Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 

**(MarkOne)**

 
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                  |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                     |
| ** ** | ** ** | **For  the Quarterly Period Ended June 30, 2008**                                                                                                                                   |
| **OR**     |
|       |       |                                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                               |
| ** ** | ** ** | **For  the transition period from               to            ** |

 

**Commission File No. 000-30901**

 

----

 

**SUPPORTSOFT, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

**1900 Seaport Boulevard, 3rdFloor**

**Redwood City, CA 94063**

(Addressof Principal Executive Offices)

(ZipCode)

 

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

 

----

 

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

 

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

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

(Do not check if a smaller reporting company) | Smaller reporting company  o |
|--------------------------------------|--------------------------------|------------------------------------------------------------------------|----------------------------------------|

 

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

 

On July 31, 2008,46,268,888 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.

 

 

 

----

Tableof Contents

 

**SUPPORTSOFT, INC.**

**FORM 10-Q**

**QUARTERLY PERIOD ENDED JUNE 30, 2008**

**INDEX**

 
|                                        | ** ** | ** **                                                                                                       | ** ** | **Page** |
|----------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I. Financial Information** |       | 3                                                                                                                |
| Item 1.                           |       | Financial Statements (Unaudited)                                                                                 |       | 3        |
|                                   |       | Condensed Consolidated  Balance Sheets at June 30, 2008 and December 31, 2007                          |       | 3        |
|                                   |       | Condensed Consolidated  Statements of Operations for the three and six months ended June 30,  2008 and 2007 |       | 4        |
|                                   |       | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007            |       | 5        |
|                                   |       | Notes to  Condensed Consolidated Financial Statements                                                            |       | 6        |
| Item 2.                           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |       | 18       |
| Item 3.                           |       | Quantitative  and Qualitative Disclosures About Market Risk                                                      |       | 26       |
| Item 4.                           |       | Controls and  Procedures                                                                                         |       | 27       |
| **Part II. Other  Information**   |       | 28                                                                                                               |
| Item 1.                           |       | Legal Proceedings                                                                                                |       | 28       |
| Item 1A.                          |       | Risk Factors                                                                                                     |       | 28       |
| Item 4.                                |       | Submission of  Matters to a Vote of Security Holders                                                             |       | 40       |
| Item 6.                           |       | Exhibits                                                                                                         |       | 41       |
| Signature                              |       | 42                                                                                                               |
| Exhibit Index                     |       | 43                                                                                                               |
|                                        |            |                                                                                                                  |            |          |  |  |

 

2

----

Tableof Contents

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**SUPPORTSOFT, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                           | ** ** | **June 30,   2008** | ** ** | **December 31,   2007** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **(Unaudited)**               | ** ** | **(1)**                           | ** ** |
| **ASSETS**                                           | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| Current assets:                                      |       |                          |       |                              |       |
| Cash and cash equivalents                            |       | $                             | 41,581     |                              | $          | 12,926 |   |
| Marketable securities, less long-term  portion       |       | 36,038                        |       | 100,014                           |       |
| Accounts receivable, net                             |       | 9,523                         |       | 10,087                            |       |
| Prepaid expenses and other current assets            |       | 1,812                         |       | 2,531                             |       |
| Total current assets                                 |       | 88,954                        |       | 125,558                           |       |
| Marketable securities, long term portion             |       | 23,265                        |       | —                            |       |
| Property and equipment, net                          |       | 1,848                         |       | 2,086                             |       |
| Goodwill                                             |       | 12,646                        |       | 9,792                             |       |
| Purchased technology                                 |       | 1,375                         |       | —                            |       |
| Intangible assets, net                               |       | 531                           |       | 340                               |       |
| Other assets                                         |       | 649                           |       | 682                               |       |
|                                                 |       |                          |       |                              |       |
| **Total  assets**                                    |       | $                             | 129,268    |                              | $          | 138,458 |   |
|                                                 |       |                          |       |                              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| Current liabilities:                                 |       |                          |       |                              |       |
| Accounts payable                                     |       | $                             | 394        |                              | $          | 461 |   |
| Accrued compensation                                 |       | 2,208                         |       | 2,320                             |       |
| Other accrued liabilities                            |       | 2,786                         |       | 3,421                             |       |
| Deferred revenue, less long-term portion             |       | 8,299                         |       | 10,076                            |       |
| Total current liabilities                            |       | 13,687                        |       | 16,278                            |       |
| Deferred revenue, long-term portion                  |       | 633                           |       | 426                               |       |
| Other long-term liabilities                          |       | 1,076                         |       | 892                               |       |
| Total Liabilities                                    |       | 15,396                        |       | 17,596                            |       |
| Commitments and contingencies                        |       |                          |       |                              |       |
| Stockholders’ equity:                           |       |                          |       |                              |       |
| Common stock                                         |       | 5                             |       | 5                                 |       |
| Additional paid-in capital                           |       | 214,891                       |       | 212,188                           |       |
| Accumulated other comprehensive loss                 |       | (2,487                        | )          | (772                              | )          |
| Accumulated deficit                                  |       | (98,537                       | )          | (90,559                           | )          |
| Total stockholders’ equity                      |       | 113,872                       |       | 120,862                           |       |
|                                                 |       |                          |       |                              |       |
| **Total  liabilities and stockholders’ equity** |       | $                             | 129,268    |                              | $          | 138,458 |   |

 

----

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

 

See accompanying notes.

 

3

----

Tableof Contents

 

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

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

 
| ** **                                                     | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:                                                       |       |                                                  |       |                                                |       |   |   |   |   |
| License                                                        |       | $                                                     | 2,897      |                                                | $          | 5,891 |   | $ | 5,871 |   | $ | 9,138 |   |
| Maintenance                                                    |       | 3,895                                                 |       | 3,910                                               |       | 7,898 |   | 7,834 |   |
| Services                                                       |       | 3,934                                                 |       | 3,370                                               |       | 7,883 |   | 6,464 |   |
| Consumer                                                       |       | 891                                                   |       | 262                                                 |       | 1,593 |   | 423 |   |
| Total revenue                                                  |       | 11,617                                                |       | 13,433                                              |       | 23,245 |   | 23,859 |   |
| Costs and expenses:                                            |       |                                                  |       |                                                |       |   |   |   |   |
| Cost of license                                                |       | 92                                                    |       | 52                                                  |       | 143 |   | 90 |   |
| Cost of maintenance                                            |       | 465                                                   |       | 661                                                 |       | 1,014 |   | 1,299 |   |
| Cost of services                                               |       | 3,496                                                 |       | 4,174                                               |       | 7,249 |   | 7,834 |   |
| Cost of consumer                                               |       | 1,871                                                 |       | 1,017                                               |       | 3,110 |   | 1,876 |   |
| Amortization of intangible assets                              |       | 58                                                    |       | 272                                                 |       | 88 |   | 545 |   |
| Research and development                                       |       | 2,184                                                 |       | 2,434                                               |       | 4,420 |   | 4,704 |   |
| Sales and marketing                                            |       | 5,710                                                 |       | 8,623                                               |       | 12,096 |   | 16,029 |   |
| General and administrative                                     |       | 2,725                                                 |       | 2,519                                               |       | 5,081 |   | 5,061 |   |
| Total costs and expenses                                       |       | 16,601                                                |       | 19,752                                              |       | 33,201 |   | 37,438 |   |
| Loss from operations                                           |       | (4,984                                                | )          | (6,319                                              | )          | (9,956 | ) | (13,579 | ) |
| Interest income and other, net                                 |       | 721                                                   |       | 1,531                                               |       | 2,170 |   | 3,384 |   |
| Loss before income taxes                                       |       | (4,263                                                | )          | (4,788                                              | )          | (7,786 | ) | (10,195 | ) |
| Provision for income taxes                                     |       | (84                                                   | )          | (131                                                | )          | (192 | ) | (346 | ) |
| Net loss                                                       |       | $                                                     | (4,347     | )                                                   | $          | (4,919 | ) | $ | (7,978 | ) | $ | (10,541 | ) |
|                                                           |       |                                                  |       |                                                |       |   |   |   |   |
| Basic and diluted net loss per share                           |       | $                                                     | (0.09      | )                                                   | $          | (0.11 | ) | $ | (0.17 | ) | $ | (0.23 | ) |
| Shares used in computing basic and diluted  net loss per share |       | 46,076                                                |       | 45,418                                              |       | 46,065 |   | 45,175 |   |

 

See accompanying notes.

 

4

----

Table of Contents

 

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

**(in thousands)(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended   June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Operating Activities:                                                                      |       |                                                |       |   |   |
| Net loss                                                                                   |       | $                                                   | (7,978     | ) | $ | (10,541 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Depreciation                                                                               |       | 612                                                 |       | 612 |   |
| Amortization of premiums and discounts on  marketable securities                           |       | (430                                                | )          | (557 | ) |
| Amortization of intangible assets                                                          |       | 88                                                  |       | 545 |   |
| Stock-based compensation                                                                   |       | 2,507                                               |       | 2,503 |   |
| Changes in assets and liabilities:                                                         |       |                                                |       |   |   |
| Accounts receivable, net                                                                   |       | 609                                                 |       | 3,645 |   |
| Prepaid expenses and other current assets                                                  |       | 719                                                 |       | 505 |   |
| Other long-term assets                                                                     |       | 33                                                  |       | (65 | ) |
| Accounts payable                                                                           |       | (67                                                 | )          | 652 |   |
| Accrued compensation                                                                       |       | (112                                                | )          | 517 |   |
| Other accrued liabilities                                                                  |       | (963                                                | )          | 18 |   |
| Other long-term liabilities                                                                |       | 184                                                 |       | 463 |   |
| Deferred revenue                                                                           |       | (1,641                                              | )          | (5,293 | ) |
| Other                                                                                      |       | (194                                                | )          | (2 | ) |
| Net cash used in operating activities                                                      |       | (6,633                                              | )          | (6,998 | ) |
|                                                                                       |       |                                                |       |   |   |
| Investing Activities:                                                                      |       |                                                |       |   |   |
| Purchases of property and equipment                                                        |       | (322                                                | )          | (2,120 | ) |
| Purchased technology                                                                       |       | (1,375                                              | )          | — |   |
| Purchases of marketable securities                                                         |       | (38,276                                             | )          | (62,690 | ) |
| Sales of marketable securities                                                             |       | 22,300                                              |       | 31,600 |   |
| Maturities of marketable securities                                                        |       | 55,544                                              |       | 40,291 |   |
| Acquisition of business, net of cash  acquired                                             |       | (2,778                                              | )          | — |   |
| Net cash provided by investing activities                                                  |       | 35,093                                              |       | 7,081 |   |
|                                                                                       |       |                                                |       |   |   |
| Financing Activities:                                                                      |       |                                                |       |   |   |
| Proceeds from issuances of common stock                                                    |       | 195                                                 |       | 3,554 |   |
| Net cash provided by financing activities                                                  |       | 195                                                 |       | 3,554 |   |
| Net increase in cash and cash equivalents                                                  |       | 28,655                                              |       | 3,637 |   |
| Cash and cash equivalents at beginning of  period                                          |       | 12,926                                              |       | 15,369 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                                   | 41,581     |   | $ | 19,006 |   |
|                                                                                       |       |                                                |       |   |   |
| Supplemental schedule of cash flow  information:                                           |       |                                                |       |   |   |
| Income taxes paid                                                                          |       | $                                                   | 137        |   | $ | 108 |   |

 

See accompanying notes.

 

5

----

Tableof Contents

 

**SUPPORTSOFT, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.Significant Accounting Policies**

 

**Basis ofPresentation**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofSupportSoft, Inc. (the “Company” or “SupportSoft”) and its wholly ownedsubsidiaries. All intercompany balances and transactions have been eliminated.The balance sheet as of June 30, 2008 and the statements of operations forthe three and six months ended June 30, 2008 and 2007 and cash flows forthe six months ended June 30, 2008 and 2007 are unaudited. In the opinionof management, these unaudited interim condensed consolidated financialstatements reflect all adjustments (consisting of normal recurring adjustments)that are necessary for a fair presentation of the results for, and as of, theperiods shown. The results of operations for such periods are not necessarilyindicative of the results expected for the full fiscal year or for any futureperiod. The condensed consolidated financial statement information as of December 31,2007 is derived from audited financial statements as of that date. Theseunaudited interim condensed consolidated financial statements should be readwith the consolidated financial statements and related notes included in ourAnnual Report on Form 10-K, filed with the Securities and ExchangeCommission on March 13, 2008.

 

**Use ofEstimates**

 

The preparation ofinterim condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the condensed consolidated financial statements and the accompanying notes.Actual results could differ materially from these estimates.

 

**Reclassifications**

 

We have reclassifiedcertain amounts previously reported in our financial statements to conform tocurrent presentation.  Thesereclassifications did not have a material impact on our consolidated financialstatements.

 

**RevenueRecognition**

 

SupportSoft recognizesrevenue from arrangements that contain a more than incidental softwarecomponent in accordance with the American Institute of Certified PublicAccountants’ (AICPA) Statement of Position (SOP) 97-2, *“SoftwareRevenue Recognition,”* as amended by SOP 98-4 and SOP 98-9. Licenserevenue is recognized when all of the following criteria are met:

 

·                  Persuasiveevidence of an arrangement exists;

 

·                  Delivery hasoccurred;

 

·                  Collection isconsidered probable; and

 

·                  The fees arefixed or determinable.

 

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

 

License revenue iscomprised of fees for perpetual and term licenses of our software. Perpetuallicense revenue is recognized using the residual method, in compliance with SOP98-9 for arrangements in which licenses are sold with multiple elements. Weallocate revenues on these licenses based upon the fair value of 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 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.

 

6

----

Tableof Contents

 

Term licenses are sold with maintenance for whichSupportSoft does not have VSOE of fair value for maintenance fees. As a result,license revenue for term licenses is recognized ratably over the duration ofthe agreement. License revenue in the accompanying financial statementsincludes maintenance for term licenses. We do not allocate maintenance revenuefrom term licenses to maintenance revenue, as we do not believe there is anallocation methodology that provides a meaningful and supportable allocationbetween license and maintenance revenues. Term license revenue was 4% and 5% oftotal revenue for three months ended June 30, 2008 and 2007,respectively.  For the six months ended June 30,2008 and 2007, term license revenue was 3% and 5% of total revenue,respectively.

 

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

 

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

 

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

 

In connection withlicensing arrangements we may also provide hosting of our own software, aservice for which SupportSoft does not have VSOE. If hosting services are soldwith perpetual licenses, license revenue is recognized ratably over the term ofthe hosting contract. Hosting revenue is also recognized ratably over theduration of the hosting contract. Consulting services sold in conjunction with arrangements that includelicenses and hosting services are recognized ratably over the duration of thehosting term.

 

Revenue in our consumer business is derived primarily from fees fortechnology support services. We provide these services through channel partnersand direct to consumers.  Channelpartners are generally invoiced monthly for services delivered during thatperiod (i.e., a sale is made through to their end-user). Fees from transactionsdirectly with consumers are generally paid with a credit card at the time ofdelivery.  Revenue is recognized in theperiod the services are delivered.  TheCompany provides an allowance for estimated refunds based on historicalexperience. Refunds have not been material to date.  Our consumer business generally provides afive-day warranty.  We also licensecertain of our consumer software products to partners who use our software toprovide services to their customers. Partners are charged a per-use fee for thesoftware and revenue is recognized in the period the product is used.

 

**Cash,Cash Equivalents and Marketable Securities**

 

All liquid instrumentswith an original maturity at the date of purchase of ninety days or less areclassified as cash equivalents. Cash equivalents and short-term marketablesecurities consist primarily of money market funds, commercial paper, corporateand municipal bonds and notes and securities issued by the United States governmentand its sponsored entities. Long-term marketable securities consist of auctionrate debt securities.  Our cashequivalents and marketable securities are classified as available-for-sale, andare reported at fair value with unrealized gains and losses included inaccumulated other comprehensive income within stockholders’ equity on theconsolidated balance sheets. Realized gains and losses and declines in valuejudged to be other-than-temporary on available-for-sale securities are includedin other income (expense), net in the consolidated statements ofoperations.  SupportSoft recorded netunrealized gains/(losses) on marketable securities of $(1.6) million and$21,000 at June 30, 2008 and December 31, 2007, respectively.

 

7

----

Tableof Contents

 

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

 

The following is asummary of cash, cash equivalents and marketable securities at June 30,2008 (in thousands):

 
| ** **                              | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|
| Cash                                    |       | $                         | 2,886      |                                     | $          | —                                    |       | $                   | —     |   | $ | 2,886 |   |
| Money market funds                      |       | 36,704                    |       | —                                   |       | —                                    |       | 36,704              |       |
| Commercial paper                        |       | 14,635                    |       | 10                                       |       | (7                                        | )          | 14,638              |       |
| Government sponsored entities           |       | 17,409                    |       | 6                                        |       | (29                                       | )          | 17,386              |       |
| Corporate bonds                         |       | 6,001                     |       | 5                                        |       | (1                                        | )          | 6,005               |       |
| Auction rate securities                 |       | 24,800                    |       | —                                   |       | (1,535                                    | )          | 23,265              |       |
|                                    |       | $                         | 102,435    |                                     | $          | 21                                        |       | $                   | (1,572     | ) | $ | 100,884 |   |
|                                    |       |                      |       |                                     |       |                                      |       |                |       |
| Classified as:                          |       |                      |       |                                     |       |                                      |       |                |       |
|                                    |       |                      |       |                                     |       |                                      |       |                |       |
| Cash and cash equivalents               |       | $                         | 41,581     |                                     | $          | —                                    |       | $                   | —     |   | $ | 41,581 |   |
| Marketable securities – short term |       | 36,054                    |       | 21                                       |       | (37                                       | )          | 36,038              |       |
| Marketable securities – long term  |       | 24,800                    |       | —                                   |       | (1,535                                    | )          | 23,265              |       |
|                                    |       | $                         | 102,435    |                                     | $          | 21                                        |       | $                   | (1,572     | ) | $ | 100,884 |   |

 

At June 30, 2008 and December 31, 2007 we had investments inAAA-rated auction-rate debt securities with various state student loanauthorities with a fair value of $23.3 million and $38.9 million,respectively. All of the securities we have invested in are rated AAA, thehighest rating issued by a rating agency, and the student loans made by theseauthorities are substantially guaranteed by the federal government through theFederal Family Education Loan Program (FFELP). Auction-rate securities arelong-term floating rate bonds tied to short-term interest rates. After theinitial issuance of the securities, the interest rate on the securities is resetperiodically, at intervals established at the time of issuance(e.g., every seven, twenty-eight, thirty-five days, or every six months),based on market demand. Auction-rate securities are bought and sold in themarketplace through a competitive bidding process often referred to as a “Dutchauction.” If there is insufficient interest in the securities at the time of anauction, the auction may not be completed. Following such a failed auction, wecannot access our funds that are invested in the corresponding auction-ratesecurities until a future auction of these investments is successful, newbuyers express interest in purchasing these securities in between reset dates,issuers establish a different form of financing to replace these securities, orfinal payments become due according to contractual maturities. In the monthsfrom February through July 2008 the auctions failed for all of theauction-rate securities we held as of June 30, 2008, and as a result ourability to liquidate our investment and fully recover the carrying value of ourinvestment in the near term may be limited or not exist.

 

The fair value of our auction-rate securities at June 30, 2008reflects an unrealized loss of $1.5 million. Fair value for such securities was based on a discounted cash flowvaluation that takes into account a number of factors including estimatedduration, credit quality, and the percentage of FFELP guarantee. We madeassumptions about future cash flows based on contractual interest rate formulasand used estimates of market data, including yields of trading securities thatwe believe to be similar or comparable. Presently we have determined the decline in value to be temporarybecause; i) we have the intent and ability to hold these securities in the nearterm in order to recoup their par values; ii) through the date of this Reportall of the securities have maintained their AAA credit ratings; iii) loans madeby the issuers are backed by the federal government; and iv) we have noted nodeterioration in the credit quality of the issuers.

 

However, if circumstances change, we may be required to recordother-than-temporary impairment charge on these investments. We may similarlybe required to record other-than-temporary impairment charges if the ratings onany of these securities are reduced or if any of the issuers default on theirobligations. In addition to impairment charges, any of these events could causeus to lose part or all of our investment in these securities. Any of theseevents could materially affect our results of operations and our financialcondition. We currently believe these securities are not significantly impairedfor the reasons described above; however, it could take until the finalmaturity of the underlying notes (up to 30 years) to realize ourinvestments’ recorded value. Based on our cash position, we do not anticipatethe potential lack of liquidity of these investments will have a materialimpact on our ability to conduct business.

 

8

----

Tableof Contents

 

**FairValue Measurements**

 

Effective January 1,2008, SupportSoft adopted SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuringfair value under generally accepted accounting principles and enhancesdisclosures about fair value measurements. Fair value is defined under SFAS No. 157as the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value under SFAS No. 157must maximize the use of observable inputs and minimize the use of unobservableinputs. The standard describes a fair value hierarchy based on three levels ofinputs, of which the first two are considered observable and the lastunobservable, that may be used to measure fair value, which are the following:

 

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

 

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

 

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

 

In accordance with SFAS No. 157,the following table represents our fair value hierarchy for our financialassets (cash equivalents and marketable securities) measured at fair value on arecurring basis as of June 30, 2008 (in thousands):

 
| ** **                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market funds            |       | $                | 36,704     |             | $          | —           |       | $         | —     |   | $ | 36,704 |   |
| Commercial paper              |       | —           |       | 14,638           |       | —           |       | 14,638    |       |
| Government sponsored entities |       | —           |       | 17,386           |       | —           |       | 17,386    |       |
| Corporate bonds               |       | —           |       | 6,005            |       | —           |       | 6,005     |       |
| Auction-rate securities       |       | —           |       | —           |       | 23,265           |       | 23,265    |       |
|                          |       | $                | 36,704     |             | $          | 38,029           |       | $         | 23,265     |   | $ | 97,998 |   |

 

Level 3 assets consist of auction rate debt securities with variousstate student loan authorities. Beginning in February of 2008 and throughthe date of this Report, all auctions for these securities have failed. Basedon the continued failure of these auctions and the underlying maturities of thesecurities, we have classified auction rate securities as long-term assets on ourbalance sheet. The fair value of these investments as of June 30, 2008 wasestimated by management. The following table provides a summary of changes infair value of our Level 3 financial assets as of June 30, 2008 (inthousands):

 
| ** **                                              | ** ** | **Auction-rate   securities** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| Balance at December 31, 2007                       |       | $                                  | —     |   |
| Transfer into Level 3                                   |       | 25,300                             |       |
| Sales                                                   |       | (500                               | )          |
| Unrealized loss included in other  comprehensive income |       | (1,535                             | )          |
| Balance at June 30, 2008                           |       | $                                  | 23,265     |   |

 

**Concentrationsof Credit Risk**

 

Financial instrumentsthat potentially subject us to concentrations of credit risk consistprincipally of cash equivalents, marketable securities and trade accountsreceivable. Our investment portfolio consists of investment grade securities.Except for obligations of the United States government and securities issued byagencies of the United States government, we diversify our investments bylimiting our holdings with any individual issuer.  We also limit the amount of credit riskexposure to any one country except the United States. We are exposed to creditrisks in the event of default by the issuers of the securities we hold to theextent of the amount recorded on the balance sheet. At June 30, 2008, weheld approximately $23.3 million of AAA-rated student loan auction-rate debtsecurities.  The student loans made bythe issuers of these securities are substantially guaranteed by the federalgovernment through FFELP.  Prior to 

 

9

----

Tableof Contents

 

February 2008, thesesecurities had not experienced failed auctions. See the Cash, Cash Equivalents and Marketable Securities section of thisNote 1 to the Condensed Consolidated Financial Statements for more information.

 

The credit risk in ourtrade accounts receivable is substantially mitigated by our credit evaluationprocess, reasonably short payment terms and because we sell our productsprimarily to large organizations in different industries.  At June 30, 2008, Customer A andCustomer B each accounted for 17% and 16% of our total accounts receivable,respectively. At December 31, 2007, three different customers accountedfor 12%, 11% and 11% of total accounts receivable.

 

For the three monthsended June 30, 2008, two customers accounted for 10% or more of totalrevenue; Customer A accounted for 18% and Customer B accounted for 10% of totalrevenue.  For the six months ended June 30,2008, the same Customer A accounted for 16% of total revenue.  No other customer individually accounted for10% or more of total revenue.  For thethree months ended June 30, 2007, two customers (customer A and C)accounted for 25% and 13% of our total revenue. For the six months ended June 30, 2007, Customer A accounted for16% of our revenue.

 

**TradeAccounts Receivable**

 

Trade accounts receivableare recorded at the invoiced amount. We perform evaluations of our customers’financial condition and generally do not require collateral. We make judgmentsas to our ability to collect outstanding receivables and provide allowances forthe portion of receivables when collection becomes doubtful. Provisions aremade based upon a specific review of all significant outstanding invoices. Forthose invoices not specifically provided for, provisions are recorded atdiffering rates, based upon the age of the receivable. In determining thesepercentages, we analyze our historical collection experience and currentpayment trends. If the historical data we use to calculate the allowance fordoubtful accounts does not reflect the future ability to collect outstandingreceivables, additional provisions for doubtful accounts may be needed and thefuture results of operations could be materially affected. At June 30,2008 and December 31, 2007, we had an allowance for doubtful accounts of$287,000 and $310,000, respectively.

 

**PurchasedTechnology**

 

Purchased technologyconsists of software that we licensed and incorporated into our product andservice offerings.  Purchased technologyis accounted for in accordance with SFAS No. 86, “*Accountingfor the Costs of Computer Software to be Sold, Leases, or Otherwise Marketed*.”Upon general release of the product that includes the licensed software, thecosts will be amortized using the straight line method over an estimated usefullife.

 

**Goodwilland Purchased Intangible Assets**

 

Goodwill is measured asthe excess of the cost of acquisition over the sum of the amounts assigned toidentifiable assets acquired less liabilities assumed.  We record purchased intangible assets at fairvalue. The original cost is amortized on a straight-line basis over theestimated useful life of each asset.

 

In accordance with SFAS No. 142,“*Goodwill and OtherIntangible Assets*” (SFAS No. 142), we review goodwilland other intangible assets that have indefinite useful lives for impairment atleast annually in our third fiscal quarter, or more frequently if an eventoccurs indicating the potential for impairment. In accordance with SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*,” (SFAS No.144),we review intangible assets that have finite useful lives and other long-livedassets when an event occurs indicating the potential for impairment.  In our reviews, we look for facts orcircumstances, either internal or external, indicating that we may not recoverthe carrying value of the asset.  Wemeasure impairment losses related to long-lived assets based on the amount bywhich the carrying amounts of these assets exceed their fair values.

 

**Stock-BasedCompensation**

 

We comply with SFAS No. 123(revised 2004), “*Share-Based Payment”* (SFAS No. 123R),which requires the measurement and recognition of compensation expense for allstock-based payment awards, including employee stock options and employee stockpurchases, made to employees and directors based on estimated fair values.

 

10

----

Tableof Contents

 

The fair value of ourstock options granted to employees and employee stock purchases for the threeand six months ended June 30, 2008 and 2007 was estimated using thefollowing assumptions:

 
| ** **                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                               | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stock Option Plan:**                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate                  |       | 3.1                                                 | %          | 5.0                                               | %          | 2.5 | % | 4.8 | % |
| Expected term                            |       | 4.1 years                                           |       | 3.8 years                                         |       | 4.1 years |   | 3.8 years |   |
| Volatility                               |       | 51.4                                                | %          | 51.2                                              | %          | 51.4 | % | 51.2 | % |
| Estimated forfeitures                    |       | 9                                                   | %          | 8                                                 | %          | 9 | % | 8 | % |
| Expected dividend                        |       | 0                                                   | %          | 0                                                 | %          | 0 | % | 0 | % |
| Weighted average fair value              |       | $                                                   | 1.62       |                                              | $          | 2.38 |   | $ | 1.59 |   | $ | 2.48 |   |
| ** **                               | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Employee Stock Purchase Plan (ESPP):** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate                  |       | 1.5                                                 | %          | 4.7                                               | %          | 1.5 | % | 4.7 | % |
| Expected term                            |       | 0.5 years                                           |       | 0.5 to 2.0 years                                  |       | 0.5 years |   | 0.5 to 2.0 years |   |
| Volatility                               |       | 58.6                                                | %          | 54.1                                              | %          | 58.6 | % | 54.1 | % |
| Estimated forfeitures                    |       | 8                                                   | %          | 8                                                 | %          | 8 | % | 8 | % |
| Expected dividend                        |       | 0                                                   | %          | 0                                                 | %          | 0 | % | 0 | % |
| Weighted average fair value              |       | $                                                   | 1.15       |                                              | $          | 1.66 |   | $ | 1.15 |   | $ | 1.66 |   |

 

 

We recorded the following stock-compensation expense for the three andsix months ended June 30, 2008 and 2007 (in thousands):

 

 
| ** **                                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stock  option compensation expense recognized in:**                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Cost of maintenance                                                        |       | $                                                   | 18         |                                              | $          | 20 |   | $ | 37 |   | $ | 35 |   |
| Cost of services                                                           |       | 172                                                 |       | 176                                               |       | 343 |   | 347 |   |
| Cost of consumer                                                           |       | 20                                                  |       | —                                            |       | 30 |   | — |   |
| Research and development                                                   |       | 110                                                 |       | 114                                               |       | 253 |   | 223 |   |
| Sales and marketing                                                        |       | 451                                                 |       | 468                                               |       | 851 |   | 907 |   |
| General and administrative                                                 |       | 523                                                 |       | 496                                               |       | 938 |   | 903 |   |
|                                                                       |       | $                                                   | 1,294      |                                              | $          | 1,274 |   | $ | 2,452 |   | $ | 2,415 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **ESPP compensation expense recognized in:**                               | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of maintenance                                                        |       | $                                                   | 1          |                                              | $          | 2 |   | $ | 1 |   | $ | 3 |   |
| Cost of services                                                           |       | 4                                                   |       | 11                                                |       | 9 |   | 24 |   |
| Cost of consumer                                                           |       | 17                                                  |       | —                                            |       | 18 |   | — |   |
| Research and development                                                   |       | 5                                                   |       | 8                                                 |       | 7 |   | 15 |   |
| Sales and marketing                                                        |       | 8                                                   |       | 16                                                |       | 13 |   | 31 |   |
| General and administrative                                                 |       | 4                                                   |       | 8                                                 |       | 7 |   | 15 |   |
|                                                                       |       | $                                                   | 39         |                                              | $          | 45 |   | $ | 55 |   | $ | 88 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Stock-based compensation expense included  in total costs and expenses** |       | $                                                   | 1,333      |                                              | $          | 1,319 |   | $ | 2,507 |   | $ | 2,503 |   |

 

11

----

Tableof Contents

 

The following tablerepresents stock option activity for the six months ended June 30, 2008:

 
| ** **                                          | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Remaining   Contractual   Term (years)** | ** ** | **Aggregate   Intrinsic Value   (in ‘000’s)** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                       | ** ** | ** **                                             | ** ** | ** **                                                                               | ** ** | ** **                                                                  | ** ** |
| Outstanding options at the beginning of the  period |       | 12,738,765                       |       | $                                                      | 4.98       |                                                                                     |       |                                                                        |       |   |
|                                                |       |                             |       |                                                   |       |                                                                                     |       |                                                                        |       |
| Granted                                             |       | 1,816,574                        |       | 3.71                                                   |       |                                                                                     |       |                                                                        |       |
|                                                |       |                             |       |                                                   |       |                                                                                     |       |                                                                        |       |
| Exercised                                           |       | —                           |       | —                                                 |       |                                                                                     |       |                                                                        |       |
|                                                |       |                             |       |                                                   |       |                                                                                     |       |                                                                        |       |
| Forfeited                                           |       | (1,261,626                       | )          | 5.58                                                   |       |                                                                                     |       |                                                                        |       |
|                                                |       |                             |       |                                                   |       |                                                                                     |       |                                                                        |       |
| Outstanding options at the end of the  period       |       | 13,293,713                       |       | $                                                      | 4.75       |                                                                                     | 5.48       |                                                                        | $          | 632 |   |
|                                                |       |                             |       |                                                   |       |                                                                                     |       |                                                                        |       |
| Options vested and expected to vest                 |       | 12,867,544                       |       | $                                                      | 4.77       |                                                                                     | 5.50       |                                                                        | $          | 632 |   |
|                                                |       |                             |       |                                                   |       |                                                                                     |       |                                                                        |       |
| Outstanding exercisable at the end of the  period   |       | 6,426,103                        |       | $                                                      | 5.19       |                                                                                     | 5.12       |                                                                        | $          | 632 |   |

 

The aggregate intrinsicvalue in the table above represents the total pre-tax intrinsic value thatwould have been received by the option holders had they all exercised theiroptions on June 30, 2008. This amount changes based on the fair marketvalue of our stock. During the three and six months ended June 30 2008,there were no exercises, therefore, the aggregate intrinsic value of optionsexercised under our stock option plans was zero. During the three and sixmonths ended June 30, 2007, the aggregate intrinsic value of optionsexercised under our stock option plans was $657,000 and $1.4 million,respectively.  Total fair value ofoptions vested during the three and six months ended June 30, 2008 was$1.3 million and $2.4 million, respectively. Total fair value of options vested during the three and six months endedJune 30, 2007 was $1.2 million and $2.4 million, respectively.

 

At June 30, 2008,there was $15.5 million of unrecognized compensation cost related to existingoptions outstanding, which is expected to be recognized over a weighted averageperiod of 2.8 years.

 

**Net LossPer Share**

 

Basic and diluted net loss per share are presented in accordance withSFAS No. 128, *“Earnings per Share”*(SFAS No. 128), for all periods presented. In accordance with SFAS No. 128,basic and diluted net loss per share have been computed using theweighted-average number of common shares outstanding during the periods.  For the three and six months ended June 30,2008 and 2007, the outstanding options were excluded from the computation ofdiluted net loss per share since their effect would have been anti-dilutive.

 

12

----

Tableof Contents

 

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

 
| ** **                                                     | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                     | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                     | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                     | ** ** | **2008**              | ** ** | **2007**            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                           |       |                  |       |                |       |   |   |   |   |
| Net loss                                                       |       | $                     | (4,347     | )                   | $          | (4,919 | ) | $ | (7,978 | ) | $ | (10,541 | ) |
| Shares used in computing basic and diluted  net loss per share |       | 46,076                |       | 45,418              |       | 46,065 |   | 45,175 |   |
| Basic and diluted net loss per share                           |       | $                     | (0.09      | )                   | $          | (0.11 | ) | $ | (0.17 | ) | $ | (0.23 | ) |

 

**Warrantiesand Indemnifications**

 

Our enterprise businessgenerally provides a warranty for its software products and services to itscustomers and accounts for its warranties under SFAS No. 5, “*Accounting for Contingencies*” (SFAS No. 5). Ourstandard warranty period is 90 days, but warranty periods can sometimes belonger and vary from customer to customer. In the event there is a breach ofsuch warranties, we generally are obligated to correct the product or serviceto conform to the warranty provision or, if we are unable to do so, thecustomer is entitled to seek a refund of the purchase price of the product orservice. In certain contracts a material breach of warranty may involvepenalties payable to the customer.  Wedid not provide for a warranty accrual as of June 30, 2008 or December 31,2007. To date, our product warranty expense has not been significant.

 

Our consumer businessgenerally provides a five-day warranty in which we will use reasonable effortsto re-perform the services we provide to consumers.  If those efforts are unsuccessful within theapplicable warranty period, consumers are entitled to seek a refund of the feesthey paid for those services.  Theconsumer warranties provided through our consumer channel partners vary,depending on the structure of our relationships with those channel partners andthe partners’ warranty commitments to their customers.  To date, our consumer services refunds havenot been significant.

 

We generally agree toindemnify customers who license software from us against legal claims that oursoftware products infringe certain third-party intellectual propertyrights.  We account for ourindemnification obligations under SFAS No.5. To date, we have not been requiredto make any payment resulting from infringement claims asserted against ourcustomers and have not recorded any related accruals.

 

**RecentAccounting Pronouncements**

 

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

 

In December 2007, FASB issued SFAS No. 160, “*Noncontrolling Interests in Consolidated FinancialStatements*” (SFAS No. 160) which establishes accounting andreporting standards for the noncontrolling (minority) interest in a subsidiaryand for the deconsolidation of a subsidiary. SFAS No. 160 is effective forbusiness arrangements entered into in fiscal years beginning on or after December 15,2008, which means that it will be effective for our fiscal year beginning January 1,2009. Early adoption is prohibited. We are currently evaluating the impact ofadopting SFAS No. 160 on our consolidated financial statements.

 

13

----

Tableof Contents

 

In March 2008, FASB issued SFAS No. 161 “*Disclosures About Derivative Instruments and Hedging Activities”*(SFASNo. 161).* *SFASNo. 161 is intended to enhance the current disclosure framework in FASBStatement 133 “*Accounting for Derivative Instrument andHedging Activities.*”  SFAS No. 161requires enhanced disclosures about an entity’s derivative and hedgingactivities.  SFAB No. 161 iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008, with early application encouraged.  We are currently evaluating the impact ofadopting SFAS No. 161 on our consolidated financial statements.

 

In May 2008, FASB issued SFAS No. 163 *“Accounting for Financial Guarantee Insurance Contracts*”(SFAS No. 163).  SFAS No. 163is to result in inconsistencies in the recognition and measurement of claimliabilities because of differing views about when a loss has been incurredunder FASB Statement No. 5.  SFAB No. 163is effective for financial statements issued for fiscal years and interimperiods beginning after December 15, 2008, with early application notpermitted.  We are currently evaluatingthe impact of adopting SFAS No. 163 on our consolidated financialstatements.

 

**Note2.  Business Combination**

 

On May 2, 2008, weacquired (the “Acquisition”) all of the stock of YourTechOnline.com (YTO), aprovider of remote technology services based in Kelowna, British Columbia.  YTO’s service delivery methodology involvestechnical support agents who view and control a computer screen remotely.  We acquired YTO to bolster our remote servicedelivery capabilities utilizing work-from-home agents.

 

The total purchase pricewas approximately $2.8 million, including cash consideration of $2.7 millionand direct transaction costs of $0.1 million. Of the cash paid at closing, approximately $0.5 million was held in anescrow account for specified indemnity obligations.

 

The operating results ofYTO have been included in our accompanying condensed consolidated statements ofoperations from the date of the acquisition on May 2, 2008 to June 30,2008.

 

To get the full benefitsof YTO’s service delivery methodology, we deemed it important to retain certainkey YTO employees in our consumer business segment.  These key employees signed non-competeagreements restricting their ability to attain competing employment outsideSupportSoft for two years after the Acquisition.  In addition, we placed value on YTO’sreferral partner relationships and existing customer relationships.

 

The purchase price forYTO exceeded the fair value of YTO net tangible and intangible assetsacquired.  As a result, we have recordedgoodwill in connection with this transaction in accordance with SFAS No. 142.

 

Theestimated purchase price and purchase price allocation, as presented below,represents our best estimates.  Theseestimates are preliminary and may change after obtaining more informationregarding, among other things, asset valuations and liabilities assumed.

 

Anallocation among the tangible and identifiable intangible assets andliabilities acquired is summarized as follows. The financial information presented includes purchase accountingadjustments to the tangible and intangible assets:

** **
| ** **                      | ** ** | **Amount  (in thousands)** | ** ** | **Amortization  Period** | ** ** |
|---------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Cash                            |       | $                               | 48         |                     |       |   |
| Accounts receivable, net        |       | 45                              |       |                     |       |
| Accrued liabilities             |       | (401                            | )          |                     |       |
| Net liabilities assumed         |       | (308                            | )          |                     |       |
| Identifiable intangible assets: |       |                            |       |                     |       |
| Non-compete                     |       | 224                             |       | 18 months                |       |
| Referral partner relationships  |       | 25                              |       | 3 years                  |       |
| Customer base                   |       | 31                              |       | 3 years                  |       |
|                            |       |                            | ** ** | ** **               | ** ** |
| Goodwill                        |       | 2,854                           | ** ** | ** **               | ** ** |
| ** **                      | ** ** | ** **                      | ** ** | ** **               | ** ** |
| Total estimated purchase price  |       | $                               | 2,826      | ** **               | ** ** | ** ** |

 

14

----

Table of Contents

 

**Note3. Comprehensive Loss**

 

SFAS No. 130 “*Reporting Comprehensive Income*” (SFAS No. 130)establishes standards for reporting and displaying comprehensive net income andits components in stockholders’ equity. SFAS No. 130 has no impact on ournet income or loss as presented in our financial statements. SFAS No. 130requires foreign currency translation adjustments and changes in the fair valueof available-for-sale securities to be included in comprehensive income orloss.

 

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

 
| ** **                                           | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                           | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                           | ** ** | **2008**              | ** ** | **2007**            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                 |       |                  |       |                |       |   |   |   |   |
| Net loss                                             |       | $                     | (4,347     | )                   | $          | (4,919 | ) | $ | (7,978 | ) | $ | (10,541 | ) |
| Net unrealized loss on available-for-sale securities |       | (220                  | )          | (46                 | )          | (1,572 | ) | (27 | ) |
| Foreign currency translation gain (loss)             |       | (27                   | )          | 22                  |       | (143 | ) | (2 | ) |
| Comprehensive loss                                   |       | $                     | (4,  594   | )                   | $          | (4,943 | ) | $ | (9,693 | ) | $ | (10,570 | ) |

 

The components ofaccumulated other comprehensive loss relate entirely to accumulated foreigncurrency translation gains/(losses) and unrealized gains/(losses) onavailable-for-sale securities and were $(935,000) and $(1.6) million at June 30,2008, and $(793,000) and $21,000 at December 31, 2007.

 

**Note4.  Income Taxes**

 

We recorded income taxprovisions of $84,000 and $192,000 for the three and six months ended June 30,2008, respectively. For the three and six months ended June 30, 2007, werecorded income tax provision of $131,000 and $346,000.  These provisions primarily reflect foreignincome taxes including foreign withholding taxes related to certaininternational customer payments.  Inaccordance with Financial Accounting Standards Interpretation No. 48 (FIN48), included in the quarterly provision was an increase in unrecognized taxbenefits of $16,000 and $31,000 and interest of $5,000 and $4,000 for the threemonths ended June 30, 2008 and 2007, respectively.

 

As of June 30, 2008,our deferred tax assets are fully offset by a valuation allowance.  SFAS No. 109 “*Accountingfor Income Taxes*” (SFAS No. 109) provides for the recognitionof deferred tax assets if realization of such assets is more likely thannot.  Based upon the weight of availableevidence, which includes SupportSoft’s historical operating performance,reported cumulative net losses since inception and difficulty in accuratelyforecasting our future results, we provided a full valuation allowance againstour net deferred tax assets.  We reassessthe need for our valuation allowance on a quarterly basis.  If it is later determined that a portion ofthe valuation allowance should be reversed it will be a benefit to the incometax provision.

 

Asof June 30, 2008, the amount of unrecognized tax benefit where it isreasonably possible that a significant change may occur in the next 12 monthsis approximately $57,000.  The changewould result from expiration of the statute of limitations in several foreignjurisdictions.

 

**Note 5.  Segment Reporting**

 

FASBNo. 131 “*Disclosures about Segments of an Enterpriseand Related Information*” (SFAS No. 131) establishes standardsfor the way in which public companies disclose certain information aboutoperating segments in their financial reports.

 

Priorto January 2008, we conducted our business in one segment.  In January 2008, we reorganized ourCompany and created two new business segments. We also appointed an executive vice president to lead each of thebusiness units. Additionally, we began tracking profitability by segment andproviding this information to our Chief Executive Officer. Consistent with SFASNo. 131, we have defined two reportable segments, distinguished by: i)market characteristics; ii) the nature of our products and services; iii) howwe manage our operations; and iv) how our chief operating decision maker viewsresults. We define the chief operating decision maker as our Chief ExecutiveOfficer.

 

Revenueand cost of revenue are provided on a segment basis, all other operatingexpenses are incorporated into the overall company results for this period asit would be impractical to reconstruct because the Company was not organized bybusiness segment nor were costs and expenses tracked by business segment.

 

15

----

Table of Contents

 

*Consumer Segment*.  Inour consumer segment, we provide premium technology support to consumers overthe phone and the internet for a fee.  Weoffer our services to consumers through retailers, digital service providersand other companies who provide technology products and services toconsumers.  We also provide our servicesdirectly to consumers through www.support.com.

 

*Enterprise Segment.*  Our enterprise customers use our software toresolve technical problems for their customers.   Digital service providers use our products toautomate the installation, activation and verification of broadband services,to reduce the cost and improve the quality of support for customers, and toenable the remote management of devices located at customer premises.  Corporate IT departments and IT outsourcingfirms use our software to improve the cost-effectiveness and efficiency oftheir support through an integrated portfolio of proactive service, selfservice and assisted service products.

 

*Other*. This category consists of common corporate expensessuch as general and administrative expenses, stock-based compensation expenses,interest income, and other income or expenses, which are items that we do notallocate to our business segments.

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies in Note 1 to the condensedconsolidated financial statements.  We donot track assets and liabilities by reportable segment and therefore do notdisclose total assets and liabilities by reporting segment. There are nointersegment sales.

 

Thefollowing table shows our financial results by reportable segment for the threemonths ended June 30, 2008 (in thousands):

 
| ** **                            | ** ** | **Enterprise** | ** ** | **Consumer** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|----------------|------------|--------------|------------|-----------|------------|------------------|------------|
| Revenue:                              |       |           |       |         |       |      |       |             |       |
| License                               |       | $              | 2,897      |         | $          | —    |       | $                | —     |   | $ | 2,897 |   |
| Maintenance                           |       | 3,895          |       | —       |       | —    |       | 3,895            |       |
| Services                              |       | 3,934          |       | —       |       | —    |       | 3,934            |       |
| Consumer                              |       | —         |       | 891          |       | —    |       | 891              |       |
| Total revenue                         |       | 10,726         |       | 891          |       | —    |       | 11,617           |       |
| Segment operating costs and expenses  |       | (7,589         | )          | (5,424       | )          | —    |       | (13,013          | )          |
| Amortization of intangible assets     |       | (30            | )          | (28          | )          | —    |       | (58              | )          |
| Common corporate expenses             |       | —         |       | —       |       | (2,197    | )          | (2,197           | )          |
| Stock-based compensation              |       | —         |       | —       |       | (1,333    | )          | (1,333           | )          |
| Interest income & other, net |       | —         |       | —       |       | 721       |       | 721              |       |
| Income (loss) before income taxes     |       | $              | 3,107      |         | $          | (4,561    | )          | $                | (2,809     | ) | $ | (4,263 | ) |

 

16

----

Table of Contents

 

Thefollowing table shows our financial results by reportable segment for the sixmonths ended June 30, 2008 (in thousands):

 
| ** **                            | ** ** | **Enterprise** | ** ** | **Consumer** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|----------------|------------|--------------|------------|-----------|------------|------------------|------------|
| Revenue:                              |       |           |       |         |       |      |       |             |       |
| License                               |       | $              | 5,871      |         | $          | —    |       | $                | —     |   | $ | 5,871 |   |
| Maintenance                           |       | 7,898          |       | —       |       | —    |       | 7,898            |       |
| Services                              |       | 7,883          |       | —       |       | —    |       | 7,883            |       |
| Consumer                              |       | —         |       | 1,593        |       | —    |       | 1,593            |       |
| Total revenue                         |       | 21,652         |       | 1,593        |       | —    |       | 23,245           |       |
| Segment operating costs and expenses  |       | (15,711        | )          | (10,760      | )          | —    |       | (26,471          | )          |
| Amortization of intangible assets     |       | (60            | )          | (28          | )          | —    |       | (88              | )          |
| Common corporate expenses             |       | —         |       | —       |       | (4,135    | )          | (4,135           | )          |
| Stock-based compensation              |       | —         |       | —       |       | (2,507    | )          | (2,507           | )          |
| Interest income & other, net |       | —         |       | —       |       | 2,170     |       | 2,170            |       |
| Income (loss) before income taxes     |       | $              | 5,881      |         | $          | (9,195    | )          | $                | (4,472     | ) | $ | (7,786 | ) |

 

**Note6. Contingencies**

 

*LegalMatters*

 

InNovember 2001, a class action lawsuit was filed against us, two of ourformer officers, and certain underwriters in the United States District Courtfor the Southern District of New York. Similar complaints have been filedagainst 55 underwriters and more than 300 other companies and other individualofficers and directors of those companies. The lawsuit alleged that our registration statement and prospectus datedJuly 18, 2000 for the issuance and initial public offering of 4,250,000shares of our common stock contained material misrepresentations and/oromissions related to alleged inflated commissions received by the underwritersof the offering. The lawsuit seeks unspecified damages as well as interest,fees and costs. All of the complaints against the underwriters, issuers andindividuals have been consolidated for pre-trial purposes before U.S. DistrictCourt Judge Scheindlin of the Southern District of New York. On June 26,2003, the plaintiffs announced that a proposed settlement between the issuerdefendants and their directors and officers had been reached. Under theproposed settlement, which is subject to court approval, our insurance carrierwould be responsible for any payments other than attorneys’ fees prior to June 1,2003. A final settlement approval hearing on the proposed issuer settlement washeld on April 24, 2006. The district court took the matter undersubmission. Meanwhile the consolidated case against the underwriters hasproceeded. On October 13, 2004, the district court certified a class inthe underwriters’ proceeding. On December 5, 2006, however, the SecondCircuit reversed, holding that the proposed class could not be certified, anddenied a petition for rehearing on April 6, 2007. On June 25, 2007,the district court entered a stipulated order terminating the proposed issuersettlement. Plaintiffs are proceeding with discovery as to underwriters andissuers, although principally with respect to focus or test cases that do not namethe Company as a defendant. The court set a briefing schedule for a new classcertification motion, which is expected to be heard in 2008. While we cannotpredict with certainty the outcome of the litigation or whether the settlementwill be approved, we believe we and our officers have meritorious defenses tothe claims in the litigation.

 

Weare also subject to other routine legal proceedings, as well as demands, claimsand threatened litigation, that arise in the normal course of our business,potentially including assertions that we may be infringing patents or otherintellectual property rights of others. We currently do not believe that theultimate amount of liability, if any, for any pending claims of any type (aloneor combined) will materially affect our financial position, results ofoperations or cash flows. The ultimate outcome of any litigation is uncertain,however, and either unfavorable or favorable outcomes could have a materialnegative impact on our financial condition and operating results. Regardless ofoutcome, litigation can have an adverse impact on us because of defense costs,negative publicity, diversion of management resources and other factors.

 

*TaxesContingencies*

 

We are required to makeperiodic filings in the jurisdictions where we are deemed to have a presencefor tax purposes. We have undergone tax audits in the past and have paidassessments arising from these audits. To date, such amounts have not beenmaterial. We evaluate estimated losses that could arise from similarassessments in accordance with SFAS No. 5. We consider such factors as the degree of probability of an unfavorableoutcome and the ability to make a reasonable estimate of the amount of loss.

 

**Note7. Restructuring Obligations and Other Charges**

 

In2007, we implemented a reduction in workforce to align our cost structure withanticipated revenue. We reduced our workforce by 41 employees, or approximately12% of the workforce at that time. As a result, we recorded a restructuringcharge of $1.2 million in 

 

17

----

Table of Contents

 

2007.The restructuring charge was primarily comprised of severance costs and otherpersonnel-related termination costs. Restructuring expenses included in theconsolidated statements of operations were $82,000 for cost of maintenance,$240,000 for cost of services, $160,000 for research and development, $679,000for sales and marketing and $28,000 for general and administrative. Cashpayments of $741,000 were made against those obligations in 2007.

 

Inthe first half of 2008, there were no additional restructuring charges and cashpayments totaling $576,000 were made against the obligation at December 31,2007.  The following table summarizesactivity associated with the restructuring and related expenses incurred as of June 30,2008 (in thousands):

 
| ** **                                        | ** ** | **Severance** | ** ** | **Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|---------------|------------|----------------|------------|-----------|------------|
| Restructuring obligations, December 31, 2006 |       | $             | 128        |           | $          | —    |       | $ | 128 |   |
| Restructuring costs incurred in 2007              |       | 1,179         |       | 11             |       | 1,190     |       |
| Cash payments                                     |       | (731          | )          | (10            | )          | (741      | )          |
| Restructuring obligations, December 31, 2007 |       | 576           |       | 1              |       | 577       |       |
| Cash payments                                     |       | (575          | )          | (1             | )          | (576      | )          |
| Restructuring obligations, June 30, 2008     |       | $             | 1          |           | $          | —    |       | $ | 1 |   |

 

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

 

*The following discussion of ourfinancial condition and results of operations**shouldbe read in conjunction with our condensed consolidated financialstatements and the related notes includedelsewhere in this Form 10-Q(the “Report”) and the section entitled “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and the consolidatedfinancial statements and related notedincluded in our Annual Report onForm 10-K for the yearended December 31, 2007. Thefollowing discussion includes forward-looking statements. Please see “**Risk Factors”**inItem **1A of this Report for important information to consider when evaluatingthese statements.*

 

**Overview**

 

SupportSoftprovides software and services designed to make technology work. Advances incomputer processing power, data transmission speeds, wireless communicationsand other areas of technology have the potential to enable and enrich dailylife. Too often, however, technology proves frustrating to all but the mostexpert users. SupportSoft’s mission is to bridge this gap, and to enabletechnology to fulfill its promise.

 

InJanuary 2008, we reorganized the company and began operating our businessin two segments, consumer and enterprise. We also appointed an executive vicepresident to lead each of the business segments. Additionally, we begantracking profitability by segment and providing this information to our ChiefExecutive Officer. Accordingly, beginning in 2008, we are providing segmentinformation for each business segment. Our consumer segment is atechnology-enabled services business and provides consumers with assistancewith frustrating technology problems. Our enterprise segment consists of ourtraditional business in which we license technical support software totelecommunications and cable companies, digital service providers and corporateIT departments.

 

Inour consumer segment, we provide premium technology support to consumers overthe phone and the internet for a fee. We offer our services to consumersthrough retailers, digital service providers and other companies who providetechnology products and services to consumers. We also provide our servicesdirectly to consumers through www.support.com.

 

Ourenterprise customers use our software to resolve technical problems for theircustomers. Digital service providers use our products to automate theinstallation, activation and verification of broadband services, to reduce thecost and improve the quality of technical support, and to enable the remotemanagement of devices located at customer premises. Corporate IT departmentsand IT outsourcing firms use our software to improve the cost-effectiveness andefficiency of their support through an integrated portfolio of proactiveservice, self-service and assisted service products.

 

Mostof our revenue to date has been derived from our traditional enterprisecustomers and has consisted of software license fees and fees for maintenance,consulting, training and hosting services. We have licensed our software to enterprise customers predominately on aperpetual basis in which we recognize license revenue up front, assuming allcriteria for revenue recognition under the applicable accounting rules havebeen met. Maintenance fees relating to perpetual software licenses result inratable recognition of revenue over the period of the maintenance term, whichis generally one year. Consulting and training revenues are generallyrecognized as the services are performed or in accordance with predefinedproject milestones. Hosting fees are recognized ratably over the term of thehosting arrangement. Revenue from our consumer offerings have been derivedpredominantly from services that are generally paid on 

 

18

----

Table of Contents

 

aper transaction basis. Going forward, we expect revenue recognition models fromour consumer offerings could vary significantly depending on specificcontractual terms.

 

Our total revenue for thequarter ended June 30, 2008 was $11.6 million.  Our total revenue decreased in the secondquarter of 2008 by $11,000, or less than 1% from the first quarter of 2008, andby $1.8 million, or 14% from the same quarter of 2007 due to a decrease inenterprise license revenue.  Thedecreases in license revenue were due to closing fewer large licensingtransactions in the second quarter of 2008. Historically, a relatively small number of customers have accounted fora substantial portion of our license revenue. Therefore, failure to obtain or close a few large customer transactionscan result in substantial fluctuations in license revenue from quarter toquarter.

 

Revenue from ourenterprise segment was $10.7 million and $21.7 million for the three and sixmonth periods ended June 30, 2008. Within this segment license revenue was $2.9 million, maintenancerevenue was $3.9 million and services revenue was $3.9 million for the threemonths ended June 2008.  For the sixmonths ended June 2008, license revenue was $5.9 million, maintenancerevenue was $7.9 million and services revenue was $7.9 million.  The key goal of our strategy in theenterprise segment is to achieve and maintain consistent segment operatingprofitability.  To attain this goal wefocus on cost control, increasing satisfaction of existing customers, andobtaining new customers.  With respect tocost levels, we completed a reduction in force in the fourth quarter of 2007and have continued to manage our spending in a disciplined way.  With respect to customer satisfaction, we areoperating with a series of tailored customer account plans designed to enableour customers to achieve maximum value from their investment in our products.  With respect to new customers, we havetargeted initiatives in specific market areas designed to expand our customerbase.  In the first two quarters of 2008,our enterprise segment was profitable at the operating income level.  See Note 5 to the condensed consolidatedfinancials statements for more information.

 

Revenuefrom our consumer segment was $891,000 and $1.6 million for the three and sixmonths ended June 30, 2008. Consumer revenue was comprised primarily of fees for technology supportservices provided through channel partners and, to a lesser extent, directly toconsumers through support.com.  In thefirst quarter of 2007 we had just launched our consumer business.  Consumer revenue in the three and six monthperiods ended June 30, 2007 was $262,000 and $423,000, respectively.  The key goal of our strategy in the consumersegment is to grow revenue primarily by developing alliances with othercompanies through which our offerings reach consumers.    We have established and are now expandingour initial channel partnerships while seeking to grow our portfolio ofpartners.

 

We do not expect immediate returns from our consumerinitiative but believe it can create sustainable revenue growth over time. Weare making significant incremental investments in support of the consumerbusiness, including investments in hiring, training, and managing home-basedconsumer technical support agents and in developing and promoting our consumerofferings.  We expect that theseadditional investments will precede any material revenue increase from our newbusiness initiatives. As a result, we currently expect to incur total companyquarterly net losses through at least 2008.

 

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

 

**CriticalAccounting Policies and Estimates**

 

In preparing ourcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States, we make assumptions,judgments and estimates that can have a significant impact on our net revenue,and operating results, as well as on the value of certain assets andliabilities on our consolidated balance sheet. 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, accounting forgoodwill and other intangible assets, and stock-based compensation have thegreatest potential impact on our condensed consolidated financial statements,so we consider these to be our critical accounting policies. We discuss belowthe critical accounting estimates associated with these policies. For furtherinformation on the critical accounting policies, see the notes to condensedconsolidated financial statements.

 

*RevenueRecognition*

 

We derive revenues fromsoftware license fees, maintenance and support, professional services andtransaction-based technology support services and multiple element arrangementsthat may include any combination of these items. We recognize revenue in 

 

19

----

Table of Contents

 

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

 

*Allowancesfor Doubtful Accounts*

 

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

 

*Accountingfor Income Taxes*

 

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

 

*Accountingfor Goodwill and Other Intangible Assets*

 

AtJune 30, 2008, goodwill was $12.6 million, and net identifiable intangibleassets were $531,000.  We assess theimpairment of goodwill annually or more often if events or changes incircumstances indicate that the carrying value may not be recoverable. Animpairment loss would be recognized if the fair value of the reporting unit isless than the carrying value of the reporting unit’s net assets on the date of theevaluation.  We assess the impairment offinite lived identifiable intangible assets whenever events or changes incircumstances indicate that its carrying amount may not be recoverable.  An impairment loss would be recognized whenthe sum of the future net cash flows expected to result from the use of theasset and its eventual disposition is less than its carrying amount. Suchimpairment loss would be measured as the difference between the carrying amountof the asset and its fair value. The estimate of cash flow is based upon, amongother things, certain assumptions about expected future operating performanceand an appropriate discount rate determined by our management. Our estimates ofdiscounted cash flows may differ from actual cash flows due to, amongother things, economic conditions, changes to the business model or changes inoperating performance. If we made different estimates, material differences mayresult in write-downs of net long-lived and intangible assets, which would bereflected by charges to our operating results for any period presented.  Furthermore, we evaluate cash flows at thelowest operating segment level.  If thenumber of reporting segments increases in the future, as it has in 2008, thismay make impairment more probable than it would be with fewer reportingsegments.

 

*Stock-basedcompensation*

 

We account forstock-based compensation in accordance with the provisions of SFAS No. 123R.We adopted SFAS No. 123R using the modified prospective transition method,which requires the application of the accounting standard starting from January 1,2006. Under the fair value recognition provisions of SFAS No. 123R,stock-based compensation cost is estimated at the grant date based on the fairvalue of the award and is recognized as expense ratably over the requisiteservice period of the award. We estimate the fair value of stock-based awardson the grant date using the Black-Scholes-Merton option-pricing model.Determining the appropriate fair value model and calculating the fair value ofstock-based awards requires judgment, including estimating stock pricevolatility, forfeiture rates and expected life. If any of theseassumptions used in the option-pricing models changes significantly,stock-based compensation may differ materially in the future from that recordedin the accompanying financial statements.

 

20

----

Table of Contents

 

**RESULTSOF OPERATIONS**

 

The following table setsforth the results of operations for the three and six months ended June 30,2008 and 2007 expressed as a percentage of total revenue.

 
| ** **                        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                        | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                        | ** ** | **2008**              | ** ** | **2007**            | ** ** | **2008** | ** ** | **2007** | ** ** |
| License                           |       | 25                    | %          | 44                  | %          | 25 | % | 38 | % |
| Maintenance                       |       | 34                    |       | 29                  |       | 34 |   | 33 |   |
| Services                          |       | 34                    |       | 25                  |       | 34 |   | 27 |   |
| Consumer                          |       | 7                     |       | 2                   |       | 7 |   | 2 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Total revenue                     |       | 100                   |       | 100                 |       | 100 |   | 100 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Costs and expenses:               |       |                  |       |                |       |   |   |   |   |
| Cost of license                   |       | 1                     |       | 0                   |       | 1 |   | 0 |   |
| Cost of maintenance               |       | 4                     |       | 5                   |       | 4 |   | 5 |   |
| Cost of services                  |       | 30                    |       | 31                  |       | 31 |   | 33 |   |
| Cost of consumer                  |       | 16                    |       | 8                   |       | 13 |   | 8 |   |
| Amortization of intangible assets |       | 1                     |       | 2                   |       | 0 |   | 2 |   |
| Research and development          |       | 19                    |       | 18                  |       | 19 |   | 20 |   |
| Sales and marketing               |       | 49                    |       | 64                  |       | 53 |   | 68 |   |
| General and administrative        |       | 23                    |       | 19                  |       | 22 |   | 21 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Total Costs and Expenses          |       | 143                   |       | 147                 |       | 143 |   | 157 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Loss from operations              |       | (43                   | )          | (47                 | )          | (43 | ) | (57 | ) |
| Interest and other income, net    |       | 6                     |       | 11                  |       | 10 |   | 14 |   |
|                              |       |                  |       |                |       |   |   |   |   |
| Loss before income taxes          |       | (37                   | )          | (36                 | )          | (33 | ) | (43 | ) |
| Income tax provision              |       | 0                     |       | (1                  | )          | (1 | ) | (1 | ) |
|                              |       |                  |       |                |       |   |   |   |   |
| Net loss                          |       | (37                   | )%         | (37                 | )%         | (34 | )% | (44 | )% |

 

 

**Threeand Six Months Ended June 30, 2008 and 2007**

 

***REVENUE***

*** ***
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands, except percentages** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$    Change** | ** ** | **%   Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$    Change** | ** ** | **%   Change** | ** ** |
|                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| License                                             |       | $                                                   | 2,897      |                                              | $          | 5,891 |   | $ | (2,994 | ) | (51 | )% | $ | 5,871 |   | $ | 9,138 |   | $ | (3,267 | ) | (36 | )% |
| Maintenance                                         |       | 3,895                                               |       | 3,910                                             |       | (15 | ) | 0 | % | 7,898 |   | 7,834 |   | 64 |   | 1 | % |
| Services                                            |       | 3,934                                               |       | 3,370                                             |       | 564 |   | 17 | % | 7,883 |   | 6,464 |   | 1,419 |   | 22 | % |
| Consumer                                            |       | 891                                                 |       | 262                                               |       | 629 |   | 240 | % | 1,593 |   | 423 |   | 1,170 |   | 277 | % |
| Total revenue                                       |       | $                                                   | 11,617     |                                              | $          | 13,433 |   | $ | (1,816 | ) | 14 | % | $ | 23,245 |   | $ | 23,859 |   | $ | (614 | ) | (3 | )% |

 

*Licenserevenue.* License revenue is comprised of fees for perpetualand term licenses of our software.  Thedecreases in license revenue for the three and six month periods ended June 30,2008 compared with the same periods in 2007 were due to our closing fewer largelicensing transactions.  Customers oftenelect to license our software in smaller initial quantities and to acquireadditional licenses as their growth requires. Additionally, the majority of our license revenue has been derived fromexisting customers who require fewer licenses in current periods since theirinitial purchases have already been made. In the second quarter of 2008, only one customer accounted for greaterthan $1 million in license revenue, compared with the same period in 2007 wheretwo customers 

 

21

----

Table of Contents

 

individually accountedfor greater than $1 million in license revenue and $4.1 million in theaggregate.  For the six months ended June 30,2008, there were three customers that accounted for greater than $1 million inlicense revenue, aggregating to $3.3 million of license revenue.  During the same period of 2007, threecustomers contributed greater than $1 million of license revenue, aggregatingto $5.3 million of license revenue. Historically, a relatively small number of customers have accounted fora substantial portion of our license revenue.

 

*Maintenance revenue.*Maintenance revenue is comprised primarily of revenue from post-contracttechnical support services which includes software product updates. Maintenancerevenue is recognized ratably over the term of the maintenance period, which isgenerally one year.  Maintenance revenueremained relatively consistent for the three and six month periods ended June 30,2008, compared with the same periods in 2007.

 

*Servicesrevenue*. Services revenue is primarily comprised of revenuefrom professional services, such as consulting, training and fees for hostingservices. Services revenue is generally recognized as the services are performed.Our services revenue may fluctuate from period to period depending on theoverall demand for our consulting services and level of consulting activitywith major customers.  The increase inservices revenue in the second quarter of 2008 from the second quarter of 2007was due primarily to increased services demand, particularly from one customerwhose services revenue increased to $1.3 million in the second quarter of 2008from $807,000 in the second quarter of 2007. The increase in services revenue in the first half of 2008 from thefirst half of 2007 was also due to increased services purchased by the samecustomer whose services revenue increased to $2.3 million in 2008 from $1.3million in 2007.

 

*Consumerrevenue.*  Revenue fromour consumer offerings have been derived predominantly from technology supportservices that are paid for on a per-incident basis.  We also license certain of our consumersoftware products to partners on a per-use basis. Consumer revenue in thesecond quarter of 2008 was comprised primarily of fees from technology supportservices delivered through our consumer partners, fees from licenses of ourconsumer software products to our consumer partners, and fees from technologysupport services offered directly to consumers through support.com.  In early 2007, we had just begun to offer ourconsumer solutions so revenues in the three and six month periods ended June 30were significantly smaller than the same periods in 2008.  The increase in consumer revenue from 2007 to2008 was due to increased services demand from consumer partners.

 

InternationalRevenue

 

Revenue from customers outside North America accountedfor approximately 24% and 23% of our total revenue for the three and six monthsended June 30, 2008, compared with 19% and 20% for the three and six monthperiods ended June 30, 2007.

 

 

***COSTS AND EXPENSES***

 

***Costs of Revenue***

*** ***
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands, except percentages** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$    Change** | ** ** | **%   Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$    Change** | ** ** | **%   Change** | ** ** |
|                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of license                                     |       | $                                                   | 92         |                                              | $          | 52 |   | $ | 40 |   | 77 | % | $ | 143 |   | $ | 90 |   | $ | 53 |   | 59 | % |
| Cost of maintenance                                 |       | $                                                   | 465        |                                              | $          | 661 |   | $ | (196 | ) | (30 | )% | $ | 1,014 |   | $ | 1,299 |   | $ | (285 | ) | (22 | )% |
| Cost of services                                    |       | $                                                   | 3,496      |                                              | $          | 4,174 |   | $ | (678 | ) | (16 | )% | $ | 7,249 |   | $ | 7,834 |   | $ | (585 | ) | (7 | )% |
| Cost of consumer                                    |       | $                                                   | 1,871      |                                              | $          | 1,017 |   | $ | 854 |   | 84 | % | $ | 3,110 |   | $ | 1,876 |   | $ | 1,234 |   | 66 | % |

 

*Cost of license.*****Costof license fees consists primarily of third-party licenses and royalty feesunder license arrangements for technology embedded in or resold with ourproducts. Cost of license fees for the three and six months ended June 30,2008 and 2007 were less than 1% of total revenue.

 

*Cost of maintenance.** ***Cost ofmaintenance consists primarily of compensation costs, travel costs, and relatedoverhead expenses for customer support personnel.  Cost of maintenance decreased for the threeand six months ended June 30, 2008 and 2007 due primarily to decrease insalary and related employees costs as a result of a lower number of customersupport personnel.

 

*Cost of services.** ***Cost of servicesconsists primarily of costs of our enterprise professional servicesorganization such as compensation, travel, related overhead expenses forprofessional services personnel and costs of third parties for subcontracted 

 

22

----

Table of Contents

 

consulting services.  The decrease in cost of services for thesecond quarter of 2008 compared with the same period in 2007 was due primarilyto a transition from higher cost third-party contractors to lower cost employees,and lower travel expenses.

 

*Cost of consumer.** *** Cost of consumer revenue consists primarily ofsalary and related expenses for the consumer operations and home-basedtechnical support agents, technology and telecommunication expenses related tothe delivery of services and other employee-related expenses.  The increases for the three and six monthsended June 30, 2008 as compared to the same periods in 2007 were dueprimarily to salary and related and overhead expenses for our consumertechnology support agents.  We increasedthe number of consumer technology support agents in order to meet anticipatedvolume increases.  We expect cost ofconsumer revenue to increase each quarter during 2008 as we add agents tosupport higher anticipated call volumes

 

 ***Amortization of IntangibleAssets***

*** ***
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands, except percentages** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$   Change** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$    Change** | ** ** | **%   Change** | ** ** |
|                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of intangible assets                   |       | $                                                   | 58         |                                              | $          | 272 |   | $ | (214 | ) | (79 | )% | $ | 88 |   | $ | 545 |   | $ | (457 | ) | (84 | )% |
|                                                     |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thedecrease in the amortization of intangible assets is due to a write-down of ourintangible assets during the fourth quarter of 2007, which reduced the carryingvalue of our intangible assets as of December 31, 2007.  Amortization expense beginning in 2008 wasbased on the reduced carrying value of the intangible assets and thereforedecreased in the three and six months ended June 2008 compared with thesame periods in 2007.

 

***OPERATING EXPENSES***

*** ***
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands, except percentages** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$    Change** | ** ** | **%   Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$    Change** | ** ** | **%   Change** | ** ** |
|                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                            |       | $                                                   | 2,184      |                                              | $          | 2,434 |   | $ | (250 | ) | (10 | )% | $ | 4,420 |   | $ | 4,704 |   | $ | (284 | ) | (6 | )% |
| Sales and marketing                                 |       | $                                                   | 5,710      |                                              | $          | 8,623 |   | $ | (2,913 | ) | (34 | )% | $ | 12,096 |   | $ | 16,029 |   | $ | (3,933 | ) | (25 | )% |
| General and administrative                          |       | $                                                   | 2,725      |                                              | $          | 2,519 |   | $ | 206 |   | 8 | % | $ | 5,081 |   | $ | 5,061 |   | $ | 20 |   | 0 | % |

 

*Researchand development.* Research and development costs are expensedas incurred. Research and development expense consists primarily ofcompensation costs, third-party consulting expenses and related overhead costsfor research and development personnel. The decrease for the three and six months ended June 30, 2008 ascompared to the same periods in 2007 was mainly due to lower salary and relatedexpenses due to fewer research and development personnel.

 

*Salesand marketing.* Sales and marketing expense consists primarilyof compensation costs, including salaries, sales commissions and relatedoverhead costs for sales, business development and marketing personnel;expenses for lead generation activities; and promotional expenses, includingpublic relations, advertising and marketing events, in both the enterprise andconsumer businesses.  The decrease insales and marketing expense was due primarily to lower salaries and relatedemployee costs and lower commissions associated with a reduction of personnelin the fourth quarter of 2007.  We planto continue to invest in our consumer business during the second half of 2008.

 

*General and administrative.*General and administrative expense consists primarily of compensation costs andrelated overhead costs for administrative personnel and professional fees forlegal, accounting and other professional services.  The increase in general and administrativeexpense for the second quarter of 2008, compared to the same quarter of 2007was primarily due to increases in contractor expenses and recruiting expensesassociated with scaling our general and administrative functions to support ourcurrent business.  General andadministrative expense remained consistent for the six month period ended June 30,2008 as compared to the same period in 2007.

 

23

----

Tableof Contents

 

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

*** ***
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands, except percentages** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income and other, net                      |       | $                                                   | 721        |                                              | $          | 1,531 |   | $ | (810 | ) | (53 | )% | $ | 2,170 |   | $ | 3,384 |   | $ | (1,214 | ) | (36 | )% |
|                                                     |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thedecrease in interest income and other was primarily due to lower average investmentbalances and lower interest income on our marketable securities as we shiftedmore of our investments into relatively safer but lower yielding money marketinstruments in order to reduce our credit risk.

 

***PROVISIONFOR INCOME TAXES***

*** ***
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In thousands, except percentages** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for income taxes                          |       | $                                                   | (84        | )                                                 | $          | (131 | ) | $ | 47 |   | 36 | % | $ | (192 | ) | $ | (346 | ) | $ | 154 |   | 45 | % |
|                                                     |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The provisions for incometaxes are primarily comprised of estimates of current taxes due in foreignjurisdictions and foreign withholding taxes.

 

The decrease in theprovision for income taxes from the three and six months ended June 30,2008 was due primarily to a reduction in projected foreign pretax income aswell as reduced tax rates in foreign jurisdictions, mainly from Belgium,Canada, Germany and UK.  In addition,there was a reduction in withholding tax paid, mainly from India.

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

Total cash, cash equivalents and marketable securities in the aggregatedecreased $12.0 million to $100.9 million at June 30, 2008 from$112.9 million at December 31, 2007.

 

***Operating Activities***

 

Net cash used in operating activities was $6.6 millionand $7.0 million for the six months ended June 30, 2008 and 2007,respectively.  Net cash used in operatingactivities for the six months ended June 30, 2008 was primarily due to thenet loss of $8.0 million and a reduction in deferred revenue of $1.6 milliondriven by lower deferred maintenance revenue, partially offset by non-cashitems of $2.7 million.  Such itemsprimarily include depreciation, amortization of premiums and discounts onmarketable securities, stock-based compensation expense, and amortization ofintangible assets.

 

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.

 

Deferred revenue decreased $1.6 million from $10.5million at December 31, 2007 to $8.9 million at June 30, 2008.  Deferred revenue at June 30, 2007decreased $5.3 million to $8.3 million from $13.6 million at December 31,2006.  The primary component of deferredrevenue was deferred maintenance revenue. Deferred maintenance is recognized ratably 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 fourth quarter 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 the quarters that follow December 31,the amortization of deferred maintenance will generally result in a decrease inour overall deferred revenue balance.

 

24

----

Table of Contents

 

***Investing Activities***

 

Net cash provided byinvesting activities was $35.1 million and $7.1 million for the six monthsended June 30, 2008 and 2007, respectively. Net cash provided by investingactivities for the six months ended June 30, 2008 was primarily due tosales and maturities of $77.8 million in marketable securities offset by thepurchases of $38.3 million in marketable securities, $2.8 million for theacquisition of YTO, expenditures of $322,000 for property and equipment and$1.4 million for purchased technology. Net cash provided by investingactivities for the six months ended June 30, 2007 was primarily due tosales and maturities of $71.9 million in marketable securities offset by thepurchase of $62.7 million in marketable securities and expenditures of $2.1million for property and equipment, primarily related to furniture andleasehold improvements for our new headquarter office.

 

***Financing Activities***

*** ***

Net cash generated byfinancing activities was $195,000 for the six months ended June 30, 2008and $3.6 million for the six months ended June 30, 2007. Net cash providedby financing activities for the six months ended June 30, 2008 wasattributable to net proceeds from the purchase of 64,181 common shares underthe employee stock purchase plan.  Netcash provided by financing activities for the six months ended June 30,2007 was attributable to net proceeds from the purchase of 47,818 shares ofcommon stock under the employee stock purchase plan and the exercise of1,063,277 stock options.

 

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

 

At June 30, 2008, wehad stockholders’ equity of $113.9 million and working capital of $75.3million. Included as a reduction to working capital is deferred revenue of $8.3million, which will not require cash to settle, but will be recognized asrevenue in the future. We believe that our existing cash balances will besufficient to meet our working capital requirements, as well as our plannedcapital expenditures for at least the next 12 months.

 

As noted above, we plan to make substantial investments in our businessduring 2008, primarily related to the consumer business segment. We believethese investments and others are essential to creating sustainable growth inour business in the future. Because these investments will likely precede anyassociated revenues, we expect our working capital to decrease in the nearterm. Additionally, we may choose to acquire other businesses or complimentarytechnologies to enhance our product capabilities and such acquisitions wouldlikely require the use of cash.

 

At June 30, 2008 and December 31, 2007 we had investments inAAA-rated auction-rate debt securities with various state student loanauthorities of $23.3 million and $38.9 million, respectively. At thetime of our initial investment and through the date of this Report, all of thesecurities we have invested in are rated AAA, the highest rating issued by arating agency, and the student loans made by these authorities aresubstantially guaranteed by the federal government through the Federal FamilyEducation Loan Program (FFELP). Auction-rate securities are long-term floatingrate bonds tied to short-term interest rates. After the initial issuance of thesecurities, the interest rate on the securities is reset periodically, atintervals established at the time of issuance (e.g., every seven,twenty-eight, thirty-five days, or every six months; etc.), based on marketdemand. Auction-rate securities are bought and sold in the marketplace througha competitive bidding process often referred to as a “Dutch auction.” If thereis insufficient interest in the securities at the time of an auction, theauction may not be completed. Following such a failed auction, we cannot accessour funds that are invested in the corresponding auction-rate securities untila future auction of these investments is successful, new buyers expressinterest in purchasing these securities in between reset dates, issuersestablish a different form of financing to replace these securities, or finalpayments become due according to contractual maturities. Given the currentnegative liquidity conditions in the global credit markets, in the months from February throughJuly 2008 the auctions failed for all of the of auction-rate securities weheld as of June 30, 2008, and as a result our ability to liquidate ourinvestment and fully recover the carrying value of our investment in the nearterm may be limited or not exist.

 

The fair value of our auction rate securities at June 30, 2008reflects an unrealized loss of $1.5 million. Fair value for such securities was based on a discounted cash flowvaluation that takes into account a number of factors including estimatedduration, credit quality, and the percentage of FFELP guarantee. We madeassumptions about future cash flows based on contractual interest rate formulasand used estimates of market data, including yields of trading securities thatwe believe to be similar or comparable. Presently we have determined the decline in value to be temporarybecause i) we have the intent and ability to hold these securities in the nearterm in order to recoup their par values, ii) through the date of this Reportall of the securities have maintained their AAA credit ratings, iii) loans madeby the issuers are backed by the federal government, and iv) we have noted nodeterioration in the credit quality of the issuers.

 

However if circumstances change, we may be required to record another-than-temporary impairment charge on these investments. We may similarlybe required to record other-than-temporary impairment charges if the ratings onany of these securities are reduced or if any of the issuers default on theirobligations. In addition to impairment charges, any of these events could causeus to lose part 

 

25

----

Table of Contents

 

or all of our investment in these securities. Any of these events couldmaterially affect our results of operations and our financial condition. Wecurrently believe these securities are not significantly impaired for thereasons described above; however, it could take until the final maturity of theunderlying notes (up to 30 years) to realize our investments’ recordedvalue. Based on our cash position and potential other sources of cash, we donot anticipate the potential lack of liquidity on these investments will have amaterial impact on our ability to conduct business.

 

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

 

***Acquisition***

*** ***

On May 2, 2008, we acquired all of thestock of YourTechOnline.com (YTO).  Inconnection with the Acquisition, we used approximately $2.8 million in cash,including cash consideration of $2.7 million and direct transaction costs of$0.1 million.  Accordingly, theoperations of YTO have been included in our accompanying condensed consolidatedstatements of operations beginning from May 2, 2008.   YTO’s service delivery methodology involves consumertechnical support agents who view and control a computer screen remotely.  We acquired YTO to bolster our remoteconsumer service delivery capabilities utilizing home-based technical supportagents.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

** **

The primary objective of our investment activities is to preserveprincipal while at the same time maximizing the income we receive from ourinvestments without significantly increasing risk. To achieve this objective,we invest our excess cash in a variety of securities, including government debtsecurities, municipal debt securities with an auction reset feature (“auction-ratesecurities”), corporate notes and bonds, commercial paper and money marketfunds meeting certain criteria. These securities are classified asavailable-for-sale and consequently are recorded on the balance sheet at fairvalue with unrealized gains or losses reported as a separate component ofaccumulated other comprehensive income (loss). Our holdings of the securitiesof any one issuer, except government agencies, do not exceed 10% of theportfolio. We do not utilize derivative financial instruments to manage ourinterest rate risks.

 

As of June 30, 2008,we held $59.3 million in marketable securities (excluding cash and cashequivalents), which consisted primarily of government debt securities,auction-rate securities, corporate notes and bonds, and commercial paper. Theweighted average interest rate of our portfolio was approximately 1.84% at June 30,2008. A decline in interest rates over time would reduce our interest incomefrom our marketable securities. A decrease in interest rates of 100 basispoints would cause a corresponding decrease in our annual interest income ofapproximately $593,000.

 

At June 30, 2008 and December 31, 2007 we had investments inAAA-rated auction-rate debt securities with various state student loanauthorities of $23.3 million and $38.9 million, respectively. At thetime of our initial investment and through the date of this Report, all of thesecurities we have invested in are rated AAA, the highest rating issued by arating agency, and the student loans made by these authorities aresubstantially guaranteed by the federal government through the Federal FamilyEducation Loan Program (FFELP). Auction-rate securities are long-term floatingrate bonds tied to short-term interest rates. After the initial issuance of thesecurities, the interest rate on the securities is reset periodically, atintervals established at the time of issuance (e.g., every seven,twenty-eight, thirty-five days, or every six months; etc.), based on marketdemand. Auction-rate securities are bought and sold in the marketplace througha competitive bidding process often referred to as a “Dutch auction.” If thereis insufficient interest in the securities at the time of an auction, theauction may not be completed. Following such a failed auction, we would not beable to access our funds that are invested in the corresponding auction-ratesecurities until a future auction of these investments is successful, newbuyers express interest in purchasing these securities in between reset dates,issuers establish a different form of financing to replace these securities, orfinal payments become due according to contractual maturities. Given thecurrent negative liquidity conditions in the global credit markets, in themonths from February through July 2008 auctions failed for all of theof auction-rate securities we held as of June 30, 2008, and as a resultour ability to liquidate our investment and fully recover the carrying value ofour investment in the near term may be limited or not exist.

 

The fair value of our auction rate securities at June 30, 2008reflects an unrealized loss of $1.5 million. Fair value for such securities was based on a discounted cash flowvaluation that takes into account a number of factors including estimatedduration, credit quality, and the percentage of FFELP guarantee. We madeassumptions about future cash flows based on contractual interest rate formulasand used estimates of market data, including yields of trading securities thatwe believe to be similar or comparable. Presently we have determined the decline in value to be temporarybecause i) we have the intent and ability to hold these securities in the nearterm in order to recoup their par values, ii) through the date of this Reportall of the securities have maintained their AAA credit ratings, iii) 

 

26

----

Table of Contents

 

loans made by the issuers are backed by the federal government, and iv)we have noted no deterioration in the credit quality of the issuers.

 

However if circumstances change, we may be required to record another-than-temporary impairment charge on these investments. We may similarlybe required to record other-than-temporary impairment charges if the ratings onany of these securities are reduced or if any of the issuers default on theirobligations. In addition to impairment charges, any of these events could causeus to lose part or all of our investment in these securities. Any of theseevents could materially affect our results of operations and our financialcondition. We currently believe these securities are not significantly impairedfor the reasons described above; however, it could take until the finalmaturity of the underlying notes (up to 30 years) to realize ourinvestments’ recorded value. Based on our cash position and potential othersources of cash, we do not anticipate the potential lack of liquidity on theseinvestments will have a material impact on our ability to conduct business.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

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

 

**Changesin Internal Control over Financial Reporting**

 

There were no changes inour internal control over financial reporting during the first half of 2008that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

27

----

Table of Contents

** **

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

**SeeNote 6 Contingencies to the condensed consolidated financial statements in Part I,Item 1 of this Quarterly Report on Form 10-Q for a description of legalproceedings.**

 

**ITEM 1A. RISK FACTORS**

 

***This report containsforward-looking statements regarding our business and expected futureperformance as well as assumptions underlying or relating to such statements ofexpectation, all of which are “forward looking statements” within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Wordssuch as “expects,” “anticipates,” “intends,” “plans,” “believes,” “forecasts,” “estimates,”“seeks,” “may result in,” “focused on,” “continue to,” and similar expressionsoften identify forward-looking statements.***

*** ***

***We are subject to many risks anduncertainties that may materially affect our business and future performanceand cause those forward-looking statements to be inaccurate.  There risks and uncertainties include thefollowing:***

*** ***

**Wehave not been profitable and may not achieve profitability in future periods.**

** **

We were not profitable in 2007 or in the first half of 2008. Inaddition, we intend to make significant investments in support of our businessin 2008 and we expect to continue to sustain losses in 2008 and possiblysubsequent periods. If we fail to achieve revenue growth as a result of theseadditional investments or if such revenue growth does not result in ourachieving profitability, the market price of our common stock will likelydecline. A sustained period of losses would also result in an increased usageof cash to fund our operating activities and a corresponding reduction in ourcash balance.

 

**Our quarterly results have in the past, andmay in the future, fluctuate significantly.**

 

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

 

Several factors that have contributed or may in the future contributeto fluctuations in our operating results include:

 

·                  Demand for our software and services;

 

·                  Our collaboration with premiumtechnology support partners including retailers, and the timing and success ofthese partners’ introduction and sale of our products;

 

·                  Size and timing of customer ordersand our ability to recognize revenue in a given quarter;

 

·                  Our ability to increase theefficiency and capacity of our customer support agents;

 

·                  Our reliance on a small number ofcustomers for a substantial portion of our revenue;

 

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

 

·                  The mix of products and services thatgenerate up-front revenue as opposed to revenue over a period of time;

 

·                  Our ability to attract and retaincustomers;

 

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

 

·                  The rate of expansion of our consumerofferings and our investments therein;

 

·                  The amount and timing of operatingcosts and capital expenditures in our business;

 

·                  Seasonal trends resulting fromcorporate spending patterns;

 

28

----

Table of Contents

 

·                  The exercise of judgment by ourmanagement in making accounting decisions in accordance with our accountingpolicies;

 

·                  Potential losses on marketablesecurities, foreign exchange exposures on contracts, or other losses fromfinancial instruments we may hold that are exposed to market risk; and

 

·                  General economic conditions and theireffect on our operations.

 

Over the last three years, we have licensed our enterprise softwarepredominately on a perpetual basis in which we recognize the license revenue upfront, assuming all criteria for revenue recognition have been met. As a resultof our current perpetual licensing model for the enterprise business, we havebecome dependent on a few customer contracts with up-front license revenue fora substantial portion of our license 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 certain previous quarters,we failed to obtain or close expected perpetual licenses with up-front revenueresulting in a revenue shortfall. If in future quarters we fail to obtain orclose orders expected to be completed by the end of a quarter, particularly ifthese orders are for perpetual licenses with up-front revenue, our quarterlyresults would suffer and the market price of our common stock would likelydecline. While revenues in our consumer business are generally recognized overthe course of a quarter based on the number of services delivered, this revenueis not significant enough at this time to offset a shortfall in enterpriseperpetual license revenue.

 

**Our inability to meet future financial performance targets that weannounce or that are published by research analysts could cause the marketprice of our common stock to decline.**

 

From time to time, we provide guidance related to our future financialperformance. In addition, financial analysts publish their own expectations ofour future financial performance. Because our quarterly revenue and our operatingresults fluctuate, future financial performance is difficult to predict. In thepast, we have failed to meet our guidance. As it did following the announcementof our third quarter results, future downward adjustments of our guidance orthe failure to meet our guidance or the expectations of research analysts wouldlikely cause the market price of our common stock to decline.

 

Management’s ability to accurately predict performance is affected inlarge part by a significant portion of our total revenue being dependent uponthe closing of new large customer orders in our enterprise business. Inaddition, our guidance is based in part upon the expectation of sales ofservices offerings in our consumer business, with which we have a limitedhistory. A significant portion of our consumer business is dependent uponrelationships with consumer support partners, including retailers. We sell tonumerous consumers through each of these partners, and these partner programsoften require a significant initial investment of resources, strategic focus,and time by us and by our consumer partners before generating revenue.  Accordingly, the timing of the rollout of ourservices by each partner, and therefore the timing of our revenue associatedwith that partner, are difficult to predict. Delay in the launch or rollout of our support services program with evenone of these partners could cause us to miss revenue targets, particularly inthe near term since we depend on relationships with only a few consumerpartners for most of our consumer revenue. In the event we fail to achieveprojected revenue levels in any quarter, we will be unable to reduce ourexpenses for that quarter in a corresponding fashion, and our results will notmeet our guidance or the expectations of securities analysts or investors,which would likely cause the market price of our common stock to decline.

 

The trading market for our common stock relies in part on the researchand reports that industry or financial analysts publish about us or our business.We do not control these analysts. If one or more of the analysts who currentlycover us downgrade our stock, our stock price would likely decline rapidly.Furthermore, if one or more of these analysts cease coverage of us, we couldlose visibility in the market, which in turn could cause the market price ofour stock to decline.

 

Finally, the market prices of software companies have been extremelyvolatile. Stock prices of many software companies have often fluctuated in amanner unrelated or disproportionate to the operating performance of suchcompanies. In the past, following periods of market volatility, stockholdershave often instituted securities class action litigation relating to the stocktrading and price volatility of the software company in question, includingSupportSoft. Any securities litigation we are involved in could result in ourincurring substantial defense costs and diverting resources and the attentionof management from our business.

 

**Our consumer business will increase our operatingexpenses without any assurance of yielding increased revenue.**

 

We are executing a plan to extend our business by providing premiumtechnology services to consumers through our alliance partners and directly. Wemay not be able to offer these new services successfully. We have limitedexperience in reaching or serving consumers or in managing consumer technicalsupport agents. All of our agents are now home-based, which will require a highdegree of coordination and quality control of employees working from diverseand remote locations. As a result, we expect to continue to use 

 

29

----

Table of Contents

 

significant cash and incur increased operating expenses to support thisinitiative, including costs associated with recruiting, training and managingour consumer technical support agents, costs to acquire technology andinfrastructure to support our consumer business, promotional costs associatedwith reaching consumers, and costs of obtaining personnel with the necessaryconsumer expertise. These investments, which typically are made in advance ofrevenue, may not yield increased revenue to offset these expenses. Furthermore,this new business initiative, if not favorably received by consumers, coulddamage the reputation of our corporate enterprise business as well as strainour management, financial and operational resources necessary to maintain ourcorporate business. The lack of market acceptance of our consumer efforts orour inability to generate satisfactory revenue from our expanded consumerservices would have a material adverse effect on our business, prospects,financial condition and operating results.

 

**If we fail to hire, train and manage ourhome-based consumer technical support agents efficiently and in a manner thatprovides an adequate level of support for our customers, our reputation andrevenues could be harmed.**

 

Our plans for our consumer business depend inpart on our ability to increase the number of our home-based consumer technicalsupport agents in order to satisfy the demand for our consumer services. We maybe unable to attract, train and manage adequate numbers of competent home-basedsupport agents, which is essential in creating a favorable interactive customerexperience, including reducing customer wait times, reducing the time it takesour agents to deliver our services, and meeting customer demand for ourservices at peak time.  We have limitedexperience in hiring, training, and managing these agents.  Although our service delivery and communicationsinfrastructure enables us to monitor and manage these agents remotely, becausethey are home-based and geographically dispersed, we are less able to directlysupervise their work.  We have attemptedto augment our service delivery operations through our recent acquisition ofYTO, a company that specializes in delivering technical support throughwork-at-home agents. Any problems we encounter with integrating theYourTechOnline.com agents, in propagating the YourTechOnline.com servicedelivery model across existing agents or in retaining agents following theacquisition could seriously jeopardize our service delivery operations and ourconsumer revenue. If we are unable to continually provide adequate staffing forour service delivery operations, our revenue and reputation could be seriouslyharmed.

 

**Disruptions in our information technology andservice delivery infrastructure and operations, including interruptions ordelays in service from****our third-party Web hosting provider, couldimpair the delivery of our services and harm our business.**

 

Our operations, and in particular our hostedproducts and consumer services, depend on the continuing operation of ourinformation technology and communication systems and those of our externalservice providers. Any damage to or failure of those systems could result ininterruptions in our service, which could reduce our revenues and profits, anddamage our reputation. We serve certain of our customers through a third-partyhosting facility located in the United States. We do not control the operationof this facility.  It may experienceunplanned outages and other technical difficulties, and it is vulnerable todamage or interruption from fires, floods, telecommunications and connectivityfailures, power failures, and similar events. This facility is also subject torisks from vandalism, break-ins, intrusion, and other malicious attacks.Despite precautions taken, such as disaster recovery planning and back-upprocedures,  a natural disaster, act ofterrorism or other unanticipated problem could cause a loss of information anddata and lengthy interruptions in the availability of our services and hostedsoftware offerings because we do not operate or maintain fully redundantsystems.  We rely on hostedsystems maintained by third-party providers to deliver technical supportservices to consumers, including taking customer orders, handlingtelecommunications for customer calls, and tracking sales and service delivery.Any interruption or failure of our internal or external systems could preventus or our service providers from accepting orders and delivering services, orcause company and customer data to be unintentionally disclosed.  Our continuing efforts to upgrade andenhance the security and reliability of our information technology andcommunications infrastructure could be very costly, and we may have to expendsignificant resources to remedy problems such as a security breach or serviceinterruption. Interruptions in our services resulting from labor disputes,telephone or Internet failures, power or service outages, natural disasters orother events, or a security breach could reduce our revenue, increase ourcosts, cause customers and partners to fail to renew or to terminate their useof our offerings, and harm our reputation and our ability to attract newcustomers.

 

**Because a small number of enterprisecustomers have historically accounted for and may in future periods account forsubstantial portions of our revenue, our revenue could decline because ofdelays or losses of specific customer orders.**

 

A small number of enterprise customers have historically accounted for,and may in future periods account for, substantial portions of our revenue. Forthe six months ended June 30, 2008, one customer accounted for 16% of ourtotal revenue.  Similarly, for the yearended December 31, 2007, one customer accounted for 18% of total revenue.In the remainder of 2008 we are likely to continue to derive a significantportion of our enterprise revenue from large transactions with a limited numberof customers. Therefore, our revenue could decline because of the loss or delayof a single enterprise customer order. Additionally, we may not obtain newcustomers.  The failure to obtainsignificant new customers, particularly customers that purchase perpetual licenseswith up-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.

 

30

----

Table of Contents

** **

**Our sales cycle in our enterprise business islengthy and if revenue forecasted for a particular quarter is not realized inthat quarter, significant expenses incurred may not be offset by correspondingrevenue.**

 

Our sales cycle for our software in our enterprise business typicallyranges from three to nine months or more and may vary substantially fromcustomer to customer. The purchase of our products and services for corporatecustomers generally involves a significant commitment of capital and otherresources by a customer. This commitment often requires significant technicalreview, assessment of competitive products and approval at a number ofmanagement levels within a customer’s organization. While our enterprisecustomers are evaluating our products and services, we may incur substantialsales and marketing expenses and spend significant management effort tocomplete these sales. Any delay in completing sales in a particular quarter orthe failure to complete a sale after expending resources during the sales cyclecould cause our operating results to suffer.

 

**We may be unable to achieve or sustainnon-GAAP profitability in our enterprise segment if we do not manage ourprofessional services organization or other costs in our enterprise businesseffectively.**

 

One of our stated goals for fiscal 2008 is to deliver non-GAAPprofitability in our enterprise segment in a consistently profitable manner ona non-GAAP basis. Our ability to do so is heavily dependent on our ability tomanage professional service costs. Clients that license our enterprise softwaresolutions usually engage our professional services organization to assist withinstallation and implementation of our software and related consultingservices. Revenue from professional services typically represents a substantialportion of our total revenue and total costs. The cost of delivering our professional services is expensive and, whilethe financial results of this business have improved significantly in priorperiods, our professional services business has not been profitable.  We have generally billed our customers forprofessional services on a time and material basis, using an agreed upon dailyrate. However, customers have increasingly requested various contractstructures, including milestone-based contracts and contracts for a fixed totalfee. If unanticipated factors in a project are encountered, we may be subject tomonetary and other significant penalties, and the operating results from ourprofessional services business would suffer. Furthermore, an estimated loss ona fixed-price contract is generally required to be recorded in the period inwhich a loss becomes evident. Recording a loss on a services contract couldhave a material adverse effect on our operating results for the period in whichthe loss is recorded. In addition to managing the costs in our professionalservices organization, if we are unable to manage costs in our enterprisecustomer support and maintenance, research and development or sales andmarketing organizations, our enterprise segment may not be able to sustainnon-GAAP profitability.

 

**If our existing customers do not renewmaintenance contracts or purchase additional products and services, ouroperating results could suffer.**

 

Historically, we have derived, and expect to continue to derive, asignificant portion of our total revenue from existing customers who purchaseadditional products and services and renew maintenance contracts. Our customersmay not renew maintenance contracts, they may renew on less favorable terms, orthey may not purchase additional products and services. In addition, as weintroduce new products, our current customers may not require or desire thefunctionality of our new products and may not ultimately purchase theseproducts. A decrease in the acquisition of new license customers or renewals inone period may lead to a decrease in the amount of maintenance revenue insubsequent periods.   If our customers donot renew maintenance contracts or do not purchase additional products andservices, our revenue would decline and our segment operating results wouldsuffer.

 

**If our revenue from our internationaloperations does not exceed the expense of establishing and maintaininginternational operations, our business could suffer.**

 

Revenue from customers outside the North America accounted forapproximately 24% and 23% of our total revenue for the three and six monthsended June 30, 2008 compared with 19% and 20% for the three and six monthperiods ended June 30, 2007.  Wehave limited experience in international operations and may not be able tocompete effectively in international markets or effectively manage ouroperations in various countries. We only recently began operating our consumerbusiness and have limited experience offering premium technology services toconsumers outside North America.  If wedo not generate enough revenue from international operations to offset theexpense of these operations, our operating results could suffer. Risks we facein conducting business internationally include:

 

·                  Expenses related to and difficultiesin staffing and managing international operations, including managing ageographically dispersed workforce in compliance with diverse local laws andcustoms;

 

·                  Changes in currency exchange ratesand controls;

 

·                  Localization of our products,services, and end user terms;

 

31

----

Table of Contents

 

·                  Compliance with a variety of complexlaws and treaties, including unexpected changes in (or new) legislative orregulatory requirements;

 

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

 

·                  Smaller customers with less abilityto pay United States rates for software and services;

 

·                  Difficulty in reaching geographicallydispersed customers;

 

·                  Loss of proprietary information dueto piracy, misappropriation or weaker laws regarding intellectual propertyprotection;

 

·                  Longer sales cycles;

 

·                  Seasonal trends unique tointernational markets;

 

·                  Dependence on local vendors,consultants and business partners;

 

·                  Potential adverse tax consequences;

 

·                  Licenses, tariffs and other tradebarriers;

 

·                  Difficulties in maintaining effectiveinternal control over financial reporting and compliance as a result of ageographically-dispersed workforce and customers;

 

·                  Longer collection cycles for accountsreceivable; and

 

·                  The effects of external events suchas terrorist acts and any related conflicts or similar events worldwide.

 

Each of these risks couldmaterially increase our costs, and unless the revenue from our internationaloperations offsets the costs of establishing and operating our business outsidethe U.S., our operating results could be significantly harmed.

 

**Our failure to establish and expandsuccessful third-party alliances would harm our operating results.**

 

Our consumer offerings require us to establish and maintainrelationships with third parties, including retailers such as Office Depot, whowill direct consumers to us and provide technology support services toconsumers based on our technology. Failure to establish or maintain third-partyrelationships in our consumer business, particularly with partners who sell ourservices, on acceptable terms or at all, could materially and adversely affectthe success of our business. We sell to numerous consumers through each ofthese partners, and therefore a delay in the launch or rollout of our consumerservices program with even one of these partners could cause us to miss revenuetargets. The process of establishing a relationship with a consumer partner canbe complex and time consuming, and we must pass multiple levels of review andtest marketing in order to be selected. If we are unable to establish asufficient number of new consumer partners on a timely basis our sales willsuffer. There is also the risk that, once established, our programs with thesepartners may take longer than we expect to produce revenue or may not producerevenue at all. One or more of our key partners may also discontinue sellingour services, offer them only on a limited basis or devote insufficient timeand attention to promoting them to their customers. If any of these keypartners merge with a competitor, particularly one that offers a servicecompetitive with ours, all of these risks could be exacerbated. Each of theserisks could reduce our sales and significantly harm our operating results.

 

While our consumer call center outsourcing relationships outside North Americagive us flexibility and greater capacity, those relationships also pose risks.We may be less able to manage the quality of services provided by outsourcedcall centers as directly as we would our own employees, and outsourced servicesmay be more costly.  We also face therisk that disruptions or delays in those third parties’ communications andinformation technology infrastructure could cause lengthy interruptions in theavailability of our services.  Any ofthese risks could harm our operating results.

 

We have alliances with third parties that are important to ourenterprise offerings. Our existing relationships include those with hardwarevendors and managed service providers who provide outsourced support tocorporate customers. If these relationships fail, we may need to devotesubstantially more resources to the sales and marketing of our products andservices than we would otherwise, 

 

32

----

Table of Contents

 

and our efforts may not be as effective. In addition, we may establishrelationships with third-party resellers and other sales partners as we expandinternationally. Our failure to maintain existing relationships, or toestablish new relationships with key third parties, could significantly harmour ability to sell our products and services. In addition, our competitors mayhave strong alliances with other companies, including hardware providers, whichcould impact our ability to obtain greater market share, participate in dealswhere hardware and software are sold together, or require us to reduce theprice of products and services, which could harm our business, prospects,financial condition and operating results.

 

**Our investments in marketable securities aresubject to market risks which may cause losses and affect the liquidity ofthese investments.**

 

At June 30, 2008, we had $41.6 million in cash and cashequivalents and $59.3 million in marketable securities. We have historicallyinvested these amounts in government debt securities, auction-rate securities,corporate notes and bonds, commercial paper and money market funds meetingcertain criteria. Certain of these investments are subject to general credit,liquidity, market and interest rate risks, which may be exacerbated by the U.S.housing recession that has affected various sectors of the financial marketsand caused credit and liquidity issues. As of June 30, 2008, we determinedthat any declines in the fair value of our investments were temporary. Theremay be further declines in the value of these investments, which we maydetermine to be other-than-temporary. If we determine that a decline isother-than-temporary we will be required to record an expense for thewrite-down in our statement of operations in the period in which we make thedetermination.  These market risksassociated with our investment portfolio may have a negative adverse effect onour results of operations, liquidity and financial condition.

 

At June 30, 2008 and December 31, 2007 we had investments inAAA-rated auction-rate debt securities with various state student loanauthorities of $23.3 million and $38.9 million, respectively. At thetime of our initial investment and through the date of this Report, all of thesecurities we have invested in are rated AAA, the highest rating issued by arating agency, and the student loans made by these authorities aresubstantially guaranteed by the federal government through the Federal FamilyEducation Loan Program (FFELP). Auction-rate securities are long-term floatingrate bonds tied to short-term interest rates. After the initial issuance of thesecurities, the interest rate on the securities is reset periodically, atintervals established at the time of issuance (e.g., every seven,twenty-eight, thirty-five days, or every six months; etc.), based on marketdemand. Auction-rate securities are bought and sold in the marketplace througha competitive bidding process often referred to as a “Dutch auction.” If thereis insufficient interest in the securities at the time of an auction, theauction may not be completed. Following such a failed auction, we cannot accessour funds that are invested in the corresponding auction-rate securities untila future auction of these investments is successful, new buyers expressinterest in purchasing these securities in between reset dates, issuersestablish a different form of financing to replace these securities, or finalpayments become due according to contractual maturities. Given the currentnegative liquidity conditions in the global credit markets, in the months from February throughJuly 2008 the auctions failed for all of the of auction-rate securities weheld as of June 30, 2008, and as a result our ability to liquidate ourinvestment and fully recover the carrying value of our investment in the nearterm may be limited or not exist.

 

The fair value of our auction rate securities at June 30, 2008reflects an unrealized loss of $1.5 million. Fair value for such securities was based on a discounted cash flowvaluation that takes into account a number of factors including estimatedduration, credit quality, and the percentage of FFELP guarantee. We madeassumptions about future cash flows based on contractual interest rate formulasand used estimates of market data, including yields of trading securities thatwe believe to be similar or comparable. At June 30, 2008, all auction ratesecurities were classified as Level 3 assets in accordance with the SFAS No. 157hierarchy.  Presently we have determinedthe decline in value to be temporary because i) we have the intent and abilityto hold these securities in the near term in order to recoup their par values,ii) through the date of this Report all of the securities have maintained theirAAA credit ratings, iii) loans made by the issuers are backed by the federalgovernment, and iv) we have noted no deterioration in the credit quality of theissuers.

 

However if circumstances change, we may be required to record another-than-temporary impairment charge on these investments. We may similarlybe required to record other-than-temporary impairment charges if the ratings onany of these securities are reduced or if any of the issuers default on theirobligations. In addition to impairment charges, any of these events could causeus to lose part or all of our investment in these securities. Any of theseevents could materially affect our results of operations and our financialcondition. We currently believe these securities are not significantly impairedfor the reasons described above; however, it could take until the finalmaturity of the underlying notes (up to 30 years) to realize ourinvestments’ recorded value.  Based onour cash position and potential other sources of cash, we do not anticipate thepotential lack of liquidity on these investments will have a material impact onour ability to conduct business.

 

**We have recorded long-lived assets, and ourresults of operations would be adversely affected if their value becomesimpaired.**

 

Goodwill and identifiable intangible assets were recorded in part dueto our acquisition of substantially all of the assets of Core Networks Incorporatedin September 2004 and our acquisition of YourTechOnline.com in May 2008.We also have certain intangible 

 

33

----

Table of Contents

 

assets with an indefinite life. We assess the impairment of goodwilland indefinite life intangible assets annually or more often if events orchanges in circumstances indicate that the carrying value may not berecoverable. We assess the impairment of acquired product rights and otherfinite life intangible assets whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. As a result of ourdiscontinuance of active marketing and selling of one of the products weacquired from Core Networks, and a reevaluation of the fair value of the CoreNetwork’s technology intangible assets, we recognized a non-cash write-down ofapproximately $1.7 million during the fourth quarter of 2007. Animpairment loss was recognized because the sum of the discounted future netcash flows expected to result from the use of the assets and their eventualdisposition was less than the carrying amounts. Such impairment loss wasmeasured as the difference between the carrying amounts of the assets and theirfair value. Furthermore, we evaluate cash flows at the lowest operating level.If the number of reporting segments increases in the future, as it has in 2008,this may make impairment more probable than it would be with fewer reportingsegments. As was the case in the fourth quarter of 2007, future write-downs ofgoodwill or net long-lived and intangible assets, would cause our operatingresults to suffer.

 

**We may engage in investments, dispositions,acquisitions or other strategic transactions that could divert managementattention and prove difficult to integrate with our business.**

 

We may engage in acquisitions or divestitures of certain assets, businesses,products or technologies, or in other strategic initiatives. For example, werecently completed the acquisition of YourTechOnline.com. Acquisitions,divestitures and other strategic transactions are inherently risky. Certaintransactions may be subject to closing conditions, which may not be satisfied,and transactions may not be completed, even after public announcement.Acquisitions may require further use of our cash resources, the issuance ofequity or debt securities, or the incurrence of other forms of debt, any ofwhich could harm our financial condition, results of operations, or ourinterest expense and leverage. If we issue equity securities, currentstockholders’ percentage ownership and earnings per share may be diluted. Theprocess of integrating employees, businesses, technologies, services orproducts may result in unforeseen operating difficulties and expenditures.Dispositions could significantly alter the revenue, costs and nature of ourbusiness.  Acquisitions and divestiturescould involve a number of other potential risks to our business, including thefollowing, any of which could harm our business results:

 

·                  Unanticipated costs and liabilitiesand unforeseen accounting charges or fluctuations;

 

·                  Delays and difficulties in deliveryof products and services;

 

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

 

·                  Loss of key employees;

 

·                  Diversion of management’s attention fromother business concerns and disruption of our ongoing business;

 

·                  Difficulty in maintaining controlsand procedures;

 

·                  Uncertainty on the part of ourexisting customers about our ability to operate after a transaction;

 

·                  Loss of customers;

 

·                  Loss of alliance partners;

 

·                  Failure to realize the potentialfinancial or strategic benefits of the acquisition or divestiture; and

 

·                  Failure to successfully furtherdevelop the combined or remaining technology, resulting in the impairment ofamounts recorded as goodwill or other intangible assets.

 

**We must compete successfully in the marketsin which we operate or our business will suffer.**

 

We compete in markets that are highly competitive, subject to rapidchange and significantly affected by new product introductions and other marketactivities of industry participants. We compete with a number of companies inthe market for automated delivery of support and service automation and othervendors who may offer products or services with features that compete withspecific elements of our software products and services. In addition, ourcustomers and potential customers have developed or may develop similarsoftware systems internally.

 

34

----

Tableof Contents

 

The markets for our products are still rapidly evolving, and we may notbe able to compete successfully against current and potential competitors. Ourability to expand our business will depend on our ability to maintain ourtechnological advantage, introduce timely enhanced products to meet growingsupport needs, deliver on-going value to our customers and scale our business.Our potential competitors may have longer operating histories, significantlygreater financial, technical and other resources, stronger strategic alliancesor greater name recognition than we have. Competition in our markets couldreduce our market share or require us to reduce the price of products andservices, which could harm our business, financial condition and operatingresults.

 

As we further expand our business into the market for premium consumertechnology support, we expect new competitors, including electronics retailersthat offer premium technology support services, companies that offer onlinetechnology support, extended warranty and service plan providers, PCmanufacturers, anti-virus providers and local computer repair shops. Certain ofthese competitors have longer operating histories, significantly greaterfinancial, technical and other resources, stronger strategic alliances orgreater name recognition than we have.

 

**The integration of new management and theloss of key personnel may affect our ability to achieve our business goals.**

 

Our success depends on the skills, experience and performance of oursenior management, engineering, sales, marketing and other key personnel. Manymembers of senior management have been appointed within the last 2 years.Our success will depend to a significant extent on the ability of theseexecutives to function effectively in their new roles and to work togethersuccessfully. If these executives do not function and work togethersuccessfully, or if we lose the services of one or more of our executives orkey employees, our business could be harmed. In addition, we have reduced ourworkforce. Reductions in our workforce could make it difficult to motivate andretain remaining employees or attract needed new employees, and could alsoaffect our ability to deliver products and services in a timely fashion.

 

**Our reorganization efforts may strain ourmanagement and our administrative, technical, operational and financialinfrastructure.**

 

In January 2008, we reorganized thecompany and began operating our business in two segments, consumer andenterprise.  We also appointed seniormanagement personnel to lead each of the business segments. We made this changein an effort to ensure that each part of our business is focused, accountable andtransparent at the segment level. In connection with this change we madeseveral management and organizational changes. We are also focused onincreasing our operating margins and improving our operating efficiencies,particularly in our enterprise business. To this end, we have undertakenreductions in our workforce in the fourth quarter of 2007. All of these changesplace a strain on our management, and our administrative, technical,operational and financial infrastructure. In addition, reductions in ourworkforce could make it difficult to motivate and retain remaining employees orattract needed new employees, and could also affect our ability to deliverproducts and services in a timely fashion.

 

**Our exposure to the credit risks of ourcustomers and resellers could adversely affect our operating results andfinancial condition.**

 

To sell to some of our customers, we may be required to take risks ofuncollectible accounts. We may be exposed to similar risks relating to thirdparty resellers and other sales partners, as we intend to increasingly utilizesuch parties as we expand into new geographic regions. Additionally, as we haveexpanded our business internationally, we have experienced longer payment termsand collection cycles from customers outside the United States. While wemonitor these situations carefully and attempt to take appropriate measures toprotect ourselves by recognizing revenue upon collection of accounts fromcustomers we deem to have credit risks and upon sell-through by resellers, itis possible that we may have to write down or write off doubtful accounts. Suchwrite-downs or write-offs would negatively affect our operating results for theperiod in which they occur, and, if large, could have a material adverse effecton our operating results and financial condition.

 

**Our future product and service offerings maynot achieve market acceptance.**

 

If we fail to develop enhanced versions of our software in a timelymanner or to provide products and services that achieve rapid and broad marketacceptance, we may not maintain or expand our market share. We may fail toidentify new product and service opportunities for our current market or newmarkets that we enter in the future. In addition, our existing products maybecome obsolete if we fail to introduce new products or product enhancementsthat meet new customer demands, support new standards or integrate with new orupgraded versions of packaged applications or operating systems. We havelimited control over factors that affect market acceptance of our product andservices, including:

 

·                  The willingness of companies totransition to automated solutions; and

 

·                  Customer preferences for competitors’solutions or other technologies.

 

35

----

Table of Contents

 

**Our products depend on, and work with,products containing complex software; if our products fail to perform properlydue to errors in the software, we may need to devote resources to correct theerrors or compensate for losses from these errors and our reputation could beharmed.**

 

Our products depend on complex software, both internally developed andlicensed from third parties. Also, our customers may use our products withother companies’ products, which may also contain complex software. Complexsoftware often contains errors and may not perform properly. These errors couldresult in:

 

·                  Delays in product shipments;

 

·                  Unexpected expenses and diversion ofresources to identify the source of errors or to correct errors, whether or notthe error is later determined to be related to our software;

 

·                  Damage to our reputation;

 

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

 

·                  Loss of customers;

 

·                  Failure to achieve market acceptance;

 

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

 

·                  Increased service and warranty costs;and

 

·                  Increased insurance costs.

 

In our consumer offerings, we generally use our own products todiagnose and resolve consumer technology problems. If our products fail toperform well in this environment, our consumer offerings would suffer and maynot be successful.

 

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

 

We currently serve a customer base with a wide variety of constantlychanging hardware, software and networking platforms. If we fail to releaseversions of our software that are compatible with operating systems, softwareapplications or hardware devices used by our customers, our business andoperating results would suffer. Our future success also depends on thecontinuing ability of our products to inter-operate with multiple platforms andpackaged applications used by our customer base and on our management ofsoftware being developed by third parties for our customers or for use with ourproducts.

 

**We rely on third-party technologies and ourinability to use or integrate third-party technologies could delay product orservice development.**

 

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

 

·                  Risks of product malfunction afternew technology is integrated;

 

·                  Risks that we may be unable to obtainor continue to obtain support, maintenance and updates from the technologysupplier;

 

·                  The diversion of resources from thedevelopment of our own proprietary technology; and

 

·                  Our inability to generate revenuefrom new technology sufficient to offset associated acquisition and maintenancecosts.

 

36

----

Table of Contents

 

**Our systems collect, access, use, and storepersonal customer information and enable customer transactions, which posessecurity risks, requires us to invest significant resources to prevent orcorrect problems caused by security breaches, and may harm our business.**

 

A fundamental requirement for online communications, transactions andsupport is the secure collection, storage and transmission of confidentialinformation. Our systems collect and store confidential and/or personalinformation of our customers, including credit card information, and ouremployees and contractors may access and use that information in the course ofproviding services for our customers. In addition, we collect and retainpersonal information of our employees in the ordinary course of our business.We and our third-party contractors use commercially available technologies tosecure this information. Despite these measures, third parties may attempt tobreach the security of our data or that of our customers. In addition, errorsin the storage or transmission of data could breach the security of thatinformation. We may be liable to our customers for any breach in security andany breach could subject us to governmental or administrative proceedings ormonetary penalties, and harm our business and reputation. Also, computers arevulnerable to computer viruses, physical or electronic break-ins and similardisruptions, which could lead to interruptions, delays or loss of data. We maybe required to expend significant capital and other resources to comply withmandatory privacy and security standards required by law, industry standard, orcontract, and to further protect against security breaches or to correctproblems caused by any breach.

 

**Privacy concerns and laws or other domesticor foreign regulations may require us to incur significant costs and may reducethe effectiveness of our solutions, and our failure to comply with those lawsor regulations may harm our business and cause us to lose customers.**

 

Our software contains features that allow our customers and ourconsumer technology support technicians to access, control, monitor or collectinformation from computers running the software. Federal, state and foreigngovernment bodies and agencies, however, have adopted or are consideringadopting laws and regulations restricting or otherwise regulating thecollection, use and disclosure of personal information obtained from consumersand individuals. Those regulations could be costly to implement, could reducethe efficiency of our operations, and could require us to modify our products,systems or services. 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 harm our reputationand inhibit adoption of our solutions. In addition, we may face claims aboutinvasion of privacy or inappropriate disclosure, use, storage, or loss of thisinformation. Any imposition of liability could harm our reputation, cause us tolose customers and cause our operating results to suffer.

 

**We areexposed to risks associated with credit card and payment fraud and with creditcard processing.**

 

Certain of our customers usecredit cards to pay for our consumer technology support offerings. We maysuffer losses as a result of orders placed with fraudulent credit cards orother payment data. Our failure to detect or control payment fraud could havean adverse effect on our results of operations. We are subject to payment cardassociation operating standards and requirements, as in effect from time totime. Compliance with those standards requires us to invest in network andsystems infrastructure and processes. Failure to comply with these rules or requirements may subject usto fines, potential contractual liabilities, and other costs, resulting in harmto our business and results of operations.

 

**If we are unable to maintain effectivedisclosure controls and procedures, including our internal control overfinancial reporting, our ability to report our financial results on a timelyand accurate basis may be adversely affected.**

 

We have evaluated our “disclosure controls and procedures” as such termis defined in Rule 13a-15(e) under the Exchange Act as of June 30,2008, as well as our internal control over financial reporting as required by Section 404of the Sarbanes-Oxley Act of 2002 as of December 31, 2007. Effectivecontrols are necessary for us to provide reliable financial reports andeffectively prevent fraud. If we cannot provide reliable financial reports orprevent fraud, our operating results would be harmed.  In addition, if we cannot establish effectiveinternal control over financial reporting and disclosure controls andprocedures, investors may lose confidence in our reported financialinformation, which could cause the market price of our common stock to decline.

 

**Failure to resolve litigation or claimsasserted against us may lead to continued costs and expenses and divertmanagement’s attention from our business, which could cause our revenue and ourstock price to decline.**

 

A securities class action lawsuit was filed against us and a largenumber of other issuers and underwriters in November 2001. Should thislawsuit linger for a longer period of time, whether ultimately resolved in ourfavor or not, or further lawsuits be filed against us,

 

37

----

Table of Contents

 

coverage limits of our insurance or our ability to pay such amounts maynot be adequate to cover the fees and expenses and any ultimate resolutionassociated with such litigation. The size of these payments, if any,individually or in the aggregate, could seriously impair our cash reserves andfinancial condition. The continued defense of this lawsuit and futurelitigation that may be filed against us also could result in diversion of ourmanagement’s time and attention away from business operations, which couldcause our financial results to decline. A failure to resolve definitivelycurrent or future material litigation in which we are involved or in which wemay become involved in the future, regardless of the merits of the respectivecases, could also cast doubt as to our prospects in the eyes of customers,potential customers and investors, which could cause our revenue and stockprice to decline.

 

**We may not obtain sufficient patentprotection, which could harm our competitive position, increase our expensesand harm our business.**

 

Our success and ability to compete depend to a significant degree uponthe protection of our software and other proprietary technology. It is possiblethat:

 

·                  We may not be issued patents we mayseek to protect our technology;

 

·                  Competitors may independently developsimilar technologies or design around any of our patents;

 

·                  Patents issued to us may not be broadenough to protect our proprietary rights; and

 

·                  Our issued patents could besuccessfully challenged.

 

**We rely upon patents, trademarks, copyrightsand trade secrets 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 a combination of laws, such as those applicable to patents,copyrights, trademarks and trade secrets, and contractual restrictions, such asconfidentiality agreements and licenses, to establish and protect ourproprietary rights. Our ability to compete and grow our business could sufferif these rights are not adequately protected. Our proprietary rights may not beadequately protected because:

 

·                  Laws and contractual restrictions maynot adequately prevent infringement of our proprietary rights andmisappropriation of our technologies or deter others from developing similartechnologies; and

 

·                  Policing infringement of our patents,trademarks and copyrights, misappropriation of our trade secrets, andunauthorized use of our products is difficult, expensive and time-consuming,and we may be unable to determine the existence or extent of this infringementor unauthorized use.

 

Intellectual property litigation is expensive and time-consuming andcould divert management’s attention from our business.  The outcome of any litigation is uncertainand could significantly impact our financial results.  Also, the laws of other countries in which wemarket our products may offer little or no protection of our proprietarytechnologies. Reverse engineering, unauthorized copying or othermisappropriation of our proprietary technologies could enable third parties tobenefit from our technologies without paying us for them, which would harm ourcompetitive position and market share.

 

**We may face intellectual property infringement claims that could becostly to defend and result in our loss of significant rights.**

 

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

 

38

----

Table of Contents

 

**We may experience a decrease in market demand due to uncertaineconomic conditions in the United States and in international markets, whichhas been further exacerbated by the concerns of terrorism, war and social andpolitical instability.**

 

The United States and international economies have in the pastexperienced periods of slow economic growth and this could occur again. Inaddition, terrorist attacks in the United States and turmoil in certainoverseas regions have increased uncertainty and may exacerbate a decline in economicconditions, both domestically and internationally. If the economy declines as aresult of economic, political and social turmoil, or if there are furtherterrorist attacks in the United States or elsewhere, we may experiencedecreases in the demand for our products and services, which would harm ouroperating results.

 

**Compliance with public company rules andregulations is costly****and requires significant resources.**

 

The Sarbanes-Oxley Act of 2002, as well as rules subsequentlyimplemented by the Securities and Exchange Commission and the Nasdaq GlobalSelect Market, has required changes in corporate governance practices of publiccompanies. These rules and regulations require significant internal andexternal resources to comply with and are costly. Additionally, such compliancehas made some activities more time-consuming. These rules and regulationsmake it more difficult and more expensive for us to obtain director and officerliability insurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. Compliance with these rules andregulations can be particularly burdensome for smaller public companies likeours.

 

39

----

Tableof Contents

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

At our annual meeting ofstockholders on May 21, 2008, the following two proposals were voted onand approved as follows:

 

1. Our stockholderselected six directors to serve until our next annual meeting of stockholders,or until their successors are duly elected and qualified.

 
| ** **              | ** ** | **Total Votes** | ** ** |
|-------------------------|------------|----------------------|------------|
| **Name**                | ** ** | **For**              | ** ** | **Withheld** | ** ** |
|                    |       |                 |       |   |   |
| Kevin C. Eichler        |       | 37,944,290           |       | 1,741,764 |   |
|                    |       |                 |       |   |   |
| Shawn Farshchi          |       | 37,944,090           |       | 1,741,964 |   |
|                    |       |                 |       |   |   |
| J. Martin O’Malley |       | 37,944,190           |       | 1,741,864 |   |
|                    |       |                 |       |   |   |
| Joshua Pickus           |       | 37,944,257           |       | 1,739,797 |   |
|                    |       |                 |       |   |   |
| Jim Stephens            |       | 37,944,290           |       | 1,741,764 |   |
|                    |       |                 |       |   |   |
| James Thanos            |       | 37,944,290           |       | 1,741,764 |   |

 

2. Our stockholdersratified the appointment of Ernst & Young LLP as our independentregistered public accounting firm.

 
| ** ** | ** ** | **Total Votes** | ** ** |
|------------|------------|----------------------|------------|
| ** ** | ** ** | ** **           | ** ** |
| For        |       | 38,229,041           |       |
|       |       |                 |       |
| Against    |       | 1,454,523            |       |
|       |       |                 |       |
| Abstain    |       | 2,490                |       |

 

40

----

Table of Contents

 
| **ITEM 6.** | **EXHIBITS** |
|------------------|--------------|
|             |         |   |
|             |         | Exhibits. |
|             |         |   |   |
|             |         | 10.1 | Amended and  Restated Executive Incentive Compensation Plan (Incorporated by reference to  the registrant’s Current Report on Form 8-K filed with the Commission on  August 1, 2008 |
|             |         |   |   |
|             |         | 31.1 | Chief Executive  Officer Section 302 Certification |
|             |         |   |   |
|             |         | 31.2 | Chief Financial  Officer Section 302 Certification |
|             |         |   |   |
|             |         | 32.1 | Statement of the  Chief Executive Officer under 18 U.S.C. § 1350(1) |
|             |         |   |   |
|             |         | 32.2 | Statement of the  Chief Financial Officer under 18 U.S.C. § 1350(1) |

 

----

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

 

41

----

Tableof Contents

 

**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 7, 2008 |       | SUPPORTSOFT,  INC. |
|---------------------|------------|--------------------|
|                |       |               |
|                |       | By:                | /s/ SHELLY SCHAFFER |
|                | ** ** | ** **         | **Shelly Schaffer** |
|                | ** ** | ** **         | **Chief Financial Officer and** |
|                | ** ** | ** **         | **Executive Vice President of Finance and** |
|                | ** ** | ** **         | **Administration** |
|                | ** ** | ** **         | **(Principal Financial Officer, Chief Accounting** |
|                | ** ** | ** **         | **Officer and Duly Authorized Signatory)** |

 

42

----

Table of Contents

 

**EXHIBITINDEX TO SUPPORTSOFT, INC.**

**QUARTERLY REPORT ON FORM 10-Q**

**FOR THE QUARTER ENDED JUNE 30,2008**

 
| 10.1   |   | Amended and  Restated Executive Incentive Compensation Plan (Incorporated by reference to  the registrant’s Current |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   | Report on  Form 8-K filed with the Commission on August 1, 2008                                                |
| 31.1   |   | Chief Executive  Officer Section 302 Certification                                                                  |
| 31.2   |   | Chief Financial  Officer Section 302 Certification                                                                  |
| 32.1   |   | Statement of the  Chief Executive Officer under 18 U.S.C. § 1350(1)                                                 |
| 32.2   |   | Statement of the  Chief Financial Officer under 18 U.S.C. § 1350(1)                                                 |

 

----

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

 

43

----