**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 SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                           |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                   |
| ** ** | ** ** | **For the  Quarterly Period Ended September 30, 2007**                                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                             |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                             |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                             |
| ** ** | ** ** | **For the  transition period  from                to                ** |

 

**Commission File No. 000-30901**

 

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

 

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

 

**1900 Seaport Boulevard, 3rd FloorRedwood City, CA 94063**(Address of Principal Executive Offices)

(Zip Code)

 

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

 

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Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  x    No  o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

 

On October 31, 2007, 46,157,346shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.

 

 

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**SUPPORTSOFT,INC.FORM 10-QQUARTERLY PERIOD ENDED SEPTEMBER 30, 2007INDEX**

 
|                          |                                                                                                             |   | **Page** |
|-------------------------------|------------------------------------------------------------------------------------------------------------------|--------|----------|
| Part I. Financial Information |                                                                                                             | 3      |
| Item 1.                  | Financial Statements (Unaudited)                                                                                 |   | 3        |
|                          | Condensed Consolidated Balance Sheets at  September 30, 2007 and December 31, 2006                               |   | 3        |
|                          | Condensed Consolidated Statements of  Operations for the three and nine months ended September 30, 2007 and 2006 |   | 4        |
|                          | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 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                      |   | 13       |
| Item 3.                  | Quantitative and Qualitative Disclosures  About Market Risk                                                      |   | 22       |
| Item 4.                  | Controls and Procedures                                                                                          |   | 22       |
| Part II. Other Information    |                                                                                                             | 23     |
| Item 1.                  | Legal Proceedings                                                                                                |   | 23       |
| Item 1A.                 | Risk Factors                                                                                                     |   | 23       |
| Item 4.                       | Submission of Matters to a Vote of Security  Holders                                                             |   | 34       |
| Item 6.                  | Exhibits                                                                                                         |   | 34       |
| Signature                     |                                                                                                             |   | 35       |
| Exhibit Index            |                                                                                                             | 36     |

 

2

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**PARTI. FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

 

**SUPPORTSOFT,INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands)**

 
| ** **                                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                     |       |                         |       |                        |       |
| Cash and cash equivalents                           |       | $                            | 22,078     |                        | $          | 15,369 |   |
| Marketable securities                               |       | 92,154                       |       | 104,522                     |       |
| Accounts receivable, net                            |       | 8,425                        |       | 15,144                      |       |
| Prepaid expenses and other current assets           |       | 2,241                        |       | 2,894                       |       |
| Total current assets                                |       | 124,898                      |       | 137,929                     |       |
| Property and equipment, net                         |       | 2,317                        |       | 937                         |       |
| Goodwill                                            |       | 9,792                        |       | 9,792                       |       |
| Intangible assets, net                              |       | 2,338                        |       | 3,155                       |       |
| Other assets                                        |       | 849                          |       | 792                         |       |
|                                                |       |                         |       |                        |       |
| **Total assets**                                    |       | $                            | 140,194    |                        | $          | 152,605 |   |
|                                                |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                |       |                         |       |                        |       |
| Accounts payable                                    |       | $                            | 426        |                        | $          | 331 |   |
| Accrued compensation                                |       | 2,020                        |       | 2,112                       |       |
| Other accrued liabilities                           |       | 3,878                        |       | 3,813                       |       |
| Deferred revenue, less long-term portion            |       | 7,690                        |       | 13,435                      |       |
| Total current liabilities                           |       | 14,014                       |       | 19,691                      |       |
| Deferred revenue—long-term portion             |       | 134                          |       | 178                         |       |
| Other long-term liabilities                         |       | 830                          |       | 233                         |       |
| Commitments and contingencies                       |       |                         |       |                        |       |
| Stockholders’ equity:                          |       |                         |       |                        |       |
| Common stock                                        |       | 4                            |       | 4                           |       |
| Additional paid-in capital                          |       | 210,735                      |       | 202,440                     |       |
| Accumulated other comprehensive loss                |       | (770                         | )          | (751                        | )          |
| Accumulated deficit                                 |       | (84,753                      | )          | (69,190                     | )          |
| Total stockholders’ equity                     |       | 125,216                      |       | 132,503                     |       |
| ** **                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Total liabilities and stockholders’ equity** |       | $                            | 140,194    |                        | $          | 152,605 |   |

 

See accompanyingnotes.

 

Open items:

 

Outstanding shares

 

3

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**SUPPORTSOFT,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(inthousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| License                                                                                           |       | $                                                    | 2,586      |                                                | $          | 4,479 |   | $ | 11,725 |   | $ | 10,013 |   |
| Services                                                                                          |       | 4,536                                                |       | 3,462                                               |       | 11,423 |   | 9,106 |   |
| Maintenance                                                                                       |       | 4,201                                                |       | 3,917                                               |       | 12,035 |   | 11,740 |   |
| Total revenue                                                                                     |       | 11,323                                               |       | 11,858                                              |       | 35,183 |   | 30,859 |   |
| Costs and expenses:                                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of license                                                                                   |       | 52                                                   |       | 119                                                 |       | 141 |   | 333 |   |
| Cost of services (including stock-based  compensation of $193, $69, $564 and $175)                |       | 5,279                                                |       | 3,606                                               |       | 14,933 |   | 9,579 |   |
| Cost of maintenance (including stock-based  compensation of $22, $18, $59 and $35)                |       | 630                                                  |       | 349                                                 |       | 1,929 |   | 863 |   |
| Amortization of purchased intangible assets                                                       |       | 272                                                  |       | 272                                                 |       | 817 |   | 816 |   |
| Research and development (including  stock-based compensation of $129, $83, $366 and $301)        |       | 2,366                                                |       | 2,267                                               |       | 7,071 |   | 7,125 |   |
| Sales and marketing (including stock-based  compensation of $493, $219, $1,431 and $592)          |       | 6,959                                                |       | 6,013                                               |       | 23,081 |   | 16,993 |   |
| General and administrative (including  stock-based compensation of $392, $415, $1,311 and $1,224) |       | 2,211                                                |       | 2,689                                               |       | 7,235 |   | 7,677 |   |
| Total costs and expenses                                                                          |       | 17,769                                               |       | 15,315                                              |       | 55,207 |   | 43,386 |   |
| Loss from operations                                                                              |       | (6,446                                               | )          | (3,457                                              | )          | (20,024 | ) | (12,527 | ) |
| Interest income and other, net                                                                    |       | 1,636                                                |       | 1,842                                               |       | 5,019 |   | 4,705 |   |
| Loss before income taxes                                                                          |       | (4,810                                               | )          | (1,615                                              | )          | (15,005 | ) | (7,822 | ) |
| Provision for income taxes                                                                        |       | (212                                                 | )          | (72                                                 | )          | (558 | ) | (333 | ) |
| Net loss                                                                                          |       | $                                                    | (5,022     | )                                                   | $          | (1,687 | ) | $ | (15,563 | ) | $ | (8,155 | ) |
| Basic and diluted net loss per share                                                              |       | $                                                    | (0.11      | )                                                   | $          | (0.04 | ) | $ | (0.34 | ) | $ | (0.19 | ) |
| Shares used in computing basic and diluted  net loss per share                                    |       | 45,614                                               |       | 44,152                                              |       | 45,449 |   | 44,000 |   |

 

See accompanyingnotes.

 

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**SUPPORTSOFT,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Operating Activities:                                                                      |       |                                                |       |   |   |
| Net loss                                                                                   |       | $                                                   | (15,563    | ) | $ | (8,155 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Depreciation, amortization and accretion of  premium/discount on securities                |       | 226                                                 |       | 947 |   |
| Amortization of intangible assets                                                          |       | 817                                                 |       | 817 |   |
| Stock-based compensation                                                                   |       | 3,731                                               |       | 2,327 |   |
| Changes in assets and liabilities:                                                         |       |                                                |       |   |   |
| Accounts receivable, net                                                                   |       | 6,719                                               |       | 10,399 |   |
| Prepaid expenses and other current assets                                                  |       | 653                                                 |       | (193 | ) |
| Other long-term assets                                                                     |       | (57                                                 | )          | 260 |   |
| Accounts payable                                                                           |       | 95                                                  |       | (820 | ) |
| Accrued compensation                                                                       |       | (92                                                 | )          | (988 | ) |
| Other accrued liabilities                                                                  |       | 65                                                  |       | 396 |   |
| Other long-term liabilities                                                                |       | 597                                                 |       | 31 |   |
| Deferred revenue                                                                           |       | (5,789                                              | )          | (4,439 | ) |
| Other                                                                                      |       | (15                                                 | )          | (129 | ) |
| Net cash provided by (used in) operating  activities                                       |       | (8,613                                              | )          | 453 |   |
|                                                                                       |       |                                                |       |   |   |
| Investing Activities:                                                                      |       |                                                |       |   |   |
| Purchases of property and equipment                                                        |       | (2,367                                              | )          | (478 | ) |
| Purchases of marketable securities                                                         |       | (78,781                                             | )          | (52,946 | ) |
| Maturities of marketable securities                                                        |       | 91,906                                              |       | 46,191 |   |
| Net cash provided by (used in) investing  activities                                       |       | 10,758                                              |       | (7,233 | ) |
|                                                                                       |       |                                                |       |   |   |
| Financing Activities:                                                                      |       |                                                |       |   |   |
| Proceeds from issuances of common stock                                                    |       | 4,564                                               |       | 1,933 |   |
| Net cash provided by financing activities                                                  |       | 4,564                                               |       | 1,933 |   |
| Net increase (decrease) in cash and cash  equivalents                                      |       | 6,709                                               |       | (4,847 | ) |
| Cash and cash equivalents at beginning of  period                                          |       | 15,369                                              |       | 23,342 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                                   | 22,078     |   | $ | 18,495 |   |
|                                                                                       |       |                                                |       |   |   |
| Supplemental schedule of cash flow  information:                                           |       |                                                |       |   |   |
| Income taxes paid                                                                          |       | $                                                   | 363        |   | $ | 253 |   |

 

See accompanyingnotes.

 

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**SUPPORTSOFT,INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.Significant Accounting Policies**

 

**Basis ofPresentation**

 

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of SupportSoft, Inc. (the “Company”, “SupportSoft”or “We”) and its wholly-owned subsidiaries. All intercompany balances andtransactions have been eliminated. The balance sheet as of September 30, 2007and the statements of operations for the three and nine months ended September 30,2007 and 2006 and cash flows for the nine months ended September 30, 2007 and2006 are unaudited. In the opinion of management, these unaudited interimcondensed consolidated financial statements reflect all adjustments (consistingof normal recurring adjustments) that are necessary for a fair presentation ofthe results for, and as of, the periods shown. The results of operations forsuch periods are not necessarily indicative of the results expected for thefull fiscal year or for any future period. The condensed consolidated financialstatement information as of December 31, 2006 is derived from auditedfinancial statements as of that date. These unaudited interim condensedconsolidated financial statements should be read with the consolidatedfinancial statements and related notes included in our Annual Report on Form10-K, filed with the Securities and Exchange Commission on March 16, 2007.

 

**Use ofEstimates and Reclassifications**

 

The preparation of interim condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the consolidated financial statementsand the accompanying notes. Actual results could differ materially from theseestimates. In addition, certain amounts that were previously reported have beenreclassified to conform to 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. 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.

 

We consider all arrangements with payment terms longerthan 90 days not to be fixed or determinable. If a fee is determined not to befixed or determinable, revenue is recognized as payments become due from acustomer. License revenue is comprised of fees for perpetual and term licensesof our software. Perpetual license revenue is recognized using the residualmethod, in compliance with SOP 98-9 for arrangements in which licensesare sold with multiple elements. We allocate revenues on these licenses basedupon the fair value of each undelivered element including undeliveredmaintenance, consulting and training. The determination of fair value is basedupon vendor specific objective evidence (VSOE). VSOE for maintenance is basedupon separate renewals of maintenance from customers. VSOE for consulting andtraining is based upon separate sales of these services to customers. Assumingall other revenue recognition criteria are met, the difference between thetotal arrangement fee and the amount deferred for each undelivered element isrecognized as license revenue. In perpetual arrangements that includecontractual obligations such as rights to unspecified future products, licenserevenue is recognized ratably over the contract period.

 

Term licenses are sold with maintenance for which we donot have VSOE to determine fair value for maintenance fees. As a result,license revenue for term licenses is recognized ratably over the duration ofthe agreement. License revenue in the accompanying financial statementsincludes maintenance for term licenses. We do not allocate maintenance revenuefrom term licenses to maintenance revenue, as we do not believe there is anallocation methodology that provides a meaningful and supportable allocationbetween license and maintenance revenues. Term license revenue was 3% and 5% oftotal revenue for

 

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the three months ended September 30, 2007 and 2006,respectively. For the nine months ended September 30, 2007 and 2006, termlicense revenue was 4% and 6% of total revenue, respectively. Services revenueassociated with the term licenses are recognized ratably over the term of thelicense.

 

We provide resellers with the right to sublicense oursoftware to end user customers. Generally, we recognize revenue from ourarrangements with resellers upon persuasive evidence that the reseller hasactually sublicensed the software to a named end user (sell-through), assumingall other criteria for revenue recognition have been met. The forms of evidenceof sell-through acceptable to us include one or more of the following: i) a copyof the agreement or license between the reseller and the end user, ii) apurchase order from the end user to the reseller, iii) a written communicationfrom the reseller to us specifically identifying the end user, or iv) deliverymade directly by us to the end user. Whether the license revenue is thenrecognized immediately or ratably depends upon the terms of the arrangementswith the reseller regarding the sublicense (i.e. perpetual license or termlicense). 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 is primarily comprised of revenuefrom post-contract technical support services, which includes software productupdates. Maintenance revenue is recognized ratably over the term of themaintenance period, which is generally one year. We invoice customers who electto renew their maintenance agreements, at which time an equal amount isrecorded as accounts receivable and deferred revenue.

 

Services revenue is primarily comprised of revenuefrom professional services such as consulting, hosting and training fees.Arrangements are evaluated to determine whether those services are essential tothe functionality of other elements of the arrangement. In the event servicesare considered essential to the functionality of other elements of thearrangement, revenue under the arrangement is recognized using contractaccounting. Services that are not essential to the functionality of thesoftware, such as consulting and training revenues are generally recognized asthe services are performed or project milestones are accepted by the customer.When non-essential services are bundled in a term licensing arrangement,revenue from the services is recognized ratably over the term of the license.

 

In connection with licensing arrangements we may also providehosting of our own software, a service for which we do not currently have VSOE.If hosting 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 Marketable Securities**

 

We consider all liquid instruments with an originalmaturity at the date of purchase of ninety days or less to be cash equivalents.At September 30, 2007, cash equivalents and marketable securities consistedprimarily of money market funds, commercial paper, auction rate securities,corporate bonds and notes and treasury bills issued by the United Statesgovernment and its agencies. Our marketable securities are classified asavailable-for-sale as of the respective balance sheet dates, and are reportedat fair value with unrealized gains and losses included in accumulated othercomprehensive income within stockholders’ equity on the consolidated balancesheet. Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities are included in otherincome (expense), net in the consolidated statement of operations.

 

The amortized cost of debt securities is adjusted foramortization of premiums and accretion of discounts to maturity, both of whichare included in interest income. We had net unrealized losses on marketablesecurities of $55,000 and $54,000 at September 30, 2007 and December 31,2006, respectively.

 

We monitor our investments for impairment on aquarterly basis and determine whether a decline in fair value isother-than-temporary by considering factors such as current economic and marketconditions, the credit rating of the security’s issuer, the length of time aninvestment’s fair value has been below our carrying value, and our ability andintent to hold investments to maturity. If an investment’s decline in fairvalue is deemed to be other-than-temporary, we reduce its carrying value to itsestimated fair value, as determined based on quoted market prices orliquidation values. Declines in value judged to be other-than-temporary, ifany, are recorded in operations, as incurred.

 

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The following is a summary of cash, cash equivalentsand marketable securities at September 30, 2007 (in thousands):

 
| ** **                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|---------------------|------------|-------------------------------|------------|---------------------|------------|
| Cash                        |       | $                   | 4,793      |                          | $          | —              |       | $ | 4,793 |   |
| Money market funds          |       | 7,313               |       | —                        |       | 7,313               |       |
| Commercial paper            |       | 24,715              |       | (44                           | )          | 24,671              |       |
| Federal agencies securities |       | 7,999               |       | 6                             |       | 8,005               |       |
| Corporate bonds             |       | 27,613              |       | (13                           | )          | 27,600              |       |
| Auction rate certificates   |       | 41,850              |       | —                        |       | 41,850              |       |
|                        |       | $                   | 114,283    |                          | $          | (51                 | )          | $ | 114,232 |   |
|                        |       |                |       |                          |       |                |       |
| Classified as:              |       |                |       |                          |       |                |       |
| Cash and cash equivalents   |       | $                   | 22,079     |                          | $          | (1                  | )          | $ | 22,078 |   |
| Marketable securities       |       | 92,204              |       | (50                           | )          | 92,154              |       |
|                        |       | $                   | 114,283    |                          | $          | (51                 | )          | $ | 114,232 |   |

 

**Concentrationsof Credit Risk**

 

Financial instruments that potentially subject us toconcentrations of credit risk consist principally of cash equivalents,marketable securities and trade accounts receivable. Our investment portfoliois diversified and consists of investment grade securities. Our investmentpolicy limits the amount of credit risk exposure to any one issuer and in anyone country, except the United States. We are exposed to credit risks in theevent of default by the issuers to the extent of the amount recorded on ourbalance sheet. The credit risk in our trade accounts receivable is substantiallymitigated by our credit evaluation process, reasonably short collection termsand because we sell our products primarily to large organizations indiversified industries.

 

For the three months ended September 30, 2007, onecustomer accounted for greater than 10%, or 21%, of our total revenue. For thesame period of 2006, one customer accounted for 21% of total revenue. For thenine months ended September 30, 2007, one customer accounted for 18% of ourtotal revenue. For the same period of 2006, no customer accounted for 10% ormore of total revenue.

 

**TradeAccounts Receivable**

 

Trade accounts receivable are recorded at the invoicedamount. We perform evaluations of our customers’ financial condition andgenerally do not require collateral. We make judgments as to our ability tocollect outstanding receivables and provide allowances for the portion ofreceivables for which collection becomes doubtful. Provisions are made basedupon a specific review of all significant outstanding invoices. For those invoicesnot specifically provided for, provisions are recorded at differing rates,based upon the age of the receivable. In determining these percentages, weanalyze our historical collection experience and current payment trends. If thehistorical data we use to calculate the allowance for doubtful accounts doesnot accurately reflect our future ability to collect outstanding receivables,additional provisions for doubtful accounts may be needed and our futureresults of operations could be materially affected. At September 30, 2007 andDecember 31, 2006, we had reserves for credit losses of $326,000 and$373,000, respectively. At September 30, 2007, one customer accounted for 18%of our total accounts receivable. At December 31, 2006, one customeraccounted for 15% of our total accounts receivable.

 

**Stock-Based Compensation**

 

On January 1, 2006, weadopted Statement of Financial Accounting Standards No. 123 (revised 2004), “*Share-Based Payment,*” (SFAS 123R) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options andemployee stock purchases based on estimated fair values.

 

8

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The fair value of our stockoptions granted to employees for the three and nine months ended September 30,2007 and 2006 was estimated using the following assumptions:

 
| ** **                                | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Stock Option Plan:**                    | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate                   |       | 4.1%                                  |       | 4.7  %                               |       | 4.7% |   | 5.2% |   |
| Expected term                             |       | 3.8  years                            |       | 3.9  years                           |       | 3.8  years |   | 3.9  years |   |
| Volatility                                |       | 51.2%                                 |       | 54.6%                                |       | 51.2% |   | 50.6% |   |
| Estimated forfeitures                     |       | 8%                                    |       | 8%                                   |       | 8% |   | 8% |   |
| Expected dividend                         |       | 0%                                    |       | 0%                                   |       | 0% |   | 0% |   |
| Weighted average fair  value              |       | $2.32                                 |       | $ 1.81                          |       | $2.47 |   | $ 1.92 |   |
| **Employee Stock Purchase Plan  (ESPP):** | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate                   |       | 4.7%                                  |       | 4.7%                                 |       | 4.7% |   | 4.7% |   |
| Expected term                             |       | 0.5  to 2.0 years                     |       | 0.5  to 2.0 years                    |       | 0.5  to 2.0 years |   | 0.5  to 2.0 years |   |
| Volatility                                |       | 54.1%                                 |       | 54.1%                                |       | 54.1% |   | 54.1% |   |
| Estimated forfeitures                     |       | 8%                                    |       | 8%                                   |       | 8% |   | 8% |   |
| Expected dividend                         |       | 0%                                    |       | 0%                                   |       | 0% |   | 0% |   |
| Weighted average fair  value              |       | $ 1.66                           |       | $ 1.66                          |       | $ 1.66 |   | $ 1.66 |   |

 

We recorded the following stock-compensationexpense for the three and nine months ended September 30, 2007 and 2006:

 
| ** **                                                             | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Stock option compensation expense  recognized in:**                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of services                                                       |       | $                                     | 184        |                                 | $          | 47 |   | $ | 530 |   | $ | 117 |   |
| Cost of maintenance                                                    |       | 21                                    |       | 15                                   |       | 55 |   | 30 |   |
| Research and development                                               |       | 122                                   |       | 65                                   |       | 345 |   | 210 |   |
| Sales and marketing                                                    |       | 482                                   |       | 196                                  |       | 1,389 |   | 490 |   |
| General and administrative                                             |       | 387                                   |       | 400                                  |       | 1,291 |   | 1,172 |   |
|                                                                   |       | $                                     | 1,196      |                                 | $          | 723 |   | $ | 3,610 |   | $ | 2,019 |   |
|                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| **ESPP compensation expense recognized in:**                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of services                                                       |       | $                                     | 9          |                                 | $          | 22 |   | $ | 34 |   | $ | 58 |   |
| Cost of maintenance                                                    |       | 1                                     |       | 3                                    |       | 4 |   | 5 |   |
| Research and development                                               |       | 7                                     |       | 18                                   |       | 21 |   | 91 |   |
| Sales and marketing                                                    |       | 11                                    |       | 23                                   |       | 42 |   | 102 |   |
| General and administrative                                             |       | 5                                     |       | 15                                   |       | 20 |   | 52 |   |
|                                                                   |       | 33                                    |       | 81                                   |       | 121 |   | 308 |   |
|                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Stock-based compensation expense included  in total costs and expenses |       | $                                     | 1,229      |                                 | $          | 804 |   | $ | 3,731 |   | $ | 2,327 |   |

 

Prior to the adoption of SFAS123R, our Board of Directors approved the acceleration of vesting of certainunvested and out-of-money stock options with exercise prices equal or greaterthan $5.00 per share. The acceleration of vesting was effective for stockoptions outstanding as of December 21, 2005. Approximately 3.0 million stockoptions or 32% of our outstanding unvested stock options were subject to thisacceleration and their weighted average price was $7.02. The optionsaccelerated 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. 

 

9

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 The followingtable represents stock option activity for the nine months ended September 30,2007:

 
| ** **                                          | ** ** | **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            |       | $                                          | 5.33       |                                                |       |                                                       |       |   |
| Granted                                             |       | 1,567,300             |       | 5.66                                       |       |                                                |       |                                                       |       |
| Exercised                                           |       | (1,219,134            | )          | 3.32                                       |       |                                                |       |                                                       |       |
| Forfeited                                           |       | (1,949,009            | )          | 8.09                                       |       |                                                |       |                                                       |       |
|                                                |       |                  |       |                                       |       |                                                |       |                                                       |       |
| Outstanding options at the end of the period        |       | 11,980,031            |       | $                                          | 5.14       |                                                | 5.90       |                                                       | $          | 13,545 |   |
|                                                |       |                  |       |                                       |       |                                                |       |                                                       |       |   |   |
| Options vested and expected to vest                 |       | 11,888,810            |       | $                                          | 5.14       |                                                | 5.90       |                                                       | $          | 13,443 |   |
|                                                |       |                  |       |                                       |       |                                                |       |                                                       |       |   |   |
| Outstanding exercisable at the end of the  period   |       | 5,479,395             |       | $                                          | 5.62       |                                                | 5.79       |                                                       | $          | 6,174 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value that would have been received bythe option holders had they all exercised their options on September 30, 2007.This amount will change based on the fair market value of our stock.

 

During the three and nine months ended September 30,2007, the aggregate intrinsic value of options exercised under our stockoptions plans was $89,000 and $1.5 million respectively. During the three andnine months ended September 30, 2006, the aggregate intrinsic value of optionsexercised under our stock options plans was $147,000 and $538,000. Total fairvalue of options vested during the three and nine months ended September 30,2007 was$1.2 million and $3.6 million. Total fair value of options vestedduring the three and nine months ended September 30, 2006 was $733,000 and $2.1million, respectively.

 

At September 30, 2007, there was $14.0 million ofunrecognized compensation cost related to existing options outstanding which isexpected to be recognized over a weighted average period of 2.9 years.

 

**Net LossPer Share**

 

Basic and diluted net loss per share are presented inaccordance with Statement of Financial Accounting Standards No. 128 *“Earnings per Share”* (SFAS 128), for all periods presented.In accordance with SFAS 128, basic and diluted net loss per share have beencomputed using the weighted-average number of common shares outstanding duringthe period.

 

The following table sets forth the computation ofbasic and diluted net loss per share (in thousands, except per share amounts):

 
| ** **                                                     | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                     | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                           |       |                   |       |                   |       |   |   |   |   |
| Net loss                                                       |       | $                      | (5,022     | )                      | $          | (1,687 | ) | $ | (15,563 | ) | $ | (8,155 | ) |
| Shares used in computing basic and diluted  net loss per share |       | 45,614                 |       | 44,152                 |       | 45,449 |   | 44,000 |   |
| Basic and diluted net loss per share                           |       | $                      | (0.11      | )                      | $          | (0.04 | ) | $ | (0.34 | ) | $ | (0.19 | ) |

 

**Warrantiesand Indemnifications**

 

We generally provide a warranty for its softwareproducts and services to its customers and accounts for its warranties underthe Financial Accounting Standards Board’s (FASB’s) Statement of FinancialAccounting Standards No. 5 “*Accounting forContingencies*” (SFAS 5). Our standard warranty period is 90days, but warranty periods can vary from customer to customer and sometimes belonger. In the event there is a failure of the product in breach of suchwarranties, we are generally obligated to correct the product or service toconform to the specifications or, if we are unable to do so, the customer isentitled to seek a refund of the purchase price of the defective product orservice. We did not provide for a warranty accrual as of September 30, 2007 orDecember 31, 2006. To date, our product warranty expense has not beensignificant.

 

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We generally agree to indemnify our customers againstlegal claims that our software products infringe certain third-partyintellectual property rights and account for our indemnification obligations underSFAS 5. To date, we have not been required to make any payment resulting frominfringement claims asserted against our customers and have not recorded anyrelated accruals.

 

**RecentAccounting Pronouncements**

 

In February 2007, the 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 forus beginning in the first quarter of fiscal year 2008, although earlieradoption is permitted. Although we are evaluating the application of SFASNo. 159, we do not currently believe adoption will have a material impacton our results of operations or financial position.

 

**Note 2.Comprehensive Loss**

 

Statement of Financial Accounting StandardsNo. 130 “*Reporting Comprehensive Income*”(SFAS 130) establishes standards for reporting and displaying comprehensive netincome and its components in stockholders’ equity. SFAS 130 requires foreigncurrency translation adjustments and changes in the fair value ofavailable-for-sale securities to be included in comprehensive income or loss.

 

The following are the components of comprehensive loss(in thousands):

 
| ** **                                                   | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **In thousands**                                             | ** ** | **2007**          | ** ** | **2006**          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                         |       |              |       |              |       |   |   |   |   |
| Net loss                                                     |       | $                 | (5,022     | )                 | $          | (1,687 | ) | $ | (15,563 | ) | $ | (8,155 | ) |
| Net unrealized gain (loss) on  available-for-sale securities |       | 25                |       | 72                |       | (1 | ) | 87 |   |
| Foreign currency translation gain (loss)                     |       | (16               | )          | 46                |       | (18 | ) | (118 | ) |
| Comprehensive loss                                           |       | $                 | (5,013     | )                 | $          | (1,569 | ) | $ | (15,582 | ) | $ | (8,186 | ) |

 

The components of accumulated other comprehensiveincome (loss) relate entirely to foreign currency translation adjustment gainsand losses and unrealized gains and losses on available-for-sale securities andare $(715,000) and $(55,000), respectively, at September 30, 2007.

 

**Note 3.Income Taxes**

 

The income tax provision was $212,000and $558,000 for the three and nine months ended September 30, 2007,respectively. For the three and nine months ended September 30, 2006, werecorded a provision for income taxes of approximately $72,000 and $333,000,respectively. The higher income tax provision for the three and nine monthperiods ended September 30, 2007 as compared to the same periods in 2006primarily reflects higher foreign income during the periods in 2007 as comparedto 2006.

 

As of September 30, 2007 andDecember 31, 2006, our deferred tax assets are fully offset by a valuationallowance. FASB’s Statement of Financial Accounting Standards No. 109 “*Accounting for Income Taxes*” (SFAS 109) provides for the recognitionof deferred tax assets if realization of such assets is more likely than not.Based upon the weight of available evidence, which includes SupportSoft’shistorical operating performance, reported cumulative net losses sinceinception and difficulty in accurately forecasting our future results, theCompany provided a full valuation allowance against our 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 be a benefit to the income tax provision.

 

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Effective January 1, 2007, weadopted Financial Accounting Standards Interpretation, No. 48 “*Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109* “ (FIN 48). FIN 48prescribes a recognition threshold and measurement guidance for the financialstatement reporting of uncertain tax positions taken or expected to be taken ina company’s income tax return. FIN 48 also provides guidance related toderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition matters related to uncertain tax positions.FIN 48 utilizes a two-step approach for evaluating uncertain tax positionsaccounted for in accordance with SFAS 109. Step one,  *Recognition*,requires a company to determine if the weight of available evidence indicatesthat a 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 largest amount of benefit, which is more likely than not to berealized on ultimate settlement. The cumulative effect of adopting FIN 48, ifany, is recorded as an adjustment to the opening balance of retained earningsas of the adoption date.

 

As a result of theimplementation of FIN 48, SupportSoft recognized no change in the liability forunrecognized tax benefits related to tax positions taken in priorperiods.  Additionally, SupportSoft reclassified $312,000 from currenttaxes payable to long-term taxes payable as FIN 48 specifies that tax positionsfor which the timing of the ultimate resolution is uncertain should berecognized as long-term liabilities.

 

As of January 1, 2007, theamount of unrecognized tax benefit with respect to which it is reasonablypossible that a significant change may occur in the next 12 months isapproximately $22,000. The change would result from expiration of the statuteof limitations for audits in several foreign jurisdictions.

 

Upon adoption of FIN 48, theCompany’s policy to include interest and penalties related to unrecognized taxbenefits within the Company’s provision for (benefit from) income taxes did notchange.  At September 30, 2007, the Company had $35,000 accrued forpayment of interest and penalties related to unrecognized tax benefits ($23,000as of the adoption date of FIN 48).  For the three and nine months endedSeptember 30, 2007, the Company recognized $4,000 and $11,000, respectively, ofinterest and penalties related to unrecognized tax benefits in its provisionfor income taxes.

 

As of adoption of FIN 48, theCompany’s total unrecognized tax benefits were $1,867,000 of which $335,000, ifrecognized, would affect its effective tax rate. At September 30, 2007, theCompany’s total unrecognized tax benefits were $1,958,000, of which $425,000,if recognized, would affect its effective tax rate. The Company anticipates anincrease to the unrecognized tax benefits during 2007 related primarily to taxcredits and certain foreign tax exposures. While the increase in theunrecognized tax benefit cannot be estimated at this time, the 2007 changes arenot expected to have a material effect on the financial statements. The taxyears 1997 through 2006 remain open to examination in several jurisdictions,none of which have individual significance.

 

**Note 4.Contingencies**

 

*LegalMatters*

 

*In re SupportSoft, Inc. SecuritiesLitigation* was a consolidated complaint filed in the UnitedStated District Court of the Northern District of California against theCompany, our former CEO and former CFO. The complaint generally allegedviolations of certain federal securities laws and sought unspecified damages.On June 1, 2006 this action was certified to proceed as a class action onbehalf of all persons and entities who purchased or otherwise acquired thesecurities of the Company from January 20, 2004 to October 1, 2004 and who wereallegedly damaged thereby. In May, 2007, the parties reached an agreement inprinciple to settle the consolidated lawsuit. The court approved the settlementand dismissed the consolidated lawsuit with prejudice on September 28, 2007.The settlement was fully funded by insurance.

 

*Whitev. Basu et al.*is a derivative shareholder complaint filed inthe Superior Court of the State of California for the County of San Mateo. Thiscomplaint was filed on behalf of the Company as a nominal plaintiff againstcertain of our directors and former directors and alleges that the directordefendants harmed the Company by making or permitting the Company to make falseand misleading statements between January 20, 2004 and October 1, 2004. OnOctober 4, 2006, the court denied the defendants’ demurrer to the plaintiffs’ FirstAmended Complaint. Plaintiffs filed a Second Amended Complaint on October 27,2006, which the defendants answered on November 6, 2006. In September, 2007,the parties reached an agreement in principle to settle the lawsuit. Thesettlement is expected to be fully funded by insurance and is subject to finalapproval of the court. A final approval hearing is scheduled for December,2007. We cannot predict with certainty the outcome of the litigation, and ifthe settlement is not finally approved by the court, we believe we havemeritorious defenses to the claims in the Second Amended Complaint.

 

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In November 2001, a class action lawsuit wasfiled against us, two of our former officers, and certain underwriters in theUnited States District Court for the Southern District of New York. The lawsuitalleged that our registration statement and prospectus dated July 18, 2000for the issuance and initial public offering of 4,250,000 shares of our commonstock contained material misrepresentations and/or omissions related to allegedinflated commissions received by the underwriters of the offering. The lawsuitseeks unspecified damages as well as interest, fees and costs. Similarcomplaints have been filed against 55 underwriters and more than 300 othercompanies and other individual officers and directors of those companies. Allof the complaints against the underwriters, issuers and individuals have beenconsolidated for pre-trial purposes before U.S. District Court Judge Scheindlinof the Southern District of New York. On June 26, 2003, the plaintiffsannounced that a proposed settlement between the issuer defendants and theirdirectors and officers had been reached. Under the proposed settlement, whichis subject to court approval, our insurance carrier would be responsible forany payments other than attorneys’ fees prior to June 1, 2003. A finalsettlement approval hearing on the proposed issuer settlement was held onApril 24, 2006. The district court took the matter under submission.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 the proposed class could not be certified, and denied a petitionfor rehearing on April 6, 2007. On June 25, 2007, the district court entered astipulated order terminating the proposed issuer settlement. Plaintiffs areproceeding with discovery as to underwriters and issuers, although principallywith respect to focus or test cases that do not name the Company as adefendant. The court set a briefing schedule for a new class certificationmotion, which is expected to be heard in early 2008. 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, including assertions that we may beinfringing patents or other intellectual property rights of others. Wecurrently believe that the ultimate amount of liability, if any, for anypending claims of any type (alone or combined) will not materially affect ourfinancial position, results of operations or cash flows. The ultimate outcomeof any litigation is uncertain, however, and either unfavorable or favorable outcomescould have a material negative impact on our financial condition and operatingresults. Regardless of outcome, litigation can have an adverse impact on usbecause of defense costs, negative publicity, diversion of management resourcesand other factors.

 

*Sales Tax Contingencies*

 

We are required to make periodic filings in the stateswhere we are deemed to have a presence for tax purposes. We have undergonestate audits in the past and have paid assessments arising from these audits.To date, such amounts have not been material. We evaluate estimated losses thatcould arise from similar assessments in accordance with SFAS 5. Weconsider such factors as the degree of probability of an unfavorable outcomeand the ability to make a reasonable estimate of the amount of loss in makingsuch evaluations.

 

**Note 5. Subsequent Events**

 

In the fourth quarter of 2007, we are implementing areduction in workforce to align our cost structure with anticipated revenue.Approximately 12% of our workforce is affected by thisrestructuring. Currently, we expect to recognize $1.7 million to $1.9 millionin restructuring costs during the fourth quarter of 2007. Actual costs may varyfrom this estimate. The restructuring charges will include personnel relatedcosts as well as lease restructuring costs.

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

You should read this Management’s Discussion andAnalysis of Financial Condition and Results of Operations (MD&A) inconjunction with the unaudited condensed consolidated financial statements andrelated notes appearing in Item 1 of this report on Form 10-Q and thesection entitled “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements andrelated notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

You should note that this MD&A discussion containsforward-looking statements that involve risks and uncertainties. Please seeItem 1A in Part II of this Quarterly Report on Form 10-Q for importantinformation to consider when evaluating such statements.

 

**Overview**

 

We are a leading provider of technology problemresolution software and services. Our solutions are designed to reduce technologysupport costs, improve customer satisfaction and enable new revenue streams fororganizations worldwide. In 2007, we expanded our offerings and now providetechnology support services directly to consumers.

 

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Our corporate customers are IT organizations anddigital service providers (telecommunications and cable companies). CorporateIT departments and managed service providers (IT outsourcing firms) use oursoftware to improve the cost-effectiveness and efficiency of their supportthrough an integrated portfolio of proactive service, self service and assistedservice capabilities. Digital service providers use our products to automatethe installation, activation and verification of broadband services, to reducethe cost and improve the quality of support for customers, to enable the remotemanagement of devices located at customer premises, and to provide value-addedservices to consumers.

 

In addition to these offerings for corporatecustomers, we are now addressing the consumer technology support market. Thisoffering is an extension of our traditional business and relies upon ourproducts, technology and expertise in technology problem resolution. The newoffering provides computer problem resolution for consumers over the phone andthe Internet. We offer our consumer technology support services throughwww.support.com and through consumer-facing companies such as retailers and digitalservice providers.

 

Our revenue has historically consisted of softwarelicense fees and fees for maintenance, consulting, hosting and trainingservices. In recent years, we have licensed our software to customerspredominately on a perpetual basis in which we generally recognize the licenserevenue up front, assuming all criteria for revenue recognition under theapplicable accounting rules have been met. We have experienced a trend ofdecreasing annual license revenue over the last three fiscal years. Maintenancefees relating to perpetual software licenses result in ratable revenue over theperiod of the maintenance term, which is generally one year. Consulting andtraining revenues are generally recognized as the services are performed or inaccordance with predefined project milestones. Hosting fees are recognized ratablyover the term of the hosting arrangement. Revenues associated with termlicenses or arrangements in which we provide hosting services are recognizedratably over the expected period of performance of the contract, as we do notcurrently have VSOE for term licenses or hosting.

 

Our total revenue for the three months ended September30, 2007 was $11.3 million. Our total revenue decreased in the third quarter of2007 by $2.1 million, or 16%, from the second quarter of 2007, and by $500,000,or 5%, from the same quarter of 2006. The sequential and year-over-yeardecreases in total revenue were due primarily to the decreases in licenserevenue, partially offset by the increases in services revenue. The decreasesin license revenue were due to closing fewer large licensing transactions inthe third quarter of 2007. Historically, a relatively small number of customershave accounted for a substantial portion of our license revenue. Therefore,closure of or delays in closing a few large customer transactions can result insubstantial fluctuations in license revenue from quarter to quarter as was thecase in the third quarter of 2007. The sequential and year-over-year increasesin services revenue were due to higher demand for our implementation consultingservices, and to our consumer technology support services.

 

During 2007, we have also begun offering consumertechnology support services to consumers. We do not expect immediate returnsfrom this initiative, but believe it can create sustainable revenue growth overtime. Although we are leveraging many of our existing resources, we are makingsignificant incremental investments in furtherance of this initiative,including investments to operate call centers and to promote our consumerofferings. We expect that these additional investments will precede anymaterial revenue increase from our new business initiatives. As a result, wecurrently expect quarterly net losses from this initiative to offset cost improvementsfrom the reduction in workforce in our traditional business for the foreseeablefuture. Furthermore, we expect that our net loss for the full year in 2007,will significantly exceed the net losses we incurred during fiscal 2006.

 

In the fourth quarter of 2007, we are implementing areduction in workforce to align our cost structure with anticipated revenue.Approximately 12% of our workforce is affected by thisrestructuring. Currently, we expect to recognize $1.7 million to $1.9 millionin restructuring costs during the fourth quarter of 2007; however, the actualcosts have not yet been determined and could vary from this estimate. Therestructuring charges will include personnel related costs as well as leaserestructuring costs.

 

We intend the following discussion of our financialcondition and results of operations to provide information that will assist inunderstanding our financial statements, the changes in certain key items inthose financial statements from year to year, and the primary factors thataccounted for those changes, as well as how certain accounting principles,policies and estimates affect our financial statements.

 

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**CriticalAccounting Policies and Estimates**

 

In preparing our consolidated financial statements inconformity with accounting principles generally accepted in the United States,we make assumptions, judgments and estimates that can have a significant impacton our net revenue and operating results, as well as on the value of certainassets and liabilities on our consolidated balance sheets. We base ourassumptions, judgments and estimates on historical experience and various otherfactors that we believe to be reasonable under the circumstances. Actualresults could differ materially from these estimates under different assumptionsor conditions. On a regular basis we evaluate our assumptions, judgments andestimates and make changes accordingly. We believe that the assumptions,judgments and estimates involved in the accounting for revenue recognition,allowance for doubtful accounts, accounting for income taxes, goodwill,intangible assets and stock-based compensation have the greatest potentialimpact on our consolidated financial statements, so we consider these to be ourcritical accounting policies. We discuss below the critical accountingestimates associated with these policies. For further information on thecritical accounting policies, see Notes to Consolidated Financial Statements.

 

*RevenueRecognition*

 

We recognize revenue in accordance with generallyaccepted accounting principles that have been prescribed for the softwareindustry. Revenue recognition requirements in the software industry are verycomplex. 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 that 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.

 

*Allowancefor Doubtful Accounts*

 

We make judgments as to our ability to collectoutstanding receivables and provide allowances for the appropriate receivableswhen collection becomes doubtful. Provisions are made based upon a specificreview of all significant outstanding invoices. For those invoices notspecifically provided for, provisions are recorded at differing rates, basedupon the age of the receivable. In determining these percentages, we analyzeour historical collection experience and current payment trends. If thehistorical data we use to calculate the allowance for doubtful accounts doesnot accurately reflect our future ability to collect outstanding receivables,additional provisions for doubtful accounts may be needed and our futureresults of operations could be materially affected.

 

*Accountingfor Income Taxes*

 

We are required to estimate our income taxes in eachof the tax jurisdictions in which we operate. This process involves management’sestimation of our actual current tax exposures together with an assessment oftemporary differences determined based on the difference between the financialstatement and tax basis of certain items. These differences result in netdeferred tax assets and liabilities, which are included within our consolidatedbalance sheet. We must then assess, based on the weight of available evidence,the 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 our statements of operations.

 

Effective January 1, 2007, we adopted FinancialAccounting Standards Interpretation, No. 48 “*Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109*” (FIN48). FIN 48 prescribes a recognitionthreshold and measurement guidance for the financial statement reporting ofuncertain tax positions taken or expected to be taken in a company’s income taxreturn. FIN 48 also provides guidance related to derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition matters related to uncertain tax positions. FIN 48 utilizes atwo-step approach for evaluating uncertain tax positions accounted for inaccordance with SFAS 109. Step one, *Recognition*,requires a company to determine if the weight of available evidence indicatesthat a tax position is more likely than not to be sustained upon audit,including resolution of related appeals or litigation processes, if any. Steptwo, *Measurement*, is based on thelargest amount of benefit, which is more likely than not to be realized onultimate settlement.

 

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*Goodwill*

 

We assess the impairment of goodwill annually or moreoften if events or changes in circumstances indicate that the carrying valuemay not be recoverable. An impairment loss would be recognized when thesum of the discounted future net cash flows expected to result from the use ofthe asset and its eventual disposition is less than its carrying amount. Suchimpairment loss would be measured as the difference between the carrying amountof the asset and its fair value. The estimate of cash flows is based upon,among other things, certain assumptions about expected future operatingperformance and an appropriate discount rate determined by our management. Ourestimates of discounted cash flows may differ from actual cash flows dueto, among other things, economic conditions, changes to our business model orchanges in operating performance. If we made different estimates, material differencesmay result in the write down of net long-lived and intangible assets,which would be reflected by charges to our operating results for any periodpresented. At September 30, 2007, 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.

 

*Intangible Assets*

 

We record purchased intangible assets at fair value.The original cost is amortized on a straight-line basis over the estimateduseful life of each asset. We assess the impairment of intangible assetswhenever events or changes in circumstances indicate that its carrying amountmay not be recoverable. The assessment considers facts and circumstances,either internal or external, which indicate that the carrying value of theasset cannot be recovered. If and when indicators of impairment exist, weassess the need to record an impairment loss, by comparing the undiscounted netcash flows associated with related assets or group of assets over theirremaining lives against their respective carrying amounts. Impairment, if any,is based on the excess of the carrying amount over the fair value of thoseassets.

 

*Stock-basedcompensation*

 

We account for stock-based compensation in accordancewith the provisions of SFAS 123R. We adopted SFAS 123R using the modifiedprospective transition method which requires the application of the accountingstandard starting from January 1, 2006. Under the fair value recognitionprovisions of SFAS 123R, stock-based compensation cost is estimated at thegrant date based on the fair value of the award and is recognized as expenseratably over the requisite service period of the award. We estimate the fairvalue of stock-based awards on the grant date using the Black-Scholes-Mertonoption-pricing model. Determining the appropriate fair value model andcalculating the fair value of stock-based awards requires judgment, includingestimating stock price volatility, forfeiture rates and expected life. Ifany of these assumptions used in the option-pricing models changessignificantly, stock-based compensation may differ materially in the futurefrom that recorded in our accompanying financial statements.

 

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**RESULTSOF OPERATIONS**

 

The following table sets forth the results ofoperations for the three and nine months ended September 30, 2007 and 2006expressed as a percentage of total revenue.

 
| ** **                        | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|-----------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                        | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                        | ** ** | **2007**          | ** ** | **2006**          | ** ** | **2007** | ** ** | **2006** | ** ** |
| License                           |       | 23                | %          | 38                | %          | 33 | % | 32 | % |
| Services                          |       | 40                |       | 29                |       | 33 |   | 30 |   |
| Maintenance                       |       | 37                |       | 33                |       | 34 |   | 38 |   |
|                              |       |              |       |              |       |   |   |   |   |
| Total revenue                     |       | 100               |       | 100               |       | 100 |   | 100 |   |
|                              |       |              |       |              |       |   |   |   |   |
| Costs and expenses:               |       |              |       |              |       |   |   |   |   |
| Cost of license                   |       | 0                 |       | 1                 |       | 0 |   | 1 |   |
| Cost of services                  |       | 47                |       | 30                |       | 42 |   | 31 |   |
| Cost of maintenance               |       | 6                 |       | 3                 |       | 5 |   | 3 |   |
| Amortization of intangible assets |       | 2                 |       | 2                 |       | 2 |   | 2 |   |
| Research and development          |       | 21                |       | 19                |       | 20 |   | 23 |   |
| Sales and marketing               |       | 61                |       | 51                |       | 66 |   | 55 |   |
| General and administrative        |       | 19                |       | 23                |       | 21 |   | 25 |   |
|                              |       |              |       |              |       |   |   |   |   |
| Total Costs and Expenses          |       | 156               |       | 129               |       | 156 |   | 140 |   |
|                              |       |              |       |              |       |   |   |   |   |
| Loss from operations              |       | (56               | )          | (29               | )          | (56 | ) | (40 | ) |
| Interest and other income, net    |       | 14                |       | 16                |       | 14 |   | 15 |   |
|                              |       |              |       |              |       |   |   |   |   |
| Loss before income taxes          |       | (42               | )          | (13               | )          | (42 | ) | (25 | ) |
| Income tax provision              |       | (2                | )          | (1                | )          | (2 | ) | (1 | ) |
|                              |       |              |       |              |       |   |   |   |   |
| Net loss                          |       | (44               | )%         | (14               | )%         | (44 | )% | (26 | )% |

 

**Threeand Nine Months Ended September 30, 2007 and 2006**

 

***License Revenue***

 
| ** **                            | ** ** | **Three Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **Ended**         | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **September 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September 30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except  percentages** | ** ** | **2007**          | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**        | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                  |       |              |       |       |       |       |       |              |       |       |       |       |       |   |   |   |   |
| License revenue                       |       | $                 | 2,586      |       | $          | 4,479      |       | $                 | (1,893     | )          | (42        | )          | $          | 11,725 |   | $ | 10,013 |   | $ | 1,712 |   | 17 |   |
|                                       |            |                   |            |            |            |            |            |                   |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

License revenue is comprised of fees for term andperpetual licenses of our software. Perpetual license revenue is recognizedusing the residual method described in SOP 98-9 for arrangements in whichlicenses are sold with multiple elements. We allocate revenues in thesearrangements based upon the fair value of each undelivered element includingundelivered maintenance, consulting and training. The determination of fairvalue is based upon vendor specific objective evidence

 

17

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(VSOE). VSOE for maintenance is based upon separaterenewals of maintenance from customers. VSOE for consulting or training isbased upon separate sales of these services to customers. Assuming all otherrevenue recognition criteria are met, the difference between the totalarrangement fee and the amount deferred for each undelivered element isrecognized as license revenue.

 

Historically, a relatively small number of customershave accounted for a substantial portion of our license revenue. Therefore, closureof a few large customer transactions can result in fluctuations in licenserevenue from period to period. The decrease in license revenue for the threemonths ended September 30, 2007, as compared with the same period in 2006, wasdue to fewer sizable license transactions with our customers.  The increase in license revenue for the ninemonths period ended September 30, 2007 was due primarily to expansion oflicense agreements with existing customers in North America and Asia/Pacific. Keytransactions that we hoped to close in the third quarter of 2007 remain in oursales pipeline, and as of the filing date of this Form 10-Q, we arein the sales and negotiation process with several companies for the purchase ofour products and services. Ultimate closure of these and certain other sizablelicense transactions prior to December 31, 2007 will have a significantinfluence on whether we miss, meet or exceed expectations for revenue in the fourthquarter of 2007.

 

***ServicesRevenue***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine Months**    | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| Services revenue                     |       | $                  | 4,536      |       | $          | 3,462      |       | $                  | 1,074      |       | 31         |       | $          | 11,423 |   | $ | 9,106 |   | $ | 2,317 |   | 25 |   |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Services revenue is primarily comprised of revenuefrom professional services, such as consulting, hosting and training, as wellas revenue from our consumer technology support services. Services revenue isgenerally recognized as the services are performed. The increase in servicesrevenue for the three and nine months periods ended September 30, 2007 comparedwith the same periods in 2006 were due primarily to higher demand for ourimplementation consulting services, and to our consumer technology supportservices.

 

***Maintenance Revenue***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine  Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| Maintenance revenue                  |       | $                  | 4,201      |       | $          | 3,917      |       | $                  | 284        |       | 7          |       | $          | 12,035 |   | $ | 11,740 |   | $ | 295 |   | 3 |   |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Maintenance revenue is comprised primarily of revenue frompost-contract technical support services which includes software productupdates. Maintenance revenue for the three and nine months ended September 30,2007, increased slightly over the same periods in 2006 due primarily tomaintenance contract renewals and maintenance associated with new licensingcontracts.

 

***International Revenue***.  Revenue from customers outside the NorthAmerica accounted for approximately 24% and 21% of our total revenue for thethree-month and nine-month periods ended September 30, 2007, compared with 19%and 22% for the three-month and nine-month periods ended September 30, 2006.The increase in international revenue as a percentage of total revenue in thethree-month period ended September 30, 2007, as compared with the same periodin the 2006 was due primarily to higher license revenue from Asia-Pacific customersand higher services revenue from EMEA customers in the third quarter of 2007.The percentage of international revenue of the total revenue for the ninemonths ended September 30, 2007 was relatively consistent with the comparableperiod in 2006.

 

18

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***Cost of license***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine  Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| Cost of license                      |       | $                  | 52         |       | $          | 119        |       | $                  | (67        | )          | (56        | )          | $          | 141 |   | $ | 333 |   | $ | (192 | ) | (58 | ) |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of license consists primarily of costs related tothird-party royalty fees under license arrangements for technology embedded inor resold with our products. The decreases in cost of license for the three andnine months ended September 30, 2007 compared with the same periods in 2006were due primarily to lower third-party royalties.

 

***Cost of services***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine Months**    | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| Cost of services                     |       | $                  | 5,279      |       | $          | 3,606      |       | $                  | 1,673      |       | 46         |       | $          | 14,933 |   | $ | 9,579 |   | $ | 5,354 |   | 56 |   |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of services consists primarily of compensationcosts, travel costs, and related overhead expenses for our professionalservices organization, payments made to third parties for subcontractedconsulting services, the cost of our call center operations for our consumertechnology support offerings and third-party hosting fees. The increases forthe three and nine months ended September 30, 2007 as compared to the sameperiods in 2006 were due primarily to:

 

•                 thecost of operating our call centers related to our consumer technology supportofferings (there was no comparable cost in 2006);

 

•                 salary expenseand related employees costs for additional professional services personnel; and

 

•                 an increase inhosting expenses.

 

***Cost of maintenance***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine  Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| Cost of maintenance                  |       | $                  | 630        |       | $          | 349        |       | $                  | 281        |       | 81         |       | $          | 1,929 |   | $ | 863 |   | $ | 1,066 |   | 124 |   |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of maintenance consists primarily of compensationcosts, travel costs, and related overhead expenses for customer supportpersonnel. The increases in cost of maintenance for the three and nine monthsended September 30, 2007 as compared with the same periods in 2006 were dueprimarily to increases in salary and related employee costs as a result of anincrease in the number of customer support personnel.

 

19

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***Operating Expenses***

*** ***
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine  Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| Research and  development            |       | $                  | 2,366      |       | $          | 2,267      |       | $                  | 99         |       | 4          |       | $          | 7,071 |   | $ | 7,125 |   | $ | (54 | ) | (1 | ) |
| Sales and marketing                  |       | 6,959              |       | 6,013      |       | 946        |       | 16                 |       | 23,081     |       | 16,993     |       | 6,088 |   | 36 |   |
| General and  administrative          |       | 2,211              |       | 2,689      |       | (478       | )          | (18                | )          | 7,235      |       | 7,677      |       | (442 | ) | (6 | ) |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

*Researchand development.* Research and development costs are expensedas incurred. Research and development expense consists primarily ofcompensation costs, consulting expenses and related overhead costs for researchand development personnel. Research and development expenses for the three andnine months ended September 30, 2007, were relatively unchanged from comparableperiods in 2006.

 

*Salesand marketing.* Sales and marketing expense consists primarilyof compensation costs, including salaries, sales commissions and relatedoverhead costs for sales and marketing personnel and promotional expenses,including public relations, advertising and trade shows. The increases for thethree and nine months ended September 30, 2007 as compared to the same periodsin 2006 were due primarily to:

 

•                  salary andrelated expenses associated with additional sales and marketing personnel;

 

•                  incrementalexpenditures for marketing programs and advertising in connection with ourconsumer offerings; and

 

•                  in the ninemonths ended September 30, 2007 an increase in commissions associated withhigher license revenue.

 

*Generaland administrative.* General and administrative expenseconsists primarily of compensation costs and related overhead costs for administrativepersonnel and professional fees for legal, accounting and other professionalservices. The decreases for the three months and nine months ended September 30,2007 as compared to the same periods in 2006 were due primarily to lowersalaries and related expenses.

 

***Interest income and other, net***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine  Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| **Interest  income and other, net**  |       | $                  | 1,636      |       | $          | 1,842      |       | $                  | (206       | )          | (11        | )          | $          | 5,019 |   | $ | 4,705 |   | $ | 314 |   | 7 |   |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income and other, net decreased slightly inthe three months ended September 30, 2007 as compared with the three monthsended September 30, 2006 because of a one-time payment of $295,000 received inthe third quarter of 2006. The payment related to the settlement of acontractual dispute. The increase for the nine months of 2007 as compared tothe same period in 2006 was primarily due to an increase in interest incomebecause of higher interest rates earned on our marketable securities.

 

***Provision for income taxes***

 
| ** **                           | ** ** | **Three  Months**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine  Months**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **September  30,** | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**           | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                 |       |               |       |       |       |       |       |               |       |       |       |       |       |   |   |   |   |
| **Provision  for income taxes**      |       | $                  | (212       | )          | $          | (72        | )          | $                  | (140       | )          | 194        |       | $          | (558 | ) | $ | (333 | ) | $ | (225 | ) | 68 |   |
|                                      |            |                    |            |            |            |            |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increases for the three and nine months ended September30, 2007 as compared to the same periods in 2006 were primarily due to higherforeign income tax and withholding taxes related to international customerpayments.

 

20

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As of September 30, 2007, ourdeferred tax assets are fully offset by a valuation allowance. SFAS 109provides 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 our 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.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Since our incorporation in December 1997, we havefinanced our operations primarily through proceeds from our initial publicoffering, follow-on public offering, cash flows from operations and, to alesser extent, the private placement of our preferred and common stock, bankborrowings and capital equipment lease financing. There are many variables thatimpact our business plan including the levels of revenue, costs and expenses,and new capital investments. Actual cash usage could differ from theseprojections. During the nine months ended September 30, 2007, our cash, cashequivalents and marketable securities, in the aggregate, decreasedapproximately $5.7 million from $119.9 million at December 31, 2006 to $114.2million at September 30, 2007.

 

***Operating Activities***

 

Net cash provided by (used in) operating activitieswas $(8.6) million and $453,000 for the nine months ended September 30, 2007and 2006, respectively. Net cash used in operating activities for the nine monthsended September 30, 2007 was primarily due to the net loss of $15.6 million anda decrease in deferred revenue of $5.8 million, partially offset by non-cashitems of $4.8 million. Such items include depreciation, amortization, accretionof premium or discount on securities and stock-based compensationexpenses.  The net loss during the periodwas also partially offset by a reduction in accounts receivable of $6.7 milliondriven by cash collections during the period.

 

Net cash provided by operating activities for the ninemonths ended September 30, 2006 was primarily due to cash collections duringthe period, which contributed to a reduction in accounts receivable of $10.4 million.The reduction in accounts receivable was offset by a net loss of $8.2 million, adecrease in deferred revenue of $4.4 million, and non-cash items of $2.6million.

 

Our accounts receivable and deferred revenue balancesfluctuate from period to period and are primarily dependent on (i) thetiming of the closure of our license agreements, especially larger agreementsconcluded late in the period, (ii) the related invoicing and paymentprovisions under those agreements, (iii) the timing of maintenancerenewals and related invoicing, and (iv) collections. Accounts receivabledecreased to $8.4 million at September 30, 2007 from $15.1 million atDecember 31, 2006. The reduction of $6.7 million was due to (i) strongcollections in the first three quarters of 2007, and (ii) lower license bookingsin the third quarter of 2007. Accounts receivable decreased to $7.0 million at September30, 2006, a reduction of $10.4  millionfrom $17.4 million at December 31, 2005. The reduction of accounts receivablewas due to the existence of several significant accounts receivable at December31, 2005 and collections of much of those receivables during the first quarterof 2006.

 

Deferred revenue decreased $5.8million and $4.4 million for the nine month periods ended September 30, 2007and 2006, respectively.  The primary component of deferred revenue isdeferred maintenance revenue, which represents amounts billed in advance formaintenance contracts.  Deferred maintenance is recognized ratably overthe maintenance term, which is typically one year. Although there are anumber of factors that could cause deferred revenue to fluctuate from quarterto quarter, we generally expect the December 31 deferred maintenance balance tobe higher than at other times during the year because of seasonally stronglicense sales in the fourth quarter and the initial and renewal maintenancebillings associated with such license sales.  In the quarters that followDecember 31, the amortization of deferred maintenance will generally result ina decrease in our overall deferred revenue balance.

 

***Investing Activities***

 

Net cash provided by (used in) in investing activitieswas $10.8 million and $(7.2) million for the nine months ended September 30,2007 and 2006, respectively. Net cash provided by investing activities for the ninemonths ended September 30, 2007, was due to net sales of marketable securitiesof $13.1 million, offset by the purchase of property and equipment of $(2.4)million, primarily computer equipment, furniture, and leasehold improvementsfor our new headquarters office which we began to occupy in April 2007. Netcash used in investing activities for the nine months ended September 30, 2006,was due primarily to the net purchases of marketable securities of $(6.8)million and property and equipment of $(478,000).

 

21

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***Financing Activities***

 

Net cash generated by financing activities was $4.6million for the nine months ended September 30, 2007 and $1.9 million for the ninemonths ended September 30, 2006. Net cash provided by financing activities inboth periods was attributable to net proceeds from the exercise of stockoptions and the purchase of common stock under our employee stock purchaseplan.

 

***Working Capital and Capital Expenditure Requirements***

 

At September 30, 2007, we had stockholders’ equity of$125.2 million and working capital of $110.9 million. Included as a reductionto working capital is deferred revenue of $5.8 million, which will not requirecash to settle, but will be recognized as revenue in the future. We believethat our existing cash balances will be sufficient to meet our working capitalrequirements as well as our planned capital expenditures for at least the next12 months.

 

In the near term, we plan to make substantialinvestments in our consumer technology support services initiative. We believe thisinvestment is essential to creating sustainable growth in our business in thefuture. Because this investment will likely precede any associated revenues, weexpect our working capital to decrease in the near term.

 

If we require additional capital resources to grow ourbusiness internally or to acquire complementary technologies and businesses atany time in the future, we may seek to sell additional equity or debtsecurities. The sale of additional equity or debt securities could result inmore dilution to our stockholders. Financing arrangements may not beavailable to us, or may not be available in amounts or on terms acceptableto us.

 

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

 

Our financial results could be affected by factorssuch as changes in foreign currency exchange rates or weak economic conditionsin foreign markets. As most sales are currently made in U.S. dollars, astrengthening of the dollar could make our products less competitive in foreignmarkets.

 

As of September 30, 2007, we held $22.1 million incash and cash equivalents consisting of highly liquid investments havingoriginal maturity dates of no more than 90 days. A decline in interest ratesover time would reduce our interest income from our highly liquid marketablesecurities. Based upon our balance of cash and cash equivalents, a decrease ininterest rates of 100 basis points would cause a corresponding decrease in ourannual interest income of approximately $221,000. Due to the nature of ourhighly liquid cash equivalents, a change in interest rates would not materiallychange the fair market value of our cash and cash equivalents.

 

As of September 30, 2007, we held $92.2 million inmarketable securities, which consisted primarily of money market funds held bylarge institutions in the U.S. and commercial paper. Our marketable securitieswere primarily invested in corporate bonds, government debt securities maturingin less than eighteen months and auction-rate securities resetting in less thanninety days. The weighted average interest rate of our portfolio wasapproximately 4.47% at September 30, 2007. A decline in interest rates overtime would reduce our interest income from our marketable securities. Adecrease in interest rates of 100 basis points would cause a correspondingdecrease in our annual interest income of approximately $922,000.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

We maintain “disclosure controls and procedures,” assuch term is defined in Rule 13a-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”), that are designed to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in Securities and Exchange Commission (the “SEC”) rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognized that disclosure controls and procedures, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the disclosure controls and procedures are met. Ourdisclosure controls and procedures have been designed to meet, and managementbelieves they meet, reasonable assurance standards. Additionally, in designingdisclosure controls and procedures, our management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possibledisclosure controls and procedures. The design of any disclosure controls andprocedures also is based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.

 

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As of September 30, 2007 and as previously reported inour Annual Report on Form 10-K, as of December 31, 2006, our Chief ExecutiveOfficer and our Chief Financial Officer concluded that we disclosure controlsand procedures were not effective due to a material weakness related to notappropriately quantifying the foreign currency translation gain or loss uponliquidation of a foreign subsidiary in 2006.

 

In response to ouridentification of the material weakness described above, 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.

 

**Changesin Internal Control over Financial Reporting**

 

There were no changes in our internal control overfinancial reporting during the quarter ended September 30, 2007 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PARTII. 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**

 

This report containsforward-looking statements regarding our business and expected futureperformance as well as assumptions underlying or relating to such statements ofexpectation, all of which are “forward looking statements” within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  We are subject tomany risks and uncertainties that may materially affect our business and futureperformance and cause those forward-looking statements to be inaccurate. Allstatements in this report, other than statements that are purely historical,are forward-looking statements. Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “forecasts,” “estimates,” “seeks,” “may result in,” “continueto,” and similar expressions often identify forward-looking statements. In thisreport, forward-looking statements include, without limitation, the following:

 

•                  our expectationsand beliefs regarding future conduct and growth of the business;

 

•                  anticipatedimpact on our business from our consumer technology support initiative fromboth revenue and expense perspectives;

 

•                  our expectationsregarding our collaboration with consumer technology support partners and theanticipated timing of revenue from these relationships;

 

•                  our beliefs andexpectations regarding the introduction of new products and related servicesand features;

 

•                  our assessmentsand expectations surrounding growth and performance of our professionalservices organization;

 

•                  our expectationsregarding cash flows and expenses, including sales and marketing, research anddevelopment efforts, and administrative expenses;

 

•                  our beliefsregarding seasonality, mix of revenue, and other trends for our business;

 

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•                  our assessmentsand beliefs regarding the future outcome of pending legal proceedings and theliability, if any, that we may incur as a result of those proceedings;

 

•                  our expectationsregarding the costs and other effects of acquisition and dispositiontransactions;

 

•                  the expectedcost and impact on our business of a reduction in our workforce;

 

•                  the assumptionsunderlying our Critical Accounting Policies and Estimates, including ourassumptions regarding revenue recognition; assumptions used to estimate thefair value of share-based compensation; assumptions regarding the impairment ofgoodwill and intangible assets; and expected accounting for income taxes; and

 

•                  the expectedeffects of the adoption of new accounting standards.

 

An investment in our stockinvolves risk, and we caution investors that forward-looking statements areonly predictions based on our current expectations about future events and arenot guarantees of future performance. We encourage you to read carefully allinformation provided in this report and in our other filings with the SECbefore deciding to invest in our stock or to maintain or change yourinvestment. Forward-looking statements are based on information as of thefiling date of this report, and we undertake no obligation to publicly reviseor update any forward-looking statement for any reason.

 

Because forward-lookingstatements involve risks and uncertainties, there are important factors thatmay cause actual results to differ materially from our stated expectations.These factors are described below.  Thislist does not include all risks that could affect our business, and if these orany other risks or uncertainties materialize, or if our underlying assumptionsprove to be inaccurate, actual results could differ materially from pastresults and from our expected future results. We encourage you to review our other reports filed periodically with theSecurities and Exchange Commission for any further information regarding risksfacing our business.

 

**We were not profitable in2006 or in the first three quarters of 2007 and will continue to sustain a lossin the foreseeable future.**

** **

Wewere not profitable in 2006 or in the first three quarters of 2007. Inaddition, we intend to make significant investments in support of our businessin 2007 and we expect to continue to sustain losses in 2007 and subsequentperiods.  If we fail to achieve revenuegrowth as a result of these additional investments or if such revenue growthdoes not result in our achieving profitability, the market price of our commonstock will likely decline.  A sustainedperiod of losses would also result in an increased usage of cash to fund ouroperating activities and a corresponding reduction in our cash balance.

 

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

** **

Ourquarterly revenue and operating results have in the past and may in thefuture fluctuate from quarter to quarter. As a result, we believe thatquarter-to-quarter and year-to-year comparisons of our revenue and operatingresults are not necessarily meaningful, and that these comparisons may notbe accurate indicators of future performance.

 

Severalfactors that have contributed or may in the future contribute tofluctuations in our operating results include:

 

•                  demandfor our software and services;

 

•                  sizeand timing of customer orders and our ability to recognize revenue in a givenquarter;

 

•                  ourcollaboration with consumer technology support partners and the anticipatedtiming of revenue from these partnerships;

 

•                  ourreliance on a small number of customers for a substantial portion of ourrevenue;

 

•                  theprice and mix of products and services we or our competitors offer;

 

•                  themix of products and services that generate up-front revenue as opposed torevenue over a period of time;

 

•                  ourability to attract and retain customers;

 

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•                  therate of expansion of our new consumer offerings and our investments therein;

 

•                  theamount and timing of operating costs and capital expenditures in our business;

 

•                  seasonaltrends resulting from corporate spending patterns;

 

•                  theexercise of judgment by our management in making accounting decisions inaccordance with our accounting policies; and

 

•                  generaleconomic conditions and their effect on our operations.

 

Inprior years, we licensed a significant portion of our software on a term basisin which revenue was recognized ratably over the length of the agreement withthe customer. In recent periods, however, we typically have licensed oursoftware on a perpetual basis in which we recognize the license revenue upfront, assuming all criteria for revenue recognition have been met. As a resultof our current perpetual licensing model, we have become dependent on a fewcustomer contracts with up-front license revenue for a substantial portion ofour revenue in any one quarter. In addition, a significant portion of our totalrevenue each quarter comes from a number of orders received in the last monthof a quarter. In previous quarters, we failed to close expected perpetuallicenses with up-front revenue resulting in a revenue shortfall. If in futurequarters we fail to close orders expected to be completed by the end of aquarter, particularly if these orders are for perpetual licenses with up-frontrevenue, our quarterly results would suffer and the market price of our commonstock 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.**

** **

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

 

Management’sability to accurately predict performance is affected in large part by asignificant portion of our total revenue being dependent upon the closing ofnew large customer orders. In addition, our guidance is based in part upon theexpectation of new product sales and services offerings with which we have alimited history. In the event we fail to achieve projected revenue levels inany quarter, we will be unable to reduce our expenses for that quarter in acorresponding fashion, and our results will not meet our guidance or theexpectations of securities analysts or investors, which would cause the marketprice of our common stock to decline.

 

Thetrading market for our common stock relies in part on the research and reportsthat industry or financial analysts publish about us or our business. We do notcontrol these analysts. If one or more of the analysts who currently cover usdowngrade our stock, our stock price would likely decline rapidly. Furthermore,if one or more of these analysts cease coverage of us, we could lose visibilityin the market, which in turn could cause the market price of our stock todecline.

 

**Our consumer technology support initiative willincrease operating expenses without any assurance of yielding increasedrevenue.**

** **

Weare executing a plan to extend our business by providing consumer technologysupport services. In addition to continuing to offer our software tocorporate customers, we are offering technology support to consumers.  We may not be able to offer these newservices successfully. We have limited experience in reaching or servingconsumers directly or in managing call centers. As a result, we expect to usesignificant cash and incur increased operating expenses to support this new initiative,including costs of our outsourced call centers, promotional costs associatedwith reaching consumers and costs of obtaining personnel with the necessaryconsumer expertise.  These investmentsmay not yield increased revenue to offset these expenses. Furthermore, this newbusiness initiative, if not favorably received by consumers, could damage thereputation of our corporate enterprise business as well as strain ourmanagement, financial and operational resources necessary to maintain our corporatebusiness. The lack of market acceptance of such efforts or our inability togenerate satisfactory revenue from such expanded services would have a materialadverse effect on our business, prospects, financial condition and operatingresults.

 

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**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.**

** **

Asmall number of customers have historically accounted for, and may infuture periods account for, substantial portions of our revenue. For thequarter ended September 30, 2007, one customer accounted for 21% of our totalrevenue for the quarter. Transaction structures that involve ratable revenuerecognition and our consumer offerings, which typically involve payment on aper transaction basis, could reduce our dependence on large transactions with asmall number of customers.   However, thesetransaction structures account for a small portion of our revenue, and in thenear term, we are likely to continue to derive a significant portion of ourrevenue from large transactions with a limited number of customers. Therefore,our revenue could decline because of the loss or delay of a single customerorder. Additionally, we may not obtain new customers. The failure toobtain significant new customers, particularly customers that purchaseperpetual licenses with up-front payments, the loss or delay of significantcustomer orders or the failure of existing customers to pay ongoing fees whendue would harm our operating 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.**

** **

Oursales cycle for our software typically ranges from three to nine months or moreand may vary substantially from customer to customer. The purchase of ourproducts and services for corporate customers generally involves a significantcommitment of capital and other resources by a customer. This commitment oftenrequires significant technical review, assessment of competitive products andapproval at a number of management levels within a customer’s organization. Inaddition, in the wake of the Sarbanes-Oxley Act of 2002, companies haveenhanced their approval processes, making sales more difficult or protracted.While our customers are evaluating our products and services, we may incursubstantial sales and marketing expenses and spend significant managementeffort to complete these sales. Any delay in completing sales in a particularquarter or the failure to complete a sale after expending resources during thesales cycle could cause our operating results to suffer.

 

**If our revenue from our international operations doesnot exceed the expense of establishing and maintaining internationaloperations, our business could suffer.**

** **

Forthe years ended December 31, 2004, 2005, 2006 and the nine-month periodended September 30, 2007, international revenue was 11%, 21%, 23% and 21% oftotal revenue, respectively. We have limited experience in internationaloperations and may not be able to compete effectively in international marketsor effectively manage our operations in various countries. If we do notgenerate enough revenue from international operations to offset the expense ofthese operations, our operating results could suffer. Risks we face inconducting business internationally include:

 

•                  costsof staffing and managing international operations;

 

•                  smallercustomers with less ability to pay United States rates for software andservices;

 

•                  difficultyin reaching geographically dispersed customers;

 

•                  differingtechnology standards, intellectual property protections and other legalconsiderations;

 

•                  longersales cycles;

 

•                  seasonaltrends unique to international markets;

 

•                  dependenceon local vendors, consultants and business partners;

 

•                  difficultiesin staffing and managing international operations, including the difficulty inmanaging a geographically dispersed workforce in compliance with diverse locallaws and customs;

 

•                  potentialadverse tax consequences;

 

•                  changesin currency exchange rates and controls;

 

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•                  difficultiesin maintaining effective internal control over financial reporting andcompliance as a result of a geographically-dispersed workforce and customers;

 

•                  longercollection cycles for accounts receivable; and

 

•                  theeffects of external events such as terrorist acts and any related conflicts orsimilar events worldwide.

 

**Our operating results will suffer if we do not manageour professional services organization effectively.**

** **

Clientsthat license our software typically engage our professional servicesorganization to assist with installation and implementation of our software andrelated consulting services. Revenue from professional services represented asubstantial portion of our total revenue for the quarter ended September 30,2007. Although significant improvement occurred in the third quarter, ourprofessional services business did not operate in a profitable manner for thenine months ended September 30, 2007. We are planning to improve the financialperformance of this organization; however, no assurance can be given that theseplans will be successful. We have generally billed our customers forprofessional services on a time and material basis, using an agreed upon dailyrate. However, customers have increasingly requested various contractstructures, including milestone-based contracts and contracts for a fixed totalfee. If unanticipated factors in a project are encountered, we may be subjectto monetary and other significant penalties, and the profitably of our professionalservices business would decline further. Furthermore, an estimated loss on acontract is generally required to be recorded in the period in which a lossbecomes evident. Recording a loss on a services contract could have a materialadverse effect on our operating results for the period in which the loss wasrecorded.

 

**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 continue to derive, a significant portion of ourtotal revenue from existing customers who purchase additional products andservices and renew maintenance contracts. Our customers may not renewmaintenance contracts or purchase additional products and services. Inaddition, as we introduce new products, our current customers may notrequire or desire the functionality of our new products and may notultimately purchase these products. If our customers do not renew maintenancecontracts or do not purchase additional products and services, our operatingresults would suffer.

 

**Our failure to establish and expand successful third-partyalliances would harm our operating results.**

** **

Our consumer offerings require us to establish andmaintain relationships with third parties who will direct consumers to us andprovide technology support services to consumers based on our technology, aswell as with third parties to whom we outsource our call center services.Failure to establish or maintain these relationships on acceptable terms or atall could materially and adversely affect the success of this initiative.  In addition, there is the risk that, onceestablished, these alliances may take longer than we expect to produce revenueor may not produce revenue at all.  Suchrisks could significantly harm our operating results.

 

Wehave alliances with third parties that are important to our traditionalofferings. Our existing relationships include those with hardware vendors andmanaged service providers who provide outsourced support to corporatecustomers. If these relationships fail, we may need to devote substantiallymore resources to the sales and marketing of our products and services than wewould otherwise, and our efforts may not be as effective. For example, companiesthat provide outsourced support and services often have extensive relationshipswith our existing and potential customers and significant input in the purchasedecisions of these customers. In addition, we may establish relationships withthird-party resellers and other sales partners as we expand internationally.Our failure to maintain existing relationships, or to establish newrelationships with key third parties, could significantly harm our ability tosell our products and services. In addition, our competitors may have strongalliances with other companies, including hardware providers, which couldimpact our ability to obtain greater market share, participate in deals wherehardware and software are sold together, or require us to reduce the price ofproducts and services, which could harm our business, prospects, financialcondition and operating results.

 

**We may engage in investments, dispositions,acquisitions or other strategic matters that could divert management attentionand prove difficult to integrate with our business.**

** **

Wemay engage in acquisitions or divestitures of certain assets, businesses,products or technologies, or in other strategic initiatives. Acquisitions,divestitures and other strategic transactions are inherently risky. Certaintransactions may

 

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be subject to closing conditions, which may not besatisfied, and transactions may not be completed, even after publicannouncement. Acquisitions may require further use of our cash resources, theissuance of equity or debt securities, or the incurrence of other forms ofdebt, any of which could harm our financial condition, results of operations,or our interest expense and leverage. If we issue equity securities, currentstockholders’ percentage ownership and earnings per share may be diluted. Theprocess of integrating businesses, technologies, services or products mayresult in unforeseen operating difficulties and expenditures. Acquisitions anddivestitures could involve a number of other potential risks to our business,including the following:

 

•                  unanticipatedcosts and liabilities and unforeseen accounting charges or fluctuations;

 

•                  delaysand difficulties in delivery of products and services;

 

•                  failureto integrate management information systems, personnel, research anddevelopment, marketing, sales and support operations;

 

•                  lossof key employees;

 

•                  diversionof management’s attention from other business concerns and disruption of ourongoing business;

 

•                  difficultyin maintaining controls and procedures;

 

•                  uncertaintyon the part of our existing customers about our ability to operate after atransaction;

 

•                  lossof customers;

 

•                  lossof alliance partners;

 

•                  failureto realize the potential financial or strategic benefits of the acquisition;and

 

•                  failureto successfully further develop the combined technology, resulting in theimpairment of amounts recorded as goodwill or other intangible assets.

 

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

** **

Wecompete in markets that are highly competitive, subject to rapid change andsignificantly affected by new product introductions and other market activitiesof industry participants. We compete with a number of companies in the marketfor automated delivery of support and service automation and other vendors whomay offer products or services with features that compete with specificelements of our software products and services. In addition, our customers andpotential customers have developed or may develop internally similarsoftware systems.

 

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

 

Aswe further enter the market for consumer technology support, we are competingagainst a set of competitors different than the competitors against whom wehave historically competed, including electronics retailers offering on-sitetechnology support services, companies offering online technology supportservices and companies offering local technology support services. Certain ofthese anticipated competitors have longer operating histories, significantlygreater financial, technical and other resources, stronger strategic alliancesor greater name recognition than we have.

 

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**The integration of new management and the loss of keypersonnel may affect our ability to achieve our business goals.**

** **

Oursuccess depends on the skills, experience and performance of our seniormanagement, engineering, sales, marketing and other key personnel. Many membersof senior management have been appointed within the last 18 months.  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 functionand work together successfully, or if we lose the services of one or more ofour executives or key employees, our business could be harmed. In addition, weare implementing a reduction in our workforce. Reductions in our workforcecould make it difficult to motivate and retain remaining employees or attractneeded new employees, and could also affect our ability to deliver products andservices in a timely fashion.

 

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

** **

Tosell to some of our customers, we may be required to take risks ofuncollectible accounts. We may be exposed to similar risks relating to thirdparty resellers and other sales partners, as we intend to increasingly utilizesuch parties as we expand into new geographic regions. Additionally, as we haveexpanded our business internationally, we have experienced longer payment termsand collection cycles from customers outside the United States. While we monitorthese situations carefully and attempt to take appropriate measures to protectourselves by recognizing revenue upon collection of accounts from customers wedeem to have credit risks and upon sell-through by resellers, it is possiblethat we may have to write down or write off doubtful accounts. Such write-downsor write-offs would negatively affect our operating results for the period inwhich they occur, and, if large, could have a material adverse effect on ouroperating results and financial condition.

 

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

** **

Ifwe fail to develop enhanced versions of our software in a timely manner or toprovide products and services that achieve rapid and broad market acceptance,we may not maintain or expand our market share. We are making significantinvestments in our consumer technology support initiative, and if our servicesdo not achieve rapid market acceptance, our operating and financial resultscould be harmed. We may fail to identify new product and service opportunitiesfor our current market or new markets that we enter in the future. In addition,our existing products may become obsolete if we fail to introduce new productsor product enhancements that meet new customer demands, support new standardsor integrate with new or upgraded versions of packaged applications oroperating systems. We have limited control over factors that affect marketacceptance of our product and services, including:

 

•                  thewillingness of companies to transition to automated solutions; and

 

•                  customerpreferences for competitors’ 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.**

** **

Ourproducts depend on complex software, both internally developed and licensedfrom third parties. Also, our customers may use our products with othercompanies’ products, which may also contain complex software. Complex softwareoften contains errors and may not perform properly. These errors could resultin:

 

•                  delaysin product shipments;

 

•                  unexpectedexpenses and diversion of resources to identify the source of errors or tocorrect errors, whether or not the error is later determined to be related toour software;

 

•                  damageto our reputation;

 

•                  lostsales;

 

•                  contractualpenalties, demands, claims and litigation and related defense costs; and

 

•                  warrantyclaims.

 

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Inour consumer offerings, we generally use our own products to diagnose andresolve consumer technology problems. If our products fail to perform well inthis environment, our consumer offerings would suffer and may not besuccessful.

 

**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.**

** **

Wecurrently serve a customer base with a wide variety of constantly changinghardware, software and networking platforms. For example, 64-bitmicroprocessors are becoming increasingly important to our customer base. If wefail to release versions of our software that are compatible with operatingsystems, software applications or hardware devices used by our customers, ourbusiness and operating results would suffer. Our future success also depends onthe continuing ability of our products to inter-operate with multiple platformsand packaged applications used by our customer base and on our management ofsoftware being developed by third parties for our customers or for use with ourproducts.

 

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

** **

Weintend to continue to license technologies from third parties, includingapplications used in our research and development activities and technologiessuch as third-party search engine technology, which are integrated into ourproducts and services. Our inability to obtain or integrate any of thesetechnologies with our own products could delay product and service developmentuntil equivalent compatible technology can be identified, licensed andintegrated. These technologies may not continue to be available to us oncommercially 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:

 

•                  risksof product malfunction after new technology is integrated;

 

•                  thediversion of resources from the development of our own proprietary technology;and

 

•                  ourinability to generate revenue from new technology sufficient to offsetassociated acquisition and maintenance 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.**

** **

Afundamental requirement for online communications, transactions and support isthe secure transmission of confidential information. Third partiesmay attempt to breach our security or that of our customers. We may beliable to our customers for any breach in security and any breach could harmour business and reputation. Also, computers are vulnerable to computerviruses, physical or electronic break-ins and similar disruptions, which couldlead to interruptions, delays or loss of data. We recently released a securityadvisory and a patch for a remote code execution vulnerability in several ofour ActiveX components. We may be required to expend significantcapital and other resources to further protect against security breaches or tocorrect problems caused by any breach.

 

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

** **

Statementof Financial Accounting Standards No. 123 (revised 2004),*“Share-Based Payment”* (SFAS 123R)became effective in our first quarter of 2006, and has resulted in ourrecognition of substantial compensation expense relating to our employee stockoptions and employee stock purchase plans. Historically, we generally have notrecognized in our statement of operations any compensation expense related tostock option grants we issue under our stock option plans or the discounts weprovide under our employee stock purchase plans. Under the new rules, we arerequired to measure the compensation expense related to employee stock awardson a fair value basis, which leads to substantial additional compensationexpense and a material adverse effect on our reported results of operations.

 

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**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.**

** **

Wehave evaluated our “disclosure controls and procedures” as such term is definedin Rule 13a-15(e) under the Exchange Act as of September 30, 2007, as well asour internal control over financial reporting as required by Section 404 of theSarbanes-Oxley Act of 2002 as of December 31, 2006. Our independent registeredpublic accounting firm has performed a similar evaluation of our internalcontrol over financial reporting as of December 31, 2006. Effective controlsare necessary for us to provide reliable financial reports and effectivelyprevent fraud. If we cannot provide reliable financial reports or preventfraud, our operating results would be harmed. For the periods ended September30, 2007 and December 31, 2006, we concluded that we had a material weakness inour internal control over financial reporting, as further described in Item 4of Part I of this Quarterly Report, and Item 9A of Part II on Form 10-K,Control and Procedures. Our independent registered public accounting firmreached the same conclusion. In the first quarter of 2007, we implementedcorrective actions that we believe will remediate this material weakness. Weare monitoring the effectiveness of these controls.  However, we cannot be certain that thesemeasures will ultimately be effective in remediating the material weakness. Ifthese actions are not successful in addressing this material weakness or ifother weaknesses are identified, our ability to report our financial results ona timely and accurate basis may be adversely affected. In addition, if wecannot establish effective internal control over financial reporting anddisclosure controls and procedures, investors may lose confidence in ourreported financial information, which could cause the market price of ourcommon stock to decline.

 

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

** **

Goodwilland identifiable intangible assets were recorded in part due to our acquisitionof substantially all of the assets of Core Networks Incorporated in September2004. We also have certain intangible assets with an indefinite life. We assessthe impairment of goodwill and indefinite life intangible assets annually ormore often if events or changes in circumstances indicate that the carryingvalue may not be recoverable. We assess the impairment of acquired productrights and other finite life intangible assets whenever events or changes incircumstances indicate that its carrying amount may not be recoverable. Animpairment loss would be recognized when the sum of the discounted future netcash flows expected to result from the use of the asset and its eventualdisposition is less than its carrying amount. Such impairment loss would bemeasured as the difference between the carrying amount of the asset and itsfair value. Material differences may result in write-downs of netlong-lived and intangible assets, which would cause our operating results tosuffer.

 

**Failure to resolve litigation or claims assertedagainst us may lead to continued costs and expenses and divert management’sattention from our business, which could cause our revenue and our stock priceto decline.**

** **

Securitiesclass action lawsuits were filed against us in November 2001 andagain in December 2004. In addition, a derivative stockholder lawsuit wasfiled against us in December 2005. Should these lawsuits linger for alonger period of time, whether ultimately resolved in our favor or not, orfurther lawsuits be filed against us, coverage limits of our insurance or ourability to pay such amounts may not be adequate to cover the fees andexpenses and any ultimate resolution associated with such litigation. The sizeof these payments, if any, individually or in the aggregate, could seriouslyimpair our cash reserves and financial condition. The continued defense ofthese lawsuits also could result in diversion of our management’s time andattention away from business operations, which could cause our financialresults to decline. A failure to resolve definitively current or futurematerial litigation in which we are involved or in which we may becomeinvolved in the future, regardless of the merits of the respective cases, couldalso cast doubt as to our prospects in the eyes of customers, potentialcustomers and investors, which could cause our revenue and stock price todecline.

 

**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.**

** **

Oursoftware contains features that allow our customers and our consumer technologysupport technicians to control, monitor or collect information from computersrunning the software. Federal, state and foreign government bodies andagencies, however, have adopted or are considering adopting laws andregulations regarding the collection, use and disclosure of personalinformation obtained from consumers and individuals. Liability for violationof, costs of compliance with, and other burdens imposed by such laws andregulations may limit the use and adoption of our solutions and reduceoverall demand for them. Even the perception of privacy concerns, whether ornot valid, may inhibit adoption of our solutions. In addition, wemay face claims about invasion of privacy or inappropriate disclosure,use, storage, or loss of this information. Any imposition of liability couldharm our reputation, cause us to lose customers and cause our operating resultsto suffer.

 

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

** **

Oursuccess and ability to compete depend to a significant degree upon theprotection of our software and other proprietary technology. It is possiblethat:

 

•                  ourpending patent applications may not be issued;

 

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

 

•                  patentsissued to us may not be broad enough to protect our proprietary rights;and

 

•                  ourissued patents could be successfully challenged.

 

**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.**

** **

Werely on a combination of laws, such as those applicable to patents, copyrights,trademarks and trade secrets, and contractual restrictions, such asconfidentiality agreements and licenses, to establish and protect ourproprietary rights. Our ability to compete and grow our business could sufferif these rights are not adequately protected. Our proprietary rightsmay not be adequately protected because:

 

•                  lawsand contractual restrictions may not adequately prevent misappropriationof our technologies or deter others from developing similar technologies; and

 

•                  policingunauthorized use of our products and trademarks is difficult, expensive andtime-consuming, and we may be unable to determine the existence or extentof this unauthorized use.

 

Also,the laws of other countries in which we market our products may offerlittle or no protection of our proprietary technologies. Reverse engineering,unauthorized copying or other misappropriation of our proprietary technologiescould enable third parties to benefit from our technologies without paying usfor them, which would harm our competitive position and market share.

 

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

** **

Ourbusiness relies upon the use and licensing of technology and software. Otherparties may assert intellectual property infringement claims against us orour customers, and our products may infringe the intellectual propertyrights of third parties. For example, our products may infringe issued patentsthat may relate to our products. In addition, as is increasingly common in thesoftware industry, we may be confronted with the aggressive enforcement ofpatents by companies whose primary business activity is to acquire patents forthe purpose of offensively asserting them against other companies. From time totime, we have received allegations of intellectual property infringement, andwe may receive more claims in the future. Intellectual property litigation isexpensive and time-consuming and could divert management’s attention from ourbusiness. The outcome of any litigation is uncertain and could significantlyimpact our financial results. If there is a successful claim of infringement,we may be required to develop non-infringing technology or enter into royaltyor license agreements, which may not be available on acceptable terms, ifat all. Our failure to develop non-infringing technologies or licenseproprietary rights on a timely basis would harm our business.

 

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

** **

Ourability to increase our revenue will depend in part on increased demand fordigital services. If this demand does not grow as rapidly or to the extent weanticipate, our business could suffer. The growth of digital services isuncertain and will depend in particular upon the availability, at a reasonableprice, of such digital services, the building of infrastructure to support suchservices, the availability of competitive products, and the reliability of suchservices.

 

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**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.**

** **

TheUnited States and international economies have in the past experienced periodsof slow economic growth and this could occur again. In addition, terroristattacks in the United States and turmoil in certain overseas regions haveincreased uncertainty and may exacerbate a decline in economic conditions,both domestically and internationally. If the economy declines as a result ofeconomic, political and social turmoil, or if there are further terroristattacks in the United States or elsewhere, we may experience decreases inthe demand for our products and services, which would harm our operatingresults.

 

**We may be required to change our businesspractices if there are changes in accounting regulations and relatedinterpretations and policies.**

 

Accountingstandards groups and regulators are actively re-examining various accountingpolicies, guidelines and interpretations related to revenue recognition, incometaxes, investments in equity securities, facilities consolidation, accountingfor acquisitions, allowance for doubtful accounts and other financial reportingmatters. These standards groups and regulators could promulgate interpretationsand guidance that could result in material and potentially adverse changes toour business practices and accounting policies.

 

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

** **

The Sarbanes-Oxley Act of2002, as well as rules subsequently implemented by the Securities andExchange Commission and the Nasdaq Global Select Market, has required changesin corporate governance practices of public companies.  These rules 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 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

**None**

 
| **ITEM 6.** | ** ** | **EXHIBITS**                                                                          |
|------------------|------------|---------------------------------------------------------------------------------------|
|             |       |                                                                                  |
|             |       | Exhibits.                                                                             |
|             |       |                                                                                  |
|             |       | 31.1 Chief  Executive Officer Section 302 Certification                               |
|             |       |                                                                                  |
|             |       | 31.2 Chief  Financial Officer Section 302 Certification                               |
|             |       |                                                                                  |
|             |       | 32.1(1) Statement of  the Chief Executive Officer under 18 U.S.C. § 1350(1) |
|             |       |                                                                                  |
|             |       | 32.2(1) Statement of  the Chief Financial Officer under 18 U.S.C. § 1350(1) |

 

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

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| November 02,  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**

**FORTHE QUARTER ENDED September 30, 2007**

 
| 31.1    |   | Chief  Executive Officer Section 302 Certification                       |
|---------|--------|--------------------------------------------------------------------------|
| 31.2    |   | Chief  Financial Officer Section 302 Certification                       |
| 32.1(1) |   | Statement of  the Chief Executive Officer under 18 U.S.C. § 1350(1) |
| 32.2(1) |   | Statement of  the Chief Financial Officer under 18 U.S.C. § 1350(1) |

 

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| (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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