**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 June 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.**(Exact Name of Registrant as Specified in Its Charter)

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

 

**1900Seaport Boulevard, 3****rd Floor**

**RedwoodCity, CA 94063**

(Address of Principal Executive Offices)

(ZipCode)

Registrant’s TelephoneNumber, Including Area Code: **(650) 556-9440**

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

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

 

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

On July 30, 2007, 45,919,318 shares of the Registrant’sCommon Stock, $0.0001 par value, were outstanding.

 

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**SUPPORTSOFT,INC.**

**FORM10-Q**

**QUARTERLYPERIOD ENDED JUNE 30, 2007**

**INDEX**
|                                | ** ** | ** **                                                                                                  | ** ** | ** ** | ** ** | **Page** |
|--------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|
| Part I. Financial  Information |       | 3                                                                                                           |
| Item 1.                   |       | Financial Statements  (Unaudited)                                                                           |       | 3          |
|                           |       | Condensed Consolidated  Balance Sheets at June 30, 2007 and December 31, 2006                               |       | 3          |
|                           |       | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2007 and 2006 |       | 4          |
|                           |       | Condensed Consolidated  Statements of Cash Flows for the six months ended June 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                 |       | 14         |
| Item 3.                   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                 |       | 23         |
| Item 4.                   |       | Controls and  Procedures                                                                                    |       | 24         |
| Part II. Other  Information    |       | 24                                                                                                          |
| Item 1.                   |       | Legal Proceedings                                                                                           |       | 24         |
| Item 1A.                  |       | Risk  Factors                                                                                               |       | 25         |
| Item 4.                        |       | Submission of Matters to a Vote of Security Holders                                                         |       | 35         |
| Item 6.                   |       | Exhibits                                                                                                    |       | 35         |
| Signature                      |       | 36                                                                                                          |
| Exhibit Index             |       | 37                                                                                                          |

 

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**PART I.FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**SUPPORTSOFT, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**
| ** **                                          | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                     |       |                    |       |                        |       |
| Cash and cash  equivalents                          |       | $                       | 19,006     |                        | $          | 15,369 |   |
| Marketable securities                               |       | 95,851                  |       | 104,522                     |       |
| Accounts receivable,  net                           |       | 11,499                  |       | 15,144                      |       |
| Prepaid expenses and  other current assets          |       | 2,389                   |       | 2,894                       |       |
| Total current assets                                |       | 128,745                 |       | 137,929                     |       |
| Property and equipment,  net                        |       | 2,445                   |       | 937                         |       |
| Goodwill                                            |       | 9,792                   |       | 9,792                       |       |
| Intangible assets, net                              |       | 2,610                   |       | 3,155                       |       |
| Other assets                                        |       | 857                     |       | 792                         |       |
|                                                |       |                    |       |                        |       |
| **Total assets**                                    |       | $                       | 144,449    |                        | $          | 152,605 |   |
|                                                |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                |       |                    |       |                        |       |
| Accounts payable                                    |       | $                       | 983        |                        | $          | 331 |   |
| Accrued compensation                                |       | 2,629                   |       | 2,112                       |       |
| Other accrued  liabilities                          |       | 3,831                   |       | 3,813                       |       |
| Deferred revenue, less  long-term portion           |       | 8,148                   |       | 13,435                      |       |
| Total current  liabilities                          |       | 15,591                  |       | 19,691                      |       |
| Deferred  revenue—long-term portion            |       | 172                     |       | 178                         |       |
| Other long-term  liabilities                        |       | 696                     |       | 233                         |       |
| Commitments and contingencies                       |       |                    |       |                        |       |
| Stockholders’ equity:                          |       |                    |       |                        |       |
| Common stock                                        |       | 4                       |       | 4                           |       |
| Additional paid-in  capital                         |       | 208,497                 |       | 202,440                     |       |
| Accumulated other  comprehensive loss               |       | (780                    | )          | (751                        | )          |
| Accumulated deficit                                 |       | (79,731                 | )          | (69,190                     | )          |
| Total stockholders’  equity                    |       | 127,990                 |       | 132,503                     |       |
| ** **                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Total liabilities and stockholders’ equity** |       | $                       | 144,449    |                        | $          | 152,605 |   |

 

See accompanying notes.

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

**(inthousands, except per share amounts)(Unaudited)**
| ** **                                                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| License                                                                                        |       | $                                               | 5,891      |                                          | $          | 3,483 |   | $ | 9,138 |   | $ | 5,534 |   |
| Maintenance                                                                                    |       | 3,910                                           |       | 3,893                                         |       | 7,834 |   | 7,822 |   |
| Services                                                                                       |       | 3,632                                           |       | 3,388                                         |       | 6,887 |   | 5,645 |   |
| Total revenue                                                                                  |       | 13,433                                          |       | 10,764                                        |       | 23,859 |   | 19,001 |   |
| Costs and expenses:                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Cost of license                                                                                |       | 52                                              |       | 109                                           |       | 90 |   | 214 |   |
| Cost of  maintenance (including stock-based compensation of $22, $3, $38 and $5)               |       | 661                                             |       | 261                                           |       | 1,299 |   | 514 |   |
| Cost of services  (including stock-based compensation of $187, $57, $371 and $118)             |       | 5,170                                           |       | 3,083                                         |       | 9,654 |   | 5,973 |   |
| Amortization of purchased  intangible assets                                                   |       | 272                                             |       | 272                                           |       | 544 |   | 544 |   |
| Research and  development (including stock-based compensation of $122, $113, $238 and $218)    |       | 2,434                                           |       | 2,332                                         |       | 4,705 |   | 4,856 |   |
| Sales and  marketing (including stock-based compensation of $484, $188, $938 and $373)         |       | 8,662                                           |       | 5,847                                         |       | 16,122 |   | 10,981 |   |
| General and  administrative (including stock-based compensation of $504, $501, $918 and  $809) |       | 2,501                                           |       | 2,859                                         |       | 5,024 |   | 4,989 |   |
| Total costs and  expenses                                                                      |       | 19,752                                          |       | 14,763                                        |       | 37,438 |   | 28,071 |   |
| Loss from operations                                                                           |       | (6,319                                          | )          | (3,999                                        | )          | (13,579 | ) | (9,070 | ) |
| Interest income  and other, net                                                                |       | 1,531                                           |       | 1,557                                         |       | 3,384 |   | 2,862 |   |
| Loss before  income taxes                                                                      |       | (4,788                                          | )          | (2,442                                        | )          | (10,195 | ) | (6,208 | ) |
| Provision for  income taxes                                                                    |       | (131                                            | )          | (94                                           | )          | (346 | ) | (260 | ) |
| Net loss                                                                                       |       | $                                               | (4,919     | )                                             | $          | (2,536 | ) | $ | (10,541 | ) | $ | (6,468 | ) |
| Basic and  diluted net loss per share                                                          |       | $                                               | (0.11      | )                                             | $          | (0.06 | ) | $ | (0.23 | ) | $ | (0.15 | ) |
| Shares used in  computing basic and diluted net loss per share                                 |       | 45,476                                          |       | 44,009                                        |       | 45,213 |   | 43,922 |   |

 

See accompanying notes.

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

**(inthousands)(Unaudited)**
| ** **                                                                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Operating  Activities:                                                                     |       |                                          |       |   |   |
| Net loss                                                                                   |       | $                                             | (10,541    | ) | $ | (6,468 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                          |       |   |   |
| Depreciation,  amortization and accretion of premium/discount on securities                |       | 55                                            |       | 670 |   |
| Amortization of  intangible assets                                                         |       | 545                                           |       | 544 |   |
| Stock-based  compensation                                                                  |       | 2,503                                         |       | 1,522 |   |
| Changes in  assets and liabilities:                                                        |       |                                          |       |   |   |
| Accounts receivable, net                                                                   |       | 3,645                                         |       | 10,832 |   |
| Prepaid expenses and other current assets                                                  |       | 505                                           |       | (84 | ) |
| Other long-term assets                                                                     |       | (65                                           | )          | 192 |   |
| Accounts payable                                                                           |       | 652                                           |       | (856 | ) |
| Accrued compensation                                                                       |       | 517                                           |       | (857 | ) |
| Other accrued liabilities                                                                  |       | 18                                            |       | (358 | ) |
| Other long-term liabilities                                                                |       | 463                                           |       | 30 |   |
| Deferred revenue                                                                           |       | (5,293                                        | )          | (4,112 | ) |
| Other                                                                                      |       | (2                                            | )          | (166 | ) |
| Net cash  provided by (used in) operating activities                                       |       | (6,998                                        | )          | 889 |   |
|                                                                                       |       |                                          |       |   |   |
| Investing  Activities:                                                                     |       |                                          |       |   |   |
| Purchases of property and equipment                                                        |       | (2,120                                        | )          | (305 | ) |
| Purchases of marketable securities                                                         |       | (62,690                                       | )          | (25,029 | ) |
| Sales and maturities of marketable securities                                              |       | 71,891                                        |       | 24,066 |   |
| Net cash  provided by (used in) investing activities                                       |       | 7,081                                         |       | (1,268 | ) |
|                                                                                       |       |                                          |       |   |   |
| Financing  Activities:                                                                     |       |                                          |       |   |   |
| Proceeds from issuances of common stock                                                    |       | 3,554                                         |       | 1,344 |   |
| Net cash  provided by financing activities                                                 |       | 3,554                                         |       | 1,344 |   |
| Net increase in  cash and cash equivalents                                                 |       | 3,637                                         |       | 965 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 15,369                                        |       | 23,342 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                             | 19,006     |   | $ | 24,307 |   |
|                                                                                       |       |                                          |       |   |   |
| Supplemental  schedule of cash flow information:                                           |       |                                          |       |   |   |
| Income taxes paid                                                                          |       | $                                             | 108        |   | $ | 179 |   |

 

See accompanying notes.

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**SUPPORTSOFT,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1. Significant Accounting Policies**

**Basis of Presentation**

The accompanyingunaudited condensed consolidated financial statements include the accounts ofSupportSoft, Inc. (the “Company” or “SupportSoft”) and its wholly-ownedsubsidiaries. All intercompany balances and transactions have been eliminated.The balance sheet as of June 30, 2007 and the statements of operations for thethree and six months ended June 30, 2007 and 2006 and cash flows for the sixmonths ended June 30, 2007 and 2006 are unaudited. In the opinion ofmanagement, these unaudited interim condensed consolidated financial statementsreflect all adjustments (consisting of normal recurring adjustments) that arenecessary for a fair presentation of the results for, and as of, the periodsshown. The results of operations for such periods are not necessarilyindicative of the results expected for the full fiscal year or for any futureperiod. The condensed consolidated financial statement information as ofDecember 31, 2006 is derived from audited financial statements as of thatdate. These unaudited interim condensed consolidated financial statementsshould be read with the consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K, filed with the Securitiesand Exchange Commission on March 16, 2007.

**Use of Estimates and Reclassifications**

Thepreparation of interim condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and the accompanying notes. Actualresults could differ materially from these estimates. In addition, certainamounts that were previously reported have been reclassified to conform to thecurrent 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.

SupportSoftconsiders all arrangements with payment terms longer than 90 days not to befixed or determinable. If a fee is determined not to be fixed or determinable,revenue is recognized as payments become due from a customer. License revenueis comprised of fees for perpetual and term licenses of our software. Perpetuallicense revenue is recognized using the residual method, in compliance with SOP98-9 for arrangements in which licenses are sold with multiple elements.We allocate revenues on these licenses based upon the fair value of eachundelivered element including undelivered maintenance, consulting and training.The determination of fair value is based upon vendor specific objectiveevidence (VSOE). VSOE for maintenance is based upon separate renewals ofmaintenance from customers. VSOE for consulting and training is based uponseparate sales of these services to customers. Assuming all other revenue recognitioncriteria are met, the difference between the total arrangement fee and theamount deferred for each undelivered element is recognized as license revenue.In perpetual arrangements that include contractual obligations such asrights to unspecified future products, license revenue is recognized ratablyover the contract period.

Term licenses are soldwith maintenance for which SupportSoft does not have VSOE to determine fairvalue for maintenance fees. As a result, license revenue for term licenses isrecognized ratably over the duration of the agreement. License revenue in theaccompanying financial statements includes maintenance for term licenses. We donot allocate maintenance revenue from term licenses to maintenance revenue, aswe do not believe there is an allocation methodology that provides a 

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meaningful andsupportable allocation between license and maintenance revenues. Term licenserevenue was 5% and 6% of total revenue for the three months ended June 30, 2007and 2006, respectively. For the six months ended June 30, 2007 and 2006, termlicense revenue was 5% and 7% of total revenue, respectively. Services revenueassociated with the term licenses are recognized ratably over the term of thelicense.

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

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

Services revenue isprimarily comprised of revenue from professional services such as consulting,hosting and training fees. Arrangements are evaluated to determine whetherthose services are essential to the functionality of other elements of thearrangement. In the event services are considered essential to thefunctionality of other elements of the arrangement, revenue under thearrangement is recognized using contract accounting. Services that are notessential to the functionality of the software, such as consulting and trainingrevenues are generally recognized as the services are performed or projectmilestones are accepted by the customer. When non-essential services arebundled in a term licensing arrangement, revenue from the services isrecognized ratably over the term of the license.

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

**Cash, Cash Equivalents and MarketableSecurities**

SupportSoftconsiders all liquid instruments with an original maturity at the date ofpurchase of ninety days or less to be cash equivalents. At June 30, 2007, cashequivalents and marketable securities consisted primarily of money marketfunds, commercial paper, auction rate securities, corporate bonds and notes andtreasury bills issued by the United States government and its agencies. Ourmarketable securities are classified as available-for-sale as of the respectivebalance sheet dates, and are reported at fair value with unrealized gains andlosses included in accumulated other comprehensive income within stockholders’equity on the consolidated balance sheet. Realized gains and losses and declinesin value judged to be other-than-temporary on available-for-sale securities areincluded in other income (expense), net in the consolidated statement ofoperations.

Theamortized cost of debt securities is adjusted for amortization of premiums andaccretion of discounts to maturity, both of which are included in interestincome. SupportSoft recorded net unrealized losses on marketable securities of$80,000 and $54,000 at June 30, 2007 and December 31, 2006, respectively.

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

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The following is a summary of cash, cash equivalentsand marketable securities at June 30, 2007 (in thousands):
| ** **                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|-------------------------------|------------|---------------------|------------|
| Cash                         |       | $                   | 6,170      |                          | $          | —              |       | $ | 6,170 |   |
| Money market  funds          |       | 4,585               |       | —                        |       | 4,585               |       |
| Commercial paper             |       | 16,810              |       | (11                           | )          | 16,799              |       |
| Federal agencies  securities |       | 9,998               |       | (12                           | )          | 9,986               |       |
| Corporate bonds              |       | 35,721              |       | (54                           | )          | 35,667              |       |
| Auction rate  securities     |       | 41,650              |       | —                        |       | 41,650              |       |
|                         |       | $                   | 114,934    |                          | $          | (77                 | )          | $ | 114,857 |   |
|                         |       |                |       |                          |       |                |       |
| Classified as:               |       |                |       |                          |       |                |       |
| Cash and cash  equivalents   |       | $                   | 19,010     |                          | $          | (4                  | )          | $ | 19,006 |   |
| Marketable  securities       |       | 95,924              |       | (73                           | )          | 95,851              |       |
|                         |       | $                   | 114,934    |                          | $          | (77                 | )          | $ | 114,857 |   |

 

**Concentrationsof Credit Risk**

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

For thethree months ended June 30, 2007, two customers (Customers A and B) accountedfor 10% or more of our total revenue. Customer A accounted for 25% and CustomerB accounted for 13% of our total revenue. For the six months ended June 30,2007, Customer A accounted for 16% of our revenue. For the three and six monthsended June 30, 2006, one customer (Customer C) accounted for 18% and 12%,respectively, of total revenue. 

**Trade Accounts Receivable**

Tradeaccounts receivable are recorded at the invoiced amount. We perform evaluationsof our customers’ financial condition and generally do not require collateral.We make judgments as to our ability to collect outstanding receivables andprovide allowances for the portion of receivables for which collection becomesdoubtful. Provisions are made based upon a specific review of all significantoutstanding invoices. For those invoices not specifically provided for,provisions are recorded at differing rates, based upon the age of the receivable.In determining these percentages, we analyze our historical collectionexperience and current payment trends. If the historical data we use tocalculate the allowance for doubtful accounts does not accurately reflect ourfuture ability to collect outstanding receivables, additional provisions fordoubtful accounts may be needed and our future results of operations could bematerially affected. At June 30, 2007 and December 31, 2006, the Companyhad reserves for credit losses of $351,000 and $373,000, respectively. At June30, 2007, two different customers accounted for 30% and 17% individually of ourtotal accounts receivable. At December 31, 2006, one customer accountedfor 15% of our total accounts receivable.

**Stock-BasedCompensation**

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

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The fair value of the Company’s stock options grantedto employees for the three and six months ended June 30, 2007 and 2006 wasestimated using the following assumptions:
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stock  Option Plan:**                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free  interest rate                  |       | 5.0                                                 | %          | 5.2                                               | %          | 4.8 | % | 5.2 | % |
| Expected term                             |       | 3.8 years                                           |       | 3.9 years                                         |       | 3.8 years |   | 3.9 years |   |
| Volatility                                |       | 51.2                                                | %          | 54.6                                              | %          | 51.2 | % | 55.6 | % |
| Estimated  forfeitures                    |       | 8                                                   | %          | 8                                                 | %          | 8 | % | 8 | % |
| Expected  dividend                        |       | 0                                                   | %          | 0                                                 | %          | 0 | % | 0 | % |
| Weighted average  fair value              |       | $2.38                                               |       | $1.94                                             |       | $2.48 |   | $1.98 |   |
| ** **                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **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 |   |

 

The Company recorded thefollowing stock-compensation expense for the three and six months ended June30, 2007 and 2006:
| ** **                                                                 | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stock  option compensation expense recognized in:**                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of maintenance                                                        |       | 20                                                  |       | 2                                                 |       | 35 |   | 3 |   |
| Cost of services                                                           |       | 176                                                 |       | 37                                                |       | 347 |   | 82 |   |
| Research and development                                                   |       | 114                                                 |       | 73                                                |       | 223 |   | 145 |   |
| Sales and marketing                                                        |       | 468                                                 |       | 144                                               |       | 907 |   | 294 |   |
| General and administrative                                                 |       | 496                                                 |       | 482                                               |       | 903 |   | 772 |   |
|                                                                       |       | 1,274                                               |       | 738                                               |       | 2,415 |   | 1,296 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **ESPP  compensation expense recognized in:**                              | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of maintenance                                                        |       | 2                                                   |       | 1                                                 |       | 3 |   | 2 |   |
| Cost of services                                                           |       | 11                                                  |       | 20                                                |       | 24 |   | 36 |   |
| Research and development                                                   |       | 8                                                   |       | 40                                                |       | 15 |   | 73 |   |
| Sales and marketing                                                        |       | 16                                                  |       | 44                                                |       | 31 |   | 79 |   |
| General and administrative                                                 |       | 8                                                   |       | 19                                                |       | 15 |   | 37 |   |
|                                                                       |       | 45                                                  |       | 124                                               |       | 88 |   | 227 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Stock-based compensation  expense included in total costs and expenses** |       | 1,319                                               |       | 862                                               |       | 2,503 |   | 1,523 |   |

 

9

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Prior to theadoption of SFAS 123R, our Board of Directors approved the acceleration ofvesting of certain unvested and out-of-money stock options with exercise pricesequal or greater than $5.00 per share. The acceleration of vesting was effective for stock options outstandingas of December 21, 2005.  Approximately3.0 million shares of stock underlying our stock options or 32% of ouroutstanding unvested stock options were subject to this acceleration and theirweighted average price was $7.02.  Theoptions accelerated excluded options previously granted to Board of Directors,employees who had terminations pending, and foreign employees who opted out ofthe acceleration for tax reasons.  Forall officers and vice-presidents (non-officers), the acceleration wasaccompanied by restrictions that prevent the sale of any such shares prior tothe date such shares would have originally vested had the optionee beenemployed on such date.   The purpose ofthe acceleration was to avoid recognizing compensation expense associated withthese options in our Consolidated Statements of Operations upon the adoption ofSFAS 123R on January 1, 2006.  

Thefollowing table represents stock option activity for the six months ended June30, 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                                             |       | 1,394,800                  |       | 5.42                                       |       |                                                |       |                                |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                |       |
| Exercised                                           |       | (1,063,277                 | )          | 3.64                                       |       |                                                |       |                                |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                |       |
| Forfeited                                           |       | (1,173,670                 | )          | 8.73                                       |       |                                                |       |                                |       |
|                                                |       |                       |       |                                       |       |                                                |       |                                |       |
| Outstanding  options at the end of the period       |       | 12,738,727                 |       | $                                          | 5.29       |                                                | 6.18       |                                | $          | 10,227 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                |       |
| Options vested  and expected to vest                |       | 12,630,241                 |       | $                                          | 5.30       |                                                | 6.18       |                                | $          | 10,141 |   |
|                                                |       |                       |       |                                       |       |                                                |       |                                |       |
| Outstanding exercisable  at the end of the period   |       | 5,567,511                  |       | $                                          | 6.06       |                                                | 6.12       |                                | $          | 4,159 |   |

 

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value that would have been received by the option holders had theyall exercised their options on June 30, 2007. This amount changes based on thefair market value of the Company’s stock. 

Duringthe three and six months ended June 30, 2007, the aggregate intrinsic value ofoptions exercised under the Company’s stock options plans was $657,000 and $1.4million, respectively. During the three and six months ended June 30, 2006, theaggregate intrinsic value of options exercised under the Company’s stockoptions plans was $95,000 and $391,000, respectively.  Total fair value of options vested during thethree and six months ended June 30, 2007 was $1.2 million and $2.4 million,respectively.  Total fair value ofoptions vested during the three and six months ended June 30, 2006 was $943,000and $1.4 million, respectively. 

At June30, 2007, there was $15.0 million of unrecognized compensation cost related toexisting options outstanding as of June 30, 2007, which is expected to berecognized over a weighted-average period of 3.1 years. 

**Net Loss Per Share**

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

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Thefollowing table sets forth the computation of basic and diluted net loss pershare (in thousands, except per share amounts):
| ** **                                                     | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                     | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                     | ** ** | **2007**              | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                           |       |                  |       |                |       |   |   |   |   |
| Net loss                                                       |       | $                     | (4,919     | )                   | $          | (2,536 | ) | $ | (10,541 | ) | $ | (6,468 | ) |
| Shares used in  computing basic and diluted net loss per share |       | 45,476                |       | 44,009              |       | 45,213 |   | 43,922 |   |
| Basic and diluted net  loss per share                          |       | $                     | (0.11      | )                   | $          | (0.06 | ) | $ | (0.23 | ) | $ | (0.15 | ) |

 

**Warrantiesand Indemnifications**

SupportSoftgenerally provides a warranty for its software products and services to itscustomers and accounts for its warranties under the Financial AccountingStandards Board’s (FASB’s) Statement of Financial Accounting StandardsNo. 5 “*Accounting for Contingencies*”(SFAS 5). Our standard warranty period is 90 days, but warranty periodscan sometimes be longer and vary from customer to customer. In the event thereis a failure of the product in breach of such warranties, SupportSoft generallyis obligated to correct the product or service to conform to the specificationsor, if SupportSoft is unable to do so, the customer is entitled to seek arefund of the purchase price of the defective product or service. SupportSoftdid not provide for a warranty accrual as of June 30, 2007 or December 31,2006. To date, SupportSoft’s product warranty expense has not been significant.

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

**Recent Accounting Pronouncements**

In February 2007, theFASB issued SFAS No. 159 “*The Fair Value Option forFinancial Assets and Financial Liabilities*” (SFAS 159).SFAS 159 permits companies to choose to measure certain financialinstruments and certain other items at fair value. The standard requires thatunrealized gains and losses on items for which the fair value option has beenelected be reported in earnings. SFAS 159 is effective for the Companybeginning in the first quarter of fiscal year 2008, although earlier adoptionis permitted. The Company is currently evaluating the impact of adoptingSFAS 159 on its consolidated financial statements.

**Note 2. Comprehensive Loss**

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

The following are the components of comprehensive loss(in thousands):
| ** **                                                   | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                   | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                   | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                   | ** ** | **2007**              | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                         |       |                  |       |                |       |   |   |   |   |
| Net loss                                                     |       | $                     | (4,919     | )                   | $          | (2,536 | ) | $ | (10,541 | ) | $ | (6,468 | ) |
| Net unrealized  gain (loss) on available-for-sale securities |       | (46                   | )          | (3                  | )          | (27 | ) | 16 |   |
| Foreign currency  translation loss                           |       | 22                    |       | (138                | )          | (2 | ) | (165 | ) |
| Comprehensive loss                                           |       | $                     | (4,943     | )                   | $          | (2,677 | ) | $ | (10,570 | ) | $ | (6,617 | ) |

 

Thecomponents of accumulated other comprehensive income (loss) relate entirely toforeign currency translation adjustment gains and losses and unrealized gainsand losses on available-for-sale securities and are $(700,000) and $(80,000) atJune 30, 2007, respectively.

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**Note 3. Income Taxes**

The income tax provisionwas $131,000 and $346,000 for the three and six months ended June 30, 2007,respectively. For the three and six months ended June 30, 2006, we recorded aprovision for income taxes of approximately $94,000 and $260,000, respectively.The higher income tax provision for the three and six month periods ended June30, 2007 as compared to the same periods in 2006 primarily reflects higher foreignincome during the periods in 2007 as compared to 2006.

As of June 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 therecognition of deferred tax assets if realization of such assets is more likelythan not. Based upon the weight of available evidence, which includesSupportSoft’s historical operating performance, reported cumulative net lossessince inception and difficulty in accurately forecasting our future results,the Company provided a full valuation allowance against 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.

Effective January 1,2007, we adopted Financial Accounting Standards Interpretation, No. 48 “*Accounting for Uncertainty in Income Taxes — an interpretationof FASB Statement No. 109* ” (FIN 48). FIN 48 prescribes arecognition threshold and measurement guidance for the financial statementreporting of uncertain tax positions taken or expected to be taken in a company’sincome tax return. FIN 48 also provides guidance related to derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition matters related to uncertain tax positions. FIN 48utilizes a two-step approach for evaluating uncertain tax positions accountedfor in accordance with SFAS 109. Step one,  *Recognition*,requires a company to determine if the weight of available evidence 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 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,the amount 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,the Company’s policy to include interest and penalties related to unrecognizedtax benefits within the Company’s provision for (benefit from) income taxes didnot change.  At June 30, 2007, the Company had $31,000 accrued for paymentof interest and penalties related to unrecognized tax benefits ($23,000 as ofthe adoption date of FIN 48).  For the three and six months ended June 30,2007, the Company recognized $4,000 and $8,000, respectively, of interest andpenalties related to unrecognized tax benefits in its provision for incometaxes.

As of adoption of FIN 48,the Company’s total unrecognized tax benefits were $1,867,000 of which$335,000, if recognized, would affect its effective tax rate. At June 30, 2007,the Company’s total unrecognized tax benefits were $1,918,000, of which$386,000, if recognized, would affect its effective tax rate. The Companyanticipates an increase to the unrecognized tax benefits during 2007 relatedprimarily to tax credits and certain foreign tax exposures. While the increasein the unrecognized tax benefit cannot be estimated at this time, the 2007changes are not expected to have a material effect on the financial statements.The tax years 1997 through 2006 remain open to examination in severaljurisdictions, none of which have individual significance.

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**Note 4. Contingencies**

*Legal Matters*

*In reSupportSoft, Inc. Securities Litigation* is a consolidatedcomplaint filed in the United Stated District Court of the Northern District ofCalifornia against the Company, our former CEO and former CFO. The complaintgenerally alleges violations of certain federal securities laws and seeksunspecified damages. On June 1, 2006 this action was certified to proceed as aclass action on behalf of all persons and entities who purchased or otherwiseacquired the securities of the Company from January 20, 2004 to October 1, 2004and who were allegedly damaged thereby. A trial date was set forOctober 29, 2007. In May, 2007, the parties reached an agreement inprinciple to settle the consolidated lawsuit. The court preliminarily approvedthe settlement on July 13, 2007. The settlement is expected to be fully fundedby insurance and is subject to final approval of the court. A final approvalhearing is scheduled for September, 2007. We cannot predict with certainty the outcome of the litigation, and ifthe settlement is not finally approved by the Court, we believe that we havemeritorious defenses to the claims in the complaint.

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

In November 2001, aclass action lawsuit was filed against us, two of our former officers, andcertain underwriters in the United States District Court for the SouthernDistrict of New York. The lawsuit alleged that our registration statement andprospectus dated July 18, 2000 for the issuance and initial public offeringof 4,250,000 shares of our common stock contained material misrepresentationsand/or omissions related to alleged inflated commissions received by theunderwriters of the offering. The lawsuit seeks unspecified damages as well asinterest, fees and costs. Similar complaints have been filed against 55underwriters and more than 300 other companies and other individual officersand directors of those companies. All of the complaints against theunderwriters, issuers and individuals have been consolidated for pre-trialpurposes before U.S. District Court Judge Scheindlin of the Southern Districtof New York. On June 26, 2003, the plaintiffs announced that a proposedsettlement between the issuer defendants and their directors and officers hadbeen reached. Under the proposed settlement, which is subject to courtapproval, our insurance carrier would be responsible for any payments otherthan attorneys’ fees prior to June 1, 2003. A final settlement approvalhearing on the proposed issuer settlement was held on April 24, 2006. Thedistrict court took the matter under submission. Meanwhile the consolidatedcase against the underwriters has proceeded. On October 13, 2004, thedistrict court certified a class in the underwriters’ proceeding. OnDecember 5, 2006, however, the Second Circuit reversed, holding that theproposed class could not be certified, and denied a petition for rehearing onApril 6, 2007. On June 25, 2007, the district court entered a stipulated orderterminating the proposed issuer settlement. Plaintiffs are proceeding withdiscovery as to underwriters and issuers, although principally with respect tofocus or test cases that do not name the Company as a defendant. The court seta briefing schedule for a new class certification motion, which is expected tobe heard in early 2008. Whilewe cannot predict with certainty the outcome of the litigation or whether thesettlement will be approved, we believe we and our officers have meritoriousdefenses to the claims 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 favorableoutcomes could have a material negative impact on our financial condition andoperating results. Regardless of outcome, litigation can have an adverse impacton SupportSoft because of defense costs, negative publicity, diversion ofmanagement resources and other factors.

*Sales TaxContingencies*

We arerequired to make periodic filings in the states where we are deemed to have apresence for tax purposes. We have undergone state audits in the past and havepaid assessments arising from these audits. To date, such amounts have not beenmaterial. We evaluate estimated losses that could arise from similarassessments in accordance with SFAS 5 . We consider such factors as thedegree of probability of an unfavorable outcome and the ability to make areasonable estimate of the amount of loss in making such evaluations.

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**Note 5. Restructuring Obligations andOther Charges**

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

In thefirst half of 2007, there were no additional restructuring charges, only cashpayments totaling $128,000 against the obligation at December 31, 2006.  The following table summarizes activityassociated with the restructuring and related expenses incurred as of June 30,2007 (in thousands):
|                                                    | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-----------|------------|
| Restructuring  costs incurred in 2006              |       | $         | 817        |   |
| Cash payments                                      |       | (689      | )          |
| Restructuring  obligations, December 31, 2006 |       | 128       |       |
| Cash payments                                      |       | (128      | )          |
| Restructuring  obligations, June 30, 2007          |       | $         | 0          |   |

 

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

Youshould read this Management’s Discussion and Analysis of Financial Conditionand Results of Operations (MD&A) in conjunction with the unauditedcondensed consolidated financial statements and related notes appearing inItem 1 of this report on Form 10-Q and the section entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and related notes included in SupportSoft’sAnnual Report on Form 10-K for the year ended December 31, 2006.

Youshould note that this MD&A discussion contains forward-looking statementsthat involve risks and uncertainties. Please see Item 1A in Part II of thisQuarterly Report on Form 10-Q for important information to consider whenevaluating such statements.

**Overview**

SupportSoft is a leadingprovider of technology problem resolution software and services. Our solutionsare designed to reduce technology support costs, improve customer satisfactionand enable new revenue streams for organizations worldwide. In 2007, weexpanded our offerings and now provide technology support services directly toconsumers.

Our corporate customersare IT organizations and digital service providers (telecommunications andcable companies). Corporate IT departments and managed service providers (IToutsourcing firms) use our software to improve the cost-effectiveness andefficiency of their support through an integrated portfolio of proactiveservice, self service and assisted service capabilities. Digital serviceproviders use our products to automate the installation, activation andverification of broadband services, to reduce the cost and improve the qualityof support for customers, to enable the remote management of devices located atcustomer premises, and to provide value-added services to consumers.

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

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Ourrevenue has historically consisted of software license fees and fees formaintenance, consulting, hosting and training services. In recent years, wehave licensed our software to customers predominately on a perpetual basis inwhich we generally recognize the license revenue up front, assuming allcriteria for revenue recognition under the applicable accountingrules have been met. Maintenance fees relating to perpetual softwarelicenses result in ratable revenue over the period of the maintenance term,which is generally one year. Consulting and training revenues are generally recognizedas the services are performed or in accordance with predefined projectmilestones. Hosting fees are recognized ratably over the term of the hostingarrangement.  Revenues associated withterm licenses or arrangements in which we provide hosting services arerecognized ratably over the expected period of performance of the contract, aswe do not currently have VSOE for term licenses or hosting.

Ourtotal revenue for the three months ended June 30, 2007 was $13.4 million. Ourtotal revenue increased in the second quarter of 2007 by $3.0 million, or 29%,from the first quarter of 2007, and by $2.7 million, or 25%, from the samequarter of 2006 due to the increases in both license and services revenue. Thesequential and year-over-year increases were due primarily to several largelicense transactions that were closed in the second quarter of 2007.

Prior to the improvedlicense revenue during three and six month periods ended June 30, 2007, weexperienced a trend of decreasing annual license revenue over the last threefiscal years. To address this trend we have made and are planning to make anumber of changes in the business. In 2006, we hired new senior leadership,including a new Chief Executive Officer, Senior Vice President of WorldwideSales, Senior Vice President of Global Services, Chief Marketing Officer,Senior Vice President of Customer Service and Senior Vice President of ConsumerBusiness Development. We have also hired new regional sales leadership for theNorth America and EMEA regions and made substantial changes in our sales forceand sales compensation plans. We have expanded our sales and marketing effortsinternationally and have begun to develop relationships with channel partners.We have also increased the size of our professional services organization, anddeveloped packaged product and service offerings capable of delivering returnon investment in shorter time frames. Most significantly, in terms ofinvestment, we have entered the consumer technology support market with ourwww.support.com and consumer technology solutions offerings.

We do not expectimmediate returns from our initiatives, but believe they can create sustainablerevenue growth over time. Although we intend to leverage many of our existingresources, we are making significant incremental investments in support ofthese initiatives, including investments to operate outsourced call centers, topromote our consumer offerings, to expand our professional servicesorganization and to increase our marketing activities with corporate customers.We expect that these additional investments will precede any material revenueincrease from our new business initiatives. As a result, we currently expect toincur quarterly net losses through at least 2007. Furthermore, we expect thatour net loss in each quarter, as well as for the full year in 2007, willsignificantly exceed the net losses we incurred during fiscal 2006. For boththe three-month and six-month periods ended June 30, 2007, total costs andexpenses increased by 33% compared with the same periods in 2006, reflectingour investment in the programs referred to above. Our basic and diluted lossper share for the three and six months ended June 30, 2007 were $(0.11) and$(0.23), respectively, compared to $(0.06) and $(0.15) for the three and sixmonths ended June 30, 2006, respectively.

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

**Critical Accounting Policies andEstimates**

Inpreparing our consolidated financial statements in conformity with accountingprinciples generally accepted in the United States, we make assumptions,judgments and estimates that can have a significant impact on our net revenueand operating results, as well as on the value of certain assets andliabilities on our consolidated balance sheets. We base our assumptions,judgments and estimates on historical experience and various other factors thatwe believe to be reasonable under the circumstances. Actual results coulddiffer materially from these estimates under different assumptions orconditions. 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.

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*Revenue Recognition*

Werecognize revenue in accordance with generally accepted accounting principlesthat have been prescribed for the software industry. Revenue recognitionrequirements in the software industry are very complex and are subject tochange. Our revenue recognition policy is one of our critical accountingpolicies because revenue is a key component of our results of operations and isbased on complex rules 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.

*Allowance for Doubtful Accounts*

We makejudgments as to our ability to collect outstanding receivables and provideallowances for the appropriate receivables when collection becomes doubtful.Provisions are made based upon a specific review of all significant outstandinginvoices. For those invoices not specifically provided for, provisions are recordedat differing rates, based upon the age of the receivable. In determining thesepercentages, we analyze our historical collection experience and currentpayment trends. If the historical data we use to calculate the allowance fordoubtful accounts does not accurately reflect our future ability to collectoutstanding receivables, additional provisions for doubtful accounts may beneeded and our future results of operations could be materially affected.

*Accounting for Income Taxes*

We arerequired to estimate our income taxes in each of the tax jurisdictions in whichwe operate. This process involves management’s estimation of our actual currenttax exposures together with an assessment of temporary differences determinedbased on the difference between the financial statement and tax basis ofcertain items. These differences result in net deferred tax assets andliabilities, which are included within our consolidated balance sheet. We mustthen assess, based on the weight of available evidence, the likelihood that thedeferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance or adjust thisallowance in a period, we must include a tax expense or benefit within the taxprovision in our statements of operations.

EffectiveJanuary 1, 2007, we adopted Financial Accounting Standards Interpretation,No. 48 “*Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109*”(FIN48). FIN 48 prescribes a recognition threshold and measurement guidance forthe financial statement reporting of uncertain tax positions taken or expectedto be taken in a company’s income tax return. FIN 48 also provides guidancerelated to derecognition, classification, interest and penalties, accounting ininterim periods, disclosure, and transition matters related to uncertain taxpositions. FIN 48 utilizes a two-step approach for evaluating uncertain taxpositions accounted for in accordance with SFAS 109. Step one, *Recognition*, requires a company todetermine if the weight of available evidence indicates that a tax position ismore likely than not to be sustained upon audit, including resolution ofrelated appeals or litigation processes, if any. Step two, *Measurement*, is based on the largestamount of benefit, which is more likely than not to be realized on ultimatesettlement. The cumulative effect of adopting FIN 48, if any, is recorded as anadjustment to the opening balance of retained earnings as of the adoption date.

*Goodwill*

We assess the impairmentof goodwill annually or more often if events or changes in circumstancesindicate that the carrying value may not be recoverable. An impairmentloss would be recognized when the sum of the discounted future net cash flowsexpected to result from the use of the asset and its eventual disposition isless than its carrying amount. Such impairment loss would be measured as thedifference between the carrying amount of the asset and its fair value. Theestimate of cash flows is based upon, among other things, certain assumptionsabout expected future operating performance and an appropriate discount ratedetermined by our management. Our estimates of discounted cash flowsmay differ from actual cash flows due to, among other things, economicconditions, changes to our business model or changes in operating performance.If we made different estimates, material differences may result in thewrite down of net long-lived and intangible assets, which would be reflected bycharges to our operating results for any period presented. AtSeptember 30, 2006, we concluded our annual evaluation for impairment ofgoodwill and no impairment was recognized. We will continue to test forimpairment during the third quarter of each year, or earlier if indicators ofimpairment exist.

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*IntangibleAssets*

We record purchasedintangible assets at fair value. The original cost is amortized on astraight-line basis over the estimated useful life of each asset. We assess theimpairment of intangible assets whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. We perform anannual review to determine if the carrying value of the intangible asset is impaired,unless earlier events or circumstances indicate a potential impairment exists,in which case a review is performed more often. The review considers facts andcircumstances, either internal or external, which indicate that the carryingvalue of the asset cannot be recovered. If and when indicators of impairmentexist, we assess the need to record an impairment loss, by comparing theundiscounted net cash flows associated with related assets or group of assetsover their remaining lives against their respective carrying amounts.Impairment, if any, is based on the excess of the carrying amount over the fairvalue of those assets.

*Stock-based compensation*

Weaccount for stock-based compensation in accordance with the provisions of SFAS123R. We adopted SFAS 123R using the modified prospective transition methodwhich requires the application of the accounting standard starting fromJanuary 1, 2006. Under the fair value recognition provisions of SFAS 123R,stock-based compensation cost is estimated at the grant date based on the fairvalue of the award and is recognized as expense ratably over the requisiteservice period of the award. We estimate the fair value of stock-based awardson the grant date using the Black-Scholes-Merton option-pricing model. Determiningthe appropriate fair value model and calculating the fair value of stock-basedawards requires judgment, including estimating stock price volatility,forfeiture rates and expected life. If any of these assumptions used inthe option-pricing models changes significantly, stock-based compensation maydiffer materially in the future from that recorded in our accompanyingfinancial statements.

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**RESULTSOF OPERATIONS**

Thefollowing table sets forth the results of operations for the three and sixmonths ended June 30, 2007 and 2006 expressed as a percentage of total revenue.
| ** **                        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                        | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                        | ** ** | **2007**              | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
| License                           |       | 44                    | %          | 32                  | %          | 38 | % | 29 | % |
| Maintenance                       |       | 29                    |       | 36                  |       | 33 |   | 41 |   |
| Services                          |       | 27                    |       | 32                  |       | 29 |   | 30 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Total revenue                     |       | 100                   |       | 100                 |       | 100 |   | 100 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Costs and  expenses:              |       |                  |       |                |       |   |   |   |   |
| Cost of license                   |       | 0                     |       | 1                   |       | 0 |   | 1 |   |
| Cost of maintenance               |       | 5                     |       | 2                   |       | 5 |   | 3 |   |
| Cost of services                  |       | 39                    |       | 29                  |       | 41 |   | 31 |   |
| Amortization of intangible assets |       | 2                     |       | 2                   |       | 2 |   | 3 |   |
| Research and development          |       | 18                    |       | 22                  |       | 20 |   | 26 |   |
| Sales and marketing               |       | 64                    |       | 54                  |       | 68 |   | 58 |   |
| General and administrative        |       | 19                    |       | 27                  |       | 21 |   | 26 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Total Costs and  Expenses         |       | 147                   |       | 137                 |       | 157 |   | 148 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Loss from  operations             |       | -47                   |       | -37                 |       | -57 |   | -48 |   |
| Interest and  other income, net   |       | 11                    |       | 14                  |       | 14 |   | 15 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Loss before  income taxes         |       | -36                   |       | -23                 |       | -43 |   | -33 |   |
| Income tax  provision             |       | -1                    |       | -1                  |       | -1 |   | -1 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Net loss                          |       | -37                   | %          | -24                 | %          | -44 | % | -34 | % |

                

**Threeand Six Months Ended June 30, 2007 and 2006**

***License Revenue***
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| License revenue                                     |       | $                     | 5,891      |       | $          | 3,483      |       | $                   | 2,408      |       | 69         |       | $          | 9,138 |   | $ | 5,534 |   | $ | 3,604 |   | 65 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Licenserevenue is comprised of fees for term and perpetual licenses of our software.Perpetual license revenue is recognized using the residual method described inSOP 98-9 for arrangements in which licenses are sold with multipleelements. We allocate revenues in these arrangements based upon the fair valueof each undelivered element including undelivered maintenance, consulting andtraining. The determination of fair value is based upon vendor specificobjective evidence (VSOE). VSOE for maintenance is based upon separate renewalsof maintenance from customers. VSOE for consulting or training is based uponseparate sales of these services to customers. Assuming all other revenuerecognition criteria are met, the difference between the total arrangement feeand the amount deferred for each undelivered element is recognized as licenserevenue.

18

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Theincreases in license revenue were due primarily to expansion of licenseagreements with existing customers in North America and Asia/Pacific in thethree and six month periods ended June 30, 2007, as compared with the sameperiods in 2006. Historically, a relatively small number of customers haveaccounted 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. For the second quarter of 2007, two customersindividually accounted for greater than $1 million in license revenue.  License revenue from these two customerstotaled $4.1 million. By comparison, only one customer contributed greater than$1 million in license revenue for the second quarter of 2006.  This customer contributed $1.6 million oflicense revenue during that period. Similarly, for the six months ended June30, 2007, there were three customers that accounted for greater than $1 millionin license revenue, aggregating to $5.3 million of license revenue. During thesame period of 2006, only one customer contributed greater than $1 million oflicense revenue, which represented $1.6 million of license revenue from thatcustomer. 

Currently we expectlicense revenues in the third quarter of 2007 to be lower than the secondquarter of 2007 due primarily to  thirdquarter seasonality in international markets. Furthermore, as of the filingdate of this Form 10-Q, we are in the sales and negotiation processwith several companies for the purchase of our products and services. Ultimateclosure of these transactions prior to September 30, 2007 will have asignificant influence on whether we miss, meet or exceed expectations forrevenue in the third quarter of 2007.

***Maintenance Revenue***
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| Maintenance revenue                                 |       | $                     | 3,910      |       | $          | 3,893      |       | $                   | 17         |       | 0          |       | $          | 7,834 |   | $ | 7,822 |   | $ | 12 |   | 0 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Maintenance revenue iscomprised primarily of revenue from post-contract technical support serviceswhich includes software product updates. Maintenance revenue for the three andsix months ended June 30, 2007, was relatively unchanged from comparableperiods in 2006. 

***ServicesRevenue***
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| Services revenue                                    |       | $                     | 3,632      |       | $          | 3,388      |       | $                   | 244        |       | 7          |       | $          | 6,887 |   | $ | 5,645 |   | $ | 1,242 |   | 22 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

 Services revenue is primarily comprised ofrevenue from professional services, such as consulting, hosting and training,as well as revenue from our consumer technology support services. Servicesrevenue is generally recognized as the services are performed. The increase inservices revenue for the second quarter of 2007 compared with the same periodin 2006 was due primarily to increases in revenue from hosting and consumertechnology support services.  The increase in services revenue for thefirst six months of 2007 as compared with the same period in 2006 was due primarilyto increases in revenue from consulting, hosting and consumer technologysupport services

*InternationalRevenue*.  Revenue fromcustomers outside the North America accounted for approximately 19% and 20% ofour total revenue for the three-month and six-month periods ended June 30,2007, compared with 27% and 24% for the three-month and six-month periods endedJune 30, 2006. The decrease in international revenue as a percentage of totalrevenue in the three and six-month periods ended June 30, 2007, as comparedwith the same periods in the 2006 were due primarily to relatively largelicense transactions with North American customers in the first six months of2007.  

19

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***Cost of license***
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| Cost of license                                     |       | $                     | 52         |       | $          | 109        |       | $                   | (57        | )          | (52        | )          | $          | 90 |   | $ | 214 |   | $ | (124 | ) | (58 | ) |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost oflicense consists primarily of costs related to third-party royalty fees underlicense arrangements for technology embedded in or resold with our products.The decreases in cost of license for the three and six months ended June 30,2007 compared with the same periods in 2006 were due primarily to lowerthird-party royalties.

***Cost of maintenance***
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| Cost of maintenance                                 |       | $                     | 661        |       | $          | 261        |       | $                   | 400        |       | 153        |       | $          | 1,299 |   | $ | 514 |   | $ | 785 |   | 153 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost ofmaintenance consists primarily of compensation costs, travel costs, and relatedoverhead expenses for customer support personnel. The increases in cost ofmaintenance for the three and six months ended June 30, 2007 as compared to thesame periods in 2006 were due primarily to increases in salary and relatedemployees costs and travel expenses as a result of an increase in the number ofcustomer support personnel.

***Cost of services***
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| Cost of services                                    |       | $                     | 5,170      |       | $          | 3,083      |       | $                   | 2,087      |       | 68         |       | $          | 9,654 |   | $ | 5,973 |   | $ | 3,681 |   | 62 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost ofservices consists primarily of compensation costs, travel costs, and relatedoverhead expenses for our professional services organization, payments made tothird parties for subcontracted consulting services, the cost of our outsourcedcall center operations for our consumer technology support offerings andthird-party hosting fees. The increases for the three and six months ended June30, 2007 as compared to the same periods in 2006 were due primarily to:

·              the cost ofoperating our outsourced call centers related to the launch of our support.comservice offering in January 2007 (there was no comparable cost in 2006 andduring the second quarter of 2007 we increased the number of call center agentsfrom 20 to 36 in order to meet anticipated volume increases);

·              salary expense andrelated employees costs for additional professional services personnel; and

·              an increase inhosting expenses.

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We haverecently signed, and expect to sign in the near future, a number of corporatepartners that will refer consumer technology support customers directly to ourcall centers. In these arrangements, our outsourced agents will deliver theservice directly to the referred customer. We currently plan to grow the capacityof our outsourced call centers in order to meet anticipated volume growth fromthese corporate partnerships. We expect that these additional expenditures willbe significant and will precede any material revenue associated with theseconsumer partnerships. 

***Operating Expenses***
| ** **                                          | ** ** | **Three Months**   | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**               | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30, ** | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**                | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                    |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| Research and  development                           |       | $                       | 2,434      |       | $          | 2,332      |       | $                   | 102        |       | 4          |       | $          | 4,705 |   | $ | 4,856 |   | $ | (151 | ) | (3 | ) |
| Sales and  marketing                                |       | 8,662                   |       | 5,847      |       | 2,815      |       | 48                  |       | 16,122     |       | 10,981     |       | 5,141 |   | 47 |   |
| General and  administrative                         |       | 2,501                   |       | 2,859      |       | (358       | )          | (13                 | )          | 5,024      |       | 4,989      |       | 35 |   | 1 |   |
|                                                     |            |                         |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

*Research and development.* Research anddevelopment costs are expensed as incurred. Research and development expenseconsists primarily of compensation costs, consulting expenses and relatedoverhead costs for research and development personnel. The increase for thethree months ended June 30, 2007 as compared to the same period in 2006 wasmainly due to the salary and related expenses for additional personnel. Thedecrease for the first half of 2007 as compared to the same period in 2006 wasprimarily due to lower overhead costs. 

*Sales and marketing.* Sales and marketingexpense consists primarily of compensation costs, including salaries, salescommissions and related overhead costs for sales and marketing personnel andpromotional expenses, including public relations, advertising and trade shows.The increases for the three and six months ended June 30, 2007 as compared tothe same periods in 2006 were due primarily to:

·                  salary andrelated expenses associated with additional sales and marketing personnel, andincreases in commissions associated with higher license revenue; and 

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

*General and administrative.* General andadministrative expense consists primarily of compensation costs and related overheadcosts for administrative personnel and professional fees for legal, accountingand other professional services. The decrease for the three months ended June30, 2007 as compared to the same period in 2006 was due primarily to lowersalaries and related expenses and lower travel costs. General andadministrative expense remained consistent for the six month period ended June30, 2007 as compared to the same period in 2006. 

*Stock-based compensation*. OnJanuary 1, 2006, we adopted SFAS 123R, which requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors including employee stock options and employee stockpurchases based on estimated fair values. For the three months ended June 30,2007 and 2006, we recognized $1.3 million and $862,000, respectively instock-based compensation expense. For the six months ended June 30, 2007 and2006, we recognized $2.5 million and $1.5 million, respectively in stock-basedcompensation expense.
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| **Interest income and other, net**                  |       | $                     | 1,531      |       | $          | 1,557      |       | $                   | (26        | )          | (2         | )          | $          | 3,384 |   | $ | 2,862 |   | $ | 522 |   | 18 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

21

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*Interest income and other, net.*  Interest income decreased slightly in thethree months ended June 30, 2007 as compared with the three months ended June30, 2006 because of lower invested cash balances, partially offset by higherinterest rates. The increase for the first six 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 and otherincome related to the receipt of a one-time payment of $325,000 in settlementof a contractual dispute. 
| ** **                                          | ** ** | **Three Months** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Ended**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **June 30,**     | ** ** | **$**      | ** ** | **%**      | ** ** | **June 30,**   | ** ** | **$**      | ** ** | **%**      | ** ** |
| **In thousands, except percentages** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change**          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                |       |                  |       |       |       |       |       |                |       |       |       |       |       |   |   |   |   |
| **Provision for income taxes**                      |       | $                     | (131       | )          | $          | (94        | )          | $                   | (37        | )          | 39         |       | $          | (346 | ) | $ | (260 | ) | $ | (86 | ) | 33 |   |
|                                                     |            |                       |            |            |            |            |            |                     |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

*Provision for income taxes.* The increasesfor the three and six months ended June 30, 2007 as compared to the same periodin 2006 was primarily due to higher foreign income tax and withholding taxesrelated to international customer payments.

As of June 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 ourincorporation in December 1997, we have financed our operations primarilythrough proceeds from our initial public offering, follow-on public offering,cash flows from operations and, to a lesser extent, the private placement ofour preferred and common stock, bank borrowings and capital equipment leasefinancing. There are many variables that impact our financial plan includingthe levels of revenue, costs and expenses, and new capital investments. Actualcash usage could differ from these projections.

***OperatingActivities***

Netcash provided by (used in) operating activities was $(7.0) million and $889,000for the six months ended June 30, 2007 and 2006, respectively. Net cash used inoperating activities for the six months ended June 30, 2007 was primarily dueto the net loss of $10.5 million, partially offset by non-cash items of $3.1million. Such items include depreciation, amortization, accretion of premium ordiscount on securities and stock-based compensation expenses.  The net loss during the period was alsopartially offset by a reduction in accounts receivable of $3.6 million drivenby cash collections during the period.

Netcash provided by operating activities for the six months ended June 30, 2006was primarily due to cash collections during the period, which contributed to areduction in accounts receivable of $10.8 million. The reduction in accountsreceivable was offset by a net loss of $6.5 million, decreases in deferredrevenue of $4.1 million, and in accounts payable and accrued compensation of$1.7 million, adjusted for non-cash items of $2.6 million.

Our accounts receivableand deferred revenue balances fluctuate from period to period and are primarilydependent on (i) the timing of the closure of our license agreements,especially larger agreements concluded late in the period, (ii) therelated invoicing and payment provisions under those agreements, (iii) thetiming of maintenance renewals and related invoicing, and(iv) collections. Accounts receivable decreased to $11.5 million at June30, 2007 from $15.1 million at December 31, 2006. The reduction of $3.6million was due to lower invoicing in the first quarter of 2007 compared withthe fourth quarter of 2006. We also collected many of the invoices raised inMarch 2007 during the second quarter of 2007. Accounts receivable decreased to$6.6 million at June 30, 2006, a reduction of $10.8 million from $17.4 millionat December 31, 2005. The reduction of accounts receivable was due to theexistence of several significant accounts receivable at December 31, 2005 andcollections of much of those receivables during the first quarter of 2006.

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Deferred revenuedecreased $5.3 million and $4.1 million for the six month periods ended June30, 2007 and 2006, respectively.  The primary component of deferredrevenue is deferred maintenance revenue, which represents amounts billed inadvance for maintenance contracts.  Deferred maintenance is recognizedratably over the maintenance term, which is typically one year. Althoughthere are a number of factors that could cause deferred revenue to fluctuatefrom quarter to quarter, we generally expect the December 31 deferredmaintenance balance to be higher than at other times during the year because ofseasonally strong license sales in the fourth quarter and the initial andrenewal maintenance billings associated with such license sales.  In thequarters that follow December 31, the amortization of deferred maintenance willgenerally result in a decrease in our overall deferred revenue balance.

***InvestingActivities***

Netcash provided by (used in) in investing activities was $7.1 million and $(1.3)million for the six months ended June 30, 2007 and 2006, respectively. Net cashprovided by investing activities for the six months ended June 30, 2007, wasdue to  net sales of marketablesecurities of $9.2 million, offset by the purchase of property and equipment of$(2.1) million, primarily computer equipment, furniture, and leaseholdimprovements for our new headquarters office which we began to occupy in April2007. Net cash used in investing activities for the six months ended June 30,2006, was due primarily to the net purchases of marketable securities of$(963,000) and property and equipment of $(305,000).

***FinancingActivities***

Netcash generated by financing activities was $3.6 million for the six monthsended June 30, 2007 and $1.3 million for the six months ended June 30, 2006.Net cash provided by financing activities in both periods was attributable tonet proceeds from the exercise of stock options and the purchase of commonstock under our employee stock purchase plan.

***Working Capital andCapital Expenditure Requirements***

At June30, 2007, we had stockholders’ equity of $128.0 million and working capital of$113.0 million. Included as a reduction to working capital is deferred revenueof $8.1 million, which will not require cash to settle, but will be recognizedas revenue in the future. We believe that our existing cash balances will besufficient to meet our working capital requirements and stock repurchaseprogram, as well as our planned capital expenditures for at least the next 12months.

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

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

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

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

As of June 30, 2007, weheld $19.0 million in cash and cash equivalents consisting of highly liquidinvestments having original maturity dates of no more than 90 days. A declinein interest rates over time would reduce our interest income from our highlyliquid marketable securities. Based upon our balance of cash and cashequivalents, a decrease in interest rates of 100 basis points would cause acorresponding decrease in our annual interest income of approximately $190,000.Due to the nature of our highly liquid cash equivalents, a change in interestrates would not materially change the fair market value of our cash and cashequivalents.

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As ofJune 30, 2007, we held $95.9 million in marketable securities, which consistedprimarily of money market funds held by large institutions in the U.S. andcommercial paper. Our marketable securities were primarily invested incorporate bonds, government debt securities maturing in less than eighteenmonths and auction-rate securities resetting in less than ninety days. Theweighted average interest rate of our portfolio was approximately 4.52% at June30, 2007. A decline in interest rates over time would reduce our interestincome from our marketable securities. A decrease in interest rates of 100basis points would cause a corresponding decrease in our annual interest incomeof approximately $959,000.

**ITEM 4.CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controls andProcedures**

Wemaintain “disclosure controls and procedures,” as such term is defined in Rule13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), thatare designed to ensure that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in Securities andExchange Commission (the “SEC”) rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating our disclosurecontrols and procedures, management recognized that disclosure controls andprocedures, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the disclosurecontrols and procedures are met. Our disclosure controls and procedures havebeen designed to meet, and management believes they meet, reasonable assurancestandards. Additionally, in designing disclosure controls and procedures, ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Thedesign of any disclosure controls and procedures also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

As ofJune 30, 2007 and as previously reported in our Annual Report on Form 10-K, asof December 31, 2006, our Chief Executive Officer and our Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures werenot effective due to a material weakness related to not appropriatelyquantifying the foreign currency translation gain or loss upon liquidation of aforeign subsidiary in 2006.

Inresponse to our identification 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. 

**Changes in Internal Control overFinancial Reporting**

Therewere no changes in our internal control over financial reporting during thequarter ended June 30, 2007 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

**PART II.OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

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

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**ITEM 1A.RISK FACTORS**

This report containsforward-looking statements regarding our business and expected futureperformance, and we are subject to many risks and uncertainties that maymaterially affect our business and future performance and cause thoseforward-looking statements to be inaccurate. All statements in this report,other than statements that are purely historical, are forward-lookingstatements. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“forecasts,” “estimates,” “seeks,” and similar expressions often identifyforward-looking statements. In this report, forward-looking statements include,without limitation, the following: 

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

·                  our beliefsregarding the impact on our business of our consumer technology supportinitiative;

·                  our expectationsregarding the area of our consumer technology support offering; 

·                  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;

·                  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; and

·                  the assumptionsunderlying our Critical Accounting Policies and Estimates, including our assumptionsregarding revenue recognition; assumptions used to estimate the fair value ofshare-based compensation; assumptions regarding the impairment of goodwill andintangible assets; and expected accounting for income taxes;

·                  the expectedeffects of the adoption of new accounting standards.

An investment inSupportSoft’s stock involves risk, and we caution investors thatforward-looking statements are only predictions based on our currentexpectations about future events and are not guarantees of future performance.We encourage you to read carefully all information provided in this report andin our other filings with the SEC before deciding to invest in our stock or tomaintain or change your investment. Forward-looking statements are based oninformation as of the filing date of this report, and we undertake noobligation to publicly revise or update any forward-looking statement for anyreason.

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 six months of 2007 and will continue to sustain a loss inthe foreseeable future.**

We were not profitable in 2006 or in the first sixmonths of 2007. In addition, we intend to make significant investments insupport of our business in 2007 and we expect to continue to sustain losses in2007 and possibly subsequent periods.  Ifwe fail to achieve revenue growth as a result of these additional investmentsor if such revenue growth does not result in our achieving profitability, themarket price of our common stock will likely decline.  A sustained period of losses would alsoresult in an increased usage of cash to fund our operating activities and acorresponding reduction in our cash balance.

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

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

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

·       demand for our software andservices;

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

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

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

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

·       our ability to attract andretain customers;

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

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

·       seasonal trends resultingfrom corporate spending patterns;

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

·       general economic conditionsand their effect on our operations.

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

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

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

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

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

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

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

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

A small number of customers have historicallyaccounted for, and may in future periods account for, substantial portionsof our revenue. For the quarter ended June 30, 2007, two customers individuallyaccounted for 25% and 13% of our total revenue for the quarter. Transactionstructures that involve ratable revenue recognition and our consumer offerings,which typically involve payment on a per transaction basis, could reduce ourdependence on large transactions with a small number of customers.   However, these transaction structuresaccount for a small portion of our revenue, and in the near term, we are likelyto continue to derive a significant portion of our revenue from largetransactions with a limited number of customers. Therefore, our revenue coulddecline because of the loss or delay of a single customer order. Additionally,we may not obtain new customers. The failure to obtain significant newcustomers, particularly customers that purchase perpetual licenses withup-front payments, the loss or delay of significant customer orders or thefailure of existing customers to pay ongoing fees when due would harm ouroperating results.

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

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

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

We are seeking toincrease our international revenues.  Forthe years ended December 31, 2004, 2005, 2006 and the six-month periodended June 30, 2007, international revenue was 11%, 21%, 23% and 20% of totalrevenue, respectively. We have limited experience in international operationsand may not be able to compete effectively in international markets oreffectively manage our operations in various countries. If we do not generateenough revenue from international operations to offset the expense of theseoperations, our operating results could suffer. Risks we face in conductingbusiness internationally include:

·       costs of staffing andmanaging international operations;

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

·       difficulty in reachinggeographically dispersed customers;

·       differing technologystandards, intellectual property protections and other legal considerations;

·       longer sales cycles;

·       seasonal trends unique tointernational markets;

·       dependence on localvendors, consultants and business partners;

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

·       potential adverse taxconsequences;

·       changes in currencyexchange rates and controls;

·       difficulties in maintainingeffective internal control over financial reporting and compliance as a resultof a geographically-dispersed workforce and customers;

·       longer collection cyclesfor accounts receivable; and

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

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

Clients that license our software typically engage ourprofessional services organization to assist with installation andimplementation of our software and related consulting services. Revenue fromprofessional services represented a substantial portion of our total revenuefor the quarter ended June 30, 2007. Our professional services business did notoperate in a profitable manner for the three and six months ended June 30,2007. We are planning to improve the financial performance of thisorganization; however, no assurance can be given that these plans will besuccessful. We have generally billed our customers for professional services ona time and material basis, using an agreed upon daily rate. However, customershave increasingly requested various contract structures, includingmilestone-based contracts and contracts for a fixed total fee. If unanticipatedfactors in a project are encountered, we may be subject to monetary and othersignificant penalties, and the profitably of our professional services businesswould decline further. Furthermore, an estimated loss on a contract isgenerally required to be recorded in the period in which a loss becomesevident. Recording a loss on a services contract could have a material adverseeffect on our operating results for the period in which the loss was recorded.

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

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

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

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

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

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

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

·       unanticipated costs andliabilities and unforeseen accounting charges or fluctuations;

·       delays and difficulties indelivery of products and services;

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

·       loss of key employees;

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

·       difficulty in maintainingcontrols and procedures;

·       uncertainty on the part ofour existing customers about our ability to operate after a transaction;

·       loss of customers;

·       loss of alliance partners;

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

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

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

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

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

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

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

Our success depends on the skills, experience andperformance of our senior management, engineering, sales, marketing and otherkey personnel. The loss of the services of any of our executive officers orother key personnel could harm our business and our ability to achieve ourbusiness goals.  In addition, manymembers of senior management have been appointed within the last 18months.  Our success will depend to asignificant extent on the ability of these executives to function effectivelyin their new roles and to work together successfully.  If these executives do not function and worktogether successfully or if we lose the services of one or more of ourexecutives or key employees, our business could be harmed.

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

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

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

If we fail todevelop enhanced versions of our software in a timely manner or to provideproducts and services that achieve rapid and broad market acceptance, we maynot maintain or expand our market share. We are making significant investmentsin our consumer technology support initiative, and if our services do notachieve rapid market acceptance, our operating and financial results could beharmed. We may fail to identify new product and service opportunities for ourcurrent market or new markets that we enter in the future. In addition, ourexisting products may become obsolete if we fail to introduce new products orproduct enhancements that meet new customer demands, support new standards orintegrate with new or upgraded versions of packaged applications or operatingsystems. We have limited control over factors that affect market acceptance ofour product and services, including:

·       the willingness ofcompanies to transition to automated solutions; and

·       customer preferences forcompetitors’ solutions or other technologies.

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

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

·       delays in productshipments;

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

·       damage to our reputation;

·       lost sales;

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

·       warranty claims.

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

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

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

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

We intend tocontinue to license technologies from third parties, including applicationsused in our research and development activities and technologies such asthird-party search engine technology, which are integrated into our productsand services. Our inability to obtain or integrate any of these technologieswith our own products could delay product and service development untilequivalent compatible technology can be identified, licensed and integrated.These technologies may not continue to be available to us on commerciallyreasonable terms or at all. We may fail to successfully integrate anylicensed technology into our products or services, which would harm ourbusiness and operating results. Third-party licenses also expose us toincreased risks that include:

·       risks of productmalfunction after new technology is integrated;

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

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

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

A fundamental requirement for online communications,transactions and support is the secure transmission of confidential information.Third parties may attempt to breach our security or that of our customers.We may be liable to our customers for any breach in security and anybreach could harm our business and reputation. Also, computers are vulnerableto computer viruses, physical or electronic break-ins and similar disruptions,which could lead to interruptions, delays or loss of data. We recently releaseda security advisory and a patch for a remote code execution vulnerability inseveral of our ActiveX components. We may be required to expendsignificant capital and other resources to further protect against securitybreaches or to correct problems caused by any breach.

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

Statement of Financial Accounting StandardsNo. 123 (revised 2004),*“Share-BasedPayment”* (SFAS 123R) became effective in our first quarter of2006, and has resulted in our recognition of substantial compensation expenserelating to our employee stock options and employee stock purchase plans.Historically, we generally have not recognized in our statement of operationsany compensation expense related to stock option grants we issue under ourstock option plans or the discounts we provide under our employee stockpurchase plans. Under the new rules, we are required to measure thecompensation expense related to employee stock awards on a fair value basis,which leads to substantial additional compensation expense and a materialadverse effect on our reported results of operations.

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

We have evaluated our “disclosure controls andprocedures” as such term is defined in Rule 13a-15(e) under the Exchange Act asof June 30, 2007, as well as our internal control over financial reporting asrequired by Section 404 of the Sarbanes-Oxley Act of 2002 as of December 31,2006. Our independent registered public accounting firm has performed a similarevaluation of our internal control over financial reporting as of December 31,2006. Effective controls are necessary for us to provide reliable financialreports and effectively prevent fraud. If we cannot provide reliable financialreports or prevent fraud, our operating results would be harmed. For theperiods ended June 30, 2007 and December 31, 2006, we concluded that we had amaterial weakness in our internal control over financial reporting, as furtherdescribed in Item 4 of Part I of this Quarterly Report, and Item 9A of Part IIon Form 10-K, Control and Procedures. Our independent registered publicaccounting firm reached the same conclusion. In the first quarter of 2007, weimplemented corrective actions that we believe will remediate this materialweakness. We are 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.**

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

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**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.**

Securities class action lawsuits were filedagainst us in November 2001 and again in December 2004. In addition,a derivative stockholder lawsuit was filed against us in December 2005.Should these lawsuits linger for a longer period of time, whether ultimatelyresolved in our favor or not, or further lawsuits be filed against us, coveragelimits of our insurance or our ability to pay such amounts may not beadequate to cover the fees and expenses and any ultimate resolution associatedwith such litigation. The size of these payments, if any, individually or inthe aggregate, could seriously impair our cash reserves and financialcondition. The continued defense of these lawsuits also could result indiversion of our management’s time and attention away from business operations,which could cause our financial results to decline. A failure to resolvedefinitively current or future material litigation in which we are involved orin which we may become involved in the future, regardless of the merits ofthe respective cases, could also cast doubt as to our prospects in the eyes ofcustomers, potential customers and investors, which could cause our revenue andstock price to decline.

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

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

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

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

·       our pending patentapplications may not be issued;

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

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

·       our issued patents could besuccessfully challenged.

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

We rely on acombination of laws, such as those applicable to patents, copyrights,trademarks and trade secrets,  andcontractual restrictions, such as confidentiality agreements and licenses, toestablish and protect our proprietary rights. Our ability to compete and growour business could suffer if these rights are not adequately protected. Our proprietaryrights may not be adequately protected because:

·       laws and contractualrestrictions may not adequately prevent misappropriation of ourtechnologies or deter others from developing similar technologies; and

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

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

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

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

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

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

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

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

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

Accounting standards groups and regulators areactively re-examining various accounting policies, guidelines andinterpretations related to revenue recognition, income taxes, investments inequity securities, facilities consolidation, accounting for acquisitions,allowance for doubtful accounts and other financial reporting matters. Thesestandards groups and regulators could promulgate interpretations and guidancethat could result in material and potentially adverse changes to our businesspractices and accounting policies.

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

The Sarbanes-OxleyAct of 2002, as well as rules subsequently implemented by the Securitiesand Exchange Commission and the Nasdaq Global Select Market, has requiredchanges in corporate governance practices of public companies.  These rules and regulations areincreasing our legal and financial compliance costs, and making some activitiesmore time-consuming and costly. These rules and regulations make it moredifficult and more expensive for us to obtain director and officer liabilityinsurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These new rules andregulations could also make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and qualified executive officers.

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

At our annual meeting of stockholders on May 23, 2007,the following two proposals were voted on and approved as follows:

1. Our stockholders elected six directors to serveuntil our next annual meeting of stockholders, or until their successors areduly elected and qualified.
|                          | ** ** | **Total Votes** | ** ** |
|--------------------------|------------|----------------------|------------|
| **Name**                 | ** ** | **For**              | ** ** | **Withheld** | ** ** |
|                     |       |                 |       |   |   |
| Kevin C. Eichler         |       | 38,715,779           |       | 1,901,253 |   |
|                     |       |                 |       |   |   |
| Shawn Farshchi           |       | 39,664,406           |       | 952,626 |   |
|                     |       |                 |       |   |   |
| J. Martin  O’Malley |       | 38,100,694           |       | 2,516,338 |   |
|                     |       |                 |       |   |   |
| Joshua Pickus            |       | 39,663,424           |       | 953,608 |   |
|                     |       |                 |       |   |   |
| Jim Stephens             |       | 38,102,794           |       | 2,514,253 |   |
|                     |       |                 |       |   |   |
| James Thanos             |       | 38,102,776           |       | 2,514,256 |   |

 

2. Our stockholders ratified the appointment of Ernst& Young LLP as our independent registered public accounting firm.
|            | ** ** | **Total Votes** | ** ** |
|------------|------------|-----------------|------------|
| ** ** | ** ** | ** **      | ** ** |
| For        |       | 40,364,467      |       |
|       |       |            |       |
| Against    |       | 194,067         |       |
|       |       |            |       |
| Abstain    |       | 58,498          |       |

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

 

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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 therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
| August 2, 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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**EXHIBIT INDEX TO SUPPORTSOFT,INC.**

**QUARTERLYREPORT ON FORM 10-Q**

**FOR THEQUARTER ENDED MARCH 31, 2007**
| 31.1 |   | Chief Executive Officer Section 302 Certification                        |
|------|--------|--------------------------------------------------------------------------|
| 31.2 |   | Chief Financial Officer Section 302 Certification                        |
| 32.1 |   | Statement of the Chief Executive Officer under 18  U.S.C. § 1350(1) |
| 32.2 |   | Statement of the Chief Financial Officer under 18  U.S.C. § 1350(1) |

 

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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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