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

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**FORM 10-Q**

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**(Mark One)**

**x****                      ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended March31, 2007**

**OR**

**o****                         ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from             to             **

**CommissionFile 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, 3****rd Floor**

**Redwood City, CA 94063**

(Addressof Principal Executive Offices)

(Zip Code)

Registrant’sTelephone Number, Including Area Code: **(650) 556-9440**

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Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90days.    Yes  x    No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated  filer  o | Accelerated filer  x | Non-accelerated filer  o |
|---------------------------------------|--------------------------------|------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act.):    Yes  o    No  x

On May3, 2007, 45,501,817 shares of the Registrant’s Common Stock, $0.0001 par value,were outstanding.

 

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**SUPPORTSOFT, INC.**

**FORM 10-Q**

**QUARTERLY PERIOD ENDED MARCH 31, 2007**

**INDEX**
|                                | ** ** | ** **                                                                                           | ** ** | **Page** |
|--------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------|
| Part I. Financial  Information |       | 3                                                                                                    |
| Item 1.                   |       | Financial Statements  (Unaudited)                                                                    |       | 3        |
|                           |       | Condensed  Consolidated Balance Sheets at March 31, 2007 and December 31, 2006                       |       | 3        |
|                           |       | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2007 and 2006 |       | 4        |
|                           |       | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 and 2006 |       | 5        |
|                           |       | Notes to  Condensed Consolidated Financial Statements                                                |       | 6        |
| Item 2.                   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |       | 15       |
| Item 3.                   |       | Quantitative  and Qualitative Disclosures About Market Risk                                          |       | 23       |
| Item 4.                   |       | Controls and  Procedures                                                                             |       | 23       |
| Part II. Other  Information    |       | 24                                                                                                   |
| Item 1.                   |       | Legal Proceedings                                                                                    |       | 24       |
| Item 1A.                  |       | Risk  Factors                                                                                        |       | 24       |
| Item 6.                   |       | Exhibits                                                                                             |       | 34       |
| Signature                      |       |                                                                                                 |       | 35       |
| Exhibit Index             |       | 36                                                                                                   |

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

**SUPPORTSOFT,INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)**

 
| ** **                                          | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                          | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                     |       |                     |       |                        |       |
| Cash and cash  equivalents                          |       | $                        | 16,912     |                        | $          | 15,369 |   |
| Marketable securities                               |       | 102,167                  |       | 104,522                     |       |
| Accounts receivable,  net                           |       | 10,528                   |       | 15,144                      |       |
| Prepaid expenses and  other current assets          |       | 2,762                    |       | 2,894                       |       |
| Total current assets                                |       | 132,369                  |       | 137,929                     |       |
| Property and equipment,  net                        |       | 2,323                    |       | 937                         |       |
| Goodwill                                            |       | 9,792                    |       | 9,792                       |       |
| Intangible assets, net                              |       | 2,883                    |       | 3,155                       |       |
| Other assets                                        |       | 800                      |       | 792                         |       |
|                                                |       |                     |       |                        |       |
| **Total assets**                                    |       | $                        | 148,167    |                        | $          | 156,605 |   |
|                                                |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities:                                |       |                     |       |                        |       |
| Accounts payable                                    |       | $                        | 764        |                        | $          | 331 |   |
| Accrued compensation                                |       | 1,943                    |       | 2,112                       |       |
| Other accrued  liabilities                          |       | 3,458                    |       | 3,813                       |       |
| Deferred revenue, less  long-term portion           |       | 11,152                   |       | 13,435                      |       |
| Total current  liabilities                          |       | 17,317                   |       | 19,691                      |       |
| Deferred  revenue—long-term portion            |       | 152                      |       | 178                         |       |
| Other long-term  liabilities                        |       | 611                      |       | 233                         |       |
| Commitments and  contingencies                      |       |                     |       |                        |       |
| Stockholders’ equity:                          |       |                     |       |                        |       |
| Common stock                                        |       | 4                        |       | 4                           |       |
| Additional paid-in  capital                         |       | 205,651                  |       | 202,440                     |       |
| Accumulated other  comprehensive loss               |       | (756                     | )          | (751                        | )          |
| Accumulated deficit                                 |       | (74,812                  | )          | (69,190                     | )          |
| Total stockholders’  equity                    |       | 130,087                  |       | 132,503                     |       |
| **Total liabilities and stockholders’ equity** |       | $                        | 148,167    |                        | $          | 156,605 |   |

See accompanying notes.

3

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**SUPPORTSOFT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(Unaudited)**
| ** **                                                                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Revenue:                                                                                                                              |       |                                             |       |   |   |
| License                                                                                                                               |       | $                                                | 3,248      |   | $ | 2,051 |   |
| Maintenance                                                                                                                           |       | 3,923                                            |       | 3,929 |   |
| Services                                                                                                                              |       | 3,255                                            |       | 2,257 |   |
| Total revenue                                                                                                                         |       | 10,426                                           |       | 8,237 |   |
| Costs and  expenses:                                                                                                                  |       |                                             |       |   |   |
| Cost of license                                                                                                                       |       | 38                                               |       | 104 |   |
| Cost of  maintenance (including stock-based compensation of $16 and $2 for the three  months ended March 31, 2007 and 2006)           |       | 638                                              |       | 252 |   |
| Cost of services  (including stock-based compensation of $184 and $61 for the three months  ended March 31, 2007 and 2006)            |       | 4,483                                            |       | 2,890 |   |
| Amortization of purchased  intangible assets                                                                                          |       | 272                                              |       | 272 |   |
| Research and  development (including stock-based compensation of $116 and $105 for the  three months ended March 31, 2007 and 2006)   |       | 2,271                                            |       | 2,525 |   |
| Sales and  marketing (including stock-based compensation of $454 and $185 for the three  months ended March 31, 2007 and 2006)        |       | 7,460                                            |       | 5,134 |   |
| General and  administrative (including stock-based compensation of $414 and $308 for the  three months ended March 31, 2007 and 2006) |       | 2,524                                            |       | 2,130 |   |
| Total costs and  expenses                                                                                                             |       | 17,686                                           |       | 13,307 |   |
| Loss from  operations                                                                                                                 |       | (7,260                                           | )          | (5,070 | ) |
| Interest income  and other, net                                                                                                       |       | 1,853                                            |       | 1,304 |   |
| Loss before  income taxes                                                                                                             |       | (5,407                                           | )          | (3,766 | ) |
| Provision for  income taxes                                                                                                           |       | (215                                             | )          | (166 | ) |
| Net loss                                                                                                                              |       | $                                                | (5,622     | ) | $ | (3,932 | ) |
| Basic net loss  per share                                                                                                             |       | $                                                | (0.13      | ) | $ | (0.09 | ) |
| Shares used in  computing basic net loss per share                                                                                    |       | 44,930                                           |       | 43,835 |   |
| Diluted net loss  per share                                                                                                           |       | $                                                | (0.13      | ) | $ | (0.09 | ) |
| Shares used in  computing diluted net loss per share                                                                                  |       | 44,930                                           |       | 43,835 |   |

See accompanying notes.

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**SUPPORTSOFT,INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**
| ** **                                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Operating  Activities:                                                                     |       |                                             |       |   |   |
| Net loss                                                                                   |       | $                                                | (5,622     | ) | $ | (3,932 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                             |       |   |   |
| Depreciation,  amortization and accretion                                                  |       | (83                                              | )          | 346 |   |
| Amortization of  intangible assets                                                         |       | 272                                              |       | 272 |   |
| Stock-based  compensation                                                                  |       | 1,184                                            |       | 661 |   |
| Changes in  assets and liabilities:                                                        |       |                                             |       |   |   |
| Accounts receivable, net                                                                   |       | 4,616                                            |       | 8,447 |   |
| Prepaid expenses and other current assets                                                  |       | 132                                              |       | (313 | ) |
| Other long-term assets                                                                     |       | (8                                               | )          | 140 |   |
| Accounts payable                                                                           |       | 433                                              |       | (432 | ) |
| Accrued compensation                                                                       |       | (169                                             | )          | (1,079 | ) |
| Other accrued liabilities                                                                  |       | (355                                             | )          | (958 | ) |
| Other long-term liabilities                                                                |       | 378                                              |       | 14 |   |
| Deferred revenue                                                                           |       | (2,309                                           | )          | (1,384 | ) |
| Other                                                                                      |       | (23                                              | )          | (27 | ) |
| Net cash  provided by (used in) operating activities                                       |       | (1,554                                           | )          | 1,755 |   |
|                                                                                       |       |                                             |       |   |   |
| Investing  Activities:                                                                     |       |                                             |       |   |   |
| Purchases of property and equipment                                                        |       | (1,619                                           | )          | (164 | ) |
| Purchases of marketable securities                                                         |       | (26,873                                          | )          | (6,511 | ) |
| Sales and maturities of marketable securities                                              |       | 29,562                                           |       | 6,566 |   |
| Net cash  provided by (used in) investing activities                                       |       | 1,070                                            |       | (109 | ) |
|                                                                                       |       |                                             |       |   |   |
| Financing  Activities:                                                                     |       |                                             |       |   |   |
| Proceeds from issuances of common stock                                                    |       | 2,027                                            |       | 1,147 |   |
| Net cash  provided by financing activities                                                 |       | 2,027                                            |       | 1,147 |   |
| Net increase in  cash and cash equivalents                                                 |       | 1,543                                            |       | 2,793 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 15,369                                           |       | 23,342 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                                | 16,912     |   | $ | 26,135 |   |
|                                                                                       |       |                                             |       |   |   |
| Supplemental  schedule of cash flow information:                                           |       |                                             |       |   |   |
| Income taxes paid                                                                          |       | $                                                | 42         |   | $ | 156 |   |

See accompanying notes.

5

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**SUPPORTSOFT, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1.Significant Accounting Policies**

**Basis ofPresentation**

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of SupportSoft, Inc. (the “Company” or “SupportSoft”) and itswholly-owned subsidiaries. All intercompany balances and transactions have beeneliminated. The balance sheet as of March 31, 2007 and the statements ofoperations for the three months ended March 31, 2007 and 2006 and cash flowsfor the three months ended March 31, 2007 and 2006 are unaudited. In theopinion of 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 ofDecember 31, 2006 is derived from audited financial statements as of thatdate. These unaudited interim condensed consolidated financial statementsshould be read with the consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K, filed with the Securitiesand Exchange Commission on March 16, 2007.

**Use ofEstimates and Reclassifications**

Thepreparation of interim condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and the accompanying notes.Actual results could differ materially from these estimates. In addition,certain amounts that were previously reported have been reclassified to conformto the current period presentation.

**RevenueRecognition**

We recognize revenue in accordance with the AmericanInstitute of Certified Public Accountants’ (AICPA) Statement of Position (SOP)97-2, *“Software Revenue Recognition,”* asamended by SOP 98-4 and SOP 98-9. License revenue is recognized when all of thefollowing criteria are met:

·                  persuasiveevidence of an arrangement exists;

·                  delivery hasoccurred;

·                  collection isconsidered probable; and

·                  the fees arefixed or determinable.

SupportSoftconsiders all arrangements with payment terms longer than 90 days not to befixed or determinable. If a fee is determined not to be fixed or determinable,revenue is recognized as payments become due from a customer. License revenueis comprised 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.We allocate revenues on these licenses based upon the fair value of eachundelivered element including undelivered maintenance, consulting and training.The determination of fair value is based upon vendor specific objectiveevidence (VSOE). VSOE for maintenance is based upon separate renewals ofmaintenance from customers. VSOE for consulting and training is based uponseparate sales of these services to customers. Assuming all other revenuerecognition criteria are met, the difference between the total arrangement feeand the amount deferred for each undelivered element is recognized as licenserevenue. In perpetual arrangements that include contractual obligationssuch as rights to unspecified future products, license revenue is recognizedratably over the contract period.

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Term licenses are soldwith maintenance for which SupportSoft does not have VSOE to determine fairvalue for maintenance fees. As a result, license revenue for term licenses isrecognized ratably over the duration of the agreement. License revenue in theaccompanying financial statements includes maintenance for term licenses. We donot allocate maintenance revenue from term licenses to maintenance revenue, aswe do not believe there is an allocation methodology that provides a meaningfuland supportable allocation between license and maintenance revenues. Termlicense revenue was 4% and 7% of total revenue for three months ended March 31,2007 and 2006, respectively. Services revenue associated with the term licensesare recognized ratably over the term of the license.

We provide resellers withthe right to sublicense our software to end user customers. Generally, werecognize revenue from our arrangements with resellers upon persuasive evidencethat the reseller has actually sublicensed the software to a named end user(sell-through), assuming all other criteria for revenue recognition have beenmet. The forms of evidence of sell-through acceptable to us include one or moreof the following:  i) a copy of theagreement or license between the reseller and the end user, ii) a purchaseorder from the end user to the reseller, iii) a written communication from thereseller to the Company specifically identifying the end user, or iv) deliverymade directly by SupportSoft to the end user. Whether the license revenue isthen recognized immediately or ratably depends upon the terms of thearrangements with the reseller regarding the sublicense (i.e. perpetual licenseor term license). If a reseller is not deemed creditworthy, revenue otherwiserecognizable is deferred until cash is received. When licensing arrangementswith resellers include guaranteed minimum amounts due, revenue is recognizedratably over the term of the arrangement commencing when payments are made orbecome due.

Maintenance revenue isprimarily comprised of revenue from post-contract technical support services,which includes software product updates. Maintenance revenue is recognizedratably over the term of the maintenance period, which is generally one year.We invoice customers who elect to renew their maintenance agreements, at whichtime an equal amount is recorded as accounts receivable and deferred revenue.

Services revenue isprimarily comprised of revenue from professional services such as consulting,training and hosting fees. Arrangements are evaluated to determine whetherthose services are essential to the functionality of other elements of thearrangement. 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 are generally recognized as the services are performed orproject milestones are accepted by the customer. When non-essential servicesare bundled in a term licensing arrangement, revenue from the services isrecognized ratably over the term of the license.

Inconnection with licensing arrangements we may also provide hosting of our ownsoftware, a service for which SupportSoft does not currently have VSOE. Ifhosting services are sold with perpetual licenses, license revenue isrecognized ratably over the longest period in the contract. Hosting, consultingand training revenue in such arrangements are also recognized ratably over thelongest period in the contract.

**Cash, Cash Equivalents and MarketableSecurities**

SupportSoftconsiders all liquid instruments with an original maturity at the date ofpurchase of ninety days or less to be cash equivalents. At March 31, 2007, cashequivalents and marketable securities consisted primarily of money marketfunds, commercial paper, auction rate securities, corporate bonds and notes andtreasury bills issued by the United States government and its agencies. Ourmarketable securities are classified as available-for-sale as of the respectivebalance sheet dates, and are reported at fair value with unrealized gains andlosses included in accumulated other comprehensive income within stockholders’equity on the consolidated balance sheet. Realized gains and losses anddeclines in value judged to be other-than-temporary on available-for-salesecurities are included in other income (expense), net in the consolidatedstatement of operations.

Theamortized cost of debt securities is adjusted for amortization of premiums andaccretion of discounts to maturity, both of which are included in interestincome. SupportSoft recorded net unrealized losses on marketable securities of$34,000 and $54,000 at March 31, 2007 and December 31, 2006, respectively.

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Wemonitor our investments for impairment on a quarterly basis and determinewhether a decline in fair value is other-than-temporary by considering factorssuch as current economic and market conditions, the credit rating of thesecurity’s issuer, the length of time an investment’s fair value has been belowour carrying value, and our ability and intent to hold investments to maturity.If an investment’s decline in fair value is deemed to be other-than-temporary,we reduce its carrying value to its estimated fair value, as determined basedon quoted market prices or liquidation values. Declines in value judged to beother-than-temporary, if any, are recorded in operations as incurred.

Thefollowing is a summary of cash, cash equivalents and marketable securities atMarch 31, 2007 (in thousands):
| ** **                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|-------------------------------|------------|---------------------|------------|
| Cash                         |       | $                   | 7,881      |                          | $          | —              |       | $ | 7,881 |   |
| Money market  funds          |       | 3,999               |       | —                        |       | 3,999               |       |
| Commercial paper             |       | 23,126              |       | (14                           | )          | 23,112              |       |
| Federal agencies  securities |       | 9,996               |       | —                        |       | 9,996               |       |
| Corporate bonds              |       | 30,511              |       | (20                           | )          | 30,491              |       |
| Auction rate  securities     |       | 43,600              |       | —                        |       | 43,600              |       |
|                         |       | $                   | 119,113    |                          | $          | (34                 | )          | $ | 119,079 |   |
|                         |       |                |       |                          |       |                |       |
| Classified as:               |       |                |       |                          |       |                |       |
| Cash and cash  equivalents   |       | $                   | 16,914     |                          | $          | (2                  | )          | $ | 16,912 |   |
| Marketable  securities       |       | 102,199             |       | (32                           | )          | 102,167             |       |
|                         |       | $                   | 119,113    |                          | $          | (34                 | )          | $ | 119,079 |   |

 

**Concentrationsof Credit Risk**

Financialinstruments that potentially subject us to concentrations of credit riskconsist principally of cash equivalents, marketable securities and tradeaccounts receivable. Our investment portfolio is diversified and consists ofinvestment grade securities. Our investment policy limits the amount of creditrisk exposure to any one issuer and in any one country except the UnitedStates. We are exposed to credit risks in the event of default by the issuersto the extent of the amount recorded on our balance sheet. The credit risk inour trade accounts receivable is substantially mitigated by our creditevaluation process, reasonably short collection terms and because the Companysells its products primarily to large organizations in diversified industries.

For thethree months ended March 31, 2007, one customer accounted for 12% of our totalrevenue.  For the three months endedMarch 31, 2006, there was no customer that accounted for 10% or more of totalrevenue.

**Trade Accounts Receivable**

Tradeaccounts receivable are recorded at the invoiced amount. We perform evaluationsof our customers’ financial condition and generally do not require collateral.We make judgments as to our ability to collect outstanding receivables andprovide allowances for the portion of receivables for which collection becomesdoubtful. Provisions are made based upon a specific review of all significantoutstanding invoices. For those invoices not specifically provided for,provisions are recorded at differing rates, based upon the age of thereceivable. In determining these percentages, we analyze our historicalcollection experience and current payment trends. If the historical data we useto calculate the allowance for doubtful accounts does not reflect the futureability to collect outstanding receivables, additional provisions for doubtfulaccounts may be needed and the future results of operations could be materiallyaffected. At March 31, 2007 and December 31, 2006, the Company hadreserves for credit losses of $294,000 and $373,000, respectively. At March 31,2007, two different customers accounted for 19% and 11% individually of ourtotal accounts receivable. At December 31, 2006, one customer accountedfor 15% of our total accounts receivable.

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**Stock-Based Compensation**

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004), “*Share-Based Payment,*”(SFAS 123R) which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directorsincluding employee stock options and employee stock purchases based onestimated fair values.

Thefair value of the Company’s stock options granted to employees for the threemonths ended March 31, 2007 and 2006 was estimated using the followingassumptions:
|                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Stock  Option Plan:**                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Risk-free  interest rate                  |       | 4.5                                              | %          | 4.7 | % |
| Expected term                             |       | 3.8 years                                        |       | 3.9 years |   |
| Volatility                                |       | 51.2                                             | %          | 60.8 | % |
| Estimated  forfeitures                    |       | 8                                                | %          | 8 | % |
| Expected  dividend                        |       | 0                                                | %          | 0 | % |
| Weighted average  fair value              |       | $                                                | 2.61       |   | $ | 2.16 |   |
| ** **                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Employee  Stock Purchase Plan (ESPP):** | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Risk-free  interest rate                  |       | 4.7                                              | %          | 4.7 | % |
| Expected term                             |       | 0.5 to 2.0 years                                 |       | 0.5 to 2.0 years |   |
| Volatility                                |       | 54.1                                             | %          | 54.1 | % |
| Estimated  forfeitures                    |       | 8                                                | %          | 8 | % |
| Expected  dividend                        |       | 0                                                | %          | 0 | % |
| Weighted average fair  value              |       | $                                                | 1.66       |   | $ | 1.66 |   |

TheCompany recorded the following stock-based compensation expense for the periodended March 31, 2007 and 2006:
| **Three Months Ended March 31,**                                           | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Stock  option compensation expense recognized in:**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of maintenance                                                        |       | $          | 15         |       | $          | 1 |   |
| Cost of services                                                           |       | 171        |       | 45         |       |
| Research and development                                                   |       | 109        |       | 72         |       |
| Sales and marketing                                                        |       | 439        |       | 150        |       |
| General and administrative                                                 |       | 407        |       | 291        |       |
| Total                                                                      |       | 1,141      |       | 559        |       |
| **ESPP  compensation expense recognized in:**                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of maintenance                                                        |       | 1          |       | 1          |       |
| Cost of services                                                           |       | 13         |       | 16         |       |
| Research and development                                                   |       | 7          |       | 33         |       |
| Sales and marketing                                                        |       | 15         |       | 35         |       |
| General and administrative                                                 |       | 7          |       | 17         |       |
| Total                                                                      |       | 43         |       | 102        |       |
|                                                                       |       |       |       |       |       |
| **Stock-based compensation  expense included in total costs and expenses** |       | $          | 1,184      |       | $          | 661 |   |

 

9

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Thefollowing table represents stock option activity for the three months endedMarch 31, 2007:
| ** **                                          | ** ** | **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 |       | 13,580,874                 |       | $                                          | 5.334      |                                                |       |                                                            |       |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Granted                                             |       | 629,500                    |       | 6.024                                      |       |                                                |       |                                                            |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Exercised                                           |       | (643,222                   | )          | 2.863                                      |       |                                                |       |                                                            |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Forfeited                                           |       | (331,998                   | )          | 7.107                                      |       |                                                |       |                                                            |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Outstanding  options at the end of the period       |       | 13,235,154                 |       | $                                          | 5.45       |                                                | 6.29       |                                                            | $          | 12,702 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Options vested  and expected to vest                |       | 13,120,657                 |       | $                                          | 5.46       |                                                | 6.29       |                                                            | $          | 12,581 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                                            |       |
| Outstanding exercisable  at the end of the period   |       | 6,111,595                  |       | $                                          | 6.44       |                                                | 6.29       |                                                            | $          | 4,880 |   |

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value that would have been received by the option holders had theyall exercised their options on March 31, 2007. This amount changes based on thefair market value of the Company’s stock. During the three months ended March31, 2007 and 2006, the aggregate intrinsic value of options exercised under theCompany’s stock option plans was $736,000 and $296,000 respectively. Total fairvalue of options vested during the three months ended March 31, 2007, and 2006was $1.2 million and $563,000, respectively.

At March 31, 2007, there was $14.5 million ofunrecognized compensation cost related to existing option outstanding which isexpected to be recognized over a weighted average period of 3.3 years.

Priorto the adoption of SFAS 123R, our Board of Directors approved the accelerationof vesting of certain unvested and out-of-money stock options with exerciseprices equal or greater than $5.00 per share. The acceleration of vesting waseffective for stock options outstanding as of December 21, 2005. Approximately3.0 million stock options or 32% of our outstanding unvested stock options weresubject to this acceleration and their weighted average price was $7.02. Theoptions accelerated excluded options previously granted to Board of Directors,employees who had terminations pending, and foreign employees who opted out ofthe acceleration for tax reasons. For all officers and vice-presidents(non-officers) the acceleration was accompanied by restrictions that preventthe sale of any such shares prior to the date such shares would have originallyvested had the optionee been employed on such date. The purpose of theacceleration was to avoid recognizing compensation expense associated withthese options in our Consolidated Statements of Operations upon the adoption ofSFAS 123R on January 1, 2006.

**Net Loss Per Share**

Basicand diluted net loss per share are presented in accordance with Statement ofFinancial Accounting Standards No. 128 *“Earnings per Share”*(SFAS 128), for all periods presented. In accordance with SFAS 128, basic anddiluted net loss per share have been computed using the weighted-average numberof common shares outstanding during the period.

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Thefollowing table sets forth the computation of basic and diluted net income(loss) per share (in thousands, except per share amounts):
|                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net loss                                             |       | $                                                | (5,622     | ) | $ | (3,932 | ) |
|                                                 |       |                                             |       |   |   |
| Basic:                                               |       |                                             |       |   |   |
| Shares used in  computing basic net loss per share   |       | 44,930                                           |       | 43,835 |   |
| Basic net loss  per share                            |       | $                                                | (0.13      | ) | $ | (0.09 | ) |
|                                                 |       |                                             |       |   |   |
| Diluted:                                             |       |                                             |       |   |   |
| Shares used in  computing diluted net loss per share |       | 44,930                                           |       | 43,835 |   |
| Diluted net loss per  share                          |       | $                                                | (0.13      | ) | $ | (0.09 | ) |

**Warrantiesand Indemnifications**

SupportSoftgenerally provides a warranty for its software products and services to itscustomers and accounts for its warranties under the FASB’s Statement ofFinancial Accounting Standards No. 5 “*Accounting forContingencies*” (SFAS 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 failure of the product in breach of suchwarranties, SupportSoft generally is obligated to correct the product orservice to conform to the warranty provision or, if SupportSoft is unable to doso, the customer is entitled to seek a refund of the purchase price of theproduct or service. SupportSoft did not provide for a warranty accrual as ofMarch 31, 2007 or December 31, 2006. To date, SupportSoft’s productwarranty expense has not been significant.

SupportSoftgenerally agrees to indemnify its customers against legal claims thatSupportSoft’s software products infringe certain third-party intellectualproperty rights and accounts for its indemnification obligations under SFAS 5.To date, SupportSoft has not been required to make any payment resulting frominfringement claims asserted against our customers and has not recorded anyrelated accruals.

**Recent Accounting Pronouncements**

In February 2007, theFinancial Accounting Standards Board (FASB) issued SFAS No. 159 “*The Fair Value Option for Financial Assets and Financial Liabilities*”(SFAS 159). SFAS 159 permits companies to choose to measure certainfinancial instruments and certain other items at fair value. The standardrequires that unrealized gains and losses on items for which the fair valueoption has been elected be reported in earnings. SFAS 159 is effective forthe Company beginning in the first quarter of fiscal year 2008, althoughearlier adoption is permitted. The Company is currently evaluating the impactof adopting SFAS 159 on its consolidated financial statements.

**Note 2. Comprehensive Loss**

Statementof Financial Accounting Standards No. 130 “*ReportingComprehensive Income*” (SFAS 130) establishes standards for reportingand displaying comprehensive net income and its components in stockholders’equity. SFAS 130 has no impact on our net income or loss as presented in ourfinancial statements. SFAS 130 requires foreign currency translationadjustments and changes in the fair value of available-for-sale securities to beincluded in comprehensive income or loss.

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The following are the components of comprehensive loss(in thousands):
|                                                       | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net loss                                              |       | $                                                | (5,622     | ) | $ | (3,932 | ) |
| Net unrealized  gain on available-for-sale securities |       | 19                                               |       | 19 |   |
| Foreign currency  translation loss                    |       | (24                                              | )          | (27 | ) |
| Comprehensive loss                                    |       | $                                                | (5,627     | ) | $ | (3,940 | ) |

Thecomponents of accumulated other comprehensive income (loss) relate entirely toforeign currency translation adjustment gains and losses and unrealized gainsand losses on available-for-sale securities and are $(722,000) and $(34,000) atMarch 31, 2007, respectively.

**Note 3. Income Taxes**

Werecorded income tax provisions of $215,000 and $166,000 for the three monthsended March 31, 2007 and 2006 respectively. These provisions primarilyreflect foreign income taxes including foreign withholding taxes related tocertain international customer payments.

As ofMarch 31, 2007, our deferred tax assets are fully offset by a valuationallowance. The FASB’s Statement of Financial Accounting Standards No. 109 “*Accounting for Income Taxes*” (SFAS 109) provides for therecognition of deferred tax assets if realization of such assets is more likelythan not. Based upon the weight of available evidence, which includesSupportSoft’s historical operating performance, reported cumulative net lossessince inception and difficulty in accurately forecasting our future results,the Company provided a full valuation allowance against its net deferred taxassets. We reassess the need for our valuation allowance on a quarterly basis.If it is later determined that a portion of the valuation allowance should bereversed, it will result in a benefit to the income tax provision.

EffectiveJanuary 1, 2007, we adopted Financial Accounting Standards Interpretation,No. 48 (FIN 48), “*Accounting  for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109.*” FIN 48 prescribes arecognition threshold and measurement guidance for the financial statementreporting of uncertain tax positions taken or expected to be taken in a company’sincome tax return. FIN 48 also provides guidance related to derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition matters related to uncertain tax positions. FIN 48utilizes a two-step approach for evaluating uncertain tax positions accountedfor in accordance with SFAS 109. Step one, *Recognition*,requires a company to determine if the weight of available evidence indicates thata tax position is more likely than not to be sustained upon audit, includingresolution of related appeals or litigation processes, if any. Step two, *Measurement*, is based on the largestamount of benefit, which is more likely than not to be realized on ultimatesettlement. The cumulative effect of adopting FIN 48, if any, is recorded as anadjustment to the opening balance of retained earnings as of the adoption date.

As aresult of the implementation of FIN 48, SupportSoft recognized no change in theliability for unrecognized tax benefits related to tax positions taken in priorperiods.  Additionally, SupportSoftreclassified $312,000 from current taxes payable to long-term taxes payable asFIN 48 specifies that tax positions for which the timing of the ultimateresolution is uncertain should be recognized as long-term liabilities.

As ofJanuary 1, 2007, the amount of unrecognized tax benefit where it is reasonablypossible that a significant change may occur in the next 12 months isapproximately $22,000.  The change wouldresult from expiration of the statute of limitations in several foreignjurisdictions.

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Uponadoption of FIN 48, the Company’s policy to include interest and penaltiesrelated to unrecognized tax benefits within the Company’s provision for(benefit from) income taxes did not change. As of March 31, 2007, the Company had $27,000 accrued for payment ofinterest and penalties related to unrecognized tax benefits ($23,000 as of theadoption date of FIN 48).  For the threemonths ended March 31, 2007, the Company recognized $4,000 of interest andpenalties related to unrecognized tax benefits in its provision for incometaxes.

As ofadoption, the Company’s total unrecognized tax benefits were $1,867,000 ofwhich $335,000, if recognized, would affect its effective tax rate. As of March31, 2007, the Company’s total unrecognized tax benefits were $1,890,000 ofwhich $358,000, if recognized, would affect its effective tax rate. The Companyanticipates an increase to the unrecognized tax benefits during 2007 relatedprimarily to tax credits and certain foreign tax exposures. While the increasein the unrecognized tax benefit cannot be estimated at this time, the 2007changes are not expected to have a material effect on the financial statements.The tax years 1997 through 2006 remain open to examination in severaljurisdictions, none of which have individual significance.

**Note 4. Contingencies**

*Legal Matters*

*In reSupportSoft, Inc. Securities Litigation* is a consolidatedcomplaint filed in the United Stated District Court of the Northern District ofCalifornia against the Company, our former CEO and former CFO. The complaintgenerally alleges violations of certain federal securities laws and seeksunspecified damages. On June 1, 2006 this action was certified to proceed as aclass action on behalf of all persons and entities who purchased or otherwiseacquired the securities of the Company from January 20, 2004 to October 1, 2004and who were allegedly damaged thereby. The case is currently in discovery. Atrial date has been set for October 29, 2007. The defendants in thelawsuit, including the Company, intend to vigorously defend themselves againstthe consolidated lawsuit. While we cannot predict with certainty theoutcome of the litigation, we believe that we have meritorious defenses to theclaims in the complaint.

*White v. Basu et al.*is a derivativeshareholder complaint filed in the Superior Court of the State of Californiafor the County of San Mateo. This complaint was filed on behalf of the Companyas a nominal defendant against certain of our directors and former directorsand alleges that the director defendants harmed the Company by making orpermitting the Company to make false and misleading statements between January20, 2004 and October 1, 2004. On October 4, 2006 the court denied thedefendants’ demurrer to the plaintiffs’ First Amended Complaint. Plaintiffsfiled a Second Amended Complaint on October 27, 2006, which the defendantsanswered on November 6, 2006. The case is currently in discovery. While wecannot predict with certainty the outcome of the litigation, we believe we havemeritorious defenses to the claims in the Second Amended Complaint.

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. The lawsuit alleged that our registration statement andprospectus dated July 18, 2000 for the issuance and initial publicoffering of 4,250,000 shares of our common stock contained materialmisrepresentations and/or omissions related to alleged inflated commissionsreceived by the underwriters of the offering. The lawsuit seeks unspecifieddamages as well as interest, fees and costs. Similar complaints have been filedagainst 55 underwriters and more than 300 other companies and other individualofficers and directors of those companies. All of the complaints against theunderwriters, issuers and individuals have been consolidated for pre-trial purposesbefore U.S. District Court Judge Scheindlin of the Southern District of NewYork. On June 26, 2003, the plaintiffs announced that a proposedsettlement between the issuer defendants and their directors and officers hadbeen reached. Under the proposed settlement, which is subject to courtapproval, our insurance carrier would be responsible for any payments otherthan attorneys’ fees prior to June 1, 2003. A final settlement approvalhearing on the proposed issuer settlement was held on April 24, 2006. Thedistrict court took the matter under submission and has not yet ruled.Meanwhile the consolidated case against the underwriters has proceeded. OnOctober 13, 2004, the district court certified a class in the underwriters’proceeding. On December 5, 2006, however, the Second Circuit reversed,holding that a class could not be certified. The Second Circuit’s holding,while directly affecting only the underwriters, raises some doubt as to whetherthe proposed issuer settlement will be approved in its present form. OnJanuary 5, 2007, plaintiffs petitioned the Second Circuit for rehearing ofthe Second Circuit’s decision. On April 6, 2007, the Second Circuit denied thepetition for rehearing. At a status conference on April 23, 2007, the districtcourt suggested that the issuers’ settlement could not be approved in itspresent form, given the Second

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Circuit’s ruling. Thedistrict court set a further status conference for May 30, 2007. While we cannot predict withcertainty the outcome of the litigation or whether the settlement will beapproved, we believe we and our officers have meritorious defenses to theclaims in the litigation.

We are also subject to other routine legalproceedings, as well as demands, claims and threatened litigation, that arisein the normal course of our business. The ultimate outcome of any litigation isuncertain, and either unfavorable or favorable outcomes could have a materialnegative impact on our financial condition and operating results. Regardless ofoutcome, litigation can have an adverse impact on SupportSoft because ofdefense costs, diversion of management resources and other factors.

*SalesTaxes Contingencies*

We arerequired to make periodic filings in the states where we are deemed to have apresence for tax purposes. We have undergone state audits in the past and havepaid assessments arising from these audits. To date, such amounts have not beenmaterial. We evaluate estimated losses that could arise from similarassessments in accordance with SFAS No. 5, “*Accountingfor 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 5. Restructuring Obligations andOther Charges**

In2006, the Company reduced its workforce by 25 employees, or approximately 10%of its workforce at that time. As a result, the Company recorded arestructuring charge of $817,000 in 2006. The restructuring charge wascomprised entirely of severance costs and other personnel-related terminationcosts. Restructuring expenses included in the consolidated statements ofoperations for 2006 were $33,000 for cost of maintenance, $163,000 for cost ofservices, $40,000 for research and development, $386,000 for sales andmarketing and $195,000 for general and administrative. Cash payments of$689,000 were made against those obligations.

In thefirst quarter of 2007, there were no additional restructuring charges, onlycash payments totaling $123,000 against the obligation at December 31,2006.  The following table summarizesactivity associated with the restructuring and related expenses incurred as ofMarch 31, 2007 (in thousands):
|                                                    | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-----------|------------|
| Restructuring  costs incurred in 2006              |       | $         | 817        |   |
| Cash payments                                      |       | (689      | )          |
| Restructuring  obligations, December 31, 2006 |       | $         | 128        |   |
| Cash payments                                      |       | (123      | )          |
| Restructuring  obligations, March 31, 2007         |       | $         | 5          |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations should be read together with the unaudited condensed consolidatedfinancial statements and related notes appearing in Item 1 of this reporton Form 10-Q and the section entitled “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the consolidated financialstatements and related notes included in SupportSoft’s Annual Report on Form10-K for the year ended December 31, 2006.

**This report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended, includingstatements regarding our expectations, beliefs, intentions or strategiesregarding the future. Words such as “anticipates,” “expects,” “intends,” “plans,”“believes,” “seeks,” “estimates” and similar expressions identify suchforward-looking statements. These statements relate to our future plans,objectives, expectations, intentions and financial performance, as well asstatements regarding the impact on our business from our new consumertechnology support initiative, anticipated competition with respect to theconsumer offering, the development of our professional services organization,expected cash flows and expenses (including sales and marketing, research anddevelopment and general and administrative expenses), the anticipated mix ofrevenue and expected seasonality in our business****.  Forward-looking statements are subjectto risks and uncertainties that could cause actual results to differ materiallyfrom those discussed in these forward-looking statements. Please see Item 1A inPart II of this Quarterly Report on Form 10-Q for important information toconsider when evaluating such statements. SupportSoft expressly disclaims any obligation or undertaking to releasepublicly any updates or revisions to any forward-looking statements containedin this report to conform these statements to actual results or changes in ourexpectations or in events, conditions or circumstances on which any suchstatement is based. You should not place undue reliance on theseforward-looking statements, which apply only as of the date hereof.**

**Overview**

SupportSoft is a leadingprovider of technology problem resolution software and services. Our solutionsare designed to reduce technology support costs, improve customer satisfactionand enable new revenue streams for organizations worldwide. We recentlyexpanded our offerings and now provide technology support directly toconsumers.

Our corporate customersare digital service providers (telecommunications and cable companies) andcorporate IT departments. Digital service providers use our products toautomate the installation, activation and verification of broadband services,to reduce the cost and improve the quality of support for customers, to enablethe remote management of devices located at customer premises, and to providevalue-added services to consumers. Corporate IT departments and managed serviceproviders (IT outsourcing firms) use our software to improve thecost-effectiveness and efficiency of their support through an integratedportfolio of proactive service, self service and assisted service capabilities.

In addition to theseofferings for corporate customers, we are now addressing the consumertechnology support market. This offering is an extension of our traditionalbusiness and relies upon our products, technology and expertise in technologyproblem resolution. The new offering provides computer problem resolution forconsumers over the phone and the Internet. We offer our consumer technologysupport services through www.support.com and through consumer-facing companiessuch as PC manufacturers and digital service providers.

Ourrevenue has historically consisted of software license fees and fees formaintenance, consulting, hosting and training services. In recent years, wehave licensed our software to customers predominately on a perpetual basis inwhich we generally recognize the license revenue up front, assuming allcriteria for revenue recognition under the applicable accountingrules have been met. Maintenance fees relating to perpetual softwarelicenses result in ratable revenue over the period of the maintenance term,which is generally one year. Consulting and training revenues are generallyrecognized as the services are performed or in accordance with predefinedproject milestones. Hosting fees are recognized ratably over the term of thehosting arrangement.  Revenues associatedwith term licenses or arrangements in which we provide hosting services arerecognized ratably over the longest period in the contract, as we do notcurrently have VSOE for term licenses or hosting.

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Ourtotal revenue for the three months ended March 31, 2007 was $10.4 million. Ourtotal revenue increased in the first quarter of 2007 by $2.2 million, or 27%,from the same quarter of 2006 primarily due to increases in both license andservices revenue. Despite the year-over-year increase, total revenue in thefirst quarter of 2007 decreased by $3.7 million, or 26%, from the fourthquarter of 2006, reflecting downward revenue seasonality between the fourth andfirst quarters of the calendar year, as many of our customers formalize ITspending budgets in the first calendar quarter and our sales compensation plansenter a new year.

We have made a number ofchanges in the business to address a trend over the last three years ofdecreasing annual license revenue. In 2006, we hired new senior leadership,including a new Chief Executive Officer, Senior Vice President of WorldwideSales, Senior Vice President of Global Services, Chief Marketing Officer,Senior Vice President of Customer Service and Senior Vice President of ConsumerBusiness Development. We have also hired new regional sales leadership for theNorth America, EMEA and Asia/Pacific regions and made substantial changes inour sales force and sales compensation plans. We have expanded our sales andmarketing efforts internationally and with channel partners and increased thesize of our professional services organization. We have also begun thedevelopment of packaged product and service offerings capable of deliveringreturn on investment in shorter time frames. Finally, we have entered theconsumer technology support market with our www.support.com and consumertechnology solutions offerings.

We do not expectimmediate returns from our initiatives but believe they can create sustainablerevenue growth over time. Although we intend to leverage many of our existingresources, we are making significant incremental investments in support ofthese initiatives, including investments to operate our outsourced call center,to promote our consumer offerings, to expand our professional servicesorganization and to increase visibility of our enterprise offerings. We expectthat these additional investments will precede any material revenue increasefrom our new business initiatives. As a result, we currently expect to incurquarterly net losses through at least 2007. We expect that our net loss in eachquarter, as well as for the full year in 2007, will significantly exceed thenet losses we incurred during fiscal 2006. For the quarter ended March 31,2007, total costs and expenses increased by 33% compared with the same quarterin 2006, reflecting our investment in the programs referred to above. Our basicand diluted loss per share for the three months ended March 31, 2007 was$(0.13) compared to $(0.09) for the three months ended March 31, 2006.

Weintend the following discussion of our financial condition and results ofoperations to provide information that will assist in understanding ourfinancial statements, the changes in certain key items in those financialstatements from year to year, and the primary factors that accounted for thosechanges, as well as how certain accounting principles, policies and estimatesaffect our financial statements.

**Critical Accounting Policies andEstimates**

Inpreparing our consolidated financial statements in conformity with accountingprinciples generally accepted in the United States, we make assumptions,judgments and estimates that can have a significant impact on our net revenue,operating results, as well as on the value of certain assets and liabilities onour consolidated balance sheets. We base our assumptions, judgments andestimates on historical experience and various other factors that we believe tobe reasonable under the circumstances. Actual results could differ materiallyfrom these estimates under different assumptions or conditions. On a regularbasis we evaluate our assumptions, judgments and estimates and make changesaccordingly. We believe that the assumptions, judgments and estimates involvedin the accounting for revenue recognition, allowance for doubtful accounts,accounting for income taxes, goodwill, intangible assets and stock-basedcompensation have the greatest potential impact on our consolidated financialstatements, so we consider these to be our critical accounting policies. Wediscuss below the critical accounting estimates associated with these policies.For further information on the critical accounting policies, see Notes toConsolidated Financial Statements.

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*Revenue Recognition*

Werecognize revenue in accordance with generally accepted accounting principlesthat have been prescribed for the software industry. Revenue recognitionrequirements in the software industry are very complex and are subject tochange. Our revenue recognition policy is one of our critical accountingpolicies because revenue is a key component of our results of operations and isbased on complex rules which require us to make judgments. In applying ourrevenue recognition policy we must determine which portions of our revenue arerecognized currently and which portions must be deferred. In order to determinecurrent and deferred revenue, we make judgments with regard to the expectedamount of future services to be performed and the appropriate fair value forthose services. We also make judgments as to whether future services areessential to the functionality of other elements of the software arrangement.We do not record revenue on sales transactions when the collection of cash isin doubt at the time of sale. Rather, revenue is recognized from thesetransactions as cash is collected. The determination of collectibility requiressignificant judgment.

*Allowance for Doubtful Accounts*

We makejudgments as to our ability to collect outstanding receivables and provideallowances for the portion of receivables when collection becomes doubtful.Provisions are made based upon a specific review of all significant outstandinginvoices. For those invoices not specifically provided for, provisions arerecorded at differing rates, based upon the age of the receivable. Indetermining these percentages, we analyze our historical collection experienceand current payment trends. If the historical data we use to calculate theallowance for doubtful accounts does not reflect the future ability to collectoutstanding receivables, additional provisions for doubtful accounts may beneeded and the future results of operations could be materially affected.

*Accounting for Income Taxes*

We arerequired to estimate our income taxes in each of the tax jurisdictions in whichwe operate. This process involves management’s estimation of our actual currenttax exposures together with an assessment of temporary differences determinedbased on the difference between the financial statement and tax basis ofcertain items. 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.

EffectiveJanuary 1, 2007, we adopted Financial Accounting Standards Interpretation,No. 48 (FIN 48), “*Accounting forUncertainty in Income Taxes – an interpretation of FASB Statement No. 109.*”FIN 48 prescribes a recognition threshold and measurement guidance for thefinancial statement reporting of uncertain tax positions taken or expected tobe taken in a company’s income tax return. FIN 48 also provides guidancerelated to derecognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition matters related to uncertain taxpositions. FIN 48 utilizes a two-step approach for evaluating uncertain taxpositions accounted for in accordance with SFAS 109. Step one, *Recognition*, requires a company todetermine if the weight of available evidence indicates that a tax position ismore likely than not to be sustained upon audit, including resolution ofrelated appeals or litigation processes, if any. Step two, *Measurement*, is based on the largestamount of benefit, which is more likely than not to be realized on ultimate settlement.The cumulative effect of adopting FIN 48, if any, is recorded as an adjustmentto the opening balance of retained earnings as of the adoption date.

*Goodwill*

We assess the impairmentof goodwill annually or more often if events or changes in circumstancesindicate that the carrying value may not be recoverable. An impairmentloss would be recognized when the sum of the discounted future net cash flowsexpected to result from the use of the asset and its eventual disposition isless than its carrying amount. Such impairment loss would be measured as thedifference between the carrying amount of the asset and its fair value. Theestimate of cash flows is

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based upon, among otherthings, certain assumptions about expected future operating performance and anappropriate 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 differencesmay result in write-down of net long-lived and intangible assets, whichwould be reflected by charges to our operating results for any periodpresented. At September 30, 2006, we concluded our annual evaluation forimpairment of goodwill and no impairment was recognized. We will continue totest for impairment during the third quarter of each year, or earlier ifindicators of impairment exist.

*IntangibleAssets*

The Company recordspurchased intangible assets at fair value. The original cost is amortized on astraight-line basis over the estimated useful life of each asset. We assess theimpairment of intangible assets whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. We perform anannual review to determine if the carrying value of the intangible asset isimpaired, unless earlier events or circumstances indicate a potentialimpairment exists, in which case a review is performed more often. The review considersfacts and circumstances, either internal or external, which indicate that thecarrying value of the asset cannot be recovered. If and when indicators ofimpairment exist, SupportSoft assesses the need to record an impairment loss,by comparing the undiscounted net cash flows associated with related assets orgroup of assets over their remaining lives against their respective carryingamounts. Impairment, if any, is based on the excess of the carrying amount overthe fair value of those assets.

*Stock-based compensation*

Weaccount for stock-based compensation in accordance with the provisions of SFAS123R. We adopted SFAS 123R using the modified prospective transition methodwhich requires the application of the accounting standard starting fromJanuary 1, 2006. Under the fair value recognition provisions of SFAS 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 requisiteservice period of the award. We estimate the fair value of stock-based awardson the grant date using the Black-Scholes-Merton option-pricing model.Determining the appropriate fair value model and calculating the fair value ofstock-based awards requires judgment, including estimating stock pricevolatility, forfeiture rates and expected life. If any of theseassumptions used in the option-pricing models changes significantly,stock-based compensation may differ materially in the future from that recordedin the accompanying financial statements.

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**RESULTSOF OPERATIONS**

Thefollowing table sets forth the results of operations for the three months endedMarch 31, 2007 and 2006 expressed as a percentage of total revenue.
|                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Revenue:                           |       |                                             |       |   |   |
| License                            |       | 31                                               | %          | 25 | % |
| Maintenance                        |       | 38                                               |       | 48 |   |
| Services                           |       | 31                                               |       | 27 |   |
|                               |       |                                             |       |   |   |
| Total revenue                      |       | 100                                              |       | 100 |   |
|                               |       |                                             |       |   |   |
| Costs and  expenses:               |       |                                             |       |   |   |
| Cost of license                    |       | 0                                                |       | 1 |   |
| Cost of  Maintenance               |       | 6                                                |       | 3 |   |
| Cost of services                   |       | 43                                               |       | 35 |   |
| Amortization of  intangible assets |       | 3                                                |       | 3 |   |
| Research and  development          |       | 22                                               |       | 31 |   |
| Sales and  marketing               |       | 72                                               |       | 62 |   |
| General and  administrative        |       | 24                                               |       | 26 |   |
|                               |       |                                             |       |   |   |
| Total costs and  expenses          |       | 170                                              |       | 162 |   |
|                               |       |                                             |       |   |   |
| Loss from  operations              |       | (70                                              | )          | (62 | ) |
| Interest and  other income, net    |       | 18                                               |       | 16 |   |
|                               |       |                                             |       |   |   |
| Loss before  income taxes          |       | (52                                              | )          | (46 | ) |
| Income tax  provision              |       | (2                                               | )          | (2 | ) |
|                               |       |                                             |       |   |   |
| Net loss                           |       | (54                                              | )%         | (48 | )% |

                                                

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

***Revenue***

*License revenue*. License revenue iscomprised of fees for term and perpetual licenses of our software. Perpetuallicense revenue is recognized using the residual method described in SOP 98-9for arrangements in which licenses are sold with multiple elements. We allocaterevenues 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.

Licenserevenue increased to $3.2 million for the three months ended March 31, 2007, anincrease of 58% from $2.1 million for the three months ended March 31, 2006.The increase in license revenue was due primarily to stronger year-over-yearlicense revenue contributions from existing customers in North America andAsia/Pacific in the first quarter of 2007, as compared with the same period in2006.

*Maintenance revenue.*Maintenance revenue is comprised primarily of revenue from post-contracttechnical support services which includes software product updates. Maintenancerevenue was $3.9 million for the three months ended March 31, 2007, unchangedfrom the three months ended March 31, 2006.

*Services revenue*. Services revenue isprimarily comprised of revenue from professional services, such as consulting,training and hosting. Services revenue is generally recognized as the servicesare performed. Services revenue increased to $3.3 million for the three monthsended March 31, 2007, an increase of 44% from $2.3 million for the three monthsended March 

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31,2006. Services revenue increased primarily due to higher consulting revenue of$762,000 for the first quarter in 2007 as compared with the same period in2006.  The higher consulting revenueresulted from additional professional service engagements with existingcustomers, principally in North America and Europe.  In addition, the first quarter of 2007includes incremental services revenue of $192,000 over the first quarter of2006 from customers using our hosting service.

*InternationalRevenue*.  Revenue fromcustomers outside the North America accounted for approximately 21% of ourtotal revenue for the three month periods ended March 31, 2007, compared with20% for the three month periods ended March 31, 2006.

***Cost of license***

Cost oflicense consists primarily of costs related to third-party royalty fees underlicense arrangements for technology embedded in or resold with our products.Cost of license fees decreased to $38,000 in the three months ended March 31,2007, a decrease of 64%  from $104,000 inthe three months ended March 31, 2006. The decrease resulted from lowerthird-party royalties in the three months ended March 31, 2007 compared withthe same quarter in the prior year.

***Cost of maintenance***

Cost ofmaintenance consists primarily of compensation costs, travel costs, and relatedoverhead expenses for customer support personnel. Cost of maintenance increasedto $638,000 for the three months ended March 31, 2007, an increase of 152% from$253,000 for the same quarter in 2006. The increase in cost of maintenance wasdue primarily to increases in salary and related employees costs and travelexpenses as a result of an increase in the number of customer supportpersonnel.

***Cost of services***

Cost ofservices consists primarily of compensation costs, travel costs, and relatedoverhead expenses for professional services personnel, payments made to thirdparties for subcontracted consulting services, the cost of our outsourced callcenter operations and outsourced hosting fees.  Cost of services increased to $4.5 million forthe three months ended March 31, 2007, an increase of 55% from $2.9 million forthe three months ended March 31, 2006. The increase was due primarily to:

·                  the cost ofoperating our outsourced call center related to the launch of ourwww.support.com service offering in January 2007;

·                  salary expenseand related employees costs for additional professional services personnel;

·                  an increase insubcontracted consulting services fees; and

·                  stock-basedcompensation expense of  $184,000 in thefirst quarter of 2007, compared with $61,000 for the same period in 2006.

Wecurrently plan to grow the capacity of our outsourced call center as callvolumes dictate and to add professional services personnel in the near term.  We expect that these additional investmentswill precede any material revenue increase from the investments. As a result,on a quarterly basis, we expect cost of services to exceed services revenue atleast through 2007.

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***Operating Expenses***

*Research and development.* Research anddevelopment costs are expensed as incurred. Research and development expenseconsists primarily of compensation costs, consulting expenses and relatedoverhead costs for research and development personnel. Research and developmentexpense decreased to $2.3 million for the three months ended March 31, 2007, adecrease of 10% from $2.5 million for the three months ended March 31, 2006.This decrease was primarily due to lower salary and related expenses arisingfrom a greater utilization of non-U.S. research and development personnel,resulting in lower average salary costs. Also, included in research anddevelopment expense for the three months ended March 31, 2007 was $116,000 ofstock-based compensation expense compared to $105,000 for the same period in2006.

*Sales and marketing.* Sales and marketingexpense consists primarily of compensation costs, including salaries, salescommissions and related overhead costs for sales and marketing personnel andpromotional expenses, including public relations, advertising and trade shows.Sales and marketing expense increased to $7.5 million for the three monthsended March 31, 2007, an increase of 45% from $5.1 million for the three monthsended March 31, 2006. The increase was due primarily to:

·                  salary expense,commissions and related employee costs associated with additional sales andmarketing personnel; and

·                  incrementalexpenditures for marketing programs and advertising in connection with ourconsumer offerings

Also,included in sales and marketing expenses for the three months ended March 31,2007 was $454,000 of stock-based compensation expense compared to $185,000 forthe same quarter in 2006.

*General and administrative.* General andadministrative expense consists primarily of compensation costs and relatedoverhead costs for administrative personnel and professional fees for legal,accounting and other professional services. General and administrative expenseincreased to $2.5 million for the three months ended March 31, 2007, an increaseof 19% from $2.1 million for the three months ended March 31, 2006. Thisincrease was due primarily to increases in professional services fees andsalaries and related employee costs. Also, included in general andadministrative expense for the three months ended March 31, 2007 was $414,000of stock-based compensation expense compared to $308,000 for the same period in2006.

*Stock-based compensation*. OnJanuary 1, 2006, we adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004) “*Share-Based Payment*,”(SFAS 123R) which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and directorsincluding employee stock options and employee stock purchases based onestimated fair values. For the three months ended March 31, 2007 and 2006, werecognized $1.2 million and $661,000 respectively in stock-based compensationexpense.

*Interest income and other, net.*  Interest income and other, net increased to$1.9 million for the three months ended March 31, 2007, an increase of 42% from$1.3 million for the three months ended March 31, 2006. The increase wasprimarily due to an increase in interest income because of higher interestrates earned on our marketable securities and other income related to thereceipt of a one-time payment of $325,000 in settlement of a contractualdispute.

*Provision for income taxes.* Our provisionfor income taxes increased to $215,000 for the three months ended March 31,2007, an increase of 29% from $166,000 for the three months ended March 31,2006. This increase was primarily due to foreign income tax and withholdingtaxes related to international customer payments.

As of March 31, 2007, our deferred tax assets are fully offset by avaluation allowance. The FASB’s Statement of Financial Accounting StandardsNo. 109 *“Accounting for Income Taxes,”*provides for the recognition of deferred tax assets if realization of suchassets is more likely than not. Based upon the weight of available evidence,which includes our historical operating performance, reported cumulative netlosses since inception and difficulty in accurately forecasting our future longterm results, we provided a full valuation allowance against its net deferredtax assets. We reassess the need for our valuation allowance on a quarterlybasis. If it is later determined that a portion of the valuation allowanceshould be reversed, it will be a benefit to the income tax provision.

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**LIQUIDITYAND CAPITAL RESOURCES**

Since ourincorporation in December 1997, we have financed our operations primarilythrough our initial public offering, follow-on public offering, cash flows fromoperations and, to a lesser extent, from the private placement of our preferredand common stock, bank borrowings and capital equipment lease financing. Thereare many variables that impact our financial plan including the levels ofrevenue, costs and expenses, and new capital investments. Actual cash usagecould differ from these projections.

***OperatingActivities***

Netcash provided by (used in) operating activities was $(1.6) million and $1.8million for the three months ended March 31, 2007 and 2006, respectively. Netcash provided by operating activities for the three months ended March 31, 2007was primarily due to cash collections during the period, which contributed to areduction in accounts receivable of $4.6 million. The reduction in accountsreceivable was offset by a net loss of $5.6 million and a decrease in deferredrevenue of $2.3 million, adjusted for amounts which did not require the use ofcash of $1.4 million. These non-cash items include depreciation, amortization,accretion and stock-based compensation expenses. Net cash provided by operatingactivities for the three months ended March 31, 2006 was primarily due to cashcollections during the period, which contributed to a reduction in accountsreceivable of $8.4 million. The reduction in accounts receivable was offset bya net loss of $3.9 million, a decrease in deferred revenue of $1.4 million, inaccrued compensation of $1.1 million and in other accrued liabilities of $1.0million, adjusted for non-cash items of $1.3 million.

Our accounts receivableand deferred revenue balances fluctuate from period to period and are primarilydependent on (i) the timing of the closure of our license agreements,especially larger agreements concluded late in the period, (ii) therelated invoicing and payment provisions under those agreements, (iii) thetiming of maintenance renewals and related invoicing, and(iv) collections. Accounts receivable decreased to $10.5 million atMarch 31, 2007 from $15.1 million at December 31, 2006. The reductionof $4.6 million was due to lower revenues and associated invoicing in the firstquarter of 2007 compared with the fourth quarter of 2006. We also collectedmany of the invoices raised in December 2006 during the first quarter of 2007.Accounts receivable decreased to $9.0 million at March 31, 2006, a reduction of$8.4 million from $17.4 million at December 31, 2006. The reduction of accountsreceivable was due to the existence of several significant accounts receivableat December 31, 2005 and collections of much of those receivables during thefirst quarter of 2006.

***Investing Activities***

Netcash provided by (used in) in investing activities was $1.1 million and$(109,000) for the three months ended March 31, 2007 and 2006, respectively.Net cash provided by investing activities for the three months ended March 31,2007, was due to the purchase of property and equipment of $(1.6) million,primarily related to furniture and leasehold improvements for our newheadquarters, offset by the net of the sales and purchases in marketablesecurities of $2.7 million. Net cash used in investing activities for the threemonths ended March 31, 2006, was due primarily to the purchase of property andequipment of $(164,000) offset by the net of the sales and purchases inmarketable securities of $55,000.

***FinancingActivities***

Netcash generated by financing activities was $2.0 million for the three monthsended March 31, 2007 and $1.1 million for the three months ended March 31,2006. Net cash provided by financing activities in both periods wasattributable to net proceeds from the purchase of common stock under theemployee stock purchase plan and the exercise of stock options.

***Working Capital andCapital Expenditure Requirements***

AtMarch 31, 2007, we had stockholders’ equity of $130.1 million and workingcapital of $115.1 million. Included as a reduction to working capital isdeferred revenue of $11.2 million, which will not require cash to settle, butwill be recognized as revenue in the future. We believe that our existing cashbalances will be sufficient to meet our working capital requirements and stockrepurchase program, as well as our planned capital expenditures for at leastthe next 12 months.

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We planto make substantial investments in our business during the remainder of 2007,including but not limited to such areas as cost of services, sales andmarketing, research and development, and capital expenditures. We believe theseinvestments and others are essential to creating sustainable growth in ourbusiness in the future. Because these investments will likely precede anyassociated revenues, we expect our working capital to decrease in the nearterm.

If werequire additional capital resources to grow our business internally or toacquire complementary technologies and businesses at any time in the future, wemay seek to sell additional equity or debt securities. The sale ofadditional equity or debt securities could result in more dilution to ourstockholders. Financing arrangements may not be available to us, ormay not be available in amounts or on terms acceptable to us.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our financial resultscould be affected by factors such as changes in foreign currency exchange ratesor weak economic conditions in foreign markets. As most sales are currentlymade in U.S. dollars, a strengthening of the dollar could make our productsless competitive in foreign markets.

As of March 31, 2007, weheld $16.9 million in cash and cash equivalents consisting of highly liquidinvestments having original maturity dates of no more than 90 days. A declinein interest rates over time would reduce our interest income from our highlyliquid marketable securities. Based upon our balance of cash and cashequivalents, a decrease in interest rates of 100 basis points would cause acorresponding decrease in our annual interest income of approximately $169,000.Due to the nature of our highly liquid cash equivalents, a change in interestrates would not materially change the fair market value of our cash and cashequivalents.

As ofMarch 31, 2007, we held $102.2 million in marketable securities, whichconsisted primarily of money market funds held by large institutions in theU.S. and commercial paper. Our marketable securities were primarily invested incorporate bonds, government debt securities maturing in less than eighteenmonths and auction-rate securities resetting in less than ninety days. Theweighted average interest rate of our portfolio was approximately 4.07% atMarch 31, 2007. A decline in interest rates over time would reduce our interestincome from our marketable securities. A decrease in interest rates of 100basis points would cause a corresponding decrease in our annual interest incomeof approximately $1.0 million.

**ITEM 4.CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controls andProcedures**

Wemaintain “disclosure controls and procedures,” as such term is defined in Rule13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), thatare designed to ensure that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in Securities andExchange Commission rules and forms, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure. In designing and evaluating our disclosure controls andprocedures, management recognized that disclosure controls and procedures, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the disclosure controls andprocedures are met. Our disclosure controls and procedures have been designedto meet, and management believes they meet, reasonable assurance standards.Additionally, in designing disclosure controls and procedures, our managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible disclosure controls and procedures. The design of anydisclosure controls and procedures also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under all potentialfuture conditions.

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As ofMarch 31, 2007 and as previously reported in our Annual Report on Form 10-K, asof December 31, 2006, our Chief Executive Officer and our Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures werenot effective due to a material weakness related to not appropriatelyquantifying the foreign currency translation gain or loss upon liquidation of aforeign subsidiary in 2006.

Inresponse to the material weakness identified, we have sinceevaluated the accumulated currency translation adjustments of our foreignsubsidiaries in order to determine the accuracy of the entity-specific andconsolidated balances. At the conclusion of this review, we determined thebalances to be properly stated as of December 31, 2006. In addition, weimplemented a monthly review of the reasonableness of our recorded currencytranslation balances of all of our subsidiaries.

Based on implementation of these additional controls, we believe theseadditional internal controls will be effective in remediating the materialweakness described above. We will continue to monitor the operatingeffectiveness of these controls.

**Changes in Internal Control overFinancial Reporting**

Otherthan the change noted above to remediate the material weakness, there were nochanges in our internal control over financial reporting during the quarterended March 31, 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II.OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

**See Note4 Contingencies to the financial statements in Part I, Item 1 of this QuarterlyReport on Form 10-Q for a description of legal proceedings.**

**ITEM 1A.RISK FACTORS**

Investing in our securities involves a high degree ofrisk. In addition to the other information contained in this report, you shouldconsider the following risk factors before investing in our securities.

**We were not profitable in2006 or in the first quarter of 2007 and will continue to sustain a loss in theforeseeable future.**

We were not profitable in 2006 or in the first quarterof 2007. In addition, we intend to make significant investments in support ofour business in 2007 and we expect to continue to sustain losses in 2007 andpossibly subsequent periods.  If we failto achieve such revenue growth as a result of these additional investments orif such revenue growth does not result in our achieving profitability, themarket price of our common stock will likely decline.  A sustained period of losses would alsoresult in an increased usage of cash to fund our operating activities and acorresponding reduction in our cash balance.

**Our quarterly results have in the past, and may inthe future, fluctuate significantly.**

Our quarterly revenue and operating results have inthe past and may in the future fluctuate from quarter to quarter. As aresult, we believe that quarter-to-quarter and year-to-year comparisons of ourrevenue and operating results are not necessarily meaningful, and that thesecomparisons may not be accurate indicators of future performance.

Several factorsthat have contributed or may in the future contribute to fluctuations inour operating results include:

·       demand for our software andservices;

·       size and timing of customerorders and our ability to recognize revenue in a given quarter;

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·       our reliance on a smallnumber of customers for a substantial portion of our revenue;

·       the price and mix ofproducts and services we or our competitors offer;

·       the mix of products andservices that generate up-front revenue as opposed to revenue over a period oftime;

·       our ability to attract andretain customers;

·       the rate of expansion ofour new consumer offerings and our investments therein;

·       the amount and timing ofoperating costs and capital expenditures in our business;

·       seasonal trends resultingfrom corporate spending patterns;

·       the exercise of judgment byour management in making accounting decisions in accordance with our accountingpolicies; and

·       general economic conditionsand their effect on our operations.

In prior years, we licensed a significant portion ofour software on a term basis in which revenue was recognized ratably over thelength of the agreement with the customer. In recent periods, however, wetypically have licensed our software on a perpetual basis in which we recognizethe license revenue up front, assuming all criteria for revenue recognitionhave been met. As a result of our current perpetual licensing model, we havebecome dependent on a few customer contracts with up-front license revenue fora substantial portion of our revenue in any one quarter. In addition, asignificant portion of our total revenue each quarter comes from a number oforders received in the last month of a quarter. In previous quarters, we failedto close expected perpetual licenses with up-front revenue resulting in arevenue shortfall. If in future quarters we fail to close orders expected to becompleted by the end of a quarter, particularly if these orders are for perpetuallicenses with up-front revenue, our quarterly results would suffer and themarket price of our common stock would likely decline.

**Our inability to meet future financial performancetargets that we announce or that are published by research analysts could causethe market price of our common stock to decline.**

From time to time, we provide guidance related to ourfuture financial performance. In addition, financial analysts publish their ownexpectations of our future financial performance. Because our quarterly revenueand our operating results fluctuate, future financial performance is difficultto predict. In the past, we have failed to meet our guidance. Future downwardadjustments of our guidance or the failure to meet our guidance or theexpectations of research analysts would cause the market price of our common stock to decline.

Management’s ability to accurately predict performanceis affected in large part by a significant portion of our total revenue beingdependent upon the closing of new large customer orders. In addition, ourguidance is based in part upon the expectation of new product sales andservices offerings with which we have a limited history.  In the event we fail to achieve projectedrevenue levels in any quarter, we will be unable to reduce our expenses forthat quarter in a corresponding fashion, and our results will not meet ourguidance or the expectations of securities analysts or investors, which wouldcause the market price of our common stock to decline.

The trading market for our common stock relies inpart on the research and reports that industry or financial analystspublish about us or our business. We do not control these analysts. If one ormore of the analysts who currently cover us downgrade our stock, our stock pricewould likely decline rapidly. Furthermore, if one or more of these analystscease coverage of us, we could lose visibility in the market, which in turncould cause the market price of our stock to decline.

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**Our recently announced consumer technology support initiativewill increase operating expenses without any assurance of yielding increasedrevenue.**

We are executing a plan to extend our business byproviding consumer technology support services. In addition to continuingto offer our software to corporate customers, we are offering technologysupport to consumers.  We may not be ableto offer these new services successfully. We have limited experience inreaching or serving consumers directly or in managing call centers. As aresult, we expect to use significant cash and incur increased operatingexpenses to support this new initiative, including costs of our outsourced callcenters, promotional costs associated with reaching consumers and costs ofobtaining personnel with the necessary consumer expertise.  These investments may not yield increasedrevenue to offset these expenses. Furthermore, this new business initiative, ifnot favorably received by consumers, could damage the reputation of ourcorporate enterprise business as well as strain our management, financial andoperational resources necessary to maintain our corporate business. The lack ofmarket acceptance of such efforts or our inability to generate satisfactoryrevenue from such expanded services would have a material adverse effect on ourbusiness, prospects, financial condition and operating results.

**Because a small number of customers have historicallyaccounted for and may in future periods account for substantial portionsof our revenue, our revenue could decline because of delays or losses ofspecific customer orders.**

A small number of customers have historicallyaccounted for, and may in future periods account for, substantial portionsof our revenue. For the quarter ended March 31, 2007, one customer accountedfor 12% of our total revenue for the quarter. Transaction structures thatinvolve ratable revenue recognition and our consumer offerings, which typicallyinvolve payment on a per transaction basis, could reduce our dependence onlarge transactions with a small number of customers.   However, in the near term, we are likely tocontinue to derive a significant portion of our revenue from large transactionswith a limited number of customers. Therefore, our revenue could declinebecause of the loss or delay of a single customer order. Additionally, wemay not obtain new customers. The failure to obtain significant newcustomers, particularly customers that purchase perpetual licenses withup-front payments, the loss or delay of significant customer orders or thefailure of existing customers to pay ongoing fees when due would harm ouroperating results.

**Our sales cycle is lengthy and if revenue forecastedfor a particular quarter is not realized in that quarter, significant expensesincurred may not be offset by corresponding revenue.**

Our sales cycle for our software typically ranges fromthree to nine months or more and may vary substantially from customer tocustomer. The purchase of our products and services for corporate customersgenerally involves a significant commitment of capital and other resources by acustomer. This commitment often requires significant technical review,assessment of competitive products and approval at a number of managementlevels within a customer’s organization. In addition, in the wake of theSarbanes-Oxley Act of 2002, companies have enhanced their approval processes,making sales more difficult or protracted. While our customers are evaluatingour products and services, we may incur substantial sales and marketingexpenses and spend significant management effort to complete these sales. Anydelay in completing sales in a particular quarter or the failure to complete asale after expending resources during the sales cycle could cause our operatingresults to suffer.

**We are seeking to increase our international revenuesand if our revenue from this effort does not exceed the expense of establishingand maintaining international operations, our business could suffer.**

We are seeking toincrease our international revenues.  Forthe years ended December 31, 2004, 2005, and 2006, international revenuewas 11%, 21% and 23% of total revenue, respectively. We have limited experiencein international operations and may not be able to compete effectively ininternational markets or effectively manage our operations in variouscountries. If we do not generate enough revenue from international operationsto offset the expense of these operations, our operating results could suffer.Risks we face in conducting business internationally include:

·       costs of staffing andmanaging international operations;

·       smaller customers with lessability to pay United States rates for software and services;

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·       difficulty in reachinggeographically dispersed customers;

·       differing technologystandards and legal considerations;

·       longer sales cycles;

·       dependence on local vendorsand consultants;

·       difficulties in staffingand managing international operations, including the difficulty in managing ageographically dispersed workforce in compliance with diverse local laws andcustoms;

·       potential adverse taxconsequences;

·       changes in currencyexchange rates and controls;

·       difficulties in maintainingeffective internal control over financial reporting as a result of ageographically-dispersed workforce and customers;

·       longer collection cycles foraccounts receivable; and

·       the effects of externalevents such as terrorist acts and any related conflicts or similar eventsworldwide.

**Our operating results will suffer if we do not expandand manage our professional services organization effectively.**

Clients that license our software typically engage ourprofessional services organization to assist with installation andimplementation of our software and related consulting services. Revenue fromprofessional services represented a substantial portion of our total revenuefor the quarter ended March 31, 2007. We plan to further increase the number ofprofessional services personnel, especially internationally, to meet customerneeds. We may not be able to recruit the professional services personnel we needor retain our current professional services personnel because competition forqualified professional services personnel is intense. New professional servicespersonnel will require training and education and it takes time for them toreach full productivity.

In addition, we cannot be certain that ourprofessional services business will operate in a profitable manner. 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 and the contract structure prevents us from billing additional amounts,we may be subject to monetary penalties, and the profitably of our professionalservices business would suffer. Furthermore, an estimated loss on a contract isgenerally required to be recorded in the period in which a loss becomesevident. Recording a loss on a services contract could have a material adverseeffect on our operating results for the period in which the loss was recorded.

**If our existing customers do not renew maintenancecontracts or purchase additional products and services, our operating resultscould suffer.**

Historically, we have derived, and expect to continueto derive, a significant portion of our total revenue from existing customerswho purchase additional products and services and renew maintenance contracts.Our customers may not renew maintenance contracts or purchase additionalproducts and services. In addition, as we introduce new products, our currentcustomers may not require or desire the functionality of our new productsand may not ultimately purchase these products. If our customers do notrenew maintenance contracts or do not purchase additional products andservices, our operating results would suffer.

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**Our failure to establish and expand third-partyalliances would harm our ability to sell our software and provide our services.**

Our consumer offeringsrequire us to establish and maintain relationships with third parties who willdirect consumers to us and provide technology support services to consumersbased on our technology, as well as with third parties to whom we outsource ourcall center services. Failure to establish or maintain these relationships onacceptable terms or at all could materially and adversely affect the success ofthis initiative.

We have alliances with third parties that areimportant to our traditional offerings. Our existing relationships includethose with hardware vendors and managed service providers who provideoutsourced support to corporate customers. If these relationships fail, we mayneed to devote substantially more resources to the sales and marketing of ourproducts and services than we would otherwise, and our efforts may not be aseffective. For example, companies that provide outsourced support and servicesoften have extensive relationships with our existing and potential customersand significant input in the purchase decisions of these customers. Inaddition, we may establish relationships with third party resellers and othersales partners as we expand internationally. Our failure to maintain existingrelationships, or to establish new relationships with key third parties, couldsignificantly harm our ability to sell our products and services. In addition,our competitors may have strong alliances with other companies, includinghardware providers, which could impact our ability to obtain greater marketshare, participate in deals where hardware and software are sold together, orrequire us to reduce the price of products and services, which could harm ourbusiness, prospects, financial condition and operating results.

**We may engage in investments or acquisitions or otherstrategic matters that could divert management attention and prove difficult tointegrate with our business.**

We may engage inacquisitions of other companies, products or technologies or in other strategicinitiatives. If we fail to integrate successfully any future acquisitions, theoperating results of the combined company could decline. The process ofintegrating businesses, technologies, services or products may result inunforeseen operating difficulties and expenditures. Acquisitions involve anumber of other potential risks to our business, including the following:

·       unanticipated costs andliabilities and unforeseen accounting charges or fluctuations;

·       delays and difficulties indelivery of products and services from the combined company;

·       failure to integratemanagement information systems, personnel, research and development, marketing,sales and support operations;

·       loss of key employees;

·       diversion of management’sattention from other business concerns and disruption of our ongoing business;

·       difficulty in maintainingcontrols and procedures;

·       uncertainty on the part ofour existing customers about our ability to operate on a combined basis;

·       loss of customers;

·       loss of alliance partners;

·       failure to realize thepotential financial or strategic benefits of the acquisition; and

·       failure to successfullyfurther develop the combined technology, resulting in the impairment of amountsrecorded as goodwill or other intangible assets.

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**We must compete successfully in the market forsoftware and services that resolve technology problems or our business willsuffer.**

We compete in markets that are highly competitive,subject to rapid change and significantly affected by new product introductionsand other market activities of industry participants. We compete with a numberof companies in the market for automated delivery of support and serviceautomation and other vendors who may offer products or services withfeatures that compete with specific elements of our software products andservices. In addition, our customers and potential customers have developed ormay develop internally similar software systems.

The markets for our products are still rapidlyevolving, and we may not be able to compete successfully against currentand potential competitors. Our ability to expand our business will depend onour ability to maintain our technological advantage, introduce timely enhancedproducts to meet growing support needs, deliver on-going value to our customersand scale our business. Our potential competitors may have longeroperating histories, significantly greater financial, technical and otherresources, stronger strategic alliances or greater name recognition than wehave. Competition in our markets could reduce our market share or require us toreduce the price of products and services, which could harm our business,financial condition and operating results.

As we further enter the market for consumer technologysupport, we are competing against a set of competitors different than thecompetitors against whom we have historically competed, including electronicsretailers offering on-site technology support services, companies offeringonline technology support services and companies offering local technologysupport services. Certain of these anticipated competitors have longeroperating histories, significantly greater financial, technical and otherresources, stronger strategic alliances or greater name recognition than wehave.

**The loss of key personnel and the integration of newmanagement may affect our ability to achieve our business goals.**

Our success depends on the skills, experience andperformance of our senior management, engineering, sales, marketing and otherkey personnel. The loss of the services of any of our executive officers orother key personnel could harm our business and our ability to achieve ourbusiness goals.  In addition, manymembers of senior management have been appointed within the last year.  Our success will depend to a significantextent on the ability of these executives to function effectively in their newroles and to work together successfully. If these executives do not function and work together successfully or ifwe lose the services of one or more of our executives or key employees, ourbusiness could be harmed.

**Our exposure to the credit risks of our customers andresellers could adversely affect our operating results and financial condition.**

To sell to some of our customers, we may be requiredto take risks of uncollectible accounts. We may be exposed to similar risksrelating to third party resellers and other sales partners, as we intend toincreasingly utilize such parties as we expand into new geographic regions.Additionally, as we have expanded our business internationally, we haveexperienced longer payment terms and collection cycles from customers outsidethe United States. While we monitor these situations carefully and attempt totake appropriate measures to protect ourselves by recognizing revenue upon collectionof accounts from customers we deem to have credit risks and upon sell-throughby resellers, it is possible that we may have to write down or write offdoubtful accounts. Such write-downs or write-offs would negatively affect ouroperating results for the period in which they occur, and, if large, could havea material adverse effect on our operating results and financial condition.

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**Our future product and service offerings may notachieve market acceptance.**

If we fail todevelop enhanced versions of our software in a timely manner or to provideproducts and services that achieve rapid and broad market acceptance, we maynot maintain or expand our market share. We may fail to identify new productand service opportunities for our current market or new markets that we enterin the future. In addition, our existing products may become obsolete if wefail to introduce new products or product enhancements that meet new customerdemands, 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 ofcompanies to transition to automated solutions; and

·       customer preferences forcompetitors’ solutions or other technologies.

**Our products depend on, and work with, productscontaining complex software; if our products fail to perform properly due toerrors in the software, we may need to devote resources to correct the errorsor compensate for losses from these errors and our reputation could be harmed.**

Our productsdepend on complex software, both internally developed and licensed from thirdparties. Also, our customers may use our products with other companies’products, which may also contain complex software. Complex software oftencontains errors and may not perform properly. These errors could result in:

·       delays in productshipments;

·       unexpected expenses anddiversion of resources to identify the source of errors or to correct errors,whether or not the error is later determined to be related to our software;

·       damage to our reputation;

·       lost sales;

·       contractual penalties,demands, claims and litigation and related defense costs; and

·       warranty claims.

In our consumer offerings, we generally use our ownproducts to diagnose and resolve consumer technology problems. If our productsfail to perform well in this environment, our consumer offerings would sufferand may not be successful.

**Our software may not operate with the hardwareand software platforms that are used by our customers now or in the future,and, as a result, our business and operating results may suffer.**

We currently serve a customer base with a wide varietyof constantly changing hardware, software and networking platforms. Forexample, 64 bit microprocessors are becoming increasingly important to ourcustomer base. If we fail to release versions of our software that arecompatible with operating systems, software applications or hardware devicesused by our customers, our business and operating results would suffer. Ourfuture success also depends on the continuing ability of our products tointer-operate with multiple platforms and packaged applications used by ourcustomer base and on our management of software being developed by thirdparties for our customers or for use with our products.

**We rely on third-party technologies and our inabilityto use or integrate third-party technologies could delay product or servicedevelopment.**

We intend tocontinue to license technologies from third parties, including applicationsused in our research and development activities and technologies such asthird-party search engine technology, which are integrated into our productsand services. Our inability to obtain or integrate any of these technologieswith our own products could delay product and

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servicedevelopment until equivalent compatible technology can be identified, licensedand integrated. These technologies may not continue to be available to uson commercially reasonable terms or at all. We may fail to successfullyintegrate any licensed technology into our products or services, which wouldharm our business and operating results. Third-party licenses also expose us toincreased risks that include:

·       risks of product malfunctionafter new technology is integrated;

·       the diversion of resourcesfrom the development of our own proprietary technology; and

·       our inability to generaterevenue from new technology sufficient to offset associated acquisition andmaintenance costs.

**Our system security is important to our customers andwe may need to spend significant resources to protect against or correctproblems caused by security breaches.**

A fundamental requirement for online communications,transactions and support is the secure transmission of confidentialinformation. Third parties may attempt to breach our security or that ofour customers. We may be liable to our customers for any breach insecurity and any breach could harm our business and reputation. Also, computersare vulnerable to computer viruses, physical or electronic break-ins andsimilar disruptions, which could lead to interruptions, delays or loss of data.We recently released a security advisory and a patch for a remote codeexecution vulnerability in several of our ActiveX components. Wemay be required to expend significant capital and other resources tofurther protect against security breaches or to correct problems caused by anybreach.

**Our reported results of operations will continue to bematerially and adversely affected by our adoption of SFAS 123R.**

Statement of Financial Accounting StandardsNo. 123 (revised 2004),*“Share-BasedPayment,”* (SFAS 123R) became effective in our first quarter of2006, and has resulted in our recognition of substantial compensation expenserelating to our employee stock options and employee stock purchase plans.Historically, we generally have not recognized in our statement of operationsany compensation expense related to stock option grants we issue under ourstock option plans or the discounts we provide under our employee stockpurchase plans. Under the new rules, we are 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.

**If we are unable to maintain effective disclosurecontrols and procedures, including our internal control over financialreporting, our ability to report our financial results on a timely and accuratebasis may be adversely affected.**

We have evaluated our “disclosure controls andprocedures” as such term is defined in Rule 13a-15(e) under the Exchange Act asof March 31, 2007, as well as our internal control over financial reporting asrequired by Section 404 of the Sarbanes-Oxley Act of 2002 as of December 31,2006. Our independent registered public accounting firm has performed a similarevaluation of our internal control over financial reporting as of December 31,2006. Effective controls are necessary for us to provide reliable financialreports and effectively prevent fraud. If we cannot provide reliable financialreports or prevent fraud, our operating results would be harmed. For theperiods ended March 31, 2007 and December 31, 2006, we concluded that we had amaterial weakness in our internal control over financial reporting, as furtherdescribed in Item 4 of Part I of this Quarterly Report, and Item 9A of Part IIon Form 10-K, Control and Procedures. Our independent registered publicaccounting firm reached the same conclusion. In the first quarter of 2007, weimplemented corrective actions, which we believe, will remediate this materialweakness. However, we cannot be certain that these measures will be effectivein remediating the material weakness. If these actions are not successful inaddressing this material weakness or if other weaknesses are identified, ourability to report our financial results on a timely and accurate basis may beadversely affected. In addition, if we cannot establish effective internalcontrol over financial reporting and disclosure controls and procedures,investors may lose confidence in our reported financial information, whichcould cause the market price of our common stock to decline.

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**We have recorded long-lived assets, and our results ofoperations would be adversely affected if their value becomes impaired.**

Goodwill and identifiable intangible assets wererecorded in part due to our acquisition of substantially all of the assets ofCore Networks Incorporated in September 2004. We also have certain intangibleassets with an indefinite life. We assess the impairment of goodwill andindefinite life intangible assets annually or more often if events or changesin circumstances indicate that the carrying value may not be recoverable.We assess the impairment of acquired product rights and other finite lifeintangible assets whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable. An impairment loss would be recognizedwhen the sum of the discounted future net cash flows expected to result fromthe use of the asset and its eventual disposition is less than its carryingamount. Such impairment loss would be measured as the difference between thecarrying amount of the asset and its fair value. Material differencesmay result in write-downs of net long-lived and intangible assets, whichwould cause our operating results to suffer.

**Failure to resolve pending securities claims and otherlawsuits may lead to continued costs and expenses and divert management’sattention from our business, which could cause our revenue and our stock priceto decline.**

Securities class action lawsuits were filedagainst us in November 2001 and again in December 2004. In addition,a derivative stockholder lawsuit was filed against us in December 2005.Should these lawsuits 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 beadequate to cover the fees and expenses and any ultimate resolution associatedwith such litigation. The size of these payments, if any, individually or inthe aggregate, could seriously impair our cash reserves and financialcondition. The continued defense of these lawsuits also could result indiversion of our management’s time and attention away from business operations,which could cause our financial results to decline. A failure to resolvedefinitively resolve current or future material litigation in which we areinvolved or in which we may become involved in the future, regardless ofthe merits of the respective cases, could also cast doubt as to our prospectsin the eyes of customers, potential customers and investors, which could causeour revenue and stock price to decline.

**Privacy concerns and laws or other domestic or foreignregulations may reduce the effectiveness of our solutions or harm ourreputation and cause us to lose customers.**

Our software contains features which allow ourcustomers to control, monitor or collect information from computers running thesoftware. Federal, state and foreign government bodies and agencies, however,have adopted or are considering adopting laws and regulations regarding thecollection, use and disclosure of personal information obtained from consumersand individuals. Liability for violation of, costs of compliance with, andother burdens imposed by such laws and regulations may limit the use andadoption of our solutions and reduce overall demand for them. Even theperception of privacy concerns, whether or not valid, may inhibit adoptionof our solutions. In addition, we may face claims about invasion ofprivacy or inappropriate disclosure, use or loss of this information. Anyimposition of liability could harm our reputation, cause us to lose customersand cause our operating results to suffer.

**We may not obtain sufficient patent protection,which could harm our competitive position, increase our expenses and harm ourbusiness.**

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

·       our pending patentapplications may not be issued;

·       competitorsmay independently develop similar technologies or design around any of ourpatents;

·       patents issued to usmay not be broad enough to protect our proprietary rights; and

·       our issued patents could besuccessfully challenged.

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**We rely upon patents, trademarks, copyrights and tradesecrets to protect our proprietary rights and if these rights are notsufficiently protected, it could harm our ability to compete and to generaterevenue.**

We rely on acombination of laws, such as patents, copyright, trademark and trade secretlaws, 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 contractualrestrictions may not adequately prevent misappropriation of ourtechnologies or deter others from developing similar technologies; and

·       policing unauthorized useof our products and trademarks is difficult, expensive and time-consuming, andwe may be unable to determine the existence or extent of this unauthorizeduse.

Also, the laws of other countries in which we marketour products may offer little or no protection of our proprietarytechnologies. Reverse engineering, unauthorized copying or othermisappropriation of our proprietary technologies could enable third parties tobenefit from our technologies without paying us for them, which would harm ourcompetitive position and market share.

**We may face intellectual property infringementclaims that could be costly to defend and result in our loss of significantrights.**

Other parties may assert intellectual propertyinfringement claims against us or our customers and our productsmay 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. Intellectual property litigation isexpensive and time-consuming and could divert management’s attention from ourbusiness. If there is a successful claim of infringement, we may be required todevelop non-infringing technology or enter into royalty or license agreements,which may not be available on acceptable terms, if at all. Our failure todevelop non-infringing technologies or license proprietary rights on a timelybasis would harm our business.

**If the growth of demand for digital services does notcontinue, our ability to increase our revenue could suffer.**

Our ability to increase our revenue will depend inpart on increased demand for digital services. 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.

**We may experience a decrease in market demand dueto uncertain economic conditions in the United States and in internationalmarkets, which has been further exacerbated by the concerns of terrorism, warand social and political instability.**

The United States and international economies have inthe past experienced periods of slow economic growth and this could occuragain. In addition, terrorist attacks in the United States and turmoil incertain overseas regions have increased uncertainty and may exacerbate adecline in economic conditions, both domestically and internationally. If the economydeclines as a result of economic, political and social turmoil, or if there arefurther terrorist attacks in the United States or elsewhere, wemay experience decreases in the demand for our products and services,which would harm our operating results.

**Wemay be required to change our business practices if there are changes inaccounting regulations and related interpretations and policies.**

Accounting standards groups and regulators areactively re-examining various accounting policies, guidelines and interpretationsrelated to revenue recognition, income taxes, investments in equity securities,facilities consolidation, accounting for acquisitions, allowance for doubtfulaccounts and other financial reporting matters. These standards groups andregulators could promulgate interpretations and guidance that could result inmaterial and potentially adverse changes to our business practices andaccounting policies.

**New rules and regulations for public companieshave increased and may continue to increase our administrative costs.**

The Sarbanes-OxleyAct of 2002, as well as rules subsequently implemented by the Securitiesand Exchange Commission and the Nasdaq Global Select Market, has requiredchanges in corporate governance practices of public companies.  These rules and regulations areincreasing our legal and financial compliance costs, and making some activitiesmore time-consuming and costly. These rules and regulations make it moredifficult and more expensive for us to obtain director and officer liability insurance,and we may be required to accept reduced coverage or incur substantiallyhigher costs to obtain coverage. These new rules and regulations couldalso make it more difficult for us to attract and retain qualified members ofour board of directors, particularly to serve on our audit committee, andqualified executive 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**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| May 9, 2007 |       |              |
|-------------|------------|-------------------|
|        |       |              |
|        |       | SUPPORTSOFT, INC. |
|        |       |              |
|        |       | By:               | /s/ KEN OWYANG |
|        | ** ** | ** **        | **Ken Owyang** |
|        | ** ** | ** **        | **Chief  Financial Officer and** |
|        | ** ** | ** **        | **Senior  Vice President of Finance and** |
|        | ** ** | ** **        | **Administration** |
|        | ** ** | ** **        | **(Principal  Financial Officer, Chief Accounting** |
|        | ** ** | ** **        | **Officer  and Duly Authorized Signatory)** |

 

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**EXHIBITINDEX TO SUPPORTSOFT, INC.**

**QUARTERLYREPORT ON FORM 10-Q**

**FOR THEQUARTER ENDED MARCH 31, 2007**
| 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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