |       | $         | 23,934     |   | $ | 102,387 |   |

 

9

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Level 3 assets consist ofauction rate debt securities with various state student loan authorities. In February 2008,auctions began to fail and substantially all subsequent auctions have alsofailed. Based on the overall failure rate of these auctions, the frequency ofthe failures, and the underlying maturities of the securities, we haveclassified auction rate securities as long-term assets on our balance sheet.These investments were valued at fair value as of March 31, 2008. Thefollowing table provides a summary of changes in fair value of the Company’sLevel 3 financial assets as of March 31, 2008 (in thousands):

 
| ** **                                              | ** ** | **Auction-rate  securities** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| Balance at  December 31, 2007                      |       | $                            | —     |   |
|                                                    |       |                         |       |
| Transfer into  Level 3                                  |       | 25,300                       |       |
|                                                    |       |                         |       |
| Unrealized loss  included in other comprehensive income |       | (1,366                       | )          |
|                                                    |       |                         |       |
| Balance at  March 31, 2008                         |       | $                            | 23,934     |   |

 

**Concentrationsof Credit Risk**

 

Financial instrumentsthat potentially subject us to concentrations of credit risk consistprincipally of cash equivalents, marketable securities and trade accountsreceivable. Our investment portfolio consists of investment grade securities.Except for obligations of the United Sates government and securities issued byagencies of the United States government, we diversify our investments bylimiting our holdings with any individual issuer.  We also limit the amount of credit riskexposure to any one country except the United States. We are exposed to creditrisks in the event of default by the issuers to the extent of the amountrecorded on the balance sheet. At March 31, 2008, we held approximately$23.9 million of AAA-rated student loan auction rate debt securities.  The student loans made by these authoritiesare substantially guaranteed by the federal government through the FederalFamily Education Loan Program (FFELP). Prior to February 2008, these securities had not experienced failedauctions.  However, beginning in February andMarch of 2008, all auctions for these securities failed.  See the Cash, Cash Equivalents and MarketableSecurities section of this Note 1 to the Condensed Consolidated FinancialStatements for more information.

 

The credit risk in ourtrade accounts receivable is substantially mitigated by our credit evaluationprocess, reasonably short payment terms and because we sell our productsprimarily to large organizations in different industries.  For the three months ended March 31,2008, one customer accounted for 15% of total revenue.  For the three months ended March 31,2007, there was one customer that accounted for 12% of total revenue.

 

**TradeAccounts Receivable**

 

Trade accounts receivableare recorded at the invoiced amount. We perform evaluations of our customers’financial condition and generally do not require collateral. We make judgmentsas to our ability to collect outstanding receivables and provide allowances forthe portion of receivables when collection becomes doubtful. Provisions aremade based upon a specific review of all significant outstanding invoices. Forthose invoices not specifically provided for, provisions are recorded atdiffering rates, based upon the age of the receivable. In determining thesepercentages, we analyze our historical collection experience and currentpayment trends. If the historical data we use to calculate the allowance fordoubtful accounts does not reflect the future ability to collect outstandingreceivables, additional provisions for doubtful accounts may be needed and thefuture results of operations could be materially affected. At March 31,2008 and December 31, 2007, the Company had an allowance for doubtfulaccounts of $346,000 and $310,000, respectively. At March 31, 2008, twodifferent customers each accounted for 15% of our total accounts receivable. AtDecember 31, 2007, three different customers accounted for 12%, 11%, and11% of our total accounts receivable.

 

**Stock-BasedCompensation**

 

On January 1, 2006,the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “*Share-Based Payment,*” (“SFAS No. 123R”)which requires the measurement and recognition of compensation expense for allstock-based payment awards, including employee stock options and employee stockpurchases, made to employees and directors based on estimated fair values.

 

10

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The fair value of theCompany’s stock options granted to employees for the three months ended March 31,2008 and 2007 was estimated using the following assumptions:

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Stock  Option Plan:**                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Risk-free  interest rate                  |       | 2.1                                              | %          | 4.5 | % |
| Expected term                             |       | 4.1 years                                        |       | 3.8 years |   |
| Volatility                                |       | 51.4                                             | %          | 51.2 | % |
| Estimated annual  forfeiture rate         |       | 9                                                | %          | 8 | % |
| Expected  dividend                        |       | 0                                                | %          | 0 | % |
| Weighted average  fair value              |       | $                                                | 1.58       |   | $ | 2.61 |   |
| ** **                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Employee  Stock Purchase Plan (ESPP):** | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Risk-free  interest rate                  |       | 1.5                                              | %          | 4.7 | % |
| Expected term                             |       | 0.5 years                                        |       | 0.5 to 2.0 years |   |
| Volatility                                |       | 58.6                                             | %          | 54.1 | % |
| Estimated annual  forfeiture rate         |       | 8                                                | %          | 8 | % |
| Expected  dividend                        |       | 0                                                | %          | 0 | % |
| Weighted average  fair value              |       | $                                                | 1.15       |   | $ | 1.66 |   |

 

The Company recorded thefollowing stock-based compensation expense for the three months ended March 31,2008 and 2007:

 
| ** **                                                                 | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Stock  option compensation expense recognized in:**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of  maintenance                                                       |       | $          | 19         |       | $          | 15 |   |
| Cost of services                                                           |       | 171        |       | 171        |       |
| Cost of consumer  revenue                                                  |       | 10         |       | —     |       |
| Research and  development                                                  |       | 143        |       | 109        |       |
| Sales and  marketing                                                       |       | 400        |       | 439        |       |
| General and  administrative                                                |       | 415        |       | 407        |       |
| Total                                                                      |       | 1,158      |       | 1,141      |       |
| **ESPP  compensation expense recognized in:**                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of  maintenance                                                       |       | —     |       | 1          |       |
| Cost of services                                                           |       | 5          |       | 13         |       |
| Cost of consumer  revenue                                                  |       | 1          |       | —     |       |
| Research and  development                                                  |       | 2          |       | 7          |       |
| Sales and  marketing                                                       |       | 5          |       | 15         |       |
| General and  administrative                                                |       | 3          |       | 7          |       |
| Total                                                                      |       | 16         |       | 43         |       |
|                                                                       |       |       |       |       |       |
| **Stock-based  compensation expense included in total costs and expenses** |       | $          | 1,174      |       | $          | 1,184 |   |

 

11

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The following table representsstock option activity for the three months ended March 31, 2008:

 
| ** **                                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value  (in ‘000’s)** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                 | ** ** | ** **                                 | ** ** | ** **                                          | ** ** | ** **                                                      | ** ** |
| Outstanding  options at the beginning of the period |       | 12,738,765                 |       | $                                          | 4.977      |                                                | 5.60       |                                                            | $          | 1,954 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Granted                                             |       | 1,135,774                  |       | 3.713                                      |       |                                                |       |                                                            |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Exercised                                           |       | —                     |       | —                                     |       |                                                |       |                                                            |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Forfeited                                           |       | (1,019,501                 | )          | 5.704                                      |       |                                                |       |                                                            |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Outstanding  options at the end of the period       |       | 12,855,038                 |       | $                                          | 4,808      |                                                | 5.659      |                                                            | $          | 655 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Options vested  and expected to vest                |       | 12,826,452                 |       | $                                          | 4.809      |                                                | 5.659      |                                                            | $          | 655 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Outstanding  exercisable at the end of the period   |       | 5,800,328                  |       | $                                          | 5.282      |                                                | 5.324      |                                                            | $          | 655 |   |

 

The aggregate intrinsicvalue in the table above represents the total pre-tax intrinsic value thatwould have been received by the option holders had they all exercised theiroptions on March 31, 2008. This amount changes based on the fair marketvalue of the Company’s stock. During the three months ended March 31, 2008and 2007, the aggregate intrinsic value of options exercised under the Company’sstock option plans was $0 and $736,000 respectively. Total fair value ofoptions vested during the three months ended March 31, 2008, and 2007 was$1.1 million and $1.2 million, respectively.

 

At March 31, 2008,there was $16.1 million of unrecognized compensation cost related to existingoptions outstanding which is expected to be recognized over a weighted averageperiod of 2.9 years.

 

Prior to the adoption ofSFAS No. 123R, our Board of Directors approved the acceleration of vestingof certain unvested and out-of-money stock options with exercise prices equalor greater than $5.00 per share previously awarded to employees, excludingexecutive officers, under our equity compensation plans. The acceleration ofvesting was effective for stock options outstanding as of December 21,2005. Approximately 3.0 million stock options or 32% of our outstandingunvested stock options were subject to this acceleration.  The weighted average price of the optionsthat were accelerated was $7.02. The options accelerated excluded optionspreviously granted to Board of Directors, employees who had terminationspending, and foreign employees who opted out of the acceleration for taxreasons. For all officers and vice-presidents (non-officers) the accelerationwas accompanied by restrictions imposed on any shares that may in the future bepurchased through the exercise of accelerated stock options.  Those restrictions prevent the sale of anysuch shares prior to the date such shares would have originally vested had theoptionee been employed on such date (whether or not the optionee is actually anemployee at that time). The purpose of the acceleration was to enable us toavoid recognizing compensation expense associated with these options in ourconsolidated statements of operations upon the adoption of SFAS No. 123Ron January 1, 2006.  Theacceleration of the vesting of these stock options resulted in an approximatetotal savings of $12.0 million of future compensation expense that would haveimpacted expenses through the third quarter of 2009.

 

**Net LossPer Share**

 

Basic and diluted netloss per share are presented in accordance with Statement of FinancialAccounting Standards No. 128 *“Earnings per Share”*(SFAS No. 128), for all periods presented. In accordance with SFAS No. 128,basic and diluted net loss per share have been computed using theweighted-average number of common shares outstanding during the periods.  For the three months ended March 31,2008 and 2007, the outstanding options were excluded from the computation ofdiluted net loss per share since their effect would have been anti-dilutive.

 

12

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The following table setsforth the computation of basic and diluted net income (loss) per share (inthousands, except per share amounts):

 
| ** **                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net loss                                                       |       | $                                                | (3,631     | ) | $ | (5,622 | ) |
|                                                           |       |                                             |       |   |   |
| Shares used in  computing basic and diluted net loss per share |       | 46,150                                           |       | 44,930 |   |
| Basic and  diluted net loss per share                          |       | $                                                | (0.08      | ) | $ | (0.13 | ) |

 

**Warrantiesand Indemnifications**

 

The Company generallyprovides a warranty for its software products and services to its customers andaccounts for its warranties under the FASB’s Statement of Financial AccountingStandards No. 5, “*Accounting forContingencies*” (SFAS No. 5). Our standard warranty period is 90days, but warranty periods can sometimes be longer and vary from customer tocustomer. In the event there is a breach of such warranties, SupportSoftgenerally is obligated to correct the product or service to conform to thewarranty provision or, if SupportSoft is unable to do so, the customer isentitled to seek a refund of the purchase price of the product or service. Incertain contracts a material breach of warranty may involve penalties payableto the customer.  SupportSoft did notprovide for a warranty accrual as of March 31, 2008 or December 31,2007. To date, SupportSoft’s product warranty expense has not been significant.

 

The Company generallyagrees to indemnify its customers against legal claims that its softwareproducts infringe certain third-party intellectual property rights and accountsfor its indemnification obligations under SFAS No.5. To date, SupportSoft hasnot been required to make any payment resulting from infringement claimsasserted against our customers and has not recorded any related accruals.

 

**RecentAccounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements,* which defines fair value, provides a frameworkfor measuring fair value, and expands the disclosures required for fair valuemeasurements. SFAS No. 157 applies to other accounting pronouncements thatrequire fair value measurements; it does not require any new fair valuemeasurements. SFAS No. 157 was effective for the quarter ended March 31,2008. The adoption of SFAS No. 157 did not have a material impact on theCompany’s consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities*”. SFAS No. 159permits companies to choose to measure certain financial instruments andcertain other items at fair value. The standard requires that unrealized gainsand losses on items for which the fair value option has been elected bereported in earnings. SFAS No. 159 was effective for quarter ended March 31,2008. The Company did not elect to adopt the fair value option under thisStatement.

 

In December 2007 theFASB issued SFAS No. 141 (revised 2007), “*BusinessCombinations.”* SFAS No. 141R will significantly change theaccounting for business combinations in a number of areas, including themeasurement of assets and liabilities acquired and the treatment of contingentconsideration, contingencies, acquisition costs, in-process research anddevelopment and restructuring costs. In addition, under SFAS No. 141R,changes in deferred tax asset valuation allowances and acquired income taxuncertainties in a business combination after the measurement period willaffect the income tax provision. SFAS No. 141R is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning after December 15, 2008, whichmeans that it will be effective for our fiscal year beginning January 1,2009. Early adoption is prohibited. The Company is currently evaluating theimpact of adopting SFAS No. 141 on its consolidated financial statements.

 

In December 2007 theFASB issued SFAS No. 160, “*NoncontrollingInterests in Consolidated Financial Statements,*” which establishesaccounting and reporting standards for the noncontrolling (minority) interestin a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160is effective for business arrangements entered into in fiscal years beginningon or after December 15, 2008, which means that it will be effective forour fiscal year beginning January 1, 2009. Early adoption is prohibited.The Company is currently evaluating the impact of adopting SFAS No. 160 onits consolidated financial statements.

 

13

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In March 2008, the FASB issued SFAS No. 161 “*Disclosures About Derivative Instruments and Hedging Activities”. *SFAS No. 161 is intended toenhance the current disclosure framework in Statement 133 “*Accountingfor Derivative Instrument and Hedging Activities*”.  SFAS 161 requires enhanced disclosures aboutan entity’s derivative and hedging activities. SFAB No. 161 is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008, withearly application encouraged.  TheCompany is currently evaluating the impact of adopting SFAS No. 161 on itsconsolidated financial statements.

 

**Note 2.Comprehensive Loss**

 

Statement of FinancialAccounting Standards No. 130 “*Reporting ComprehensiveIncome*” (SFAS No. 130) establishes standards for reporting anddisplaying comprehensive net income and its components in stockholders’ equity.SFAS No. 130 has no impact on our net income or loss as presented in ourfinancial statements. SFAS No. 130 requires foreign currency translationadjustments and changes in the fair value of available-for-sale securities tobe included in comprehensive income or loss.

 

The following are thecomponents of comprehensive loss (in thousands):

 
| ** **                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net loss                                                     |       | $                                                | (3,631     | ) | $ | (5,622 | ) |
| Net unrealized  gain (loss) on available-for-sale securities |       | (1,352                                           | )          | 19 |   |
| Foreign currency  translation loss                           |       | (116                                             | )          | (24 | ) |
| Comprehensive  loss                                          |       | $                                                | (5,099     | ) | $ | (5,627 | ) |

 

The components ofaccumulated other comprehensive loss relate entirely to accumulated foreigncurrency translation gains/(losses) and unrealized gains/(losses) onavailable-for-sale securities and were $(909,000) and $(1.3) million at March 31,2008, and $(793,000) and $21,000 at December 31, 2007.

 

**Note 3.Income Taxes**

 

We recorded income taxprovisions of $108,000 and $215,000 for the three months ended March 31,2008 and 2007 respectively. These provisions primarily reflect foreign incometaxes including foreign withholding taxes related to certain internationalcustomer payments.  In accordance withFinancial Accounting Standards Interpretation No. 48 (FIN 48), included inthe quarterly provision was an increase in unrecognized tax benefits of $14,000and $23,000 and interest of $5,000 and $4,000 for the three months ended March 31,2008 and 2007 respectively.

 

As of March 31,2008, our deferred tax assets are fully offset by a valuation allowance.  FASB’s Statement of Financial AccountingStandards No. 109 “*Accounting for IncomeTaxes*” (SFAS No. 109) provides for the recognition of deferredtax assets if realization of such assets is more likely than not.  Based upon the weight of available evidence,which includes SupportSoft’s historical operating performance, reportedcumulative net losses since inception and difficulty in accurately forecastingour future results, the Company provided a full valuation allowance against ournet deferred tax assets.  We reassess theneed for our valuation allowance on a quarterly basis.  If it is later determined that a portion ofthe valuation allowance should be reversed it will be a benefit to the incometax provision.

 

As of March 31,2008, the amount of unrecognized tax benefit where it is reasonably possiblethat a significant change may occur in the next 12 months is approximately$30,000.  The change would result fromexpiration of the statute of limitations in several foreign jurisdictions.

 

14

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**Note4.  Segment Reporting**

 

Statement of FinancialAccounting Standards No. 131, (SFAS No. 131), “*Disclosuresabout Segments of an Enterprise and Related Information*,”establishes standards for the way in which public companies disclose certaininformation about operating segments in their financial reports.

 

In January 2008, wereorganized the Company and created two new business units.  We also appointed an executive vice presidentto lead each of the business units. Additionally, we began trackingprofitability by segment and providing this information to our Chief ExecutiveOfficer. Consistentwith SFAS No. 131, we have defined two reportable segments, distinguishedby i) market characteristics, ii) the nature of our products and services, iii)how we manage our operations and iv) how our chief operating decision makerviews results. We define the chief operating decision maker as our ChiefExecutive Officer.

 

Prior to January 2008,the Company conducted its business in one segment.  As such, segment results for these periodswould be impracticable to reconstruct because the Company was not organized bybusiness unit nor were costs and expenses tracked by business unit.  Consumer revenue for the three months ended March 31,2007 was $162,000.

 

*ConsumerSegment*.  In our consumer segment, we provide premiumtechnology support to consumers over the phone and the internet for a fee.  We offer our services to consumers throughretailers, digital service providers and other companies who provide technologyproducts and services to consumers.  Wealso provide our services directly to consumers through www.support.com.

 

*EnterpriseSegment.*  Our enterprise customers use our software toresolve technical problems for their customers.   Digital service providers use our productsto automate the installation, activation and verification of broadbandservices, to reduce the cost and improve the quality of support for customers,and to enable the remote management of devices located at customerpremises.  Corporate IT departments andIT outsourcing firms use our software to improve the cost-effectiveness andefficiency of their support through an integrated portfolio of proactiveservice, self service and assisted service products.

 

*Other*. This category consists of commoncorporate expenses such as general and administrative expenses, stock-basedcompensation expenses, amortization of intangible assets, interest income, andother income or expenses, which are items that we do not allocate to ourbusiness units.

 

The accounting policiesof the segments are the same as those described in the summary of significantaccounting policies in Note 1 to the consolidated financial statements.  We do not track assets by reportable segmentand therefore do not disclose total assets by reporting segment. There are nointersegment sales.

 

The following table showsour financial results by reportable segment for the three months ended March 31,2008:

 
| ** **                             | ** ** | **Enterprise** | ** ** | **Consumer** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|----------------|------------|--------------|------------|-----------|------------|------------------|------------|
| Revenue:                               |       |           |       |         |       |      |       |             |       |
| License                                |       | $              | 2,974      |         | $          | —    |       | $                | —     |   | $ | 2,974 |   |
| Maintenance                            |       | 4,002          |       | —       |       | —    |       | 4,002            |       |
| Services                               |       | 3,949          |       | —       |       | —    |       | 3,949            |       |
| Consumer                               |       | —         |       | 703          |       | —    |       | 703              |       |
| Total revenue                          |       | 10,925         |       | 703          |       | —    |       | 11,628           |       |
| Segment  operating costs and expenses  |       | (8,121         | )          | (5,337       | )          | —    |       | (13,458          | )          |
| Amortization of  intangible assets     |       | —         |       | —       |       | (30       | )          | (30              | )          |
| Common corporate  expenses             |       | —         |       | —       |       | (1,938    | )          | (1,938           | )          |
| Stock-based  compensation              |       | —         |       | —       |       | (1,174    | )          | (1,174           | )          |
| Interest  income & other, net |       | —         |       | —       |       | 1,449     |       | 1,449            |       |
| Income (loss)  before income taxes     |       | $              | 2,804      |         | $          | (4,634    | )          | $                | (1,693     | ) | $ | (3,523 | ) |

 

15

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**Note 5. Contingencies**

 

*Legal Matters*

 

In November 2001, aclass action lawsuit was filed against us, two of our former officers, andcertain underwriters in the United States District Court for the SouthernDistrict of New York. Similar complaints have been filed against 55underwriters and more than 300 other companies and other individual officersand directors of those companies.  Thelawsuit alleged that our registration statement and prospectus dated July 18,2000 for the issuance and initial public offering of 4,250,000 shares of ourcommon stock contained material misrepresentations and/or omissions related toalleged inflated commissions received by the underwriters of the offering. Thelawsuit seeks unspecified damages as well as interest, fees and costs. All ofthe complaints against the underwriters, issuers and individuals have beenconsolidated for pre-trial purposes before U.S. District Court Judge Scheindlinof the Southern District of New York. On June 26, 2003, the plaintiffsannounced that a proposed settlement between the issuer defendants and theirdirectors and officers had been reached. Under the proposed settlement, whichis subject to court approval, our insurance carrier would be responsible forany payments other than attorneys’ fees prior to June 1, 2003. A finalsettlement approval hearing on the proposed issuer settlement was held on April 24,2006. The district court took the matter under submission. Meanwhile theconsolidated case against the underwriters has proceeded. On October 13,2004, the district court certified a class in the underwriters’ proceeding. On December 5,2006, however, the Second Circuit reversed, holding that the proposed classcould not be certified, and denied a petition for rehearing on April 6,2007. On June 25, 2007, the district court entered a stipulated orderterminating the proposed issuer settlement. Plaintiffs are proceeding withdiscovery as to underwriters and issuers, although principally with respect tofocus or test cases that do not name the Company as a defendant. The court seta briefing schedule for a new class certification motion, which is expected tobe heard in 2008. While we cannot predict with certainty the outcome of thelitigation or whether the settlement will be approved, we believe we and ourofficers have meritorious defenses to the claims in the litigation.

 

We are also subject toother routine legal proceedings, as well as demands, claims and threatenedlitigation, that arise in the normal course of our business, including assertionsthat we may be infringing patents or other intellectual property rights ofothers. We currently do not believe that the ultimate amount of liability, ifany, for any pending claims of any type (alone or combined) will materiallyaffect our financial position, results of operations or cash flows. Theultimate outcome of any litigation is uncertain, however, and eitherunfavorable or favorable outcomes could have a material negative impact on ourfinancial condition and operating results. Regardless of outcome, litigationcan have an adverse impact on us because of defense costs, negative publicity,diversion of management resources and other factors.

 

*TaxesContingencies*

 

We are required to makeperiodic filings in the jurisdictions where we are deemed to have a presencefor tax purposes. We have undergone tax audits in the past and have paidassessments arising from these audits. To date, such amounts have not beenmaterial. We evaluate estimated losses that could arise from similarassessments in accordance with Statement of Financial Accounting Standard No. 5,“*Accounting for Contingencies*.”  We consider such factors as the degree ofprobability of an unfavorable outcome and the ability to make a reasonableestimate of the amount of loss.

 

**Note 6. Restructuring Obligations and Other Charges**

 

In 2007, the Companyimplemented a reduction in workforce to align its cost structure withanticipated revenue. The Company reduced its workforce by 41 employees, orapproximately 12% of its workforce at that time. As a result, the Companyrecorded a restructuring charge of $1.2 million in 2007. The restructuringcharge was primarily comprised of severance costs and other personnel-relatedtermination costs. Restructuring expenses included in the consolidated statementsof operations were $82,000 for cost of maintenance, $240,000 for cost ofservices, $160,000 for research and development, $679,000 for sales andmarketing and $28,000 for general and administrative. Cash payments of $741,000were made against those obligations in 2007.

 

16

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In the first quarter of2008, there were no additional restructuring charges and cash payments totaling$259,000 were made against the obligation at December 31, 2007.  The following table summarizes activityassociated with the restructuring and related expenses incurred as of March 31,2008 (in thousands):

 
| ** **                                         | ** ** | **Severance** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------|------------|----------------|------------|-----------|------------|
| Restructuring  obligations, December 31, 2006 |       | $             | 128        |           | $          | —    |       | $ | 128 |   |
| Restructuring  costs incurred in 2007              |       | 1,179         |       | 11             |       | 1,190     |       |
| Cash payments                                      |       | (731          | )          | (10            | )          | (741      | )          |
| Restructuring  obligations, December 31, 2007 |       | 576           |       | 1              |       | 577       |       |
| Cash payments                                      |       | (259          | )          | —         |       | (259      | )          |
| Restructuring  obligations, March 31, 2008    |       | $             | 317        |           | $          | 1         |       | $ | 318 |   |

 

**Note 7. Subsequent Event**

 

On May 5, 2008, SupportSoft Inc. announced thecompletion of its acquisition of YourTechOnline.com (YTO), a provider of remotetechnology services based in Kelowna, British Columbia.  YTO’s service delivery methodology involvestechnical support agents who view and control a computer screen remotely.  The acquisition is intended to furtherenhance our remote service delivery capabilities utilizing work from homeagents.

 

In the quarter ending June 30, 2008, the Companyexpects to utilize between $3.5 million and $4.5 million of cash related to thepurchase of YTO, as well as integration, operations and retention costs relatedto key personnel.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andthe related notes included elsewhere in this Form 10-Q and the sectionentitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and the consolidated financial statements and relatednoted included in our Annual Report on Form 10-K for the year ended December 31,2007. The following discussion includes forward-looking statements. Please see “*Risk Factors”* in Item 1A of thisReport for important information to consider when evaluating these statements.**

 

**Overview**

 

SupportSoft providessoftware and services designed to make technology work. Advances in computerprocessing power, data transmission speeds, wireless communications and otherareas of technology have the potential to enable and enrich daily life. Toooften, however, technology proves frustrating to all but the most expert users.SupportSoft’s mission is to bridge this gap, and to enable technology tofulfill its promise.

 

In January 2008, wereorganized the company and began operating our business in two segments,consumer and enterprise. We also appointed an executive vice president to leadeach of the business units. Additionally, we began tracking profitability bysegment and providing this information to our Chief Executive Officer.Accordingly, beginning in 2008, we are providing segment information for eachbusiness unit. Our consumer segment is a technology-enabled services businessand provides consumers with assistance with frustrating technology problems.Our enterprise segment consists of our traditional business in which we licensetechnical support software to telecommunications and cable companies, digitalservice providers and corporate IT departments.

 

In our consumer segment,we provide premium technology support to consumers over the phone and theinternet for a fee. We offer our services to consumers through retailers,digital service providers and other companies who provide technology productsand services to consumers. We also provide our services directly to consumersthrough www.support.com.

 

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Our enterprise customersuse our software to resolve technical problems for their customers. Digitalservice providers use our products to automate the installation, activation andverification of broadband services, to reduce the cost and improve the qualityof technical support, and to enable the remote management of devices located atcustomer premises. Corporate IT departments and IT outsourcing firms use oursoftware to improve the cost-effectiveness and efficiency of their supportthrough an integrated portfolio of proactive service, self-service and assistedservice products.

 

Most of our revenue todate has been derived from our traditional enterprise customers and hasconsisted of software license fees and fees for maintenance, consulting,training and hosting services.  We havelicensed our software to enterprise customers predominately on a perpetualbasis in which we recognize the license revenue up front, assuming all criteriafor revenue recognition under the applicable accounting rules have beenmet. Maintenance fees relating to perpetual software licenses result in ratablerecognition of revenue over the period of the maintenance term, which isgenerally one year. Consulting and training revenues are generally recognizedas the services are performed or in accordance with predefined projectmilestones. Hosting fees are recognized ratably over the term of the hostingarrangement. Revenue from our consumer offerings have been derivedpredominantly from services that are generally paid on a per transaction basis.Going forward, revenue recognition models from our consumer offerings couldvary significantly depending on specific contractual terms.

 

Our total revenue for thequarter ended March 31, 2008 was $11.6 million, an increase of $1.2million or 12% over $10.4 million in the first quarter of 2007.

 

Revenue from ourenterprise segment was $10.9 million in the first quarter of 2008.  Within this segment license revenue was $3.0million, maintenance revenue was $4.0 million and services revenue was $3.9million.  For the first quarter of 2008,an increase in services revenue was partially offset by a decrease in licenserevenue when compared with the same period in 2007.  During 2008, our principal goal in theenterprise segment is to operate in a profitable fashion at the segmentoperating income level.  The key elementsof our strategy to achieve this goal are cost control, increasing satisfactionof existing customers, and obtaining new customers.  With respect to cost levels, we completed areduction in force in the fourth of 2007. With respect to customer satisfaction, we are operating with a series oftailored customer account plans designed to enable our customers to achievemaximum value from their investment in our products.  With respect to new customers, we havetargeted initiatives in specific market areas designed to expand our customerbase.

 

Revenue from our consumersegment was $703,000 in the first quarter of 2008 and was comprised primarilyof fees for technology support services provided through channel partners and,to a lesser extent, directly to consumers through support.com.  In the first quarter of 2007 we had justlaunched our consumer business.  Consumerrevenue in that period was $162,000.  In2007 we sought to establish the consumer business in two primary ways: bydeveloping alliances with other companies through which our offerings couldreach consumers, and by establishing a direct-to-consumer business under thesupport.com brand. In 2008, our goal is to add new alliances with othercompanies and to continue to develop existing alliances to generate futurerevenue. We also intend to continue to invest in support.com in an effort todrive steady improvements in our direct-to-consumer business.

 

We do not expect immediate returns from our consumerinitiative but believe it can create sustainable revenue growth over time.Although we are leveraging many of our existing resources, we are makingsignificant incremental investments in support of the consumer business,including investments in customer support agents and to further develop andpromote our consumer offerings.  Weexpect that these additional investments will precede any material revenueincrease from our new business initiatives. As a result, we currently expect toincur quarterly net losses through at least 2008.

 

We intend the followingdiscussion of our financial condition and results of operations to provideinformation that will assist in understanding our financial statements, thechanges in certain key items in those financial statements from period toperiod, and the primary factors that accounted for those changes, as well ashow certain accounting principles, policies and estimates affect our financialstatements.

 

**Critical Accounting Policies and Estimates**

 

In preparing ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States, we make assumptions, judgments andestimates that can have a significant impact on our net revenue, and operatingresults, as well as on the value of certain assets and liabilities on ourconsolidated balance sheet. We base our assumptions, judgments and estimates onhistorical experience and various other factors that we believe to bereasonable under the circumstances. Actual results could differ materially fromthese estimates under different assumptions or conditions. On a regular basiswe evaluate our assumptions, judgments 

 

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and estimates and makechanges accordingly. We believe that the assumptions, judgments and estimatesinvolved in the accounting for revenue recognition, allowance for doubtfulaccounts, accounting for income taxes, accounting for goodwill and otherintangible assets, and stock-based compensation have the greatest potentialimpact on our consolidated financial statements, so we consider these to be ourcritical accounting policies. We discuss below the critical accountingestimates associated with these policies. For further information on thecritical accounting policies, see the notes to consolidated financial statements.

 

*Revenue Recognition*

 

We derive revenues from software license fees,maintenance and support, professional services and transaction-based technologysupport services and multiple element arrangements that may include anycombination of these items. We recognize revenue in accordance with generallyaccepted accounting principles that are appropriate for each type of revenue.Our revenue recognition policy is one of our critical accounting policiesbecause revenue is a key component of our results of operations and is based oncomplex rules which require us to make judgments. In applying our revenuerecognition policy we must determine which portions of our revenue arerecognized currently and which portions must be deferred and recognized later.In order to determine current and deferred revenue, we make estimates withregard to the expected amount of future services to be performed and theappropriate fair value for those services. We also make judgments as to whetherfuture services are essential to the functionality of other elements of thesoftware arrangement. We do not record revenue on sales transactions when thecollection of cash is in doubt at the time of sale. Rather, revenue isrecognized from these transactions as cash is collected. The determination ofcollectibility requires significant judgment.

 

*Allowances for Doubtful Accounts*

 

We make judgments as toour ability to collect outstanding receivables and provide allowances for theportion of receivables when collection becomes doubtful. Provisions are madebased upon a specific review of all significant outstanding invoices. For thoseinvoices not specifically provided for, provisions are recorded at differingrates, based upon the age of the receivable. In determining these percentages, weanalyze our historical collection experience and current payment trends. If thehistorical data we use to calculate the allowance for doubtful accounts doesnot reflect the future ability to collect outstanding receivables, additionalprovisions for doubtful accounts may be needed and the future results ofoperations could be materially affected.

 

*Accounting for Income Taxes*

 

We are required toestimate our income taxes in each of the tax jurisdictions in which we operate.This process involves management’s estimation of our actual current taxexposures together with an assessment of temporary differences determined basedon the difference between the financial statement and tax basis of certainitems. These differences result in net deferred tax assets and liabilities,which are included within the consolidated balance sheet. We must then assessthe likelihood that the deferred tax assets will be recovered from futuretaxable income and to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent we establish a valuationallowance or adjust this allowance in a period, we must include a tax expenseor benefit within the tax provision in the statements of operations.

 

*Accountingfor Goodwill and Other Intangible Assets*

 

At March 31, 2008,goodwill was $9.8 million, and net identifiable intangible assets were $1.7million.  We assess the impairment ofgoodwill annually or more often if events or changes in circumstances indicatethat the carrying value may not be recoverable. An impairment loss wouldbe recognized if the fair value of the reporting unit is less than the carryingvalue of the reporting unit’s net assets on the date of the evaluation.  We assess the impairment of finite lifeidentifiable intangible assets whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable.  An impairment loss would be recognized whenthe sum of the future net cash flows expected to result from the use of theasset and its eventual disposition is less than its carrying amount. Suchimpairment loss would be measured as the difference between the carrying amountof the asset and its fair value. The estimate of cash flow is based upon, amongother things, certain assumptions about expected future operating performanceand an appropriate discount rate determined by our management. Our estimates ofdiscounted cash flows may differ from actual cash flows due to, amongother things, economic conditions, changes to the business model or changes inoperating performance. If we made different estimates, material differences mayresult in write-downs of net long-lived and intangible assets, which would bereflected by charges to our operating results for any period presented.  Furthermore, we evaluate cash flows at thelowest operating segment level.  If thenumber of reporting units increases in the future, as it has in 2008, this maymake impairment more probable than it would be with fewer reporting units.

 

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*Stock-based compensation*

 

We account forstock-based compensation in accordance with the provisions of SFAS No. 123R.We adopted SFAS No. 123R using the modified prospective transition methodwhich requires the application of the accounting standard starting from January 1,2006. Under the fair value recognition provisions of SFAS No. 123R,stock-based compensation cost is estimated at the grant date based on the fairvalue of the award and is recognized as expense ratably over the requisite serviceperiod of the award. We estimate the fair value of stock-based awards on thegrant date using the Black-Scholes-Merton option-pricing model. Determining theappropriate fair value model and calculating the fair value of stock-basedawards requires judgment, including estimating stock price volatility,forfeiture rates and expected life. If any of these assumptions used inthe option-pricing models changes significantly, stock-based compensation maydiffer materially in the future from that recorded in the accompanyingfinancial statements.

 

**RESULTS OF OPERATIONS**

 

The following table setsforth the results of operations for the three months ended March 31, 2008and 2007 expressed as a percentage of total revenue.

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Revenue:                           |       |                                             |       |   |   |
| License                            |       | 26                                               | %          | 31 | % |
| Maintenance                        |       | 34                                               |       | 38 |   |
| Services                           |       | 34                                               |       | 31 |   |
| Consumer revenue                   |       | 6                                                |       | — |   |
|                               |       |                                             |       |   |   |
| Total revenue                      |       | 100                                              |       | 100 |   |
|                               |       |                                             |       |   |   |
| Costs and  expenses:               |       |                                             |       |   |   |
| Cost of license                    |       | —                                           |       | — |   |
| Cost of  maintenance               |       | 5                                                |       | 6 |   |
| Cost of services                   |       | 32                                               |       | 43 |   |
| Cost of consumer  revenue          |       | 11                                               |       | — |   |
| Amortization of  intangible assets |       | —                                           |       | 3 |   |
| Research and  development          |       | 19                                               |       | 22 |   |
| Sales and  marketing               |       | 55                                               |       | 72 |   |
| General and  administrative        |       | 20                                               |       | 24 |   |
|                               |       |                                             |       |   |   |
| Total costs and  expenses          |       | 142                                              |       | 170 |   |
|                               |       |                                             |       |   |   |
| Loss from  operations              |       | (42                                              | )          | (70 | ) |
| Interest and  other income, net    |       | 12                                               |       | 18 |   |
|                               |       |                                             |       |   |   |
| Loss before  income taxes          |       | (30                                              | )          | (52 | ) |
| Provision for  income taxes        |       | (1                                               | )          | (2 | ) |
|                               |       |                                             |       |   |   |
| Net loss                           |       | (31                                              | )%         | (54 | )% |

 

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

 

***REVENUE***

 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **March 31,**    | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2008**              | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |   |   |
| License                                             |       | $                     | 2,974      |       | $          | 3,248      |       | $ | (274 | ) | (8 | )% |
| Maintenance                                         |       | 4,002                 |       | 3,923      |       | 79         |       | 2 |   |
| Services                                            |       | 3,949                 |       | 3,255      |       | 694        |       | 21 |   |
| Consumer                                            |       | 703                   |       | —     |       | 703        |       | 100 |   |
| Total revenue                                       |       | $                     | 11,628     |       | $          | 10,426     |       | $ | 1,202 |   | 12 | % |

 

*Licenserevenue.* License revenue is comprised of fees for term andperpetual licenses of our software. Perpetual license revenue is recognizedusing the residual method described in SOP 98-9 for arrangements in whichlicenses are sold with multiple elements. We allocate revenues on theselicenses based upon the fair value of each undelivered element including undeliveredmaintenance, consulting and training. The determination of fair value is basedupon vendor specific objective evidence (VSOE). VSOE for maintenance is basedupon separate renewals of maintenance from customers. VSOE for consulting ortraining is based upon separate sales of these services to customers. Assumingall other revenue recognition criteria are met, the difference between thetotal arrangement fee and the amount deferred for each undelivered element isrecognized as license revenue.  The year-over-yeardecrease in license revenue was due to closing fewer large licensingtransactions with our traditional enterprise customers. For example, in thefirst quarter of 2008 we had 2 customers that contributed greater than $300,000in license revenue, compared to 5 such customers in the first quarter of 2007.

 

*Maintenance revenue.*Maintenance revenue is comprised primarily of revenue from post-contracttechnical support services which includes software product updates. Maintenancerevenue is recognized ratably over the term of the maintenance period, which isgenerally one year.  Maintenance revenueremained at a relatively consistent at approximately $4.0 million for the firstquarters of 2007 and 2008.

 

*Servicesrevenue*. Services revenue is primarily comprised of revenuefrom professional services, such as consulting, training and fees for hostingservices. Services revenue is generally recognized as the services areperformed. Our services revenue may fluctuate from period to period dependingon the overall demand for our consulting services and level of consultingactivity with major customers.  Theincrease in services revenue in the first quarter of 2008 from first quarter of2007 was due primarily to increased services demand, particularly from one customerwhose services revenue increased to $989,000 in the first quarter of 2008 from$356,000 in the first quarter of 2007.

 

*Consumerrevenue.*  Revenue fromour consumer offerings have been derived predominantly from technology supportservices that are paid for on a per incident basis.  We also license certain of our consumersoftware products to partners on a per use basis. Consumer revenue in the firstquarter of 2008 was comprised primarily of fees from technology supportservices delivered through our consumer partners, fees from licenses of ourconsumer software products to our consumer partners, and fees from technologysupport services offered directly to consumers through support.com.  In the first quarter of 2007, we had justbegun to offer our consumer solutions. Consumer revenue in that period was $162,000.  Prior to January 1, 2008, such revenuewas reported predominantly in services revenue.

 

International Revenue

 

Revenue from customers outside the North Americaaccounted for approximately 22% of our total revenue for the three months endedMarch 31, 2008, compared with 21% for the three month periods ended March 31,2007.

 

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***COSTS AND EXPENSES***

 

***Costs of Revenue***

 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **March 31,**    | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2008**              | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |   |   |
| Cost of license                                     |       | $                     | 51         |       | $          | 38         |       | $ | 13 |   | 34 | % |
| Cost of  maintenance                                |       | $                     | 549        |       | $          | 638        |       | $ | (89 | ) | (14 | )% |
| Cost of services                                    |       | $                     | 3,753      |       | $          | 4,518      |       | $ | (765 | ) | (17 | )% |
| Cost of consumer  revenue                           |       | $                     | 1,240      |       | $          | —     |       | 1,240 |   | 100 | % |

 

*Cost of license.*****Costof license fees consists primarily of third-party royalty fees under licensearrangements for technology embedded in or resold with our products. Cost oflicense fees remained consistent between the three months ended March 31,2008 and 2007 and was less than 1% of total revenue.

 

*Cost of maintenance.** ***Cost ofmaintenance consists primarily of compensation costs, travel costs, and relatedoverhead expenses for customer support personnel.  Cost of maintenance decreased for the threemonths ended March 31, 2008 from the same period in 2007 due primarily todecrease in salary and related employees costs as a result of a lower number ofcustomer support personnel.

 

*Cost of services and cost ofconsumer revenue.** ***Cost of servicesconsists primarily of costs of our enterprise professional servicesorganization such as compensation, travel, related overhead expenses forprofessional services personnel and costs of third parties for subcontractedconsulting services.  Prior to the firstquarter of 2008, cost of services also included the cost of our call centeragents who provide our technology support services within the consumerbusiness.  At that time we operated ourbusiness in a single reporting unit. Consequently, our call center costs, aswell as other consumer segment costs, were included in cost of services.  In January 2008, we reorganized theCompany and created two separate business units, consumer and enterprise.  Accordingly, cost of consumer revenue ispresented separately starting in the first quarter of 2008.  The cost of our professional servicesorganization within the enterprise business increased only slightly (less than3%).  The cost of consumer revenueincreased due to the addition of call center agents to support highertechnology support call volumes. We expect cost of consumer revenue to increaseeach quarter during 2008 as we add call center agents to support higheranticipated call volumes.

 

 ***Amortization of IntangibleAssets***

 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **March 31,**    | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2008**              | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |   |   |
| Amortization of  intangible assets                  |       | $                     | 30         |       | $          | 272        |       | $ | (242 | ) | (89 | )% |
|                                                     |            |                       |            |            |            |            |            |  |  |  |  |  |

 

The decrease in theamortization of intangible assets is due to a write-down of our intangibleassets during the fourth quarter of 2007 which reduced the carrying value ofour intangible assets as of December 31, 2007.  Amortization expense beginning in 2008 wasbased on the reduced carrying value of the intangible assets and thereforedecreased in the first quarter of 2008 compared with the same quarter in theprior year.

 

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***OPERATINGEXPENSES***

 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **March 31,**    | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2008**              | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |   |   |
| Research and  development                           |       | $                     | 2,235      |       | $          | 2,271      |       | $ | (36 | ) | (2 | )% |
| Sales and  marketing                                |       | $                     | 6,386      |       | $          | 7,406      |       | $ | (1,020 | ) | (14 | )% |
| General and  administrative                         |       | $                     | 2,356      |       | $          | 2,543      |       | $ | (187 | ) | (7 | )% |

 

*Researchand development.* Research and development costs are expensedas incurred. Research and development expense consists primarily ofcompensation costs, third-party consulting expenses and related overhead costsfor research and development personnel. Research and development expense was relatively consistent for the firstquarters of 2008 and 2007.

 

*Salesand marketing.* Sales and marketing expense consists primarilyof compensation costs, including salaries, sales commissions and related overheadcosts for sales, business development and marketing personnel; expenses forlead generation activities; and promotional expenses, including publicrelations, advertising and marketing events, in both the enterprise andconsumer businesses.  The decrease insales and marketing expense was due primarily to lower salaries and relatedemployee costs and lower commissions associated with a reduction of personnelin the fourth quarter of 2007. Additionally, we operated with a lower level of marketing programspending and advertising in the consumer business in the first quarter of 2008.

 

*General and administrative.*General and administrative expense consists primarily of compensation costs andrelated overhead costs for administrative personnel and professional fees forlegal, accounting and other professional services.  The decrease in general and administrativeexpense was due primarily to decrease in professional services fees and lowersalaries and related employee costs on reduced headcount.

 

***INTEREST INCOME AND OTHER, NET***

 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **March 31,**    | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2008**              | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |   |   |
| Interest income  and other, net                     |       | $                     | 1,449      |       | $          | 1,853      |       | $ | (404 | ) | (22 | )% |
|                                                     |            |                       |            |            |            |            |            |  |  |  |  |  |

 

Thedecrease in interest income and other was primarily due to a one-time paymentof $325,000 received in the first quarter of 2007 in settlement of acontractual dispute and lower interest income due to lower interest rates onour marketable securities.

 

***PROVISIONFOR INCOME TAXES***

 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **March 31,**    | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2008**              | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |   |   |
| Provision  of income taxes                          |       | $                     | (108       | )          | $          | (215       | )          | $ | (107 | ) | (50 | )% |
|                                                     |            |                       |            |            |            |            |            |  |  |  |  |  |

 

The provisions for incometaxes are comprised of estimates of current taxes due in foreign jurisdictionsand payments of foreign withholding taxes.

 

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Our provision for incometaxes decreased to $108,000 for the three months ended March 31, 2008, adecrease of 50% from $215,000.  Thehigher provision for income taxes in the first quarter of 2007 was dueprimarily to $99,000 of foreign withholding taxes paid during that period.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Total cash, cashequivalents and marketable securities in the aggregate decreased$5.5 million to $107.4 million at March 31, 2008 from$112.9 million at December 31, 2007.

 

***Operating Activities***

 

Net cash used in operating activities was $3.2 millionand $1.6 million for the three months ended March 31, 2008 and 2007,respectively.  Amounts included in netloss, which do not require the use of cash, primarily include the depreciation,amortization of premiums and discounts on marketable securities, stock-basedcompensation expense, and amortization of intangible assets.  The sum of these items was $1.2 million and$1.4 million in the first quarter of 2008 and 2007, respectively.  Net cash used in operating activities in thefirst quarter of 2008 was primarily the result of the net loss of $3.6 millionand an increase in accounts receivable of $857,000, offset by a decrease inprepaid expenses of $748,000.  Net cashused in operating activities for the three months ended March 31, 2007 wasprimarily due to cash collections during the period, which contributed to a reductionin accounts receivable of $4.6 million. This reduction was also due to lower revenues and associated invoicingin the first quarter of 2007 compared with the fourth quarter of 2006. Thereduction in accounts receivable was offset by a net loss of $5.6 million and adecrease in deferred revenue of $2.3 million. Customers typically purchase maintenance contracts when they license ourproducts.  The decrease in deferred maintenancerevenue is consistent with the lower level of license revenue in the firstquarter of 2007 compared with the fourth quarter of 2006. Additionally,deferred revenue had decreased due to the ongoing amortization of term-basedlicenses originally recorded in deferred revenue at the outset of thosearrangements.

 

 Our accounts receivable and deferred revenuebalances fluctuate from period to period and are primarily dependent on (i) thetiming of the closure of our license agreements, especially larger agreementsconcluded late in the period, (ii) the related invoicing and paymentprovisions under those agreements, (iii) the timing of maintenancerenewals and related invoicing, and (iv) collections.

 

***Investing Activities***

 

Net cash provided byinvesting activities was $33.2 million and $1.1 million for the three monthsended March 31, 2008 and 2007, respectively. Net cash provided byinvesting activities for the three months ended March 31, 2008 wasprimarily due to sales and maturities of $54.9 million in marketable securitiesoffset by the purchases of $20.1 million in marketable securities, expendituresof $137,000 for property and equipment and $1.4 million for acquiredtechnology. Net cash provided by investing activities for the three monthsended March 31, 2007 was primarily due to sales and maturities of $29.6million in marketable securities offset by the purchase of $26.9 million inmarketable securities and expenditures of $1.6 million for property andequipment, primarily related to furniture and leasehold improvements for ournew headquarter office.

 

***Financing Activities***

 

Net cash generated byfinancing activities was $195,000 for the three months ended March 31,2008 and $2.0 million for the three months ended March 31, 2007. Net cashprovided by financing activities for the three months ended March 31, 2008was attributable to net proceeds from the purchase of 64,181 common sharesunder the employee stock purchase plan. Net cash provided by financing activities for the three months ended March 31,2007 was attributable to net proceeds from the purchase of 62,802 common stockunder the employee stock purchase plan and the exercise of 643,222 stockoptions.

 

***Working Capital and Capital ExpenditureRequirements***

 

At March 31, 2008,we had stockholders’ equity of $117.1 million and working capital of $80.7million. Included as a reduction to working capital is deferred revenue of $9.5million, which will not require cash to settle, but will be recognized asrevenue in the future. We believe that our existing cash balances will besufficient to meet our working capital requirements and stock repurchaseprogram, as well as our planned capital expenditures for at least the next 12months.

 

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If we require additionalcapital resources to grow our business internally or to acquire complementarytechnologies and businesses at any time in the future, we may seek to selladditional equity or debt securities. The sale of additional equity or debtsecurities could result in more dilution to our stockholders. Financingarrangements may not be available to us, or may not be available inamounts or on terms acceptable to us.

 

As noted above, we planto make substantial investments in our business during 2008, including but notlimited to such areas as cost of consumer revenue and sales and marketing. Webelieve these investments and others are essential to creating sustainablegrowth in our business in the future. Because these investments will likelyprecede any associated revenues, we expect our working capital to decrease inthe near term. Additionally, we may choose to acquire other businesses orcomplimentary technologies to enhance our product capabilities and suchacquisitions would likely require the use of cash.

 

At March 31, 2008and December 31, 2007 we had investments in AAA-rated auction-rate debtsecurities with various state student loan authorities of $23.9 millionand $38.9 million, respectively. At the time of our initial investment andthrough the date of this Report, all of the securities we have invested in arerated AAA, the highest rating issued by a rating agency, and the student loansmade by these authorities are substantially guaranteed by the federalgovernment through the Federal Family Education Loan Program (FFELP).Auction-rate securities are long-term variable rate bonds tied to short-terminterest rates. After the initial issuance of the securities, the interest rateon the securities is reset periodically, at intervals established at the timeof issuance (e.g., every seven, twenty-eight, or thirty-five days; every sixmonths; etc.), based on market demand for a reset period. Auction-ratesecurities are bought and sold in the marketplace through a competitive biddingprocess often referred to as a “Dutch auction”. If there is insufficientinterest in the securities at the time of an auction, the auction may not becompleted and the rates may be reset to predetermined “penalty” or “maximum”rates. Following such a failed auction, we would not be able to access ourfunds that are invested in the corresponding auction-rate securities until afuture auction of these investments is successful, new buyers express interestin purchasing these securities in between reset dates, issuers establish adifferent form of financing to replace these securities, or final payments becomedue according to contractual maturities. Given the current negative liquidityconditions in the global credit markets, in the months from February throughApril 2008 auctions failed for all of the of auction-rate securities weheld as of March 31, 2008, and as a result our ability to liquidate ourinvestment and fully recover the carrying value of our investment in the nearterm may be limited or not exist.

 

The fair value of ourauction rate securities at March 31, 2008 reflects an unrealized loss of$1.4 million.  Fair value for suchsecurities was based on a discounted cash flow valuation that takes intoaccount a number of factors including estimated duration, credit quality, andthe percentage of FFELP guarantee. We made assumptions about future cash flowsbased on maximum rate formulas and used estimates of market data, includingyields of trading securities that we believe to be similar or comparable. At March 31,2008, all auction rate securities were classified as Level 3 assets inaccordance with the SFAS No.157 hierarchy. Presently we have determined the decline in value to be temporarybecause i) we have the intent and ability to hold these securities in the nearterm in order to recoup their par values, ii) through the date of this Reportall of the securities have maintained their AAA credit ratings, iii) loans madeby the issuers are backed by the federal government, and iv) we have noted nodeterioration credit quality of the issuers.

 

However if circumstanceschange in the future and we believe we will not hold these securities tomaturity, we may be required to record an other than temporary impairmentcharge on these investments. We may similarly be required to record other thantemporary impairment charges if the ratings on any of these securities arereduced or if any of the issuers default on their obligations. In addition toimpairment charges, any of these events could cause us to lose part or all ofour investment in these securities. Any of these events could materially affectour results of operations and our financial condition. We currently believethese securities are not significantly impaired, primarily due to the AAAcredit rating of the issuers and the government backing of the loans made bythe issuers; however, it could take until the final maturity of the underlyingnotes (up to 30 years) to realize our investments’ recorded value. Basedon our expected operating cash flows, and our other sources of cash, we do notanticipate the potential lack of liquidity on these investments will affect ourability to execute our current business plan.

 

*Acquisition*

 

On May 5, 2008,SupportSoft Inc. announced the completion of its acquisition ofYourTechOnline.com (YTO), a provider of remote technology services based inKelowna, British Columbia.  YTO’s servicedelivery methodology involves technical support agents who view and control acomputer screen remotely.  Theacquisition is intended to further enhance our remote service deliverycapabilities utilizing work from home agents.

 

In the quarter endingJune 30, 2008, the Company expects to utilize between $3.5 million and $4.5million of cash related to the purchase of YTO, as well as integration,operations and retention costs related to key personnel.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The primary objective ofour investment activities is to preserve principal while at the same timemaximizing the income we receive from our investments without significantlyincreasing risk. To achieve this objective, we invest our excess cash in avariety of securities, including government debt securities, municipal debtsecurities with an auction reset feature (“auction-rate securities”), corporatenotes and bonds, commercial paper and money market funds meeting certain criteria.These 

 

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securities are classifiedas available-for-sale and consequently are recorded on the balance sheet atfair value with unrealized gains or losses reported as a separate component ofaccumulated other comprehensive income (loss). Our holdings of the securitiesof any one issuer, except government agencies, do not exceed 10% of theportfolio. We do not utilize derivative financial instruments to manage ourinterest rate risks.

 

As of March 31,2008, we held $64.2 million in marketable securities (excluding cash and cashequivalents), which consisted primarily of government debt securities,auction-rate securities, corporate notes and bonds, and commercial paper. Theweighted average interest rate of our portfolio was approximately 4.64% at March 31,2008. A decline in interest rates over time would reduce our interest incomefrom our marketable securities. A decrease in interest rates of 100 basispoints would cause a corresponding decrease in our annual interest income ofapproximately $642,000.

 

At March 31, 2008and December 31, 2007 we had investments in AAA-rated auction-rate debtsecurities with various state student loan authorities of $23.9 millionand $38.9 million, respectively. At the time of our initial investment andthrough the date of this Report, all of the securities we have invested in arerated AAA, the highest rating issued by a rating agency, and the student loansmade by these authorities are substantially guaranteed by the federalgovernment through the Federal Family Education Loan Program (FFELP).Auction-rate securities are long-term variable rate bonds tied to short-terminterest rates. After the initial issuance of the securities, the interest rateon the securities is reset periodically, at intervals established at the timeof issuance (e.g., every seven, twenty-eight, or thirty-five days; everysix months; etc.), based on market demand for a reset period. Auction-ratesecurities are bought and sold in the marketplace through a competitive biddingprocess often referred to as a “Dutch auction”. If there is insufficientinterest in the securities at the time of an auction, the auction may not becompleted and the rates may be reset to predetermined “penalty” or “maximum” rates.Following such a failed auction, we would not be able to access our funds thatare invested in the corresponding auction-rate securities until a futureauction of these investments is successful, new buyers express interest inpurchasing these securities in between reset dates, issuers establish adifferent form of financing to replace these securities, or final paymentsbecome due according to contractual maturities. Given the current negativeliquidity conditions in the global credit markets, in the months from February throughApril 2008 auctions failed for all of the of auction-rate securities weheld as of March 31, 2008, and as a result our ability to liquidate ourinvestment and fully recover the carrying value of our investment in the nearterm may be limited or not exist.

 

The fair value of ourauction rate securities at March 31, 2008 reflects an unrealized loss of$1.4 million.  Fair value for suchsecurities was based on a discounted cash flow valuation that takes intoaccount a number of factors including estimated duration, credit quality, andthe percentage of FFELP guarantee. We made assumptions about future cash flowsbased on maximum rate formulas and used estimates of market data, includingyields of trading securities that we believe to be similar or comparable. At March 31,2008, all auction rate securities were classified as Level 3 assets inaccordance with the SFAS No. 157 hierarchy.  Presently we have determined the decline invalue to be temporary because i) we have the intent and ability to hold thesesecurities in the near term in order to recoup their par values, ii) throughthe date of this Report all of the securities have maintained their AAA creditratings, iii) loans made by the issuers are backed by the federal government,and iv) we have noted no deterioration credit quality of the issuers.

 

However if circumstanceschange in the future and we believe we will not hold these securities tomaturity, we may be required to record an other than temporary impairmentcharge on these investments. We may similarly be required to record other thantemporary impairment charges if the ratings on any of these securities arereduced or if any of the issuers default on their obligations. In addition toimpairment charges, any of these events could cause us to lose part or all ofour investment in these securities. Any of these events could materially affectour results of operations and our financial condition. We currently believethese securities are not significantly impaired, primarily due to the AAAcredit rating of the issuers and the government backing of the loans made bythe issuers; however, it could take until the final maturity of the underlyingnotes (up to 30 years) to realize our investments’ recorded value. Basedon our expected operating cash flows, and our other sources of cash, we do notanticipate the potential lack of liquidity on these investments will affect ourability to execute our current business plan.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

We maintain “disclosurecontrols and procedures,” as such term is defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in Securities and ExchangeCommission rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognized that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Our disclosure controls and procedures have been designed to meet, andmanagement believes they meet, reasonable assurance standards. Additionally, indesigning disclosure controls and procedures, our management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible disclosure controls and procedures. The design of any disclosurecontrols and procedures also is based in part upon certain assumptions aboutthe likelihood of future events, and there can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions.

 

Our Chief ExecutiveOfficer and our Chief Financial Officer, after evaluating the effectiveness ofour “disclosure controls and procedures” as of the end of the period covered bythis quarterly report, have concluded that our disclosure controls andprocedures are effective based on their evaluation of these controls andprocedures required by paragraph (b) of Exchange Act Rules 13a-15or 15d-15.

 

**Changes in Internal Control over Financial Reporting**

 

There were no changes inour internal control over financial reporting during the quarter ended March 31,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

**See Note 5 Contingencies to thecondensed consolidated financial statements in Part I, Item 1 of thisQuarterly Report on Form 10-Q for a description of legal proceedings.**

 

**ITEM 1A. RISK FACTORS**

 

**This report contains forward-looking statementsregarding our business and expected future performance as well as assumptionsunderlying or relating to such statements of expectation, all of which are “forwardlooking statements” within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934. We aresubject to many risks and uncertainties that may materially affect our businessand future performance and cause those forward-looking statements to beinaccurate. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“forecasts,” “estimates,” “seeks,” “may result in,” “focused on,” “continue to,”and similar expressions often identify forward-looking statements.**

** **

**We have not been profitable and may not achieveprofitability in future periods.**

** **

We were not profitable in2007 or in the first quarter of 2008. In addition, we intend to makesignificant investments in support of our business in 2008 and we expect tocontinue to sustain losses in 2008 and possibly subsequent periods. If we failto achieve revenue growth as a result of these additional investments or ifsuch revenue growth does not result in our achieving profitability, the marketprice of our common stock will likely decline. A sustained period of losseswould also result in an increased usage of cash to fund our operatingactivities and a corresponding reduction in our cash balance.

 

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**Ourquarterly results have in the past, and may in the future, fluctuatesignificantly.**

 

Our quarterly revenue andoperating results have in the past and may in the future fluctuate from quarterto quarter. As a result, we believe that quarter-to-quarter and year-to-yearcomparisons of our revenue and operating results are not necessarilymeaningful, and that these comparisons may not be accurate indicators of futureperformance.

 

Several factors that havecontributed or may in the future contribute to fluctuations in our operatingresults include:

 

·                  Demand for our software and services;

 

·                  Our collaboration with premium technology support partners includingretailers, and the timing and success of these partners’ introduction and saleof our products;

 

·                  Size and timing of customer orders and our ability to recognize revenuein a given quarter;

 

·                  Our ability to increase the efficiency and capacity of our customersupport agents;

 

·                  Our reliance on a small number of customers for a substantial portionof our revenue;

 

·                  The price and mix of products and services we or our competitors offer;

 

·                  The mix of products and services that generate up-front revenue asopposed to revenue over a period of time;

 

·                  Our ability to attract and retain customers;

 

·                  Our ability to adapt to our customers’ needs in a market space definedby frequent technological change;

 

·                  The rate of expansion of our new consumer offerings and our investmentstherein;

 

·                  The amount and timing of operating costs and capital expenditures in ourbusiness;

 

·                  Seasonal trends resulting from corporate spending patterns;

 

·                  The exercise of judgment by our management in making accountingdecisions in accordance with our accounting policies

 

·                  Potential losses on marketable securities, foreign exchange exposureson contracts, or other losses from financial instruments we may hold that areexposed to market risk; and

 

·                  General economic conditions and their effect on our operations.

 

Over the last threeyears, we have licensed our enterprise software predominately on a perpetualbasis in which we recognize the license revenue up front, assuming all criteriafor revenue recognition have been met. As a result of our current perpetuallicensing model for the enterprise business, we have become dependent on a fewcustomer contracts with up-front license revenue for a substantial portion ofour license revenue in any one quarter. In addition, a significant portion ofour total revenue each quarter comes from a number of orders received in thelast month of a quarter. In previous quarters, we failed to close expectedperpetual licenses with up-front revenue resulting in a revenue shortfall. Ifin future quarters we fail to close orders expected to be completed by the endof a quarter, particularly if these orders are for perpetual licenses withup-front revenue, our quarterly results would suffer and the market price ofour common stock would likely decline. While revenues in our consumer businessare generally recognized over the course of a quarter based on the number ofservices delivered, this revenue is not significant enough at this time tooffset a shortfall in perpetual license revenue.

 

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**Ourinability to meet future financial performance targets that we announce or thatare published by research analysts could cause the market price of our commonstock to decline.**

 

From time to time, weprovide guidance related to our future financial performance. In addition,financial analysts publish their own expectations of our future financialperformance. Because our quarterly revenue and our operating results fluctuate,future financial performance is difficult to predict. In the past, includingthe third quarter of 2007, we have failed to meet our guidance. As it didfollowing the announcement of our third quarter results, future downwardadjustments of our guidance or the failure to meet our guidance or theexpectations of research analysts would likely cause the market price of ourcommon stock to decline.

 

Management’s ability toaccurately predict performance is affected in large part by a significantportion of our total revenue being dependent upon the closing of new largecustomer orders. In addition, our guidance is based in part upon theexpectation of new product sales and services offerings, including our consumerbusiness, with which we have a limited history. A significant portion of ourconsumer business is dependent upon relationships with consumer supportpartners, including retailers. We sell to numerous consumers through each ofthese partners, and therefore a delay in the acquisition or rollout of ourrelationship with even one of these partners could cause us to miss revenuetargets. In the event we fail to achieve projected revenue levels in anyquarter, we will be unable to reduce our expenses for that quarter in acorresponding fashion, and our results will not meet our guidance or theexpectations of securities analysts or investors, which would likely cause themarket price of our common stock to decline.

 

The trading market forour common stock relies in part on the research and reports that industry orfinancial analysts publish about us or our business. We do not control theseanalysts. If one or more of the analysts who currently cover us downgrade ourstock, our stock price would likely decline rapidly. Furthermore, if one ormore of these analysts cease coverage of us, we could lose visibility in themarket, which in turn could cause the market price of our stock to decline.

 

Finally, the marketprices of software companies have been extremely volatile. Stock prices of manysoftware companies have often fluctuated in a manner unrelated ordisproportionate to the operating performance of such companies. In the past,following periods of market volatility, stockholders have often institutedsecurities class action litigation relating to the stock trading and pricevolatility of the software company in question, including SupportSoft. Anysecurities litigation we are involved in could result in substantial cost to usto defend and divert resources and the attention of management from ourbusiness.

 

**Ourconsumer business will increase operating expenses without any assurance ofyielding increased revenue.**

 

We are executing a planto extend our business by providing premium technology support services. Inaddition to continuing to offer our software to corporate customers, we areoffering technology support to consumers through our alliance partners anddirectly. We may not be able to offer these new services successfully. We havelimited experience in reaching or serving consumers or in managing customersupport agents. We expect that many of our agents will be home-based, whichwill require a high degree of coordination and quality control of employeesworking from diverse and remote locations. As a result, we expect to continueto use significant cash and incur increased operating expenses to support thisinitiative, including costs associated with our customer support agents, coststo acquire technology and infrastructure to support our consumer business,promotional costs associated with reaching consumers, and costs of obtainingpersonnel with the necessary consumer expertise. These investments may notyield increased revenue to offset these expenses. Furthermore, this newbusiness initiative, if not favorably received by consumers, could damage thereputation of our corporate enterprise business as well as strain ourmanagement, financial and operational resources necessary to maintain our corporatebusiness. The lack of market acceptance of such efforts or our inability togenerate satisfactory revenue from such expanded services would have a materialadverse effect on our business, prospects, financial condition and operatingresults.

 

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**Ifwe fail to manage our customer support agents efficiently and in a manner thatprovides an adequate level of support for our customers, our reputation andrevenues could be harmed.**

 

Our plans for ourconsumer business depend in part on our ability to increase the number of ourcustomer support agents in order to satisfy the demand for our consumerservices. Any material disruption or slowdown in our service deliveryinfrastructure and systems resulting from labor disputes, telephone or Internetfailures, power or service outages, natural disasters or other events couldmake it difficult or impossible to provide adequate customer service andsupport. Further, we may be unable to attract and retain adequate numbers ofcompetent customer support agents, which is essential in creating a favorableinteractive customer experience. We have attempted to augment our servicedelivery operations through our recent acquisition of YourTechOnline.com, acompany that specializes in delivering technical support through work-at-homeagents. Any problems we encounter with integrating the YourTechOnline.comagents, in propagating the YourTechOnline.com service delivery model acrossexisting agents or in retaining agents following the acquisition couldseriously jeopardize our service delivery operations and our consumer revenue.If we are unable to continually provide adequate staffing for our servicedelivery operations, our revenue and reputation could be seriously harmed.

 

**Becausea small number of enterprise customers have historically accounted for and mayin future periods account for substantial portions of our revenue, our revenuecould decline because of delays or losses of specific customer orders.**

 

A small number of enterprisecustomers have historically accounted for, and may in future periods accountfor, substantial portions of our revenue. For the three months ended 2008, onecustomer accounted for 15% of our total revenue.  Similarly, for the year ended December 31,2007, one customer accounted for 18% of total revenue. In 2008, we are likelyto continue to derive a significant portion of our enterprise revenue fromlarge transactions with a limited number of customers. Therefore, our revenuecould decline because of the loss or delay of a single enterprise customerorder. Additionally, we may not obtain new customers. The failure to obtainsignificant new customers, particularly customers that purchase perpetuallicenses with up-front payments, the loss or delay of significant customerorders or the failure of existing customers to pay ongoing fees when due wouldharm our operating results.

 

**Oursales cycle in our enterprise business is lengthy and if revenue forecasted fora particular quarter is not realized in that quarter, significant expensesincurred may not be offset by corresponding revenue.**

 

Our sales cycle for oursoftware in our enterprise business typically ranges from three to nine monthsor more and may vary substantially from customer to customer. The purchase ofour products and services for corporate customers generally involves asignificant commitment of capital and other resources by a customer. Thiscommitment often requires significant technical review, assessment ofcompetitive products and approval at a number of management levels within acustomer’s organization. While our enterprise customers are evaluating ourproducts and services, we may incur substantial sales and marketing expensesand spend significant management effort to complete these sales. Any delay incompleting sales in a particular quarter or the failure to complete a saleafter expending resources during the sales cycle could cause our operatingresults to suffer.

 

**Wemay be unable to achieve or sustain profitability in our enterprise business ifwe do not manage our professional services organization or other costs in ourenterprise business effectively.**

 

Clients that license ourenterprise software solutions usually engage our professional servicesorganization to assist with installation and implementation of our software andrelated consulting services. Revenue from professional services typicallyrepresents a substantial portion of our total revenue and total costs.  The cost of delivering our professionalservices is expensive and in prior periods our professional services businesshas not been profitable.  We havegenerally billed our customers for professional services on a time and materialbasis, using an agreed upon daily rate. However, customers have increasinglyrequested various contract structures, including milestone-based contracts andcontracts for a fixed total fee. If unanticipated factors in a project areencountered, we may be subject to monetary and other significant penalties, andthe operating results from our professional services business would suffer.Furthermore, an estimated loss on a contract is generally required to berecorded in the period in which a loss becomes evident. Recording a loss on aservices contract could have a material adverse effect on our operating resultsfor the period in which the loss was recorded. One of our stated goals forfiscal 2008 is to operate our enterprise business in a consistently profitablemanner. Our ability to do so is heavily dependent on our ability to manageprofessional service costs. In addition to managing the costs in ourprofessional services organization, if we are unable to manage costs in ourenterprise customer support, research and development or sales and marketingorganizations, our enterprise business may not be able to achieve or sustainprofitability.

 

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**Ifour existing customers do not renew maintenance contracts or purchaseadditional products and services, our operating results could suffer.**

 

Historically, we havederived, and expect to continue to derive, a significant portion of our totalrevenue from existing customers who purchase additional products and servicesand renew maintenance contracts. In the past, some customers have sought toreduce the fees required to renew their maintenance contracts. In certain caseswe have permitted customers to reduce their maintenance fees for acorresponding reduction in the level of our support obligation to them.Furthermore, our customers may not renew maintenance contracts or purchaseadditional products and services. In addition, as we introduce new products,our current customers may not require or desire the functionality of our newproducts and may not ultimately purchase these products. If our customers donot renew maintenance contracts or do not purchase additional products andservices, our operating results would suffer.

 

**Ifour revenue from our international operations does not exceed the expense ofestablishing and maintaining international operations, our business couldsuffer.**

 

We have limitedexperience in international operations and may not be able to competeeffectively in international markets or effectively manage our operations invarious countries. If we do not generate enough revenue from internationaloperations to offset the expense of these operations, our operating resultscould suffer. Risks we face in conducting business internationally include:

 

·                  Costs of staffing and managing international operations;

 

·                  Changes in currency exchange rates and controls;

 

·                  Smaller customers with less ability to pay United States rates forsoftware and services;

 

·                  Difficulty in reaching geographically dispersed customers;

 

·                  Compliance with a variety of complex laws and treaties, includingunexpected changes in (or new) legislative or regulatory requirements;

 

·                  Differing technology standards, intellectual property protections,consumer protection and data privacy standards, and other legal considerations;

 

·                  Loss of proprietary information due to piracy, misappropriation orweaker laws regarding intellectual property protection;

 

·                  Longer sales cycles;

 

·                  Seasonal trends unique to international markets;

 

·                  Need to localize our products and services;

 

·                  Dependence on local vendors, consultants and business partners;

 

·                  Difficulties in staffing and managing international operations,including the difficulty in managing a geographically dispersed workforce incompliance with diverse local laws and customs;

 

·                  Potential adverse tax consequences;

 

·                  Licenses, tariffs and other trade barriers;

 

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·                  Difficulties in maintaining effective internal control over financialreporting and compliance as a result of a geographically-dispersed workforceand customers;

 

·                  Longer collection cycles for accounts receivable; and

 

·                  The effects of external events such as terrorist acts and any relatedconflicts or similar events worldwide.

 

**Ourfailure to establish and expand successful third-party alliances would harm ouroperating results.**

 

Our consumer offeringsrequire us to establish and maintain relationships with third parties,including retailers such as Office Depot, who will direct consumers to us andprovide technology support services to consumers based on our technology, aswell as with third parties to whom we outsource some of our service deliveryoperations. Failure to establish or maintain third-party relationships in our consumerbusiness, particularly with partners who sell our services, on acceptable termsor at all could materially and adversely affect the success of our business. Wesell to numerous consumers through each of these partners, and therefore adelay in the acquisition or rollout of our relationship with even one of thesepartners could cause us to miss revenue targets. Like our sales cycle in theenterprise business, the process of establishing a relationship with a retailpartner can be complex and time consuming, and we must pass multiple levels ofreview and test marketing in order to be selected. If we are unable toestablish a sufficient number of new retail partners on a timely basis oursales will suffer. There is also the risk that, once established, with thesepartners may take longer than we expect to produce revenue or may not producerevenue at all. One or more of our key partners may also discontinue sellingour services, offer them only on a limited basis or devote insufficient timeand attention to promoting them to their customers. If any of these keypartners merge with a competitor, particularly one that offers a servicecompetitive with ours, all of these risks could be exacerbated. Each of theserisks could reduce our sales and significantly harm our operating results.

 

While our consumer callcenter outsourcing relationships give us flexibility and greater capacity,those relationships also pose risks. We may be less able to manage the qualityof services provided by outsourced call centers as directly as we would our ownemployees, and outsourced services may be more costly.

 

We have alliances withthird parties that are important to our enterprise offerings. Our existingrelationships include those with hardware vendors and managed service providerswho provide outsourced support to corporate customers. If these relationshipsfail, we may need to devote substantially more resources to the sales andmarketing of our products and services than we would otherwise, and our effortsmay not be as effective. In addition, we may establish relationships withthird-party resellers and other sales partners as we expand internationally.Our failure to maintain existing relationships, or to establish newrelationships with key third parties, could significantly harm our ability tosell our products and services. In addition, our competitors may have strongalliances with other companies, including hardware providers, which couldimpact our ability to obtain greater market share, participate in deals where hardwareand software are sold together, or require us to reduce the price of productsand services, which could harm our business, prospects, financial condition andoperating results.

 

**Ourinvestments in marketable securities are subject to market risks which maycause losses and affect the liquidity of these investments.**

 

At March 31, 2008,we had $43 million in cash and cash equivalents and $64 million in marketablesecurities. We have historically invested these amounts in government debtsecurities, auction-rate securities, corporate notes and bonds, commercialpaper and money market funds meeting certain criteria. Certain of theseinvestments are subject to general credit, liquidity, market and interest raterisks, which may be exacerbated by the U.S. housing recession that has affectedvarious sectors of the financial markets and caused credit and liquidityissues. As of March 31, 2008, we determined that any declines in the fairvalue of our investments were temporary. There may be further declines in thevalue of these investments, which we may determine to be other-than-temporary.These market risks associated with our investment portfolio may have a negativeadverse effect on our results of operations, liquidity and financial condition.

 

At March 31, 2008and December 31, 2007 we had investments in AAA-rated auction-rate debtsecurities with various state student loan authorities of $23.9 millionand $38.9 million, respectively. At the time of our initial investment andthrough the date of this Report, all of the securities we have invested in arerated AAA, the highest rating issued by a rating agency, and the student loansmade by these authorities are substantially guaranteed by the federalgovernment through the Federal Family Education Loan Program (FFELP).Auction-rate securities are long-term variable rate bonds tied to short-terminterest rates. After the initial issuance of the securities, the interest rateon the securities is reset periodically, at intervals 

 

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established at the timeof issuance (e.g., every seven, twenty-eight, or thirty-five days; everysix months; etc.), based on market demand for a reset period. Auction-ratesecurities are bought and sold in the marketplace through a competitive biddingprocess often referred to as a “Dutch auction”. If there is insufficientinterest in the securities at the time of an auction, the auction may not becompleted and the rates may be reset to predetermined “penalty” or “maximum”rates. Following such a failed auction, we would not be able to access ourfunds that are invested in the corresponding auction-rate securities until afuture auction of these investments is successful, new buyers express interestin purchasing these securities in between reset dates, issuers establish adifferent form of financing to replace these securities, or final paymentsbecome due according to contractual maturities. Given the current negativeliquidity conditions in the global credit markets, in the months from February throughApril 2008 auctions failed for all of the of auction-rate securities weheld as of March 31, 2008, and as a result our ability to liquidate ourinvestment and fully recover the carrying value of our investment in the nearterm may be limited or not exist.

 

The fair value of ourauction rate securities at March 31, 2008 reflects an unrealized loss of$1.4 million.  Fair value for suchsecurities was based on a discounted cash flow valuation that takes intoaccount a number of factors including estimated duration, credit quality, andthe percentage of FFELP guarantee. We made assumptions about future cash flowsbased on maximum rate formulas and used estimates of market data, includingyields of trading securities that we believe to be similar or comparable. At March 31,2008, all auction rate securities were classified as Level 3 assets inaccordance with the SFAS No. 157 hierarchy.  Presently we have determined the decline invalue to be temporary because i) we have the intent and ability to hold thesesecurities in the near term in order to recoup their par values, ii) throughthe date of this Report all of the securities have maintained their AAA creditratings, iii) loans made by the issuers are backed by the federal government,and iv) we have noted no deterioration credit quality of the issuers.

 

However if circumstanceschange in the future and we believe we will not hold these securities tomaturity, we may be required to record an other than temporary impairmentcharge on these investments. We may similarly be required to record other thantemporary impairment charges if the ratings on any of these securities arereduced or if any of the issuers default on their obligations. In addition toimpairment charges, any of these events could cause us to lose part or all ofour investment in these securities. Any of these events could materially affectour results of operations and our financial condition. We currently believethese securities are not significantly impaired, primarily due to the AAAcredit rating of the issuers and the government backing of the loans made bythe issuers; however, it could take until the final maturity of the underlyingnotes (up to 30 years) to realize our investments’ recorded value. Basedon our expected operating cash flows, and our other sources of cash, we do notanticipate the potential lack of liquidity on these investments will affect ourability to execute our current business plan.

 

**We haverecorded long-lived assets, and our results of operations would be adverselyaffected if their value becomes impaired.**

 

Goodwill and identifiableintangible assets were recorded in part due to our acquisition of substantiallyall of the assets of Core Networks Incorporated in September 2004. We alsohave certain intangible assets with an indefinite life. We assess theimpairment of goodwill and indefinite life intangible assets annually or moreoften if events or changes in circumstances indicate that the carrying valuemay not be recoverable. We assess the impairment of acquired product rights andother finite life intangible assets whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. As a result of ourdiscontinuance of active marketing and selling of one of the products weacquired from Core Networks, and a reevaluation of the fair value of the CoreNetwork’s technology intangible assets, we recognized a non-cash write-down ofapproximately $1.7 million during the fourth quarter of 2007. Animpairment loss was recognized because the sum of the discounted future netcash flows expected to result from the use of the assets and their eventualdisposition was less than the carrying amounts. Such impairment loss wasmeasured as the difference between the carrying amounts of the assets and theirfair value. Furthermore, we evaluate cash flows at the lowest operating level.If the number of reporting units increases in the future, as it has in 2008,this may make impairment more probable than it would be with fewer reporting units.As was the case in the fourth quarter of 2007, future write-downs of goodwillor net long-lived and intangible assets, would cause our operating results tosuffer.

 

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**Wemay engage in investments, dispositions, acquisitions or other strategictransactions that could divert management attention and prove difficult tointegrate with our business.**

 

We may engage inacquisitions or divestitures of certain assets, businesses, products ortechnologies, or in other strategic initiatives. For example, we recentlycompleted the acquisition of YourTechOnline.com. Acquisitions, divestitures andother strategic transactions are inherently risky. Certain transactions may besubject to closing conditions, which may not be satisfied, and transactions maynot be completed, even after public announcement. Acquisitions may requirefurther use of our cash resources, the issuance of equity or debt securities,or the incurrence of other forms of debt, any of which could harm our financialcondition, results of operations, or our interest expense and leverage. If weissue equity securities, current stockholders’ percentage ownership andearnings per share may be diluted. The process of integrating businesses,technologies, services or products may result in unforeseen operatingdifficulties and expenditures. Acquisitions and divestitures could involve anumber of other potential risks to our business, including the following:

 

·                  Unanticipated costs and liabilities and unforeseen accounting chargesor fluctuations;

 

·                  Delays and difficulties in delivery of products and services;

 

·                  Failure to integrate management information systems, personnel,research and development, marketing, sales and support operations;

 

·                  Loss of key employees;

 

·                  Diversion of management’s attention from other business concerns anddisruption of our ongoing business;

 

·                  Difficulty in maintaining controls and procedures;

 

·                  Uncertainty on the part of our existing customers about our ability tooperate after a transaction;

 

·                  Loss of customers;

 

·                  Loss of alliance partners;

 

·                  Failure to realize the potential financial or strategic benefits of theacquisition; and

 

·                  Failure to successfully further develop the combined technology,resulting in the impairment of amounts recorded as goodwill or other intangibleassets.

 

**Wemust compete successfully in the markets in which we operate or our businesswill suffer.**

 

We compete in marketsthat are highly competitive, subject to rapid change and significantly affectedby new product introductions and other market activities of industryparticipants. We compete with a number of companies in the market for automateddelivery of support and service automation and other vendors who may offerproducts or services with features that compete with specific elements of oursoftware products and services. In addition, our customers and potentialcustomers have developed or may develop internally similar software systems.

 

The markets for ourproducts are still rapidly evolving, and we may not be able to competesuccessfully against current and potential competitors. Our ability to expandour business will depend on our ability to maintain our technologicaladvantage, introduce timely enhanced products to meet growing support needs,deliver on-going value to our customers and scale our business. Our potentialcompetitors may have longer operating histories, significantly greaterfinancial, technical and other resources, stronger strategic alliances orgreater name recognition than we have. Competition in our markets could reduceour market share or require us to reduce the price of products and services,which could harm our business, financial condition and operating results.

 

As we further expand ourbusiness into the market for premium technology support, we expect newcompetitors, including electronics retailers that offer premium technologysupport services, companies that offer online technology support and localcomputer repair shops. Certain of these competitors have longer operatinghistories, significantly greater financial, technical and other resources,stronger strategic alliances or greater name recognition than we have.

 

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**Theintegration of new management and the loss of key personnel may affect ourability to achieve our business goals.**

 

Our success depends onthe skills, experience and performance of our senior management, engineering,sales, marketing and other key personnel. Many members of senior managementhave been appointed within the last 2 years. Our success will depend to asignificant extent on the ability of these executives to function effectivelyin their new roles and to work together successfully. If these executives donot function and work together successfully, or if we lose the services of oneor more of our executives or key employees, our business could be harmed. Inaddition, we have reduced our workforce. Reductions in our workforce could makeit difficult to motivate and retain remaining employees or attract needed newemployees, and could also affect our ability to deliver products and servicesin a timely fashion.

 

**Ourreorganization efforts may strain our management and our administrative, technical,operational and financial infrastructure.**

 

In January 2008,we reorganized the company and began operating in two business units, theConsumer Group and the Enterprise Group. We also appointed an executive vice president to lead each of thebusiness units. We made this change in an effort to ensure that each part ofour business is focused, accountable and transparent at the segment level. Inconnection with this change we made several management and organizationalchanges. We are also focused on increasing our operating margins and improvingour operating efficiencies, particularly in our enterprise business. To thisend, we have undertaken reductions in our workforce in the fourth quarter of2007. All of these changes place a strain on our management, and ouradministrative, technical, operational and financial infrastructure. Inaddition, reductions in our workforce could make it difficult to motivate andretain remaining employees or attract needed new employees, and could alsoaffect our ability to deliver products and services in a timely fashion.

 

**Ourexposure to the credit risks of our customers and resellers could adverselyaffect our operating results and financial condition.**

 

To sell to some of ourcustomers, we may be required to take risks of uncollectible accounts. We maybe exposed to similar risks relating to third party resellers and other salespartners, as we intend to increasingly utilize such parties as we expand intonew geographic regions. Additionally, as we have expanded our businessinternationally, we have experienced longer payment terms and collection cyclesfrom customers outside the United States. While we monitor these situationscarefully and attempt to take appropriate measures to protect ourselves byrecognizing revenue upon collection of accounts from customers we deem to havecredit risks and upon sell-through by resellers, it is possible that we mayhave to write down or write off doubtful accounts. Such write-downs orwrite-offs would negatively affect our operating results for the period inwhich they occur, and, if large, could have a material adverse effect on ouroperating results and financial condition.

 

**Ourfuture product and service offerings may not achieve market acceptance.**

 

If we fail to developenhanced versions of our software in a timely manner or to provide products andservices that achieve rapid and broad market acceptance, we may not maintain orexpand our market share. We may fail to identify new product and serviceopportunities for our current market or new markets that we enter in thefuture. In addition, our existing products may become obsolete if we fail tointroduce new products or product enhancements that meet new customer demands,support new standards or integrate with new or upgraded versions of packagedapplications or operating systems. We have limited control over factors thataffect market acceptance of our product and services, including:

 

·                  The willingness of companies to transition to automated solutions; and

 

·                  Customer preferences for competitors’ solutions or other technologies.

 

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**Ourproducts depend on, and work with, products containing complex software; if ourproducts fail to perform properly due to errors in the software, we may need todevote resources to correct the errors or compensate for losses from theseerrors and our reputation could be harmed.**

 

Our products depend oncomplex software, both internally developed and licensed from third parties.Also, our customers may use our products with other companies’ products, whichmay also contain complex software. Complex software often contains errors andmay not perform properly. These errors could result in:

 

·                  Delays in product shipments;

 

·                  Unexpected expenses and diversion of resources to identify the sourceof errors or to correct errors, whether or not the error is later determined tobe related to our software;

 

·                  Damage to our reputation;

 

·                  Loss of or delay in revenue and loss of market share;

 

·                  Loss of customers;

 

·                  Failure to achieve market acceptance;

 

·                  Contractual penalties, demands, claims and litigation and relateddefense costs;

 

·                  Increased service and warranty costs; and

 

·                  Increased insurance costs.

 

In our consumerofferings, we generally use our own products to diagnose and resolve consumertechnology problems. If our products fail to perform well in this environment,our consumer offerings would suffer and may not be successful.

 

**Oursoftware may not operate with the hardware and software platforms that are usedby our customers now or in the future, and, as a result, our business andoperating results may suffer.**

 

We currently serve acustomer base with a wide variety of constantly changing hardware, software andnetworking platforms. For example, 64-bit microprocessors are becomingincreasingly important to our customer base. If we fail to release versions ofour software that are compatible with operating systems, software applicationsor hardware devices used by our customers, our business and operating resultswould suffer. Our future success also depends on the continuing ability of ourproducts to inter-operate with multiple platforms and packaged applicationsused by our customer base and on our management of software being developed bythird parties for our customers or for use with our products.

 

**Werely on third-party technologies and our inability to use or integratethird-party technologies could delay product or service development.**

 

We intend to continue tolicense technologies from third parties, including applications used in ourresearch and development activities and technologies such as third-party searchengine technology, which are integrated into our products and services. Our useof technologies licensed from third parties poses certain risks. Some of thethird-party technologies we license may be provided under “open source”licenses, which may have terms that require us to make generally available ourmodifications or derivative works based on such open source code. Our inabilityto obtain or integrate third-party technologies with our own products coulddelay product and service development until equivalent compatible technologycan be identified, licensed and integrated. These third-party technologies maynot continue to be available to us on commercially reasonable terms or at all.We may fail to successfully integrate any licensed technology into our productsor services, which would harm our business and operating results. Third-partylicenses also expose us to increased risks that include:

 

·                  Risks of product malfunction after new technology is integrated;

 

·                  The diversion of resources from the development of our own proprietarytechnology; and

 

·                  Our inability to generate revenue from new technology sufficient tooffset associated acquisition and maintenance costs.

 

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**Interruptionsor delays in service from our third-party Web hosting provider could impair thedelivery of our services and harm our business.**

 

We serve certain of ourcustomers through a third-party hosting facility located in the United States.We do not control the operation of this facility, and it is vulnerable todamage or interruption from fires, floods, telecommunications and connectivityfailures, power failures, and similar events. This facility is also subject torisks from vandalism, break-ins, intrusion, and similar intentional misconduct.Despite precautions taken at this facility such as disaster recovery planning,a natural disaster, act of terrorism or other unanticipated problem could causelengthy interruptions in the availability of our services and hosted softwareofferings. Interruptions in our services could reduce our revenue, increase ourcosts, cause customers and partners to fail to renew or to terminate their useof our offerings, and harm our reputation and our ability to attract newcustomers.

 

**Oursystems collect, access, use, and store personal customer information andenable customer transactions, which poses security risks, requires us to investsignificant resources to prevent or correct problems caused by securitybreaches, and may harm our business.**

 

A fundamental requirementfor online communications, transactions and support is the secure collection,storage and transmission of confidential information. Our systems collect andstore confidential and/or personal information of our customers, includingcredit card information, and our employees and contractors may access and usethat information in the course of providing services for our customers. Inaddition, we collect and retain personal information of our employees in theordinary course of our business. We and our third-party contractors usecommercially available technologies to secure this information. Despite thesemeasures, third parties may attempt to breach the security of our data or thatof our customers. In addition, errors in the storage or transmission of datacould breach the security of that information. We may be liable to ourcustomers for any breach in security and any breach could subject us togovernmental or administrative proceedings or monetary penalties, and harm ourbusiness and reputation. Also, computers are vulnerable to computer viruses,physical or electronic break-ins and similar disruptions, which could lead tointerruptions, delays or loss of data. We may be required to expend significantcapital and other resources to comply with mandatory privacy and security standardsrequired by law, industry standard, or contract, and to further protect againstsecurity breaches or to correct problems caused by any breach.

 

**Privacyconcerns and laws or other domestic or foreign regulations may require us toincur significant costs and may reduce the effectiveness of our solutions, andour failure to comply with those laws or regulations may harm our business andcause us to lose customers.**

 

Our software containsfeatures that allow our customers and our consumer technology supporttechnicians to access, control, monitor or collect information from computersrunning the software. Federal, state and foreign government bodies andagencies, however, have adopted or are considering adopting laws andregulations restricting or otherwise regulating the collection, use anddisclosure of personal information obtained from consumers and individuals.Those regulations could be costly to implement, could reduce the efficiency ofour operations, and could require us to modify our products, systems orservices. Liability for violation of, costs of compliance with, and otherburdens imposed by such laws and regulations may limit the use and adoption ofour solutions and reduce overall demand for them. Even the perception ofprivacy concerns, whether or not valid, may harm our reputation and inhibitadoption of our solutions. In addition, we may face claims about invasion ofprivacy or inappropriate disclosure, use, storage, or loss of this information.Any imposition of liability could harm our reputation, cause us to losecustomers and cause our operating results to suffer.

 

**Ourreported results of operations will continue to be materially and adverselyaffected by our adoption of SFAS No. 123R.**

 

Statement of FinancialAccounting Standards No. 123 (revised 2004), *“Share-Based Payment”* (SFAS No. 123R) becameeffective in our first quarter of 2006, and has resulted in our recognition ofsubstantial compensation expense relating to our employee stock options andemployee stock purchase plans. Historically, we generally have not recognizedin our statement of operations any compensation expense related to stock optiongrants we issue under our stock option plans or the discounts we provide underour employee stock purchase plans. We are now required to measure thecompensation expense related to employee stock awards on a fair value basis,which leads to substantial additional compensation expense and a materialadverse effect on our reported results of operations.

 

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**Ifwe are unable to maintain effective disclosure controls and procedures,including our internal control over financial reporting, our ability to reportour financial results on a timely and accurate basis may be adversely affected.**

 

We have evaluated our “disclosurecontrols and procedures” as such term is defined in Rule 13a-15(e) underthe Exchange Act as of March 31, 2008, as well as our internal controlover financial reporting as required by Section 404 of the Sarbanes-OxleyAct of 2002 as of December 31, 2007. Effective controls are necessary forus to provide reliable financial reports and effectively prevent fraud. If wecannot provide reliable financial reports or prevent fraud, our operatingresults would be harmed.  In addition, ifwe cannot establish effective internal control over financial reporting anddisclosure controls and procedures, investors may lose confidence in ourreported financial information, which could cause the market price of ourcommon stock to decline.

 

**Failureto resolve litigation or claims asserted against us may lead to continued costsand expenses and divert management’s attention from our business, which couldcause our revenue and our stock price to decline.**

 

A securities class actionlawsuit was filed against us and many other issuers in November 2001.Should this lawsuit linger for a longer period of time, whether ultimatelyresolved in our favor or not, or further lawsuits be filed against us, coveragelimits of our insurance or our ability to pay such amounts may not be adequateto cover the fees and expenses and any ultimate resolution associated with suchlitigation. The size of these payments, if any, individually or in theaggregate, could seriously impair our cash reserves and financial condition.The continued defense of this lawsuit also could result in diversion of ourmanagement’s time and attention away from business operations, which couldcause our financial results to decline. A failure to resolve definitivelycurrent or future material litigation in which we are involved or in which wemay become involved in the future, regardless of the merits of the respectivecases, could also cast doubt as to our prospects in the eyes of customers,potential customers and investors, which could cause our revenue and stockprice to decline.

 

**Wemay not obtain sufficient patent protection, which could harm our competitiveposition, increase our expenses and harm our business.**

 

Our success and abilityto compete depend to a significant degree upon the protection of our softwareand other proprietary technology. It is possible that:

 

·                  Our pending patent applications may not be issued;

 

·                  Competitors may independently develop similar technologies or designaround any of our patents;

 

·                  Patents issued to us may not be broad enough to protect our proprietaryrights; and

 

·                  Our issued patents could be successfully challenged.

 

**Werely upon patents, trademarks, copyrights and trade secrets to protect ourproprietary rights and if these rights are not sufficiently protected, it couldharm our ability to compete and to generate revenue.**

 

We rely on a combinationof laws, such as those applicable to patents, copyrights, trademarks and tradesecrets, and contractual restrictions, such as confidentiality agreements andlicenses, to establish and protect our proprietary rights. Our ability tocompete and grow our business could suffer if these rights are not adequatelyprotected. Our proprietary rights may not be adequately protected because:

 

·                  Laws and contractual restrictions may not adequately preventmisappropriation of our technologies or deter others from developing similartechnologies; and

 

·                  Policing unauthorized use of our products and trademarks is difficult,expensive and time-consuming, and we may be unable to determine the existenceor extent of this unauthorized use.

 

Also, the laws of othercountries in which we market our products may offer little or no protection ofour proprietary technologies. Reverse engineering, unauthorized copying orother misappropriation of our proprietary technologies could enable thirdparties to benefit from our technologies without paying us for them, whichwould harm our competitive position and market share.

 

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**Wemay face intellectual property infringement claims that could be costly todefend and result in our loss of significant rights.**

 

Our business relies uponthe use and licensing of technology and software. Other parties may assertintellectual property infringement claims against us or our customers, and ourproducts may infringe the intellectual property rights of third parties. Forexample, our products may infringe issued patents that may relate to ourproducts. In addition, as is increasingly common in the software industry, wemay be confronted with the aggressive enforcement of patents by companies whoseprimary business activity is to acquire patents for the purpose of offensivelyasserting them against other companies. From time to time, we have receivedallegations of intellectual property infringement, and we may receive moreclaims in the future. Intellectual property litigation is expensive andtime-consuming and could divert management’s attention from our business. Theoutcome of any litigation is uncertain and could significantly impact ourfinancial results. If there is a successful claim of infringement, we may berequired to develop non-infringing technology or enter into royalty or licenseagreements, which may not be available on acceptable terms, if at all. Ourfailure to develop non-infringing technologies or license proprietary rights ona timely basis would harm our business.

 

**Ifthe growth of demand for digital services does not continue, our ability toincrease our revenue could suffer.**

 

Our ability to increaseour revenue will depend in part on increased demand for digital services suchas high speed data, video over DSL and VoIP. If this demand does not grow asrapidly or to the extent we anticipate, our business could suffer. The growthof digital services is uncertain and will depend in particular upon theavailability, at a reasonable price, of such digital services, the building ofinfrastructure to support such services, the availability of competitiveproducts, and the reliability of such services.

 

**Wemay experience a decrease in market demand due to uncertain economic conditionsin the United States and in international markets, which has been furtherexacerbated by the concerns of terrorism, war and social and political instability.**

 

The United States andinternational economies have in the past experienced periods of slow economicgrowth and this could occur again. In addition, terrorist attacks in the UnitedStates and turmoil in certain overseas regions have increased uncertainty andmay exacerbate a decline in economic conditions, both domestically andinternationally. If the economy declines as a result of economic, political andsocial turmoil, or if there are further terrorist attacks in the United Statesor elsewhere, we may experience decreases in the demand for our products andservices, which would harm our operating results.

 

**Compliancewith public company rules and regulations is costly and requiressignificant resources.**

 

The Sarbanes-Oxley Act of2002, as well as rules subsequently implemented by the Securities andExchange Commission and the Nasdaq Global Select Market, has required changesin corporate governance practices of public companies. These rules andregulations require significant internal and external resources to comply withand are costly. Additionally, such compliance has made some activities moretime-consuming. These rules and regulations make it more difficult andmore expensive for us to obtain director and officer liability insurance, andwe may be required to accept reduced coverage or incur substantially highercosts to obtain coverage. Also, these new rules and regulations could alsomake it more difficult for us to attract and retain qualified members of ourboard of directors, particularly to serve on our audit committee, and qualifiedexecutive officers.

 

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**ITEM 6. EXHIBITS**

 
|        |       | Exhibits. —                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | 31.1 Chief Executive Officer Section 302  Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | 31.2 Chief Financial Officer Section 302  Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | 32.1 Statement of the Chief Executive Officer under  18 U.S.C. § 1350(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |       | 32.2 Statement of the Chief Financial Officer under  18 U.S.C. § 1350(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |
| (1)    | ** ** | The certifications filed as Exhibits 32.1 and 32.2  are not deemed “filed” for purposes of Section 18 of the Securities  Exchange Act of 1934 and are not to be incorporated by reference into any  filing of the Company under the Securities Exchange Act of 1933 or the  Securities Exchange Act of 1934, whether made before or after the date hereof  irrespective of any general incorporation by reference language contained in  any such filing, except to the extent that the registrant specifically  incorporates it by reference. |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                  |       |              |
|------------------|------------|-------------------|
|             |       |              |
| May 9, 2008 |       | SUPPORTSOFT, INC. |
|             |       |              |
|             |       | By:               | /s/ SHELLY  SCHAFFER |
|             | ** ** | ** **        | **Shelly  Schaffer** |
|             | ** ** | ** **        | **Chief  Financial Officer and** |
|             | ** ** | ** **        | **Executive  Vice President of Finance and** |
|             | ** ** | ** **        | **Administration** |
|             | ** ** | ** **        | **(Principal  Financial Officer, Chief Accounting** |
|             | ** ** | ** **        | **Officer  and Duly Authorized Signatory)** |

 

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**EXHIBITINDEX TO SUPPORTSOFT, INC.**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED MARCH 31,2008**

 
| 31.1   |   | Chief Executive Officer Section 302  Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2   |   | Chief Financial Officer Section 302  Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Statement of the Chief Executive Officer under 18  U.S.C. § 1350(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.2   |   | Statement of the Chief Financial Officer under 18  U.S.C. § 1350(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |
| (1)    |   | The certifications filed as Exhibits 32.1 and 32.2  are not deemed “filed” for purposes of Section 18 of the Securities  Exchange Act of 1934 and are not to be incorporated by reference into any  filing of the Company under the Securities Exchange Act of 1933 or the  Securities Exchange Act of 1934, whether made before or after the date hereof  irrespective of any general incorporation by reference language contained in  any such filing, except to the extent that the registrant specifically  incorporates it by reference. |

 

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