**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**(Mark One)**

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the Fiscal Year Ended December 31, 2006**

**OR**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the Transition Period from                       to                         **

**Commission File No. 000-30901**

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**SUPPORTSOFT, INC.**

**(ExactName of Registrant as Specified in Its Charter)**

| **Delaware**                                                     |   | **94-3282005**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
| **1900 Seaport Boulevard, 3rd Floor, Redwood City,  CA**         |   | **94063**                             |
| (Address of  Registrant’s Principal Executive Offices)      |   | (Zip Code)                            |

 

Registrant’s telephone number including area code: **(650) 556-9440**

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**Securitiesregistered pursuant to Section 12(b) of the Act:**

|                                | **Title of each class** | ** **                  | ** ** | ** ** | **Name of each exchange on which registered** | ** ** |
|--------------------------------|-------------------------|-----------------------------|------------|------------|-----------------------------------------------|------------|
| Common Stock, $.0001 par value |                    | The NASDAQ Stock Market LLC |

 

Securitiesregistered pursuant to Section 12(g) of the Act:**NONE**

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Indicateby check mark if registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

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

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

Theaggregate market value of the registrant’s common stock, $.0001 par value, heldby non-affiliates of the registrant was approximately $144,440,648 based uponthe closing price of $3.94 per share as of June 30, 2006. Shares of commonstock held by each executive officer, director, and stockholders known by theregistrant to own 10% or more of the outstanding stock based onSchedule 13G filings and other information known to us, have been excludedsince such persons may be deemed affiliates. This determination ofaffiliate status is not necessarily a conclusive determination for otherpurposes.

Asof March 8, 2007, there were 45,486,342 shares of the registrant’s commonstock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Part III,Items 10 (as to directors, section 16(a) beneficial ownership andaudit committee and audit committee financial expert), 11, 12 (as to beneficialownership), 13 and 14 incorporate by reference information from the registrant’sdefinitive proxy statement (the “Proxy Statement”) to be mailed to stockholdersin connection with the solicitations of proxies for its 2007 annual meeting ofstockholders scheduled to be held on May 23, 2007. Except as expresslyincorporated by reference, the registrant’s Proxy Statement shall not be deemedto be part of this report.

 

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**SUPPORTSOFT, INC.**

**FORM 10-K**

**FORFISCAL YEAR ENDED DECEMBER 31, 2006**

**TABLEOF CONTENTS**

|                    | ** **                                                                                                              | **Page** |
|--------------------|-------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**    | 4                                                                                                                       |
| ITEM 1.       | Business                                                                                                                | 4        |
| ITEM 1A.      | Risk Factors                                                                                                            | 14       |
| ITEM 1B.      | Unresolved Staff  Comments                                                                                              | 24       |
| ITEM 2.       | Properties                                                                                                              | 24       |
| ITEM 3.       | Legal Proceedings                                                                                                       | 24       |
| ITEM 4.       | Submission of  Matters to a Vote of Security Holders                                                                    | 25       |
| **PART II**   | 26                                                                                                                      |
| ITEM 5.       | Market for the  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 26       |
| ITEM 6.       | Selected  Consolidated Financial Data                                                                                   | 28       |
| ITEM 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 29       |
| ITEM 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 40       |
| ITEM 8.       | Financial  Statements and Supplementary Data                                                                            | 41       |
|               | Report of  Independent Registered Public Accounting Firm                                                                | 42       |
| ITEM 9.       | Changes In and  Disagreements With Accountants on Accounting and Financial Disclosures                                  | 71       |
| ITEM 9A.      | Controls and  Procedures                                                                                                | 71       |
|               | Report of  Management on Internal Control over Financial Reporting                                                      | 71       |
|               | Report of  Independent Registered Public Accounting Firm on Internal Control over  Financial Reporting                  | 73       |
| ITEM 9B.      | Other Information                                                                                                       | 75       |
| **PART III**  | 75                                                                                                                      |
| ITEM 10.      | Directors and  Executive Officers of the Registrant                                                                     | 75       |
| ITEM 11.      | Executive  Compensation                                                                                                 | 75       |
| ITEM 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | 76       |
| ITEM 13.      | Certain  Relationships and Related Transactions                                                                         | 77       |
| ITEM 14.      | Principal  Accountant Fees and Services                                                                                 | 77       |
| **PART IV**   | 78                                                                                                                      |
| ITEM 15.      | Exhibits and  Financial Statement Schedules                                                                             | 78       |
| Signatures         | 81                                                                                                                      |
| Exhibit Index |                                                                                                                    |

 

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**FORWARD-LOOKINGSTATEMENTS**

The statements contained in this Report on Form 10-Kthat are not purely historical are forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, including statementsregarding our expectations, beliefs, intentions or strategies regarding thefuture. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,”“seeks,” “estimates” and similar expressions identify such forward-lookingstatements. These forward-looking statements are subject to risks anduncertainties that could cause actual results to differ materially from thoseindicated in the forward-looking statements. These are statements that relateto future periods and include, but are not limited to, statements relating toanticipated features and benefits of our current products and services andthose that we intend to offer in the future; anticipated customer demand forfeatures and benefits provided by our products and services; the impact on ourbusiness from our new consumer technology support initiative; our industry and trends,such as the changing competitive landscape as a result of growing complexity intechnologies; our strategy and components of our strategy, including ourintentions to expand internationally and the potential international marketopportunities for our solutions, to strengthen our indirect channels, our planto establish new strategic relationships and our product development andservice offering strategies and future plans; our anticipated competition withrespect to our consumer offering; the development of our professional servicesorganization; our strategic alliances and distribution relationships; expectedresults, cash flows and expenses, including those related to sales andmarketing, research and development and general and administrative; expectedrevenue and sources of revenue; anticipated mix of revenue; expected impact, ifany, of legal proceedings; expected seasonality in our business; the adequacyof liquidity and capital resources; the growth in business and operations; andthe effect of recent accounting pronouncements. Factors that could cause actualresults to differ materially from those predicted, include but are not limitedto, our dependence on a small number of relatively large orders, our ability toattract and retain customers for existing and new services and to achieveadoption and acceptance of our products and services, the ability of ourproducts and service offerings to achieve market penetration, our ability touse or integrate third-party technologies and to expand infrastructure to meetthe demand for our services, our ability to expand internationally, our abilityto attract and retain key employees, our ability to control expenses, thesuccess of our strategic relationships, lack of renewals or payments forlicense agreements, the impact of international conflict and continued economicdownturns in either domestic or foreign markets and the resulting changes inthe amount of technology spending by customers and prospects, the effects ofongoing litigation, the rapid pace of technological change and the strength ofcompetitive offerings and our ability to address our material weakness in ourinternal control over financial reporting. Additional factors, which couldcause actual results to differ materially, include those set forth in thefollowing discussion, and, in particular, the risks discussed in Item 1A, “RiskFactors.” These forward-looking statements speak only as of the date hereof.Unless required by law, we undertake no obligation to update publicly anyforward-looking statements.

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**PART I**

**ITEM 1.**                BUSINESS.

**Overview**

SupportSoft is a leading provider of software andservices that automate the resolution of technology problems.  Oursolutions reduce technology support costs, improve customer satisfaction andenable new revenue streams for organizations worldwide.  We recently expanded our offerings and nowprovide technology support directly to consumers. 

Our corporate customers are digital service providers(telecommunications and cable companies) and corporate IT departments.  Digital service providers use our products toautomate the installation, activation and verification of broadband services,to reduce the cost and improve the quality of support for customers, to enablethe remote management of devices located at customer premises, and to providevalue-added services to consumers.  CorporateIT departments and managed service providers (IT outsourcing firms) use oursoftware to improve the cost-effectiveness and efficiency of their support throughan integrated portfolio of proactive service, self service and assisted servicecapabilities.

In the second half of2006, we announced a new offering to address the consumer technology supportmarket.  This offering is an extension ofour traditional business and relies upon our products, technology and expertisein technology problem resolution. The new offering provides computer problemresolution for consumers over the phone and the Internet.  We offer our consumer technology supportservices through www.support.com and through consumer-facing companies such asPC manufacturers and digital service providers. 

**Industry Background**

Technology has become a fundamental part of everydaylife.  Devices such as personal computers,cellular phones, personal digital assistants, digital cameras and home networks,and digital services such as high speed data, video over DSL (IPTV) and voiceover Internet Protocol (VoIP), are increasingly common.  As technology has become more prevalent,technology problems, whether with individual devices or systems incorporatingmultiple devices, have proliferated.  Asa result, we believe the need for efficient and effective technology support,both inside and outside the workplace, has become pressing.

For digital service providers, the availability ofhigh speed data, IPTV and VoIP services, often refered to as “triple play,” haschanged the competitive dynamics worldwide. We expect these dynamics to changefurther and grow in complexity as wireless services grow in popularity and“triple play” evolves to “multi-play.” The change in the competitive landscapethat triple play has wrought causes digital service providers to offer abroader and more complex range of services. With these services has come a growing number of technology problems forsubscribers, which we believe digital service providers must addressefficiently and effectively to succeed in the marketplace. 

Inside the enterprise, corporate IT departments aretasked with managing, supporting and servicing an expanding array oftechnologies used by employees. This challenge, combined with a redefinition ofthe workplace to include the office, the home and any point between, has madekeeping the enterprise secure from virus attacks, maintaining business criticalapplications and responding to end-user requests for assistance an increasinglydifficult and expensive task. 

The traditional approachthat organizations have embraced to address these challenges relies upon callcenters and help desks resolving problems in a largely manual fashion.  This approach to meeting technology supportneeds has been ineffective for many organizations, given its costly andtime-intensive nature. This approach has also been inadequate for consumers,who require an increasing amount of assistance to manage the technology thatnow pervades their lives.

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**Strategy**

SupportSoft is a leadingprovider of support automation solutions, supplying companies worldwide withtechnology designed to facilitate the identification, diagnosis and resolutionof technology-related problems. Our strategy includes the following initiatives:

*Enter ConsumerTechnology Support Market*

Based on our own researchand the success of early market entrants, we believe there is an opportunity toprovide fee-based technology support to consumers.  We also believe that our products, technologyand expertise in technology problem resolution equip us well to participate inthis market.  To capitalize on thisopportunity, we are offering technology support to consumers over the phone andthe Internet through www.support.com.  Weare also offering hosted consumer technology solutions through consumer-facingpartners such as PC manufacturers and digital service providers.

*Expand Internationally*

Historically, our presencein international markets has been limited, and we believe we have anopportunity to expand our international business. We believe the digitalservice provider market overseas represents a growth opportunity for us. Wealso believe that there are opportunities for our solutions in corporate ITdepartments overseas that we have not previously addressed. We have recently expandedour sales efforts internationally to address these internationalopportunities.  

*Strengthen IndirectChannels to Market*

We are seeking tostrengthen and expand relationships with key hardware and services companieswho provide complementary products or services.  We have established relationships with anumber of consumer premises equipment (CPE) manufacturers and managed serviceproviders.  We plan to enhance existingrelationships and establish new ones to broaden our routes to market.

*Deliver PackagedSolutions*

We have traditionallyoffered comprehensive solutions with extensive feature sets. While thesesolutions can provide substantial value, they also require significant implementationeffort.  In our next generation ofproducts and services, we are tailoring our offerings to include targetedsolutions with shorter implementation cycles designed to achieve acceleratedreturn on investment.  We believe thesepackaged offerings can expand the addressable market for our solutions.

*Enhance DigitalService Provider Solutions*

The triple play of highspeed data, IPTV and VoIP services is changing the dynamics of the digitalservice market worldwide. We believe that service providers are looking forproven solutions which can enable them to deal with the complexities ofinstallation, activation, verification, management and on-going support ofthese services for new and existing subscribers.  We are enhancing our existing products anddeveloping new products to help digital service providers address a number ofthe key challenges related to supporting these new services.  These products are being designed to providevalue to both established firms and emerging providers.

*Enhance Solutionsfor Corporate IT Departments*

As corporate ITdepartments and managed service providers face the ever increasing complexitiesof supporting remote and mobile workforces with a wide variety of newtechnologies, our proven solutions can both reduce cost and improveeffectiveness through automation.  We areenhancing our existing 

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productsand developing new products to help corporate IT departments and managedservice providers address a number of key challenges.  These products are being designed to providevalue to enterprises of many sizes. 

**Products**

For corporate customers, we offer a number of productssuitable for both digital service providers and corportate IT departments.  We also offer certain products targeted specificallyat digital service providers.  We haverecently introduced solutions for the consumer technology support market thatbuild upon our established offerings.

Products that are suitable for both for digital serviceproviders and corporate IT departments include the following: 

*DesktopAgent.*   TheSupportSoft agent is a desktop application that identifies, diagnoses andcorrects potential problems prior to their impact on a user.  Additionally, should a user need to call a customerservice representative or help desk analyst, the SupportSoft agent providespermission-based tools for speeding the call by transferring system levelinformation to the analyst electronically.  For digital service providers, this product candiagnose and resolve connectivity and email issues as well as other commonproblems that are faced by high-speed data subscribers.  For corporate IT departments, this productalso supports the proactive resolution of problems through the delivery ofupdates to desktops.  

*Self-ServiceSuite.*   Self-ServiceSuite is an integrated set of products designed to bring togetherknowledge automation capabilities and service request management capabilitiesto support users who require web-based answers to technology-related issues, automatedfixes to technology problems, or the ability to submit requests for assistance.The Self-Service Suite includes the SupportSoft Knowledge Center andRequestAssist products described below.

*IntelligentAssistance Suite.*   Intelligent Assistance Suite is an integrated set ofproducts designed to provide technical support representatives with a full setof capabilities to speed problem resolution. The Intelligent Assistance Suite includes the SupportSoft KnowledgeCenter, AnalystAssist, RemoteAssist, LiveAssist and EmailAssist productsdescribed below.

*KnowledgeCenter.*   KnowledgeCenter is designed to automate the real-time creation, publication andmanagement of knowledge-based content for technology problem resolution. Userscan benefit from Knowledge Center solutions through their ability to quicklyaccess personalized, self-service answers online, including access to automated“one-click-fixes.” Analysts can benefit from Knowledge Center software throughfunctionality that allows them to access a rich repository of knowledge tospeed problem resolution, including both structured and unstructured data.Knowledge Center content can be used to create consumer or employee facingself-service portals and/or call center or help desk facing content.

*RequestAssist.*   RequestAssist is designed tomanage the complete lifecycle of request management, from identificationthrough resolution. A Web-based interface lets end-users quickly create, submitor check the status of typical requests and incidents. RequestAssist incorporatescapabilities to support rules-based escalation of requests to the appropriate analysts,as well as automated notification of such escalations via the Web or email.

*RemoteAssist.*   RemoteAssist is designed toenable analysts to remotely take control of a user’s computer to speed problemresolution. By remotely managing and controlling a device, an analyst candiagnose problems in detail.  This mayinclude identifying whether the problem is at the application, hardware or operatingsystem level, determining the necessary action to resolve the problem and implementingthe resolution. No complex software installation or re-boot of the computer istypically required and a complete audit trail of all remote sessions isretained to expedite resolution should the problem be encountered again.

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*LiveAssist.*   LiveAssist is designed toprovide call center organizations and IT help desks with a full set of chatcapabilities.  LiveAssist allows usersand analysts to communicate directly with each other with a scalable, real-timechat solution enhanced by Web-push capabilities and access to relevant content.

*EmailAssist.*   EmailAssist is designed toprovide call center organizations and IT help desks with tools to supporte-mail support channels. EmailAssist enables analysts to create e-mailresponses faster by leveraging standard content and also manages the escalationof e-mail created tickets.

*AnalystAssist.*   AnalystAssist is designed toprovide call center organizations and IT help desks with a comprehensive set ofdiagnostic and problem resolution tools to solve technical problems remotely,without requiring on-site support. AnalystAssist also provides analysts withfull visibility into the diagnostic tests performed, the tools used and thesolutions provided to resolve the problem. AnalystAssist can be used byanalysts during chat sessions using our LiveAssist product and during telephonesessions as well as in combination with our RemoteAssist product.

Products targeted specifically at digital serviceproviders include: 

*SmartAccess.*   SmartAccessis designed to automatically determine if a subscriber’s computing systemqualifies for a broadband connection and, if so, enable self-installation ofhigh-speed data service while providing a platform for the qualification,notification, installation, management and support of additional services.SmartAccess automates these front-end processes to enable auto-provisioning ofservices.

*ServiceGateway.*   ServiceGateway is designed toautomate CPE configuration activities, such as firmware upgrades.ServiceGateway also enables analysts to take remote control of CPE devices,such as routers or gateways, to diagnose and solve problems on a “one-to-one”basis.

*ServiceVerify.*   ServiceVerifyis designed to enable digital service providers to automatically verify thesuccessful installation, activation and ongoing operations of high-speed data,IPTV and VoIP services.  ServiceVerifyprovides tools and service information to the service technician and dispatcheras well as the analyst. ServiceVerify can help technicians determine that thework has been performed correctly and the customer has access to all theservices ordered before the technician leaves the job. ServiceVerify alsoprovides analyst tools designed to rapidly diagnose and resolve problems when acustomer calls with a service-related problem.

*ServiceAutomation Suite for Video.*   Developed in conjunction with Scientific-Atlanta (a Ciscocompany), Service Automation Suite for Video can improve the way broadbandcable service providers deliver high quality video services to their customersand enhance the consumer experience for digital cable delivery, while enablingcustomer-facing personnel such as installers, dispatchers and analysts to moreeffectively and efficiently uncover and resolve customer issues and problems.

Under the brand name of support.com, we currentlyoffer technology support services directly to consumers.  We offer these services through ouroutsourced North American Solution Center, currently staffed with 25 solutionsengineers.  These technical supportprofessionals provide services over the telephone and the Internet, using oursoftware solutions to identify, diagnose and resolve problems.  Key features of our consumer technologysupport services are the following: (1) our services are provided remotely, withtechnical experts available over the phone and the internet rather than throughin-home or in-store appointments; (2) our services leverage our proprietary technologywhich is protected by eight patents; and (3) our services leverage our extensiveknowledgebase of solving technology problems for digital service providers andcorporate IT departments. Serviceofferings on support.com include:

*Comprehensive ProblemResolution.*   Our Comprehensive Problem Resolution service isdesigned to assist consumers with a wide range of computer-relatedproblems.  Our solutions engineers useour technology to remotely identify, diagnose and resolve technical problemsand to answer questions that customers have about their computers and relateddevices.

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*System Tune-Up.*   Our System Tune-Up service is designed to enhance the performance ofcomputers.  Our agents use our technologyto remotely perform various tasks such as optimizing computer settings,removing unnecessary programs and content, and re-organizing and compactingcomputer hard disk contents.  Thisresults in faster computer processes including computer start-up and shut-down,loading of programs and internet browsing as well as increased disk space.  

*Virusand Spyware Removal.*   Our Virus and Spyware Removal service is designed to eradicate malicioussoftware that may impact computer performance and threaten the consumer’s data. Our agents use technology to remotelyscan, identify and remove viruses and spyware and offer suggestions forcontinued protection. 

*SecurityAudit.*   Our Security Audit service is designed toprotect a computer from hackers and malicious software. Our agents use our technology to remotely perform various tasks such asconfiguring Internet firewalls, closing security holes in the operating system,and verifying that antivirus and anti-spyware software is installed andcurrent.  

*WindowsVistaTM Upgrade Assessment.*   Our Windows Vista Upgrade Assessment service is designedto help determine if a computer can be upgraded to Microsoft Windows VistaTM aswell as to recommend the most appropriate version of the new operatingsystem.  In addition, our agents cananswer customer questions about Windows Vista. 

*Digital Camera Training and Setup.*   Our**DigitalCamera Training and Setup service is designed to help consumers connect, manageand share digital photos.  Our agentsassist consumers with installing and configuring digital camera, photomanagement and photo editing software. Our agents also train consumers how to transfer digital photos from the camerato the computer, share pictures over the Internet and obtain prints from onlinephoto processing services.  

*MP3Player Training and Setup.*   Our MP3 PlayerTraining and Setup service helps consumers learn how to transfer, download andorganize digital music and audio books. Our agents assist consumers withinstalling and configuring software to connect an MP3 player to a computer,download music from an Internet music site, copy music from a CD to a computer,and organize music.

In addition to providingservices through support.com, we also license technology solutions to partnersfor their use in providing services to consumers.  These consumer technology solutions aredelivered to partners on a hosted basis for use by the partner’s call centeragents.  System Tune-Up is currentlyavailable for license and the Virus and Spyware Removal service is expected tobe available for license in the second quarter of 2007.  

**Technology **

Our software provides self-healing capabilitiesdesigned to identify, diagnose and correct potential problems prior to theirimpact on the user.  If a user doesrequire assistance, our products are designed to provide an integrated approachto escalating the problem to either self-service web-based portals or to analystswho use our products to deliver the appropriate resolution to the problem.  Many of our products have been architected tofunction on a common software platform which is based on a set of patentedtechnologies.

Our technology is designedto enable our products to be extended and easily adapt to, and integrate with,varying software environments. Our solutions support a high degree ofscalability using industry standard web server infrastructure and datacenterpractices such as load balancing, clustering and data partitioning. Ourproducts are web-based and provide similar functionality on a variety of webservers, application servers, operating systems and databases. The productarchitecture has been used in implementations that scale to several millionendpoints. Common services such as user and group management, user-basedsecurity, user interface navigation, database access, extensible markuplanguage 

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handling,reporting and integration are shared by many of our products, allowing forfaster product development.

**Sales and Marketing**

We maintain a worldwide sales organization to reachdigital service providers and corporate IT departments. Our sales organizationis managed geographically in three regions: the Americas; Europe, the MiddleEast and Africa; and Asia/Pacific. Within regions, some sales representativessell specifically to digital service providers, some to corporate ITdepartments, and some to both.

The marketing organization works closely with thesales organization to create programs which build awareness of our solutions.The marketing organization uses a wide range of programs to build marketawareness, including relationships with industry analysts, direct mail andrelationship marketing programs, business and trade press tours, andparticipation in industry-specific trade shows. The marketing organization alsocreates collateral for the sales process.

For our consumerofferings, our customer acquisition program is currently focused on onlinemarketing, primarily search, banners and viral programs, and terrestrial radio,as well as public relations activities. We expect to expand our marketing activities as our consumer offeringevolves. We have a consumer business development organization that establishesand manages relationships with partners through whom we make our consumerofferings available.  

**Customers**

Representative digitalservice providers who have purchased our products and services include:Belgacom, BellSouth, Bharti, Casema, Carphone Warehouse (Talk Talk), Charter,Comcast, Cox, Essent Kabelcom, FastWeb, KPN, Ono, Portugal Telecom, TDC Kabel,TDC Solutions, TDC Switzerland, TeliaSonera, Time Warner Cable, UPC Broadband,Verizon, and other service providers worldwide. Representative companies thathave licensed SupportSoft software for corporate IT operations and customersupport requirements include: ADP, Bank of America, BT, Kimberly-Clark,Lockheed Martin, Marriott, Northrop Grumman, Sony Electronics, Symantec,Thomson Financial and Trend Micro. Representative managed service providersthat have purchased our products to provide outsourced services to enterprisesinclude: CGI, CSC, CompuCom, EDS and IBM. 

**Alliances**

We establish alliances with other companies to expandthe reach of our sales and marketing efforts. We incorporate products from other companies, such as search engines,where we believe they will enhance the functionality of our products.

We work closely with CPE manufacturers and maintain aninteroperability laboratory to test their hardware products against standardsdeveloped by the DSL Forum. Certain of these firms resell our products todigital service providers.

We have formed relationships with managed serviceproviders that represent a customer base as well as a delivery option for ourproducts. We have developed relationships with managed service providers,including CGI, CSC, CompuCom, EDS and IBM to address customer demand foroutsourced IT services. 

We have formed relationshipswith consumer facing companies in order to expand the reach of our consumerofferings.  We have relationships with alarge personal computer manufacturer and a European digital service provider inwhich such firms use our System Tune-Up solution to provide computerperformance enhancement services to consumers. We have also established referral and affiliate programs which providefees to third parties referring consumers to support.com.  

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**Global Services**

Our Global Servicesorganization provides best practice solutions tailored to support our customersin maximizing value from our products.  Our services capabilities are dividedinto five core areas with the goal of guiding the customer through a successfuldeployment:

·       *Project Planning and Management.* Builds comprehensiveproject plans in coordination with customers and partners with a goal ofensuring that budget, timeline and quality objectives are achieved.

·       *Design and Implementation.* Provides architecturalsolution design, product integration and deployment services.

·       *Education*.  Trains customers and alliance partners inthe design, implementation and support of our products.

·       *Customer Support*.  Responds to design, feature and deploymentquestions. We use our own software to provide an Internet support portal,titled ExpertExchange, in providing support to our customers. Under ourstandard maintenance contracts, our customers also receive generally availablepatches, enhancements and updates to the products they have purchased.

·       *Strategic Services.* Educates customers on “bestpractices” for supporting and servicing users and moving from traditionalsupport processes to more automated approaches.

**Research andDevelopment**

We devote a substantial portion of our resources todeveloping new and enhanced versions of our support automation software,conducting product testing and improving our core technologies. Fundamental toour research and development strategy are rapid product development cycles,continuous improvement and customer feedback. We have created customer advisorycouncils with representatives from our customers to formalize this input. We useour own products in providing support to both corporate customers andconsumers, thereby gaining real-time knowledge and experience with our ownproducts.

Research and developmentexpense was $9.2 million in 2006, $11.2 million in 2005, and $9.7 million in2004. 

**IntellectualProperty**

As of December 31, 2006, we had eight patents inthe United States. We also hold patents in China, Singapore and Israel and havea number of patent applications pending in other foreign jurisdictions. Wemay or may not seek additional patents in the future. We do not knowif our current patent applications or any future patent application will resultin a patent being issued with the scope of the claims we seek, if at all. Also,we do not know whether any patents we have or may receive will bechallenged or invalidated. It is difficult to monitor unauthorized use oftechnology, particularly in foreign countries where the laws may notprotect our proprietary rights as fully as in the United States, and ourcompetitors may develop technology that competes with ours butnevertheless does not infringe our intellectual property rights.

We maintain a number of trademarks and service marksassociated with our business.

We rely on a combinationof copyright, trade secret, trademark and contractual protection to establishand protect our proprietary rights that are not protected by patent. We alsoenter into confidentiality agreements with our employees and consultantsinvolved in product development. We routinely require our employees, customersand potential business partners to enter into confidentiality agreements beforewe will disclose any sensitive aspects of our business. Also, we requireemployees to agree to assign and 

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surrenderto us any proprietary information, inventions or other intellectual propertythey generate or come to possess while employed by us. These precautionsmay not prevent misappropriation or infringement of our intellectualproperty.

**Competition**

We compete in markets that are highly competitive,subject to rapid change and significantly affected by new product introductionsand other market activities of industry participants. Although we do notbelieve there is one principal competitor for all aspects of our offerings, wedo compete with a number of other vendors.

Companies weencounter in competing for corporate customers include a broad range ofpublicly-traded and privately-held companies. In our digital service providerbusiness, we compete with Motive, NGB, Fine Point Technologies, 2Wire, Alcatel,Motorola and Siemens. In our corporate IT business, our principal competitioncomes from companies such as ATG, BMC, CA, eGain, Hewlett Packard, Talisma,Kana, Knova and RightNow. In addition, we expect that internally developedapplications will continue to be a significant source of competition in theforeseeable future. We believe that the principal competitive factors for ourcorporate offerings include the following:

·       Breadthand depth of product functionality;

·       Demonstratedcustomer success and return on investment;

·       Scalabilityof platform and integrated architecture;

·       Quality,performance and reputation of solutions;

·       Pricing;

·       Implementationservices and support; and

·       Productinnovation.

We believe that we presently compete favorably withrespect to each of these factors. However, the markets for our products arestill rapidly evolving, and we may not be able to compete successfullyagainst current and potential competitors. Our ability to expand our businesswill depend on our ability to maintain our technological advantage, introducetimely enhanced products to meet growing support needs, deliver on-going valueto our customers and scale our business. Our potential competitorsmay have longer operating histories, significantly greater financial,technical and other resources, stronger strategic alliances or greater namerecognition than we have. Competition in our markets could reduce our marketshare or require us to reduce the price of products and services, which couldharm our business, financial condition and operating results.

As we enter the market forconsumer technology support, we expect to compete against a set of competitorsdifferent than the competitors against whom we have historically competed,including retailers offering on-site technology support services, companiesoffering online technology support services and companies offering localtechnology support services. Principal competitive factors in this marketinclude breadth and depth of service offerings; quality of the consumerexperience; pricing; brand recognition; and relationships with industryparticipants.  Certain of our competitorsin this market have longer operating histories, significantly greaterfinancial, technical and other resources, stronger strategic alliances orgreater name recognition than we have.  

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**Employees**

As of December 31,2006, we had 278 full-time employees and 34 contractors for total full-timeequivalent headcount of 312. None of our employees are covered by collectivebargaining agreements. We believe our relations with our employees are good.

**Executive Officers**

Ourexecutive officers and their ages as of March 10, 2007 are:

| **Name**      | ** ** | ** ** | ** ** | **Age**                                                                           | ** ** | **Position** |
|---------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|--------------|
| Josh Pickus   |       | 45         |       | President and Chief  Executive Officer                                            |
| Ken Owyang    |       | 43         |       | Chief Financial Officer,  and Senior Vice President of Finance and Administration |
| Michael Sayer |       | 55         |       | Senior Vice President of  Worldwide Sales                                         |
| Robert Barnum |       | 45         |       | Senior Vice President of Global Services                                          |

 

**JoshPickus.****  **Mr.Pickus has served as President, Chief Executive Officer and as a director ofSupportSoft since April 2006. Mr. Pickus served as Senior Vice President andGeneral Manager of the Clarity Division of Computer Associates, Inc., an ITmanagement software company, from August 2005 until April 2006. FromNovember 1999 until August 2005, Mr. Pickus held various executive positions atNiku Corporation, an IT governance software company, including President andChief Executive Officer from November 2002 until August 2005, Chief FinancialOfficer from April 2001 to October 2002, and President of Vertical Markets fromNovember 1999 to March 2001. Mr. Pickus holds a Bachelor of Arts fromPrinceton University and a Juris Doctor from University of Chicago School of Law.

**KenOwyang.**   Mr. Owyanghas served as Chief Financial Officer and Senior Vice President of Finance andAdministration since March 2006. Mr. Owyang served as Interim ChiefFinancial Officer from January to March 2006, and as Vice President of Finance ofSupportSoft from November 2004 to January 2006. Mr. Owyang providedconsulting services to SupportSoft from April 2004 to November 2004. FromMay 2003 until April 2004, he was an independent financial consultantto private and public companies. From November 1997 untilFebruary 2002, Mr. Owyang was employed by Marimba, Inc, an enterprisesoftware company, initially as Controller and then as Chief Financial Officerbeginning in June 2000. Mr. Owyang holds a B.A. in BusinessAdministration and Accounting from San Francisco State University.

**MichaelSayer.**   Mr. Sayer has served as Senior VicePresident of Worldwide Sales of SupportSoft since May 2006.  Mr. Sayer served as Vice President ofWorldwide Sales of the Clarity Division of Computer Associates, Inc., an ITmanagement software company, from August 2005 until April 2006.  From August 2003 until August 2005, Mr. Sayerwas Executive Vice President of Worldwide Sales of Niku Corporation, an ITgovernance software company.  FromNovember 1999 to April 2003, Mr. Sayer served as the Chief Executive Officer ofHipbone Corporation, a venture-backed startup company. Earlier in his career,Mr. Sayer established Remedy Corporation’s European sales operations. Mr. Sayerholds a Bachelor of Science in Industrial Engineering from the University ofHerfordshire in the United Kingdom.

**Robert Barnum.**   Mr.Barnum has served as Senior Vice President of Global Services of SupportSoftsince August 2006. From April 1997 until December 2005, Mr. Barnum held variousprofessional services leadership positions at Oracle Corporation (formerlyPeopleSoft, Inc.) including Vice President of North American Solutions Centersfrom April 2003 to December 2005. Mr. Barnum holds a B.S. in ManagementInformation Systems from the University of Nevada, Las Vegas and an M.B.A. inInternational Business from San Francisco State University.

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**Other Key Employees**

Other key employee as of March 10, 2007 are:

**AnthonyRodio.**   Mr. Rodio has served as Chief MarketingOfficer and Senior Vice President since September 2006.  Mr. Rodio was Vice President of ProductManagement at SideStep, Inc., a private vertical search company in the travelspace, from June 2005 to August 2006. From April 2004 to March of 2005, Mr. Rodio was Vice President ofMarketing at StubHub, Inc., a secondary ticketing company that was recentlyacquired by eBay.  From January 2001 toApril 2004, Mr. Rodio served as Senior Director Brand and Communications of theMSN division of Microsoft.  Earlier inhis career, Mr. Rodio held marketing positions at Amazon.com Inc. andProcter & Gamble.  Mr. Rodioholds a Bachelor of Science from the University of Oregon, a Master of Sciencefrom Portland State University and a Master of Business Administration from theOlin School of Business at Washington University in St. Louis.

**RichardMandeberg.**   Mr. Mandeberg has served as SeniorVice President of Consumer Business Development since December of 2006.  From September 2005 to December of 2006, Mr.Mandeberg was Executive Director of Market Development at Seagate Technology’sConsumer Branded Division.  From January2003 until September 2005, Mr. Mandeberg held various executive positions includingChief Executive Officer at Mirra Inc., a consumer storage appliance productcompany, before its acquisition by Seagate. Prior to Mirra, Mr. Mandeberg was Chief Executive Officer of IQCommerce, an online marketing and consumer services software company.  Mr. Mandeberg holds a Bachelor of Artsdegree in Film and Computer Imaging from the University of Michigan.

**DavidTemlak.**   Mr. Temlak has served as Senior VicePresident of Customer Service at SupportSoft since November 2006.  Mr. Temlak served as Senior Vice President ofCustomer Care at Time Warner Cable, a large cable operator, from January 2002until November 2006.  From August 1998until January 2002, Mr. Temlak held various positions at Road Runner, abroadband internet service provider, including Vice President and Group VicePresident of Customer Care.  Mr. Temlakholds a Bachelor of Science degree in Electrical Engineering from NortheasternUniversity.

**RichMatta.**   Mr. Matta has served as Vice President ofEngineering since November 2005 and has been with us since November 2000 invarious engineering and product management capacities.  Mr. Matta holds a B.A. in Economics fromPomona College.

**MarkWilliams.**   Mr. Williams has served as VicePresident of Customer Support since July 2006. Between May 2005 and July 2006, Mr. Williams served as IT Director.  From April 2002 to May 2005, Mr. Williamsserved as Director of Consolidated Support overseeing the internal IT and CustomerSupport organizations.  Mr. Williams alsoserved as IT Director from December 1999 until April 2002.  Mr. Williams holds a Bachelor of Sciencein Cognitive Science from the University of California, San Diego.

**Cadir B. Lee.**   Mr.Lee co-founded SupportSoft. He has served in various leadership positions sinceour incorporation in December 1997, including most recently as our ChiefTechnology Officer.  Mr. Lee holds aBachelor of Science in biological sciences and a Bachelor of Arts in music fromStanford University.

**SEC Filings andOther Available Information**

We were incorporated inDelaware in December, 1997. We file reports with the Securities andExchange Commission (SEC), including without limitation annual reports onForm 10-K, quarterly reports on Form 10-Q and current reports onForm 8-K filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934. The public may read andcopy any materials we file with the SEC at the SEC’s Public ReferenceRoom at 100 F Street, N.E., Washington, DC 20549. The publicmay obtain information on the operation of the Public ReferenceRoom by calling the SEC at (202) 551-8090. In addition, we are anelectronic filer. The SEC maintains an Internet site that contains reports,proxy and 

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informationstatements, and other information regarding issuers, including us, that fileelectronically with the SEC at the website address located athttp://www.sec.gov.

Our telephone number is650-556-9440 and our website address is http://www.supportsoft.com. Theinformation contained in our website does not form any part of thisAnnual Report on Form 10-K. However, we make available free of chargethrough our website our Annual Report on Form 10-K, our quarterly reportson Form 10-Q, our current reports on Form 8-K filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 as soon as reasonably practicable after we electronically file thismaterial with, or furnish it to, the SEC. In addition, we also make availableon http://www.supportsoft.com/investors our Code of Ethics and Business Conductfor Employees, Officers and Directors. This Code is also available in printwithout charge to any person who requests it by writing to:

SupportSoft, Inc.Investor Relations1900 Seaport Boulevard, 3rd FloorRedwood City, CA 94063

www.supportsoft.com

**ITEM 1A.**        RISKFACTORS. 

Investing in oursecurities involves a high degree of risk. In addition to the other informationcontained in this report, you should consider the following risk factors beforeinvesting in our securities.

**We were not profitable in 2006 and will continue tosustain a loss in the foreseeable future.**

We were not profitable in2006. In addition, we intend to make significant investments in support of our businessin 2007 and we expect to sustain a loss in 2007 and possibly subsequentperiods.  If we fail to achieve suchrevenue growth as a result of these additional investments or if such revenuegrowth does not result in our achieving profitability, the market price of ourcommon stock will likely decline.  Asustained period of losses would also result in an increased usage cash to fundour operating activities and a corresponding reduction in our cash balance.

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

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

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

·       demandfor our software and services;

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

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

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

·       ourability to attract and retain customers;

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

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

·       seasonaltrends resulting from corporate spending patterns;

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·       theexercise of judgment by our management in making accounting decisions in accordancewith our accounting policies; and 

·       generaleconomic conditions and their effect on our operations.

In prior years, welicensed a significant portion of our software on a term basis in which revenuewas recognized ratably over the length of the agreement with the customer. Inrecent periods, however, we typically have licensed our software on a perpetualbasis in which we recognize the license revenue up front, assuming all criteriafor revenue recognition have been met. As we have shifted to a perpetuallicensing model, we have become dependent on a few customer contracts with up-frontlicense revenue for a substantial portion of our revenue in any one quarter. Inaddition, a significant portion of our total revenue each quarter comes from anumber of orders received in the last month of a quarter. In previous quarters,we failed to close expected perpetual licenses with up-front revenue resultingin a revenue shortfall. If in future quarters we fail to close orders expectedto be completed by the end of a quarter, particularly if these orders are forperpetual licenses with up-front revenue, our quarterly results would suffer andthe market price of our common stock would likely decline. We are seeking tointroduce transaction structures that involve ratable revenue recognition, butthese types of transactions do not yet account for a material portion of ourrevenue.

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

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

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

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

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

A small number ofcustomers have historically accounted for, and may in future periodsaccount for, substantial portions of our revenue. For the quarter endedDecember 31, 2006, one customer accounted for 13% of our total revenue forthe quarter. Transaction structures that involve ratable revenue recognitionand our consumer offerings, which typically involve payment on a pertransaction basis, could reduce our dependence on large transactions with asmall number of customers.   However, inthe near term, we are likely to continue to derive a significant portion of ourrevenue from large transactions with a limited number of customers. Therefore,our revenue could decline because of the loss or delay of a single 

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customerorder. Additionally, we may not obtain new customers. The failure toobtain significant new customers, particularly customers that purchase perpetuallicenses with up-front payments, the loss or delay of significant customerorders or the failure of existing customers to pay ongoing fees when due wouldharm our operating results.

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

Our sales cycle for oursoftware typically ranges from three to nine months or more and may varysubstantially from customer to customer. The purchase of our products andservices for corporate customers generally involves a significant commitment ofcapital and other resources by a customer. This commitment often requiressignificant technical review, assessment of competitive products and approvalat a number of management levels within a customer’s organization. In addition,in the wake of the Sarbanes-Oxley Act of 2002, companies have enhanced theirapproval processes, making sales more difficult or protracted. While ourcustomers 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.

**Our recently announced consumer technology supportinitiative will increase operating expenses without any assurance of yieldingincreased revenue.**

We have announced a plan toextend our business by providing consumer technology support services. Inaddition to continuing to offer our software to corporate customers, we areoffering technology support to consumers. We may not be able to offer these new services successfully. We havelimited experience in reaching or serving consumers directly or in managingcall centers. As a result, we expect to use significant cash and incurincreased operating expenses to support this new initiative, including costs ofour outsourced call centers, promotional costs associated with reachingconsumers and costs of obtaining personnel with the necessary consumerexpertise.  These investments may not yieldincreased revenue to offset these expenses. Furthermore, this new businessinitiative, if not favorably received by consumers, could damage the reputationof our corporate enterprise business as well as strain our management,financial and operational resources necessary to maintain our corporate business.The lack of market acceptance of such efforts or our inability to generatesatisfactory revenue from such expanded services would have a material adverseeffect on our business, prospects, financial condition and operating results.

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

If we fail todevelop enhanced versions of our software in a timely manner or to provideproducts and services that achieve rapid and broad market acceptance, we maynot maintain or expand our market share. We may fail to identify new productand service opportunities for our current market or new markets that we enterin the future. In addition, our existing products may become obsolete if wefail to introduce new products or product enhancements that meet new customerdemands, support new standards or integrate with new or upgraded versions ofpackaged applications or operating systems. We have limited control overfactors that affect market acceptance of our product and services, including:

·       thewillingness of companies to transition to automated solutions; and

·       customer preferences forcompetitors’ solutions or other technologies.

**If our existing customers do not renew maintenance contractsor purchase additional products and services, our operating results couldsuffer.**

Historically, we havederived, and expect to continue to derive, a significant portion of our totalrevenue from existing customers who purchase additional products and servicesand renew maintenance 

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contracts.Our customers may not renew maintenance contracts or purchase additionalproducts and services. In addition, as we introduce new products, our currentcustomers may not require or desire the functionality of our new productsand may not ultimately purchase these products. If our customers do notrenew maintenance contracts or do not purchase additional products and services,our operating results would suffer.

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

We are seeking toincrease our international revenues.  Forthe years ended December 31, 2004, 2005, and 2006, international revenuewas 11%, 21% and 23% of total revenue, respectively.  We have limited experience in internationaloperations and may not be able to compete effectively in international marketsor effectively manage our operations in various countries. If we do notgenerate enough revenue from international operations to offset the expense ofthese operations, our operating results could suffer. Risks we face inconducting business internationally include:

·       costsof staffing and managing international operations;

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

·       difficultyin reaching geographically dispersed customers;

·       differingtechnology standards and legal considerations;

·       longersales cycles;

·       dependenceon local vendors and consultants;

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

·       potentialadverse tax consequences;

·       changesin currency exchange rates and controls;

·       difficultiesin maintaining effective internal control over financial reporting as a resultof a geographically-dispersed workforce and customers;

·       longercollection cycles for accounts receivable; and

·       the effects of external eventssuch as terrorist acts and any related conflicts or similar events worldwide.

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

Clients that license our software typically engage ourprofessional services organization to assist with installation andimplementation of our software and related consulting services. Revenue fromprofessional services represented a substantial portion of our total revenuefor the year ended December 31, 2006. We plan to further increase the number ofprofessional services personnel, especially internationally, to meet customerneeds. We may not be able to recruit the professional services personnel weneed or retain our current professional services personnel because competitionfor qualified professional services personnel is intense. New professional servicespersonnel will require training and education and take time to reach fullproductivity.

In addition, we cannot becertain that our professional services business will operate in a profitablemanner. We have generally billed our customers for professional services on atime and material basis, using an agreed upon daily rate. However, customershave increasingly requested various contract 

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structures,including milestone-based contracts and contracts for a fixed total fee. Ifunanticipated factors in a project are encountered and the contract structureprevents us from billing additional amounts, we may be subject to monetarypenalties, and the profitably of our professional services business wouldsuffer. Furthermore, an estimated loss on a contract is generally required tobe recorded in the period in which a loss becomes evident. Recording a loss ona services contract could have a material adverse effect on our operatingresults for the period in which the loss was recorded.

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

We have alliances with third parties that areimportant to our business. Our existing relationships include those with  hardware vendors and managed service providerswho provide outsourced support to corporate customers. If these relationshipsfail, we may need to devote substantially more resources to the sales andmarketing of our products and services than we would otherwise, and our effortsmay not be as effective. For example, companies that provide outsourced supportand services often have extensive relationships with our existing and potentialcustomers and significant input in the purchase decisions of these customers.In addition, we may establish relationships with third party resellers andother sales partners as we expand internationally. Our failure to maintainexisting relationships, or to establish new relationships with key thirdparties, could significantly harm our ability to sell our products andservices. In addition, our competitors may have strong alliances with othercompanies, including hardware providers, which could impact our ability toobtain greater market share, participate in deals where hardware and softwareare sold together, or require us to reduce the price of products and services,which could harm our business, prospects, financial condition and operatingresults.

Our consumer offeringsrequire us to establish and maintain relationships with third parties who will directconsumers to us and provide technology support services to consumers based onour technology, as well as with third parties to whom  we outsource our call center services. Failureto establish or maintain these relationships on acceptable terms or at allcould materially and adversely affect the success of this initiative.

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

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

·       unanticipatedcosts and liabilities and unforeseen accounting charges or fluctuations;

·       delaysand difficulties in delivery of products and services from the combinedcompany;

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

·       lossof key employees;

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

·       difficultyin maintaining controls and procedures;

·       uncertaintyon the part of our existing customers about our ability to operate on acombined basis;

·       lossof customers;

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·       lossof alliance partners;

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

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

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

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

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

As we further enter themarket for consumer technology support, we expect to compete against a set ofcompetitors different than the competitors against whom we have historically competed,including electronics retailers offering on-site technology support services,companies offering online technology support services and companies offeringlocal technology support services. Certain of these anticipated competitorshave longer operating histories, significantly greater financial, technical andother resources, stronger strategic alliances or greater name recognition thanwe have.

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

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

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

To sell to some of ourcustomers, we may be required to take risks of uncollectible accounts. We maybe exposed to similar risks relating to third party resellers and other salespartners, as we intend to increasingly utilize such parties as we expand intonew geographic regions. Additionally, as we have expanded our businessinternationally, we have experienced longer payment terms and collection cyclesfrom customers outside the United States. While we monitor these situationscarefully and attempt to take appropriate measures to protect ourselves byrecognizing revenue upon collection of accounts from 

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customerswe deem to have credit risks and upon sell-through by resellers, it is possiblethat we may have to write down or write off doubtful accounts. Such write-downsor write-offs would negatively affect our operating results for the period inwhich they occur, and, if large, could have a material adverse effect on ouroperating results and financial condition.

**Our products depend on and work with productscontaining complex software, and if our products fail to perform properly dueto 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 dependon complex software, both internally developed and licensed from third parties.Also, our customers may use our products with other companies’ products, which mayalso contain complex software. Complex software often contains errors and maynot perform properly. These errors could result in:

·       delaysin product shipments;

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

·       damageto our reputation;

·       lostsales;

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

·       warrantyclaims.

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

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

We currently serve acustomer base with a wide variety of constantly changing hardware, software andnetworking platforms. If we fail to release versions of our software that arecompatible with operating systems, software applications or hardware devicesused by our customers, our business and operating results would suffer. Ourfuture success also depends on the continuing ability of our products tointer-operate with multiple platforms and packaged applications used by ourcustomer base and on our management of software being developed by third partiesfor our customers or for use with our products.

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

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

·       risksof product malfunction after new technology is integrated;

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

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

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

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

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

Statement of FinancialAccounting Standards No. 123 (revised 2004),*Share-Based Payment* (SFAS 123R), became effective inour first quarter of 2006, and has resulted in our recognition of substantialcompensation expense relating to our employee stock options and employee stockpurchase plans. Historically, we generally have not recognized in our statementof operations any compensation expense related to stock option grants we issueunder our stock option plans or the discounts we provide under our employeestock purchase plans. Under the new rules, we are required to measure thecompensation expense related to employee stock awards on a fair value basis,which leads to substantial additional compensation expense and a material adverseeffect on our reported results of operations.

**If we are unable to successfully address the materialweakness in our disclosure controls and procedures or otherwise maintaineffective disclosure controls and procedures, including our internal controlover financial reporting, our ability to report our financial results on atimely and accurate basis may be adversely affected.**

We have evaluated our“disclosure controls and procedures” as such term is defined in Rule 13a-15(e)under the Securities Exchange Act of 1934, as well as our internal control overfinancial reporting as required by Section 404 of the Sarbanes-Oxley Act of2002. Our independent registered public accounting firm has performed a similarevaluation of our internal control over financial reporting. Effective controlsare necessary for us to provide reliable financial reports and effectivelyprevent fraud. If we cannot provide reliable financial reports or preventfraud, our operating results would be harmed. For the period ended December 31,2006, we concluded that we had a material weakness in our internal control overfinancial reporting, as further described in Item 8, Report of Management onInternal Control over Financial Reporting. Our independent registered publicaccounting firm reached the same conclusion. We are implementing correctiveactions, which we believe will remediate this material weakness. However, wecannot be certain that these measures will remediate the material weakness wehave identified or, if we are successful in remediating this material weakness,whether we will be able to maintain adequate controls over our financialprocesses and reporting in the future. If these actions are not successful inaddressing this material weakness, our ability to report our financial resultson a timely and accurate basis may be adversely affected. In addition, if wecannot establish effective internal control over financial reporting anddisclosure controls and procedures, investors may lose confidence in our reportedfinancial information, which could cause the market price of our common stockto decline. 

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

Goodwill and identifiableintangible assets were recorded in part due to our acquisition of substantiallyall of the assets of Core Networks Incorporated in September 2004. We also havecertain intangible assets with an indefinite life. We assess the impairment ofgoodwill and indefinite life intangible assets annually or more often if eventsor changes in circumstances indicate that the carrying value may not berecoverable. We assess the impairment of acquired product rights and other finitelife intangible assets whenever events or changes in circumstances indicatethat its carrying amount may not be recoverable. An impairment loss wouldbe recognized when the sum of the discounted future net cash flows expected toresult from the use of the asset and its eventual disposition is less than itscarrying amount. Such impairment loss would be measured as the differencebetween the carrying amount of the asset and its fair value. Materialdifferences may result in write-downs of net long-lived and intangibleassets, which would cause our operating results to suffer.

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

Securities class actionlawsuits were filed against us in November 2001 and again inDecember 2004. In addition, a derivative stockholder lawsuit was filedagainst us in December 2005. Should these lawsuits linger for a longperiod of time, whether ultimately resolved in our favor or not, or furtherlawsuits be filed against us, coverage limits of our insurance or our abilityto pay such amounts may not be adequate to cover the fees and expenses andany ultimate resolution associated with such litigation. The size of these payments,if any, individually or in the aggregate, could seriously impair our cashreserves and financial condition. The continued defense of these lawsuits alsocould result in diversion of our management’s time and attention away frombusiness operations, which could cause our financial results to decline. Afailure to resolve definitively current or future material litigation in whichwe are involved or in which we may become involved in the future,regardless of the merits of the respective cases, could also cast doubt as toour prospects in the eyes of customers, potential customers and investors,which could cause our revenue and stock price to decline.

**Privacyconcerns and laws or other domestic or foreign regulations may reduce theeffectiveness of our solutions or harm our reputation and cause us to losecustomers.**

Our software containsfeatures which allow our customers to control, monitor or collect informationfrom computers running the software. Federal, state and foreign governmentbodies and agencies, however, have adopted or are considering adopting laws andregulations regarding the collection, use and disclosure of personalinformation obtained from consumers and individuals. Liability for violationof, costs of compliance with, and other burdens imposed by such laws andregulations may limit the use and adoption of our solutions and reduceoverall demand for them. Even the perception of privacy concerns, whether ornot valid, may inhibit adoption of our solutions. In addition, wemay face claims about invasion of privacy or inappropriate disclosure, useor loss of this information. Any imposition of liability could harm ourreputation, cause us to lose customers and cause our operating results tosuffer.

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

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

·       ourpending patent applications may not be issued;

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

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

·       our issued patents could besuccessfully challenged.

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

Werely on a combination of laws, such as patents, copyright, trademark and tradesecret laws, and contractual restrictions, such as confidentiality agreementsand licenses, to establish and protect our proprietary rights. Our ability tocompete and grow our business could suffer if these rights are not adequatelyprotected. Our proprietary rights may not be adequately protected because:

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

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

Also, the laws of othercountries in which we market our products may offer little or noprotection of our proprietary technologies. Reverse engineering, unauthorizedcopying or other misappropriation of our proprietary technologies could enablethird parties to benefit from our technologies without paying us for them,which would harm our competitive position and market share.

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

Other partiesmay assert intellectual property infringement claims against us or ourcustomers and our products may infringe the intellectual property rightsof third parties. For example, our products may infringe issued patents thatmay relate to our products. In addition, as is increasingly common in thesoftware industry, we may be confronted with the aggressive enforcement ofpatents by companies whose primary business activity is to acquire patents forthe purpose of offensively asserting them against other companies. Intellectualproperty litigation is expensive and time-consuming and could divertmanagement’s attention from our business. If there is a successful claim ofinfringement, we may be required to develop non-infringing technology or enterinto royalty or license agreements, which may not be available onacceptable terms, if at all. Our failure to develop non-infringing technologiesor license proprietary rights on a timely basis would harm our business.

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

Our ability to increaseour revenue will depend in part on increased demand for digital services. Ifthis demand does not grow as rapidly or to the extent we anticipate, our businesscould suffer. The growth of digital services is uncertain and will depend inparticular upon the availability, at a reasonable price, of such digitalservices, the building of infrastructure to support such services, theavailability of competitive products, and the reliability of such services.

**Wemay experience a decrease in market demand due to uncertain economicconditions in the United States and in international markets, which has beenfurther exacerbated by the concerns of terrorism, war and social and politicalinstability.**

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

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

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

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

The Sarbanes-Oxley Act of2002, as well as new rules subsequently implemented by the Securities andExchange Commission and the Nasdaq Global Select Market, has required changesin corporate governance practices of public companies.  These rules and regulations areincreasing our legal and financial compliance costs, and making some activitiesmore time-consuming and costly. These rules and regulations make it moredifficult and more expensive for us to obtain director and officer liabilityinsurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These new rules andregulations could also make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and qualified executive officers.

**ITEM 1B.  UNRESOLVED STAFF COMMENTS.**

Not applicable.

**ITEM 2.**                PROPERTIES.

In the fourth quarter of2006, we signed a lease for our new corporate headquarters facility withapproximately 37,400 square feet at 1900 Seaport Boulevard, 3rd Floor, Redwood City, California. We arecurrently transitioning our headquarters from 575 Broadway in Redwood City,California, where our lease for approximately 23,600 square feet expires in May 2007.The new corporate headquarters lease expires in July, 2012. We believe the newfacilities are adequate and suitable for our business requirements.

**ITEM 3.**                LEGALPROCEEDINGS.

Between December 2004 and January 2005,several purported securities class action suits were filed in the UnitedStates District Court for the Northern District of California against us, ourformer Chief Executive Officer, Radha R. Basu, and our former ChiefFinancial Officer, Brian M. Beattie. These actions were consolidated on March 22,2005 as *In re SupportSoft, Inc.Securities Litigation,* Civil Action No.: c 04-5222SI. The consolidated complaint alleges generally violations of certain federalsecurities laws and seeks unspecified damages on behalf of a class ofpurchasers of our common stock between January 20, 2004 and October 1,2004. Plaintiffs allege, among other things, that defendants made false andmisleading statements concerning our business and guidance for the thirdquarter 2004, purportedly violating Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 and Rule 10b-5 promulgatedthereunder. On June 1, 2006, this action was certified to proceed as aclass action on behalf of all persons and entities who purchased or otherwiseacquired the securities of the Company from January 29, 2004 to October 1,2004 and who were allegedly damaged thereby. The case is currently indiscovery. A trial date has been set for October 29, 2007. Defendantsintend to vigorously defend themselves against the consolidatedlawsuit. While we cannot predict with certainty the outcome of thelitigation, we believe that we have meritorious defenses to such claims.

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In December 2005, a purported derivativestockholder complaint was filed in the Superior Court of the State of Californiafor the County of San Mateo captioned *Whitev. Vase et al.*, No. Civ. 451677. This complaint pursuesclaims—derivatively and on behalf of the Company as a nominal defendant—againstcertain of our directors and former directors: Radha R. Basu, Manuel Diaz,Kevin C. Eichler, Edward S. Russell and James Thanos. The derivativecomplaint alleges, among other things, that the director-defendants harmed usby making or permitting us to make false and misleading statements between January 20,2004 and October 1, 2004 concerning our business and guidance for thethird quarter 2004 and by purportedly exposing us to liability for securitiesfraud in violation of their fiduciary duties. On October 4, 2006, thecourt denied the defendants’ demurrer to the plaintiffs’ first amendedcomplaint. The defendants’ answered this complaint on November 6,2006. The case is currently in discovery. While we cannot predict withcertainty the outcome of the litigation, we believe we have meritoriousdefenses to such claims.

In November 2001, a class action lawsuit wasfiled against us and two of our officers in the United States District Courtfor the Southern District of New York. The lawsuit alleged that ourregistration statement and prospectus dated July 18, 2000 for the issuanceand initial public offering of 4,250,000 shares of our common stock containedmaterial misrepresentations and/or omissions related to alleged inflatedcommissions received by the underwriters of the offering. The defendants namedin the lawsuit are SupportSoft, Radha Basu, Brian Beattie, Credit Suisse FirstBoston Corporation, Bear, Stearns & Co. Inc. and FleetBoston RobertsonStephens Inc. The lawsuit seeks unspecified damages as well as interest, feesand costs. Similar complaints have been filed against 55 underwriters and morethan 300 other companies and other individual officers and directors of thosecompanies. 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 and has not yet ruled. Meanwhile the consolidated case against theunderwriters has proceeded. On October 13, 2004, the district courtcertified a class. On December 5, 2006, however, the Second Circuitreversed, holding that a class could not be certified. The Second Circuit’sholding, while directly affecting only the underwriters, raises some doubt asto whether the proposed issuer settlement will be approved in its present form.On January 5, 2007, plaintiffs petitioned the Second Circuit for rehearingof the Second Circuit’s decision. On January 24, 2007, the Second Circuitasked the underwriter defendants to respond to the petition by February 7,2007. On February 7, 2007, the underwriters filed their response. While wecannot predict with certainty the outcome of the litigation or whether thesettlement will be approved, we believe that the claims against us and ourofficers are without merit.

We are also subject toother routine legal proceedings, as well as demands, claims and threatenedlitigation that arise in the normal course of our business. The ultimateoutcome of any litigation is uncertain, and either unfavorable or favorableoutcomes could have a material negative impact. Regardless of outcome,litigation can have an adverse impact on SupportSoft because of defense costs,diversion of management resources and other factors.

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

No matters were submittedto a vote of security holders during the fourth quarter of the year ended December 31,2006.

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**PART II**

**ITEM 5.**                MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.

**Market of CommonStock**

Ourcommon stock has been traded publicly on the Nasdaq Global Select Market underthe symbol “SPRT” since July 19, 2000. Before July 19, 2000, therewas no public market for our common stock. The following table sets forth thehighest and lowest sale price of our common stock for the quarters indicated:

| ** **            | ** ** | **Low** | ** ** | **High** | ** ** |
|-----------------------|------------|---------|------------|----------|------------|
| **Fiscal Year 2005:** |       |    |       |     |       |
| First Quarter         |       | $       | 5.06       |     | $          | 6.70 |   |
| Second Quarter        |       | $       | 4.50       |     | $          | 5.70 |   |
| Third Quarter         |       | $       | 4.78       |     | $          | 6.17 |   |
| Fourth Quarter        |       | $       | 3.93       |     | $          | 5.12 |   |
| **Fiscal Year 2006:** |       |    |       |     |       |
| First Quarter         |       | $       | 3.99       |     | $          | 4.80 |   |
| Second Quarter        |       | $       | 3.60       |     | $          | 4.77 |   |
| Third Quarter         |       | $       | 3.31       |     | $          | 4.39 |   |
| Fourth Quarter        |       | $       | 4.14       |     | $          | 6.05 |   |

 

**Holders of Record**

As of March 8, 2007,there were approximately 180 holders of record of our common stock (notincluding beneficial holders of stock held in street name).

**Dividend Policy**

We have not declared orpaid any cash dividends on our capital stock since our inception and do notexpect to do so in the foreseeable future. We currently anticipate that allfuture earnings, if any, generated from operations will be retained by us todevelop and expand our business. Any future determination with respect to thepayment of dividends will be at the discretion of the Board of Directors andwill depend upon, among other things, our operating results, financialcondition and capital requirements, the terms of then-existing indebtedness,general business conditions and such other factors as the Board of Directorsdeems relevant.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

Information regarding thesecurities authorized for issuance under our equity compensation plans can befound under Item 12 of Part III of this Report.

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**Stock PricePerformance Graph**

The following graphillustrates a comparison of the cumulative total stockholder return (change instock price plus reinvested dividends) of the Company’s Common Stock and theCRSP Total Return Index for the Nasdaq U.S. Stocks (the “Nasdaq Composite Index”)and Nasdaq Computer and Data Processing Services Index from December 31,2001 through December 29, 2006. The graph assumes that $100 was investedon December 29, 2001 in us, the Nasdaq Composite Index and the NasdaqComputer and Data Processing Services Index and that all dividends werereinvested. No cash dividends have been declared or paid on the Company’sCommon Stock. The Company’s Common Stock has been traded on the Nasdaq GlobalSelect Market since July 19, 2000. The comparisons in the table arerequired by the Securities and Exchange Commission and are not intended toforecast or be indicative of possible future performance of the Company’sCommon Stock.

**COMPARISON OFCUMULATIVE TOTAL RETURN AMONGSUPPORTSOFT, INC.,THE NASDAQ COMPOSITE INDEX, ANDTHE NASDAQ COMPUTER AND DATA PROCESSING SERVICES INDEX**

****

**CUMULATIVETOTAL RETURN AT PERIOD END**

| ** **                                                      | ** ** | **12/31/01** | ** ** | **12/31/02** | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/30/05** | ** ** | **12/31/06** | ** ** |
|-----------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| SupportSoft, Inc.                                          |       | $            | 100.00     |         |       | $            | 62.84      |         |       | $            | 209.89     |         | $          | 106.22 |   | $ | 67.30 |   | $ | 87.40 |   |
| Nasdaq Composite  Index                                         |       | $            | 100.00     |         |       | $            | 69.13      |         |       | $            | 103.36     |         | $          | 112.49 |   | $ | 114.88 |   | $ | 126.21 |   |
| Nasdaq  Computer & Data Processing Services Index |       | $            | 100.00     |         |       | $            | 68.93      |         |       | $            | 90.84      |         | $          | 100.15 |   | $ | 103.55 |   | $ | 116.26 |   |

 

The information presentedabove in the stock performance graph shall not be deemed to be “solicitingmaterial” or to be “filed” with the Commission or subject to Regulation 14A or14C, except to the extent that we subsequently specifically request that suchinformation be treated as soliciting material or specifically incorporate it byreference into a filing under the Securities Act or Exchange Act.

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**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA.

The information set forthbelow is not necessarily indicative of results of future operations and shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand related notes included in Items 7 and 8 of Part II of this Report.

| ** **                                                    | ** ** | **Years Ended December 31,**                        | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated  Statements of Operations Data:**              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue:                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| License fees                                                  |       | $                                                                  | 16,415     |   | $ | 32,737 |   | $ | 37,923 |   | $ | 40,885 |   | $ | 31,260 |   |
| Maintenance                                                   |       | 15,672                                                             |       | 14,317 |   | 11,002 |   | 5,757 |   | 3,038 |   |
| Services                                                      |       | 12,941                                                             |       | 14,877 |   | 11,692 |   | 6,629 |   | 6,862 |   |
| Total revenue                                                 |       | 45,028                                                             |       | 61,931 |   | 60,617 |   | 53,271 |   | 41,160 |   |
| Costs and expenses:                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of license fees                                          |       | 499                                                                |       | 555 |   | 295 |   | 369 |   | 289 |   |
| Cost of maintenance(1)                                        |       | 1,225                                                              |       | 988 |   | 418 |   | 400 |   | — | (1) |
| Cost of services                                              |       | 13,599                                                             |       | 13,128 |   | 9,592 |   | 6,446 |   | 5,883 |   |
| Amortization of  intangible assets                            |       | 1,090                                                              |       | 1,090 |   | 363 |   | — |   | 1,580 |   |
| Research and development                                      |       | 9,247                                                              |       | 11,185 |   | 9,746 |   | 9,199 |   | 8,834 |   |
| Sales and marketing                                           |       | 23,336                                                             |       | 25,159 |   | 23,965 |   | 22,038 |   | 22,464 |   |
| General and administrative                                    |       | 10,163                                                             |       | 8,618 |   | 6,454 |   | 5,405 |   | 5,637 |   |
| In-process research and  development                          |       | —                                                             |       | — |   | 1,618 |   | — |   | — |   |
| Amortization of deferred  compensation                        |       | —                                                             |       | — |   | — |   | — |   | 578 |   |
| Total costs and expenses                                      |       | 59,159                                                             |       | 60,723 |   | 52,451 |   | 43,857 |   | 45,265 |   |
| Income (loss) from  operations                                |       | (14,131                                                            | )          | 1,208 |   | 8,166 |   | 9,414 |   | (4,105 | ) |
| Interest income and  other, net                               |       | 6,383                                                              |       | 3,619 |   | 2,298 |   | 502 |   | 640 |   |
| Income (loss) before  income taxes                            |       | (7,748                                                             | )          | 4,827 |   | 10,464 |   | 9,916 |   | (3,465 | ) |
| Provision for income  taxes                                   |       | (487                                                               | )          | (402 | ) | (310 | ) | (496 | ) | (177 | ) |
| Net income (loss)                                             |       | (8,235                                                             | )          | 4,425 |   | 10,154 |   | 9,420 |   | (3,642 | ) |
| Basic net income (loss)  per share                            |       | $                                                                  | (0.19      | ) | $ | 0.10 |   | $ | 0.24 |   | $ | 0.27 |   | $ | (0.11 | ) |
| Shares used in computing  basic net income (loss) per share   |       | 44,113                                                             |       | 43,032 |   | 42,355 |   | 34,682 |   | 32,486 |   |
| Diluted net income  (loss) per share                          |       | $                                                                  | (0.19      | ) | $ | 0.10 |   | $ | 0.22 |   | $ | 0.25 |   | $ | (0.11 | ) |
| Shares used in computing diluted net income (loss)  per share |       | 44,113                                                             |       | 44,519 |   | 45,590 |   | 38,048 |   | 32,486 |   |

 

| ** **                                        | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| **Consolidated Balance Sheet Data:**              |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents  and marketable securities |       | $                       | 119,891    |   | $ | 120,663 |   | $ | 120,341 |   | $ | 121,414 |   | $ | 30,615 |   |
| Working capital                                   |       | 118,238                 |       | 119,807 |   | 113,320 |   | 114,089 |   | 23,918 |   |
| Total assets                                      |       | 152,605                 |       | 156,249 |   | 150,205 |   | 139,044 |   | 42,160 |   |
| Long-term obligations                             |       | 411                     |       | 1,111 |   | 2,210 |   | 1,478 |   | 67 |   |
| Accumulated deficit                               |       | (69,190                 | )          | (60,955 | ) | (65,380 | ) | (75,534 | ) | (84,954 | ) |
| Total stockholders’ equity                   |       | 132,503                 |       | 134,394 |   | 127,857 |   | 114,006 |   | 23,147 |   |
|                                                   |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Thecost of maintenance was recorded separately beginning in 2003. In 2002, thecost of maintenance was included in cost of services.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

**The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes included elsewhere in thisForm 10-K. The following discussion includes forward-lookingstatements.  Please refer to ourcautionary statement on page 3 related to forward-looking statements andour risks and uncertainties listed under Item 1A of this report.**

**Overview**

SupportSoft is a leading provider of software andservices that automate the resolution of technology problems. Our solutionsreduce technology support costs, improve customer satisfaction and enable newrevenue streams for organizations worldwide. We recently expanded our offeringsand now provide technology support directly to consumers.

Our corporate customers are digital service providers(telecommunications and cable companies) and corporate IT departments. Digitalservice providers use our products to automate the installation, activation andverification of broadband services, to reduce the cost and improve the qualityof support for customers, to enable the remote management of devices located atcustomer premises, and to provide value-added services to consumers. CorporateIT departments and managed service providers (IT outsourcing firms) use oursoftware to improve the cost-effectiveness and efficiency of their supportthrough an integrated portfolio of proactive service, self service and assistedservice capabilities.

In the second half of 2006, we announced a newoffering to address the consumer technology support market. This offering is anextension of our traditional business and relies upon our products, technologyand expertise in technology problem resolution. The new offering providescomputer problem resolution for consumers over the phone and the Internet. Weoffer our consumer technology support services through www.support.com andthrough consumer-facing companies such as PC manufacturers and digital serviceproviders.

Through December of 2006, our revenue hasconsisted entirely of software license fees and fees for maintenance,consulting, hosting and training services. In recent years, we have licensedour software to customers predominately on a perpetual basis in which werecognize the license revenue up front, assuming all criteria for revenuerecognition under the applicable accounting rules have been met.Maintenance fees relating to perpetual software licenses result in ratablerevenue over the period of the maintenance term, which is generally one year.Consulting and training revenues are generally recognized as the services areperformed or in accordance with predefined project milestones. Hosting fees arerecognized ratably over the term of the hosting arrangement.

License revenue and total revenue grew in each of thethree quarters following the first quarter of 2006, resulting in licenserevenue of $16.4 million and total revenue of $45.0 million for the year endedDecember 31, 2006. Despite the sequential quarterly increases in licenserevenue in the last three quarters of 2006, we have experienced a trend ofdecreasing annual license revenue over the last three fiscal years. Licenserevenue has decreased due to closing fewer large licensing transactions withcorporate customers, particularly U.S.-based digital service providers. Toaddress the trend of decreasing annual revenue, we have made and are planning tomake a number of changes in the business. We have hired new senior leadership,including a new Chief Executive Officer, Senior Vice President of WorldwideSales, Senior Vice President of Global Services, Chief Marketing Officer,Senior Vice President of Customer Service and Senior Vice President of ConsumerBusiness Development. We have also hired new regional sales leadership for theNorth America, EMEA and Asia/Pacific regions and made substantial changes inour sales force and sales compensation plans. We have expanded our sales andmarketing efforts internationally and with channel partners and increased thesize of our professional services organization. 

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We have also begun thedevelopment of packaged product and service offerings capable of deliveringreturn on investment in shorter time frames. Finally, we have entered theconsumer technology support market with our support.com and consumer technologysolutions offerings.

We do not expect immediate returns from ourinitiatives but believe they can create sustainable revenue growth over time.Although we intend to leverage many of our existing resources, we are makingsignificant incremental investments in support of these initiatives, includinginvestments to operate our outsourced call center, to promote our consumerofferings, to expand our professional services organization and to increasevisibility of our enterprise offerings. We expect that these additionalinvestments will precede any material revenue increase from our new businessinitiatives. As a result, we currently expect to incur a net loss in eachquarter, at least through 2007. We expect that our net loss in each quarter, aswell as for the full year in 2007, will significantly exceed the net losses weincurred during fiscal 2006.

Based upon our recent history, we expect to experiencedownward revenue seasonality between the fourth and first quarters.Consequently, we expect revenues for the first quarter of 2007 to besignificantly lower than revenue recorded in the fourth quarter of 2006. Thisseasonal revenue decline, coupled with the incremental investments noted abovewill likely result in a significantly larger net loss in the first quarter of2007 as compared with the fourth quarter of 2006. Furthermore, as of the filingdate of this Form 10-K, we are in the sales and negotiation processwith several companies for the purchase of our products and services. Ultimateclosure of these transactions prior to March 31, 2007 will have asignificant influence on whether or not we meet expectations for revenue in thefirst quarter of 2007.

We intend the followingdiscussion of our financial condition and results of operations that follows toprovide information that will assist in understanding our financial statements,the changes in certain key items in those financial statements from year toyear, and the primary factors that accounted for those changes, as well as howcertain accounting principles, policies and estimates affect our financialstatements.

**Critical AccountingPolicies and Estimates**

In preparing our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States, we make assumptions, judgments and estimatesthat can have a significant impact on our net revenue, and operating results,as well as on the value of certain assets and liabilities on our consolidatedbalance sheet. We base our assumptions, judgments and estimates on historicalexperience and various other factors that we believe to be reasonable under thecircumstances. Actual results could differ materially from these estimatesunder different assumptions or conditions. On a regular basis we evaluate ourassumptions, judgments and estimates and make changes accordingly. We believethat the assumptions, judgments and estimates involved in the accounting forrevenue recognition, allowance for doubtful accounts, accounting for incometaxes, accounting for goodwill and other intangible assets, and stock-basedcompensation have the greatest potential impact on our consolidated financialstatements, so we consider these to be our critical accounting policies. Wediscuss below the critical accounting estimates associated with these policies.For further information on the critical accounting policies, see Note 1 of ourNotes to Consolidated Financial Statements.

*Revenue Recognition*

We recognize revenue inaccordance with generally accepted accounting principles that have beenprescribed for the software industry. Revenue recognition requirements in thesoftware industry are very complex and are subject to change. Our revenuerecognition policy is one of our critical accounting policies because revenueis a key component of our results of operations and is based on complex rules whichrequire us to make judgments. In applying our revenue recognition policy wemust determine which portions of our revenue are recognized currently and whichportions must be deferred. In order to 

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determinecurrent and deferred revenue, we make estimates with regard to the expectedamount of future services to be performed and the appropriate fair value forthose services. We also make judgments as to whether future services areessential to the functionality of other elements of the software arrangement.We do not record revenue on sales transactions when the collection of cash isin doubt at the time of sale. Rather, revenue is recognized from thesetransactions as cash is collected. The determination of collectibility requiressignificant judgment.

*Allowances forDoubtful 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.

*Accounting forIncome Taxes*

We are required to estimateour income taxes in each of the tax jurisdictions in which we operate. Thisprocess involves management’s estimation of our actual current tax exposurestogether with an assessment of temporary differences determined based on thedifference between the financial statement and tax basis of certain items.These differences result in net deferred tax assets and liabilities, which areincluded within the consolidated balance sheet. We must then assess thelikelihood 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.

*Accounting forGoodwill and Other Intangible Assets*

At December 31, 2006,goodwill was $9.8 million, and net identifiable intangible assets were$3.2 million. We assess the impairment of goodwill and indefinite lifeintangible assets annually or more often if events or changes in circumstances,indicate that the carrying value may not be recoverable. We assess potentialimpairment at the entity level because we have only one reporting unit. Animpairment loss would be recognized if the fair value of the Company is lessthan the carrying value of the Company’s net assets on the date of theevaluation. We assess the impairment of finite life identifiable intangibleassets whenever events or changes in circumstances indicate that its carryingamount may not be recoverable. An impairment loss would be recognized when thesum of the undiscounted future net cash flows expected to result from the useof the asset and its eventual disposition is less than its carrying amount.Such impairment 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, among other things,economic conditions, changes to the business model or changes in operatingperformance. If we made different estimates, material differences may result inwrite-downs of net long-lived and intangible assets, which would be reflectedby charges to our operating results for any period presented. At September 30,2006, management concluded its annual evaluation for impairment of goodwill andno impairment was recognized.

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*Stock-basedcompensation*

We account for stock-basedcompensation in accordance with the provisions of SFAS 123R. We adopted SFAS123R using the modified prospective transition method which requires theapplication of the accounting standard starting from January 1, 2006.Under the fair value recognition provisions of SFAS 123R, stock-basedcompensation cost is estimated at the grant date based on the fair value of theaward and is recognized as expense ratably over the requisite service period ofthe award. We estimate the fair value of stock-based awards on the grant date usingthe Black-Scholes-Merton option-pricing model. Determining the appropriate fairvalue model and calculating the fair value of stock-based awards requiresjudgment, including estimating stock price volatility, forfeiture rates andexpected life. If any of these assumptions used in the option-pricing modelschanges significantly, stock-based compensation may differ materially in thefuture from that recorded in the accompanying financial statements.

**Results ofOperations**

Thefollowing table presents certain consolidated statements of operations data forthe periods indicated as a percentage of total revenue.

| ** **                             | ** ** | **Years Ended  December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| License fees                           |       |                                    | 36         | % |   |   | 53 | % |   |   | 63 | % |   |
| Maintenance                            |       |                                    | 35         |   |   |   | 23 |   |   |   | 18 |   |   |
| Services                               |       |                                    | 29         |   |   |   | 24 |   |   |   | 19 |   |   |
| Total revenue                          |       |                                    | 100        |   |   |   | 100 |   |   |   | 100 |   |   |
| Costs and expenses:                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Cost of license fees                   |       |                                    | 1          |   |   |   | 1 |   |   |   | 0 |   |   |
| Cost of maintenance                    |       |                                    | 3          |   |   |   | 2 |   |   |   | 1 |   |   |
| Cost of services                       |       |                                    | 30         |   |   |   | 21 |   |   |   | 15 |   |   |
| Amortization of  intangible assets     |       |                                    | 2          |   |   |   | 2 |   |   |   | 1 |   |   |
| Research and development               |       |                                    | 20         |   |   |   | 18 |   |   |   | 16 |   |   |
| Sales and marketing                    |       |                                    | 52         |   |   |   | 40 |   |   |   | 40 |   |   |
| General and  administrative            |       |                                    | 23         |   |   |   | 14 |   |   |   | 11 |   |   |
| In-process research and  development   |       |                                    | 0          |   |   |   | 0 |   |   |   | 3 |   |   |
| Amortization of deferred  compensation |       |                                    | 0          |   |   |   | 0 |   |   |   | 0 |   |   |
| Total costs and expenses               |       |                                    | 131        |   |   |   | 98 |   |   |   | 87 |   |   |
| Income (loss) from  operations         |       |                                    | (31        | ) |   |   | 2 |   |   |   | 13 |   |   |
| Interest income and  other, net        |       |                                    | 14         |   |   |   | 6 |   |   |   | 4 |   |   |
| Income (loss) before  income taxes     |       |                                    | (17        | ) |   |   | 8 |   |   |   | 17 |   |   |
| Provision for income  taxes            |       |                                    | (1         | ) |   |   | (1 | ) |   |   | 0 |   |   |
| Net income (loss)                      |       |                                    | (18        | )% |   |   | 7 | % |   |   | 17 | % |   |

 

**Years EndedDecember 31, 2006, 2005, and 2004**

***Revenue***($ in thousands)

| ** **    | ** ** | **2006** | ** ** | **% Change  2005 to 2006** | ** ** | **2005** | ** ** | **% Change  2004 to 2005** | ** ** | **2004** | ** ** |
|---------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|
| License fees  |       | $        | 16,415     |                                      |       | (50      | )%         |                                      | $          | 32,737   |       |   | (14 | )% |   | $ | 37,923 |   |
| Maintenance   |       | 15,672   |       |                                      | 9          | %        |       | 14,317                                    |       |     | 30         | % |   | 11,002 |   |
| Services      |       | 12,941   |       |                                      | (13        | )%       |       | 14,877                                    |       |     | 27         | % |   | 11,692 |   |
| Total revenue |       | $        | 45,028     |                                      |       | (27      | )%         |                                      | $          | 61,931   |       |   | 2 | % |   | $ | 60,617 |   |

 

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*TotalRevenue.**  *Totalrevenue decreased by 27% in 2006 as compared to 2005 and increased by 2% in2005 as compared to 2004. Each of the components of total revenue is discussedin more detail below.

*Licenserevenue.**  *Licenserevenue is comprised of fees for term and perpetual licenses of our software.Perpetual license revenue is recognized using the residual method described inSOP 98-9 for arrangements in which licenses are sold with multipleelements. We allocate revenues on these licenses based upon the fair value ofeach undelivered element including undelivered maintenance, consulting andtraining. The determination of fair value is based upon vendor specificobjective evidence (VSOE). VSOE for maintenance is based upon separate renewalsof maintenance from customers. VSOE for consulting or training is based uponseparate sales of these services to customers. Assuming all other revenuerecognition criteria are met, the difference between the total arrangement feeand the amount deferred for each undelivered element is recognized as licenserevenue. Revenue from license fees was $16.4 million in 2006, $32.7 million in2005, and $37.9 million in 2004. License fees decreased by approximately $16.3 million,or 50%, in 2006 from 2005 and $5.2 million, or 14%, in 2005 from 2004. Thedecreases in license revenue from 2005 to 2006 and from 2004 to 2005 wereprimarily due to fewer large license transactions from our corporate customers.For example, in 2006, we had three customers that contributed greater than $1.0million in license revenue for the year as compared with eight customers in2005.

*Maintenancerevenue.**  *Maintenancerevenue is comprised primarily of revenue from post-contract technical supportservices which includes software product updates. Maintenance revenue isrecognized ratably over the term of the maintenance period, which is generallyone year.

Maintenance revenue was $15.7 million in 2006, $14.3million in 2005 and $11.0 million in 2004. Maintenance revenue increased byapproximately $1.4 million, or 9%, in 2006 from 2005, and $3.3 million, or 30%,in 2005 from 2004. The increases in maintenance revenue were due to new licensecustomers who generally purchase maintenance in connection with their purchaseof our software products and more customers who have licensed our products on aperpetual basis versus a term basis. Generally, under a perpetual licensearrangement, maintenance services are sold separately and, therefore,maintenance revenue is recognized as a separate component of total revenue.Under a term license arrangement, maintenance services are bundled and not soldseparately and, therefore, included with license revenue because we do not haveVSOE of fair value to determine fair value of maintenance for a term-basedlicense.

*Servicesrevenue.**  *Servicesrevenue is primarily comprised of revenue from professional services, such asconsulting, training and fees for hosting services. Services revenue isgenerally recognized as the services are performed.

Services revenue was $12.9 million in 2006, $14.9million in 2005, and $11.7 million in 2004. Services revenue decreased byapproximately $1.9 million, or 13%, in 2006 from 2005 and increased byapproximately $3.2 million, or 27%, in 2005 from 2004. The decrease in servicesrevenue in 2006 from 2005 was due mainly to lower services revenue from asingle customer who ordered approximately $1.5 million less consulting servicesin 2006, as compared to 2005. The increase in services revenue in 2005 from2004 was mainly due to performing implementation projects in connection withthe growth of our customer base.

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*Revenue Mix.*   Thecomponents of revenue by type, expressed as a percentage of total revenue were:

| ** **                 | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Perpetual license  revenue |       |                                   | 32         | % |   |   | 48 | % |   |   | 47 | % |   |
| Term license  revenue      |       |                                   | 4          | % |   |   | 5 | % |   |   | 16 | % |   |
| Maintenance  revenue       |       |                                   | 35         | % |   |   | 23 | % |   |   | 18 | % |   |
| Services revenue           |       |                                   | 29         | % |   |   | 24 | % |   |   | 19 | % |   |
| Total revenue              |       |                                   | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

We currently anticipate that license revenue willcomprise approximately 30% to 40% of total revenue over the next 12 months,with services and maintenance revenue comprising the balance. We expect thatrevenue from perpetual licensing arrangements will comprise almost all of ourlicense revenue and term license revenue will represent a  small percentage of our license revenue overthe next 12 months. Therefore, our future revenue will depend upon sales ofperpetual licenses, generally with up-front license revenue recognition,resulting in less predictability of future operating results.

The year over year decreases in term license revenue,which is recognized ratably over the duration of the agreement, are largelyrelated to new customers who have purchased perpetual licenses and existingcustomers who initially licensed our software on a term license basis choosing,at or near the end of the initial term, to renew their licenses on a perpetuallicense basis.

For the years ended December 31, 2006 and 2005,no customers accounted for 10% or more of our total revenue. For the year endedDecember 31, 2004, two customers accounted for 13% and 10%, respectively,of our total revenue.

Revenue from customersoutside the United States accounted for approximately 23%, 21% and 11% of ourtotal revenue in 2006, 2005 and 2004, respectively. Although the percentage ofrevenue we recognize in the future from international customers will vary fromperiod to period, we are expanding our international sales and marketingactivities and we currently anticipate that revenue from internationalcustomers will increase as a percentage of revenue over the next 12 months.

***Cost of license fees, maintenance, services and theamortization of intangible assets***

**($ inthousands)**

| ** **                         | ** ** | **2006** | ** ** | **% Change  2005 to 2006** | ** ** | **2005** | ** ** | **% Change  2004 to 2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|
| Cost of license  fees              |       | $        | 499        |                                      |       | (10      | )%         |                                      | $          | 555      |       |   | 88 | % |   | $ | 295 |   |
| Cost of  maintenance               |       | 1,225    |       |                                      | 24         | %        |       | 988                                       |       |     | 136        | % |   | 418 |   |
| Cost of services                   |       | 13,599   |       |                                      | 4          | %        |       | 13,128                                    |       |     | 37         | % |   | 9,592 |   |
| Amortization of  intangible assets |       | 1,090    |       |                                      | 0          | %        |       | 1,090                                     |       |     | 200        | % |   | 363 |   |
| Total cost of  revenues            |       | $        | 16,413     |                                      |       | 4        | %          |                                      | $          | 15,761   |       |   | 48 | % |   | $ | 10,668 |   |

* *

*Costof license fees.**  *Costof license fees consists primarily of third-party royalty fees under licensearrangements for technology embedded into or sold with our products andrepresented approximately 1% or less of total revenue in each year. Cost oflicense fees was $499,000 in 2006, $555,000 in 2005, and $295,000 in 2004. Costof license fees in 2006 was generally in line with 2005 and increased $260,000,or 88%, in 2005 from 2004. The increase in cost of license fees in 2005 from2004 was due primarily to royalties for a third-party product that was resoldwith our products during 2005, which we did not sell in 2004.

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*Costof maintenance.**  *Costof maintenance consists primarily of compensation costs, travel costs, relatedoverhead expenses for customer support personnel. Cost of maintenance was $1.2million in 2006, $1.0 million in 2005, and $418,000 in 2004. Cost ofmaintenance increased by $237,000, or 24%, in 2006 from 2005 and $570,000, or136%, in 2005 from 2004. The year over year increases in cost of maintenancewere due primarily to increases in salary and related employees costs andtravel expenses as a result of an increase in the number of customer supportpersonnel.

*Costof services.**  *Costof services consists primarily of compensation costs, travel costs, relatedoverhead expenses for professional services personnel and costs from thirdparties for subcontracted consulting services. Cost of services revenue was$13.6 million in 2006, $13.1 million in 2005, and $9.6 million in 2004.Cost of services revenue increased by $471,000, or 4%, in 2006 from 2005, and$3.5 million, or 37%, in 2005 from 2004. The year over year increases incost of service revenue were due primarily to increases in salary and relatedemployees costs and travel expenses as a result of an increase in the number ofprofessional services personnel. Included in cost of services for the year endedDecember 31, 2006 was $379,000 of stock-based compensation expense. Therewere no comparable expenses in the prior years, because we adopted theprovisions of SFAS 123R effective January 1, 2006. We plan to hireadditional professional services personnel in 2007 and therefore expect cost ofservices to increase over 2006. Cost of services also includes the third-partycosts for our outsourced call center and other costs to support our consumertechnology support offering that was launched in January 2007. Althoughsuch costs were not a significant portion of cost of services in 2006, weexpect a substantial increase in these costs for 2007.

*Amortization of intangibleassets.**  *Thereis no change in amortization of intangible assets in 2006 from 2005.Amortization of intangible assets increased approximately $727,000, or 200%, in2005 from 2004. The increase in amortization of intangible assets in 2005 from2004 was due primarily to the acquisition of substantially all of the assets ofCore Networks which was effective September 2, 2004. Consequently, 2006and 2005 include a full twelve months of amortization, compared with only fourmonths of amortization in 2004.

***Operating expenses***

**($ inthousands)**

| ** **                                  | ** ** | **2006** | ** ** | **% Change  2005 to 2006** | ** ** | **2005** | ** ** | **% Change  2004 to 2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|
| Research and  development                   |       | $        | 9,247      |                                      |       | (17      | )%         |                                      | $          | 11,185   |       |   | 15 | % |   | $ | 9,746 |   |
| Sales and  marketing                        |       | 23,336   |       |                                      | (7         | )%       |       | 25,159                                    |       |     | 5          | % |   | 23,965 |   |
| General and  administrative                 |       | 10,163   |       |                                      | 18         | %        |       | 8,618                                     |       |     | 34         | % |   | 6,454 |   |
| In-process  research & development |       | —   |       |                                      | N/A        |     |       | —                                    |       |     | (100       | )% |   | 1,618 |   |
| Total operating  expenses                   |       | $        | 42,746     |                                      |       | (5       | )%         |                                      | $          | 44,962   |       |   | 8 | % |   | $ | 41,783 |   |

 

*Researchand development.**  *Researchand development costs are expensed as incurred. Research and developmentexpense consists primarily of compensation costs, third-party consultingexpenses and related overhead costs for research and development personnel.Research and development expense was $9.2 million in 2006, $11.2 millionin 2005, and $9.7 million in 2004. Research and development expense decreasedapproximately $1.9 million, or 17%, in 2006 from 2005. The decrease in researchand development expense in 2006 from 2005 was due primarily to a workforcereduction in the third quarter of 2006 designed to align staffing with our newinitiatives. The increase in research and development expense of $1.4 million,or 15%, in 2005 from 2004 was primarily due to additional headcount and relatedexpenses resulting from the acquisition of Core Networks in September 2004.Twenty three employees were added to our research and development organizationfrom the acquisition of Core Networks. Included in research and developmentexpense for the year ended December 31, 2006 was $422,000 of stock-based 

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compensation expense.There were no comparable expenses in the prior years, because we adopted theprovisions of SFAS 123R effective January 1, 2006. We believe the decreasein research and development expense from 2005 to 2006 was temporary because weexpect to grow our research and development expense in 2007.

*Salesand marketing.**  *Salesand marketing expense consists primarily of compensation costs, includingsalaries, sales commissions and related overhead costs for sales and marketingpersonnel; expenses for lead generation activities; and promotional expenses,including public relations, advertising and marketing events. Sales andmarketing expense was $23.3 million in 2006, $25.2 million in 2005, and $24.0million in 2004. Sales and marketing expense decreased by $1.8 million, or 7%,in 2006 from 2005 due primarily to a reduction in commission expenses as aresult of lower revenue in 2006 and a workforce reduction during the thirdquarter of 2006 designed to align staffing with our new initiatives. Theincrease in sales and marketing expense of $1.2 million, or 5%, in 2005 from2004 was primarily due to increased headcount and related compensation andtravel expenses throughout the year, and international marketing events in2005. Included in sales and marketing expense for the year ended December 31,2006 was $899,000 of stock-based compensation expense. There were no comparableexpenses in the prior years, because we adopted the provisions of SFAS 123Reffective January 1, 2006. In 2007 we expect to substantially increase oursales and marketing expenses to continue to develop and promote our consumertechnology support offering and to fund other marketing and selling initiativesthat we believe are essential to creating sustainable revenue growth.

*Generaland administrative.**  *Generaland administrative expense consists primarily of compensation costs and relatedoverhead costs for administrative personnel and professional fees for legal,accounting and other professional services. General and administrative expensewas $10.2 million in 2006, $8.6 million in 2005, and $6.5 million in 2004.General and administrative expense increased approximately $1.5 million,or 18%, in 2006 from 2005 and $2.2 million, or 34%, in 2005 from 2004. Includedin general and administrative expense for the year ended December 31, 2006was $1,638,000 of stock-based compensation expense. There were no comparableexpenses in the prior years, because we adopted the provisions of SFAS 123Reffective January 1, 2006. The increase from 2004 to 2005 in general andadministrative expense were primarily due to increases in salaries, consultingexpenses and legal fees related to the defense of the class actionlawsuit.

*In-process research anddevelopment.**  *In-processresearch and development expense was zero in 2006 and 2005 and $1.6 million in2004. The in-process research and development expense was a one-time expenserelated to our acquisition of substantially all of the assets of Core Networkson September 2, 2004.

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

**($ inthousands)**

| ** **                      | ** ** | **2006** | ** ** | **% Change  2005 to 2006** | ** ** | **2005** | ** ** | **% Change  2004 to 2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|-------------------------------------------|------------|----------|------------|
| Interest income  and other, net |       | $        | 6,383      |                                      |       | 76       | %          |                                      | $          | 3,619    |       |   | 57 | % |   | $ | 2,298 |   |
|                                 |            |          |            |                                           |            |          |            |                                           |            |          |            |  |  |  |  |  |  |  |

 

*Interest income and other,net.**  *Interestincome and other, net was $6.4 million in 2006, $3.6 million in 2005, and $2.3million in 2004. Interest income and other, net increased approximately $2.8million, or 76%, in 2006 from 2005 and increased by $1.3 million, or 57%, in2005 from 2004. The increases in interest income and other, net in 2006 from2005 and in 2005 from 2004 were primarily due to higher interest rates earnedon our invested cash and marketable securities.

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***Provision for income taxes***

**($ inthousands)**

| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income (loss)  before income taxes |       | $        | (7,748     | )        | $          | 4,827    |       | $ | 10,464 |   |
| Provision for  income taxes        |       | (487     | )          | (402     | )          | (310     | )          |
| Net Income (loss)                  |       | $        | (8,235     | )        | $          | 4,425    |       | $ | 10,154 |   |

 

*Provision for income taxes.**  *In 2006, 2005, and 2004, werecorded income tax provisions of $487,000, $402,000, and $310,000,respectively. These tax provisions are based on estimates of current taxes duein foreign jurisdictions for income and withholding taxes. The 2006, 2005 and 2004tax provisions varied from the expected tax provision at the U.S. federalstatutory rate primarily due to benefits from stock option deductions for whichstock-based compensation was not previously benefited and the net reversal oftiming differences, offset by nondeductible expenses.

**Liquidity andCapital Resources**

*OperatingActivities*

Net cash generated by (used in) operating activitieswas $(3.0) million in 2006, $(844,000) in 2005, and $14.5 million in 2004.Amounts included in net income (loss), which do not require the use of cash,primarily include the depreciation of fixed assets, stock-based compensation expense,amortization of intangible assets, and in-process research and development. Thesum of these items totaled $5.4 million, $2.2 million, and $2.9 million in2006, 2005 and 2004, respectively. Net cash used in operating activities during2006 was the result of the net loss of $(8.2) million, a decrease in deferredrevenue of $1.4 million, a decrease in accounts payable of $700,000, a decreasein accrued compensation of $556,000, and an increase in prepaid expenses andother current assets of $443,000 partially offset by a decrease in accountsreceivable of $2.3 million and an increase in other accrued liabilities of $605,000.Net cash used in operating activities during 2005 was a result of net income of$4.4 million, an increase in accounts receivable of $7.8 million, an increaseof $177,000 in other long-term assets, and a decrease in deferred revenues of$1.6 million offset by a decrease in prepaid expenses and other current assetsof $1.1 million, an increase in accounts payable of $686,000, an increase inother accrued liabilities and other long-term liabilities of $520,000. Net cashgenerated by operating activities during 2004 was the result of net income of$10.2 million, a decrease in accounts receivable of $3.0 million, a decrease inprepaid expenses and other current assets of $291,000, a decrease in otherlong-term assets of $195,000, an increase in accrued compensation of $904,000and an increase in other accrued liabilities of $726,000, offset by a decreasein deferred revenue of $4.3 million and accounts payable of $83,000.

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

Accounts receivable decreased to $15.1 million at December 31,2006 from $17.4 million at December 31, 2005. There were two customerswith balances greater than $1.0 million at December 31, 2006. These twocustomers accounted for approximately $3.6 million in the aggregate, or 24% ofnet accounts receivable. The balances for these two customers resultedprimarily from invoices raised in December 2006. By comparison, the higheraccounts receivable balance at December 31, 2005 was due primarily toseveral large license and maintenance renewal invoices raised in December 2005for six customers. These six customers each had accounts receivable balancesgreater than $1.0 million and together accounted for approximately $11.1million, or 63% of net accounts receivable at December 31, 2005. As of December 31,2004, there were only two customers with balances greater than $1.0 million. 

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These two customersaccounted for approximately $4.9 million in the aggregate, or 51% of netaccounts receivable.

Total deferred revenue decreased to $13.6 million at December 31,2006 from $15.0 million at December 31, 2005 due primarily to lowerdeferred maintenance revenue. Customers typically purchase maintenancecontracts when they purchase our products. Therefore, the decrease in deferredmaintenance revenue is consistent with the lower level of license revenue in2006 as compared to 2005. Total deferred revenue decreased to $16.7 million at December 31,2004 from $20.9 million at December 31, 2003. The decrease in totaldeferred revenue was primarily due to a decrease in deferred license revenuefrom term-based arrangements, partially offset by an increase in deferredmaintenance revenue, as our business has transitioned to more perpetual-basedarrangements from term-based arrangements.

In 2007, we expect to makesubstantial investments in support of business initiatives that we believe areessential to creating long term revenue growth. We expect that theseinvestments will precede any material revenue from our new business initiatives.We therefore expect to use a significantly higher level of cash from operationsin 2007 than in 2006.

*InvestingActivities*

Net cash provided by (usedin) investing activities was $(8.0) million in 2006, $5.5 million in 2005, and$(24.2) million in 2004. Net cash used in investing activities in 2006 wasprimarily due to the purchase of $92.4 million in marketable securities and toa lesser extent the purchase of $964,000 in property and equipment offset bythe sale and maturity of $85.3 million in marketable securities. Net cashprovided by investing activities in 2005 was primarily due to sales andmaturities of $98.0 million of marketable securities largely offset by thepurchase of $91.5 million of marketable securities and the purchase of $963,000of property and equipment. Net cash used in investing activities in 2004 wasalso primarily due to the purchase of $94.0 million in marketable securities,payments for a business acquisition of $17.6 million and to a lesserextent the purchase of $791,000 in property and equipment offset by the saleand maturity of $88.3 million in marketable securities. In 2007, we expectour capital expenditures to be significantly higher than historical levels dueprimarily to the build out of our new headquarters office under a lease thatwas entered into in November 2006. See Note 5 to the ConsolidatedFinancial Statements.

*Financing Activities*

Net cash generated byfinancing activities was $3.1 million for 2006, $2.1 million for 2005, and$4.0 million for 2004. In 2006, cash generated by financing activities wasprimarily due to the exercise of employee stock options and the purchase of commonstock under the employee stock purchase plan of $3.1 million. In 2005, net cashgenerated by financing activities was primarily due to the exercise of employeestock options and the purchase of common stock under the employee stockpurchase plan of $3.1 million, offset by $0.9 million of common stockrepurchases by the Company. In 2004, net cash generated by financing activitiesof $4.0 million was primarily due to the exercise of employee stock options andthe purchase of common stock under the employee stock purchase plan.

*Commitments*

Thefollowing summarizes our contractual obligations at December 31, 2006 andthe effect these contractual obligations are expected to have on our liquidityand cash flows in future periods (in thousands).

| ** **       | ** ** | **Payments Due By Period** | ** ** |
|------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **Total**                                 | ** ** | **1 Year  or Less** | ** ** | **1—3  Years** | ** ** | **After  3 Years** | ** ** |
| Operating leases |       | $                                         | 5,777      |   | $ | 1,557 |   | $ | 1,988 |   | $ | 2,232 |   |
|                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

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These obligations are fornoncancelable operating leases which relate primarily to the lease of ourheadquarters office in Redwood City, California and international offices tocarry out sales, marketing, research and development, and services operations.

*Working Capital andCapital Expenditure Requirements*

At December 31, 2006, we had stockholders’ equityof $132.5 million and working capital of $118.2 million. Included as areduction to working capital is short-term deferred revenue of $13.4 million,which will not require settlement in cash, but will be recognized as revenue inthe future. We believe that our existing cash balances will be sufficient tomeet our working capital and capital expenditure requirements for at least thenext 12 months.

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

As noted above, we plan tomake substantial investments in our business during 2007, including but notlimited to such areas as (i) cost of services, (ii) sales andmarketing, (iii) research and development, and (iv) capitalexpenditures. We believe these investments and others are essential to creatingsustainable growth in our business in the future. Because these investmentswill likely precede any associated revenues, we expect our working capital todecrease in the near term.

*Recent AccountingPronouncements*

In June 2006, the FASB issued FASB InterpretationNo. (“FIN”) 48, *Accounting forUncertainty in Income Taxes-an Interpretation of FASB Statement No. 109*.FIN No. 48 clarifies the accounting for uncertainty in income taxes bycreating a framework for how companies should recognize, measure, present, anddisclose in their financial statements uncertain tax positions that they havetaken or expect to take in a tax return. FIN No. 48 is effective forfiscal years beginning after December 15, 2006 and is required to beadopted by the Company beginning in the first quarter of fiscal 2007. We arecurrently evaluating the impact of FIN No. 48 on our results of operationsand financial position.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements,*which defines fair value, provides a frameworkfor measuring fair value, and expands the disclosures required for fair valuemeasurements. SFAS No. 157 applies to other accounting pronouncements thatrequire fair value measurements; it does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007 and is required to be adopted by the Company beginning in the firstquarter of fiscal 2008. Although the Company will continue to evaluate theapplication of SFAS No. 157, management does not currently believe adoptionwill have a material impact on the Company’s results of operations or financialposition.

In February 2007, the FASBissued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*”. SFAS No. 159permits companies to choose to measure certain financial instruments andcertain other items at fair value. The standard requires that unrealized gainsand losses on items for which the fair value option has been elected bereported in earnings. SFAS No. 159 is effective for the Company beginningin the first quarter of fiscal year 2008, although earlier adoption ispermitted. The Company is currently evaluating the impact of adopting SFASNo. 159 on its consolidated financial statements.

39

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**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

As of December 31, 2006, we held $15.4 million incash and cash equivalents consisting of highly liquid investments havingoriginal maturity dates of no more than 90 days. A decline in interest ratesover time would reduce our interest income from our highly liquid marketablesecurities. Based upon our balance of cash and cash equivalents, a decrease ininterest rates of 100 basis points would cause a corresponding decrease in ourannual interest income of approximately $154,000. Due to the nature of ourhighly liquid cash equivalents, a change in interest rates would not materiallychange the fair market value of our cash and cash equivalents.

As of December 31,2006, we held $104.5 million in marketable securities, which consistedprimarily of money market funds held by large institutions in the U.S. andcommercial paper. Our marketable securities were primarily invested incorporate bonds, government debt securities maturing in less than eighteenmonths and auction-rate securities resetting in less than ninety days. Theweighted average interest rate of our portfolio was approximately 4.14% at December 31,2006. 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 $1.0 million. Due to the nature of our highly liquid cashequivalents, a change in interest rates would not materially change the fairmarket value of our marketable securities.

40

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

**SUPPORTSOFT, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                          | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
| Report of  Independent Registered Public Accounting Firm |       | 42       |   |
| Consolidated Balance Sheets                              |       | 43       |   |
| Consolidated  Statements of Operations                   |       | 44       |   |
| Consolidated  Statements of Stockholders’ Equity    |       | 45       |   |
| Consolidated  Statements of Cash Flows                   |       | 46       |   |
| Notes to  Consolidated Financial Statements              |       | 47       |   |

 

41

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders ofSupportSoft, Inc.

We have audited the accompanying consolidated balancesheets of SupportSoft, Inc. as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of SupportSoft, Inc. at December 31, 2006 and 2005, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles.

As discussed in Note 1 to the consolidated financialstatements, in 2006, SupportSoft, Inc. changed its method of accounting forshare-based payments in accordance with guidance provided in Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment.”

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of SupportSoft, Inc.’sinternal control over financial reporting as of December 31, 2006, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 12, 2007 expressed an unqualified opinion on management’sassessment and an adverse opinion on the effectiveness of internal control overfinancial reporting.
|                      | /s/  Ernst & Young LLP |
|----------------------|---------------------------------|
| San Jose, California |
| March 12, 2007  |

 

42

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**SUPPORTSOFT, INC.**

**CONSOLIDATED BALANCESHEETS(in thousands except share and per share data)**

| ** **                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                               |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                     |       | $                     | 15,369     |   | $ | 23,342 |   |
| Marketable securities                                                                                                                                                                         |       | 104,522               |       | 97,321 |   |
| Accounts receivable, less allowance of $373 and $296  at December 31, 2006 and 2005, respectively                                                                                        |       | 15,144                |       | 17,437 |   |
| Prepaid expenses and other current assets                                                                                                                                                     |       | 2,894                 |       | 2,451 |   |
| Total current assets                                                                                                                                                                          |       | 137,929               |       | 140,551 |   |
| Property and  equipment, net                                                                                                                                                                  |       | 937                   |       | 1,211 |   |
| Goodwill                                                                                                                                                                                      |       | 9,792                 |       | 9,792 |   |
| Intangible  assets, net                                                                                                                                                                       |       | 3,155                 |       | 3,994 |   |
| Other assets                                                                                                                                                                                  |       | 792                   |       | 701 |   |
| Total assets                                                                                                                                                                                  |       | $                     | 152,605    |   | $ | 156,249 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                          |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                              |       | $                     | 331        |   | $ | 1,030 |   |
| Accrued compensation                                                                                                                                                                          |       | 2,112                 |       | 2,669 |   |
| Other accrued liabilities                                                                                                                                                                     |       | 3,813                 |       | 2,985 |   |
| Deferred revenue, less long-term portion                                                                                                                                                      |       | 13,435                |       | 14,060 |   |
| Total current liabilities                                                                                                                                                                     |       | 19,691                |       | 20,744 |   |
| Deferred  revenue—long-term portion                                                                                                                                                      |       | 178                   |       | 969 |   |
| Other long-term  liabilities                                                                                                                                                                  |       | 233                   |       | 142 |   |
| Commitments and  contingencies                                                                                                                                                                |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                    |       |                  |       |   |   |
| Preferred stock; par value $0.0001, 5,000,000 shares  authorized, no shares issued or outstanding at December 31, 2006 and  2005                                                         |       | —                |       | — |   |
| Common stock; par value $0.0001, 150,000,000 shares  authorized, 44,587,720 issued and outstanding at December 31, 2006 and  43,627,075 issued and outstanding at December 31, 2005 |       | 4                     |       | 4 |   |
| Additional  paid-in capital                                                                                                                                                                   |       | 202,440               |       | 195,990 |   |
| Accumulated other  comprehensive loss                                                                                                                                                         |       | (751                  | )          | (645 | ) |
| Accumulated  deficit                                                                                                                                                                          |       | (69,190               | )          | (60,955 | ) |
| Total stockholders’ equity                                                                                                                                                               |       | 132,503               |       | 134,394 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                              |       | $                     | 152,605    |   | $ | 156,249 |   |

 

See accompanying notes.

43

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**SUPPORTSOFT, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(in thousands except per share data)**

| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                                      |       |                                        |       |   |   |   |   |
| License fees                                                  |       | $                                           | 16,415     |   | $ | 32,737 |   | $ | 37,923 |   |
| Maintenance                                                   |       | 15,672                                      |       | 14,317 |   | 11,002 |   |
| Services                                                      |       | 12,941                                      |       | 14,877 |   | 11,692 |   |
| Total revenue                                                 |       | 45,028                                      |       | 61,931 |   | 60,617 |   |
| Costs and  expenses:                                          |       |                                        |       |   |   |   |   |
| Cost of license fees                                          |       | 499                                         |       | 555 |   | 295 |   |
| Cost of maintenance                                           |       | 1,225                                       |       | 988 |   | 418 |   |
| Cost of services                                              |       | 13,599                                      |       | 13,128 |   | 9,592 |   |
| Amortization of intangible assets                             |       | 1,090                                       |       | 1,090 |   | 363 |   |
| Research and development                                      |       | 9,247                                       |       | 11,185 |   | 9,746 |   |
| Sales and marketing                                           |       | 23,336                                      |       | 25,159 |   | 23,965 |   |
| General and administrative                                    |       | 10,163                                      |       | 8,618 |   | 6,454 |   |
| In-process research and development                           |       | —                                      |       | — |   | 1,618 |   |
| Total costs and expenses                                      |       | 59,159                                      |       | 60,723 |   | 52,451 |   |
| Income (loss) from operations                                 |       | (14,131                                     | )          | 1,208 |   | 8,166 |   |
| Interest income  and other, net                               |       | 6,383                                       |       | 3,619 |   | 2,298 |   |
| Income (loss) before income taxes                             |       | (7,748                                      | )          | 4,827 |   | 10,464 |   |
| Provision for  income taxes                                   |       | (487                                        | )          | (402 | ) | (310 | ) |
| Net income (loss)                                             |       | $                                           | (8,235     | ) | $ | 4,425 |   | $ | 10,154 |   |
| Basic net income (loss) per share                             |       | $                                           | (0.19      | ) | $ | 0.10 |   | $ | 0.24 |   |
| Shares used in computing basic net income (loss) per  share   |       | 44,113                                      |       | 43,032 |   | 42,355 |   |
| Diluted net income (loss) per share                           |       | $                                           | (0.19      | ) | $ | 0.10 |   | $ | 0.22 |   |
| Shares used in  computing diluted net income (loss) per share |       | 44,113                                      |       | 44,519 |   | 45,590 |   |

 

See accompanying notes.

44

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**SUPPORTSOFT, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share data)**

| ** **                                                        | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Stockholders’** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                        | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Income (Loss)** | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
| Balances at December 31, 2003                                |       | 41,744,260            |       |                    | $          | 4                                     |       |                   |       | $                             | 189,693    |   |   |   | $ | (157 | ) |   |   | $ | (75,534 | ) |   |   | $ | 114,006 |   |   |
| Components of  comprehensive income:                              |       |                  |       |                    |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                        |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 10,154 |   |   |   | 10,154 |   |   |
| Unrealized loss on investments                                    |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | (265 | ) |   |   | — |   |   |   | (265 | ) |   |
| Foreign currency translation adjustment                           |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | (196 | ) |   |   | — |   |   |   | (196 | ) |   |
| Comprehensive income                                              |       |                  |       |                    |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   | 9,693 |   |   |
| Compensation expense related to stock options                     |       | —                |       |                    | —     |                                  |       |                   | 183        |                          |       |   | — |   |   |   | — |   |   |   | 183 |   |   |
| Issuance of common stock upon exercise of stock  options for cash |       | 766,027               |       |                    | —     |                                  |       |                   | 2,954      |                          |       |   | — |   |   |   | — |   |   |   | 2,954 |   |   |
| Issuance of common stock under employee stock  purchase plan      |       | 165,241               |       |                    | —     |                                  |       |                   | 1,021      |                          |       |   | — |   |   |   | — |   |   |   | 1,021 |   |   |
| Balances at December 31, 2004                                |       | 42,675,528            |       |                    | $          | 4                                     |       |                   |       | $                             | 193,851    |   |   |   | $ | (618 | ) |   |   | $ | (65,380 | ) |   |   | $ | 127,857 |   |   |
| Components of  comprehensive income:                              |       |                  |       |                    |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                        |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 4,425 |   |   |   | 4,425 |   |   |
| Unrealized gain on investments                                    |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | 152 |   |   |   | — |   |   |   | 152 |   |   |
| Foreign currency translation adjustment                           |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | (179 | ) |   |   | — |   |   |   | (179 | ) |   |
| Comprehensive income                                              |       |                  |       |                    |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   | 4,398 |   |   |
| Issuance of common stock upon exercise of stock  options for cash |       | 959,016               |       |                    | —     |                                  |       |                   | 2,162      |                          |       |   | — |   |   |   | — |   |   |   | 2,162 |   |   |
| Issuance of common stock under employee stock  purchase plan      |       | 185,129               |       |                    | —     |                                  |       |                   | 899        |                          |       |   | — |   |   |   | — |   |   |   | 899 |   |   |
| Repurchase of common stock                                        |       | (192,598              | )          |                    |       |                                  |       |                   | (922       | )                             |       |   |   |   |   |   |   |   |   |   | (922 | ) |   |
| Balances at December 31, 2005                                |       | 43,627,075            |       |                    | $          | 4                                     |       |                   |       | $                             | 195,990    |   |   |   | $ | (645 | ) |   |   | $ | (60,955 | ) |   |   | $ | 134,394 |   |   |
| Components of comprehensive  income:                              |       |                  |       |                    |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                          |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | (8,235 | ) |   |   | (8,235 | ) |   |
| Unrealized gain on investments                                    |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | 63 |   |   |   | — |   |   |   | 63 |   |   |
| Foreign currency translation adjustment                           |       | —                |       |                    | —     |                                  |       |                   | —     |                          |       |   | (169 | ) |   |   | — |   |   |   | (169 | ) |   |
| Comprehensive loss                                                |       |                  |       |                    |       |                                  |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   | (8,341 | ) |   |
| Stock-based compensation expense                                  |       |                  |       |                    |       |                                  |       |                   | 3,338      |                          |       |   |   |   |   |   |   |   |   |   | 3,338 |   |   |
| Issuance of common stock upon exercise of stock  options for cash |       | 807,967               |       |                    | —     |                                  |       |                   | 2,600      |                          |       |   | — |   |   |   | — |   |   |   | 2,600 |   |   |
| Issuance of common stock under employee stock purchase  plan      |       | 152,678               |       |                    | —     |                                  |       |                   | 512        |                          |       |   | — |   |   |   | — |   |   |   | 512 |   |   |
| Balances at  December 31, 2006                               |       | 44,587,720            |       |                    | $          | 4                                     |       |                   |       | $                             | 202,440    |   |   |   | $ | (751 | ) |   |   | $ | (69,190 | ) |   |   | $ | 132,503 |   |   |

 

See accompanying notes.

45

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**SUPPORTSOFT, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

| ** **                                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating activities:                                                                                |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                                    |       | $                                          | (8,235     | ) | $ | 4,425 |   | $ | 10,154 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                       |       |   |   |   |   |
| Depreciation                                                                                         |       | 988                                        |       | 1,099 |   | 766 |   |
| Stock-based compensation expenses                                                                    |       | 3,338                                      |       | — |   | 183 |   |
| Amortization of intangible assets                                                                    |       | 1,090                                      |       | 1,090 |   | 363 |   |
| In-process research and development                                                                  |       | —                                     |       | — |   | 1,618 |   |
| Changes in assets  and liabilities:                                                                  |       |                                       |       |   |   |   |   |
| Accounts receivable, net                                                                             |       | 2,293                                      |       | (7,843 | ) | 2,985 |   |
| Prepaid expenses and other current assets                                                            |       | (443                                       | )          | 1,072 |   | 291 |   |
| Other assets                                                                                         |       | (91                                        | )          | (177 | ) | 195 |   |
| Accounts payable                                                                                     |       | (700                                       | )          | 686 |   | (83 | ) |
| Accrued compensation                                                                                 |       | (556                                       | )          | (87 | ) | 904 |   |
| Other accrued liabilities                                                                            |       | 828                                        |       | 378 |   | 726 |   |
| Other long-term liabilities                                                                          |       | 91                                         |       | 142 |   | — |   |
| Deferred revenue                                                                                     |       | (1,416                                     | )          | (1,612 | ) | (4,281 | ) |
| Other                                                                                                |       | (223                                       | )          | (17 | ) | 673 |   |
| Net cash provided by (used in) operating activities                                                  |       | (3,036                                     | )          | (844 | ) | 14,494 |   |
| Investing  activities:                                                                               |       |                                       |       |   |   |   |   |
| Purchases of property and equipment                                                                  |       | (964                                       | )          | (963 | ) | (791 | ) |
| Payment for business acquisition, net of cash  acquired                                              |       | —                                     |       | — |   | (17,562 | ) |
| Purchases of marketable securities                                                                   |       | (92,351                                    | )          | (91,493 | ) | (94,079 | ) |
| Sales and maturities of marketable securities                                                        |       | 85,266                                     |       | 97,994 |   | 88,264 |   |
| Net cash provided by (used in) investing activities                                                  |       | (8,049                                     | )          | 5,538 |   | (24,168 | ) |
| Financing  activities:                                                                               |       |                                       |       |   |   |   |   |
| Proceeds from issuances of common stock                                                              |       | 3,112                                      |       | 3,061 |   | 3,975 |   |
| Repurchase of common stock                                                                           |       | —                                     |       | (922 | ) | — |   |
| Net cash provided by financing activities                                                            |       | 3,112                                      |       | 2,139 |   | 3,975 |   |
| Net increase (decrease) in cash and cash equivalents                                                 |       | (7,973                                     | )          | 6,833 |   | (5,699 | ) |
| Cash and cash  equivalents at beginning of period                                                    |       | 23,342                                     |       | 16,509 |   | 22,208 |   |
| Cash and cash equivalents at end of period                                                           |       | $                                          | 15,369     |   | $ | 23,342 |   | $ | 16,509 |   |
| Supplemental  schedule of cash flow information:                                                |       |                                       |       |   |   |   |   |
| Income taxes paid                                                                                    |       | $                                          | 294        |   | $ | 293 |   | $ | 247 |   |

 

See accompanying notes.

46

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1. Organization andSummary of Significant Accounting Policies**

*Nature ofOperations*

SupportSoft, Inc. (“SupportSoft,” “the Company,” “We”or “Our”), was incorporated in the state of Delaware on December 3, 1997. Weare a leading provider of software and services that automate the resolution oftechnology problems.  Our solutions reduce technology support costs,improve customer satisfaction and enable new revenue streams for organizationsworldwide.  We recently expanded ourofferings and now provides technology support directly to consumers. 

Our headquarters islocated in Redwood City, California and we maintain offices in several othercities in the United States. We have international operations in severalcountries around the world.

*Basis ofPresentation*

The consolidated financialstatements include the accounts of SupportSoft and its wholly-ownedsubsidiaries. SupportSoft has export sales from the United States and hasoperations in India, Canada, Europe and the Asia/Pacific region. Allsignificant intercompany transactions and balances have been eliminated.

*Acquisition*

On September 2, 2004,the Company acquired substantially all the assets and certain liabilities ofCore Networks Incorporated (“Core Networks”). The acquisition was accounted foras a purchase and the operating results have been included in our consolidatedfinancial statements since the date of acquisition.

*Foreign CurrencyTranslation*

Assets and liabilities ofSupportSoft’s wholly-owned foreign subsidiaries are translated from theirrespective functional currencies at exchange rates in effect at the balancesheet date, and revenues and expenses are translated at average exchange ratesprevailing during the year. Any material resulting translation adjustments arereflected as a separate component of stockholders’ equity in accumulated othercomprehensive income or loss. Realized foreign currency transaction gains andlosses were not material during the years ending December 31, 2006, 2005,and 2004.

*Use of Estimatesand Reclassifications*

The preparation of consolidatedfinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and theaccompanying notes. Actual results could differ materially from theseestimates. The Company has made certain reclassifications to conform to currentyear’s presentation.

*Concentrations ofCredit Risk*

Financial instruments thatpotentially subject us to concentrations of credit risk consist principally ofcash equivalents, marketable securities and trade accounts receivable. Ourinvestment portfolio is diversified and consists of investment gradesecurities. Our investment policy limits the amount of credit risk exposure toany one issuer and in any one country except the United States. We are exposedto credit 

47

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

risks inthe event of default by the issuers to the extent of the amount recorded on thebalance sheet. The credit risk in our trade accounts receivable issubstantially mitigated by our credit evaluation process, reasonably shortcollection terms and because the Company sells its products primarily to largeorganizations in diversified industries.

*Trade AccountsReceivable and Allowance for Doubtful Accounts*

Trade accounts receivable are recorded at the invoicedamount. We perform evaluations of our customers’ financial condition andgenerally do not require collateral. We make judgments as to our ability tocollect outstanding receivables and provide allowances for the portion ofreceivables when collection becomes doubtful. Provisions are made based upon aspecific review of all significant outstanding invoices. For those invoices notspecifically provided for, provisions are recorded at differing rates, basedupon the age of the receivable. In determining these percentages, we analyzeour historical collection experience and current payment trends. If thehistorical data we use to calculate the allowance for doubtful accounts doesnot reflect the future ability to collect outstanding receivables, additionalprovisions for doubtful accounts may be needed and the future results ofoperations could be materially affected.

Thefollowing table summarizes the allowance for doubtful accounts as of December 31,2006, 2005 and 2004 (in thousands):

| ** **                         | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged/  (Recovery) to  Costs and  Expenses** | ** ** | **Write-  offs** | ** ** | **Balance at  End  of Period** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|------------------|------------|------------------------------------------|------------|
| Allowance for doubtful  accounts:  |       |                                           |       |                                                       |       |             |       |                                     |       |   |   |   |   |   |   |
| Year ended December 31, 2004  |       |                                           | $          | 735                                                        |       |             |       | $                                        | (134       | ) |   | $ | (154 | ) |   | $ | 447 |   |   |
| Year ended December 31, 2005  |       |                                           | 447        |                                                       |       |             | 209        |                                     |       | (360 | ) |   | 296 |   |   |
| Year ended  December 31, 2006 |       |                                           | 296        |                                                       |       |             | 185        |                                     |       | (108 | ) |   | 373 |   |   |
|                                    |            |                                                |            |                                                            |            |                  |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table lists customers representing greater than 10% of total accountreceivable, net as of December 31, 2006 and 2005:

| ** ** | ** ** | **% of Total  Accounts Receivable,  Net Years Ended  December 31,** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                                                          | ** ** | **2005** | ** ** |
| Customer A |       |                                                                                              | 15         | % |   |   | 20 | % |   |
| Customer B |       |                                                                                              | —     |   |   |   | 20 | % |   |

 

Included in accountsreceivable and deferred revenue at December 31, 2006 is approximately $1.0million related to advance maintenance billings for customers who have electedto renew their maintenance contracts.

48

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

*Cash, CashEquivalents and Marketable Securities*

SupportSoft considers all liquid instruments with anoriginal maturity at the date of purchase of ninety days or less to be cashequivalents. Cash equivalents and marketable securities consist primarily ofmoney market funds, commercial paper, auction rate securities, corporate bondsand notes and treasury bills issued by the United States government and itsagencies. Our cash equivalents and marketable securities are classified asavailable-for-sale, and are reported at fair value with unrealized gains andlosses included in accumulated other comprehensive income within stockholders’equity on the consolidated balance sheets. Realized gains and losses anddeclines in value judged to be other than temporary on available-for-salesecurities are included in other income (expense), net in the consolidatedstatements of operations. The amortized cost of debt securities is adjusted foramortization of premiums and accretion of discounts to maturity, both of whichare included in interest income. SupportSoft recorded net unrealized losses onavailable-for-sale securities of $54,000 and $117,000 as of December 31,2006 and 2005, respectively. Realized gains and losses are recorded using thespecific identification method and were immaterial during the years ending December 31,2006, 2005, and 2004.

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

Thefollowing is a summary of available-for-sale securities (in thousands):

| ** **                     | ** ** | **For the Year Ended December 31, 2006** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**                                                    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| Cash                           |       | $                                                                      | 2,372      |   |   | $ | — |   |   |   | $ | — |   |   | $ | 2,372 |   |
| Money market fund              |       | 22                                                                     |       |   | — |   |   |   | — |   |   | 22 |   |
| Commercial paper               |       | 35,390                                                                 |       |   | — |   |   |   | (30 | ) |   | 35,360 |   |
| Federal agencies               |       | 2,000                                                                  |       |   | — |   |   |   | (1 | ) |   | 1,999 |   |
| Corporate bonds                |       | 31,511                                                                 |       |   | — |   |   |   | (23 | ) |   | 31,488 |   |
| Auction rate  securities       |       | 48,650                                                                 |       |   | — |   |   |   | — |   |   | 48,650 |   |
|                           |       | $                                                                      | 119,945    |   |   | $ | — |   |   |   | $ | (54 | ) |   | $ | 119,891 |   |
| Classified as:                 |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents |       | $                                                                      | 15,372     |   |   | $ | — |   |   |   | $ | (3 | ) |   | $ | 15,369 |   |
| Marketable securities          |       | 104,573                                                                |       |   | — |   |   |   | (51 | ) |   | 104,522 |   |
|                           |       | $                                                                      | 119,945    |   |   | $ | — |   |   |   | $ | (54 | ) |   | $ | 119,891 |   |

** **

49

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

 

| ** **                     | ** ** | **For the Year Ended December 31, 2005** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**                                                    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| Cash                           |       | $                                                                      | 8,257      |   |   | $ | — |   |   |   | $ | — |   |   | $ | 8,257 |   |
| Money market fund              |       | 625                                                                    |       |   | — |   |   |   | — |   |   | 625 |   |
| Commercial paper               |       | 16,725                                                                 |       |   | — |   |   |   | (3 | ) |   | 16,722 |   |
| Federal agencies               |       | 1,000                                                                  |       |   | — |   |   |   | — |   |   | 1,000 |   |
| Corporate bonds                |       | 22,773                                                                 |       |   | — |   |   |   | (114 | ) |   | 22,659 |   |
| Auction rate  securities       |       | 71,400                                                                 |       |   | — |   |   |   | — |   |   | 71,400 |   |
|                           |       | $                                                                      | 120,780    |   |   | $ | — |   |   |   | $ | (117 | ) |   | $ | 120,663 |   |
| Classified as:                 |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents |       | $                                                                      | 23,345     |   |   | $ | — |   |   |   | $ | (3 | ) |   | $ | 23,342 |   |
| Marketable securities          |       | 97,435                                                                 |       |   | — |   |   |   | (114 | ) |   | 97,321 |   |
|                           |       | $                                                                      | 120,780    |   |   | $ | — |   |   |   | $ | (117 | ) |   | $ | 120,663 |   |

 

Thefollowing table summarizes the estimated fair value of our available-for-saledebt securities held in marketable securities classified by the stated maturitydate of the security (in thousands):

| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Due within one  year    |       | $                     | 51,103     |   | $ | 56,371 |   |
| Due within two  years   |       | 4,769                 |       | — |   |
| Due within three  years |       | —                |       | — |   |
| Due after three years   |       | 48,650                |       | 40,950 |   |
|                    |       | $                     | 104,522    |   | $ | 97,321 |   |

 

Although SupportSoft’sinvestment portfolio in auction rate securities includes investments maturingafter 3 years, these investments are highly liquid and typically reset between28 and 90 days and are therefore classified in marketable securities.

*Property andEquipment*

Property and equipment isstated at cost, less accumulated depreciation which is determined using thestraight-line method over the estimated useful lives of 2 years for computerequipment and software, 3 years for furniture and fixtures, and the shorter ofthe estimated useful lives or the lease term for leasehold improvements.

*Goodwill*

Goodwill resulted from the Company’s acquisition ofCore Networks on September 2, 2004. The Company applies the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 142, “*Goodwill and Other Intangibles Assets*,” which prohibits theamortization of goodwill.

50

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

We assess the impairmentof goodwill annually or more often if events or changes in circumstancesindicate that the carrying value may not be recoverable. An impairmentloss would be recognized when the sum of the discounted future net cash flowsexpected to result from the use of the asset and its eventual disposition isless than its carrying amount. Such impairment loss would be measured as thedifference between the carrying amount of the asset and its fair value. Theestimate of cash flows is based upon, among other things, certain assumptionsabout expected future operating performance and an appropriate discount ratedetermined by our management. Our estimates of discounted cash flowsmay differ from actual cash flows due to, among other things, economicconditions, changes to the business model or changes in operating performance.If we made different estimates, material differences may result inwrite-down of net long-lived and intangible assets, which would be reflected bycharges to our operating results for any period presented. At September 30,2006, we concluded our annual evaluation for impairment of goodwill and noimpairment was recognized. We will continue to test for impairment during thethird quarter of each year, or earlier if indicators of impairment exist.

*Intangible Assets*

The Company records purchased intangible assets atfair value. The original cost is amortized on a straight-line basis over theestimated useful life of each asset. We assess the impairment of intangibleassets whenever events or changes in circumstances indicate that its carryingamount may not be recoverable. We perform an annual review to determine ifthe carrying value of the intangible asset is impaired, unless events orcircumstances indicate a potential impairment exists in which case a review isperformed more often. The review considers facts and circumstance, eitherinternal or external, which indicate that the carrying value of the assetcannot be recovered. If and when indicators of impairment exist, SupportSoftassesses the need to record an impairment loss, by comparing the undiscountednet cash flows associated with related assets or group of assets over theirremaining lives against their respective carrying amounts. Impairment, if any,is based on the excess of the carrying amount over the fair value of thoseassets.

As of December 31,2006, intangible assets, in the amount of $2.9 million, net of amortization,consist of customer relationships, developed and core technology, which areamortized over an estimated useful lives of 5 years. Included in intangibleassets, in the aggregate amount of $250,000, is the cost of obtaining atoll-free telephone number which does not have a finite useful life.

*Revenue Recognition*

We recognizerevenue in accordance with the American Institute of Certified PublicAccountants’ (AICPA) Statement of Position (“SOP”) 97-2, Software RevenueRecognition, as amended by SOP 98-4 and SOP 98-9. License revenueis recognized when all of the following criteria are met:

·       Persuasiveevidence of an arrangement exists;

·       Deliveryhas occurred;

·       Collectionis considered probable; and

51

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

·       Thefees are fixed or determinable.

SupportSoft considers all arrangements with paymentterms longer than 90 days, not to be fixed or determinable. If the fee isdetermined not to be fixed or determinable, revenue is recognized as paymentsbecome due from the customer.

License revenue is comprised of fees for perpetual andterm licenses of our software. Perpetual license revenue is recognized usingthe residual method, in compliance with SOP 98-9 for arrangements inwhich licenses are sold with multiple elements. We allocate revenues on theselicenses based upon the fair value of each undelivered element includingundelivered maintenance, consulting and training. The determination of fairvalue is based upon vendor specific objective evidence (VSOE). VSOE formaintenance is based upon separate renewals of maintenance from customers. VSOEfor consulting or training is based upon separate sales of these services tocustomers. Assuming all other revenue recognition criteria are met, thedifference between the total arrangement fee and the amount deferred for eachundelivered element is recognized as license revenue. In perpetual arrangementsthat include contractual obligations such as rights to unspecified futureproducts, license revenue is recognized ratably over the contract period.

Term licenses are sold with maintenance for whichSupportSoft does not have VSOE to determine fair value for maintenance fees. Asa result, license revenue for term licenses is recognized ratably over theduration of the agreement. License revenue in the accompanying financialstatements includes maintenance for term licenses. We do not allocatemaintenance revenue from term licenses to maintenance revenue, as we do notbelieve there is an allocation methodology that provides a meaningful andsupportable allocation between license and maintenance revenues. Servicesrevenue associated with the term licenses are recognized ratably over theperiod associated with the initial payment, generally one year.

We provide resellers with the right to sublicense oursoftware to end user customers. Generally, we recognize revenue from ourarrangements with resellers when we receive persuasive evidence that the resellerhas actually sublicensed the software to a named end user (sell-through),assuming all other criteria for revenue recognition have been met. The forms ofsell-through acceptable to us include one or more of 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. When licensing arrangements with resellers include guaranteed minimumamounts due, revenue is recognized ratably over the term of the arrangementcommencing when payments are made or become due.

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

Services revenue is primarily comprised of revenuefrom professional services such as consulting, training and hosting fees. Arrangementsare evaluated to determine whether those services are essential to 

52

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

the functionality of otherelements of the arrangement. In the event services are considered essential tothe functionality of other elements of the arrangement, revenue under thearrangement is recognized using contract accounting. Non-essential consultingand training revenues are generally recognized as the services are performed orproject milestones are accepted by the customer. When non-essential servicesare bundled in a term licensing arrangement, revenue from the services isrecognized ratably over the period associated with the initial payment,generally one year.

In connection withlicensing arrangements we may also provide hosting of our own software, aservice for which SupportSoft does not have VSOE currently. If hosting servicesare sold with perpetual licenses, license revenue is recognized ratably overthe term of the hosting contract. Hosting revenue is also recognized ratablyover the duration of the hosting contract. Consulting services sold inconjunction with arrangements that include licenses and hosting services arerecognized ratably over the duration of the hosting term.

*Research andDevelopment*

Research and developmentexpenditures are charged to operations as incurred. Statement of FinancialAccounting Standards No. 86, “*Accounting for the Costsof Computer Software to Be Sold, Leased or Otherwise Marketed*,”requires the capitalization of certain software development costs subsequent tothe establishment of technological feasibility. Based on SupportSoft’s productdevelopment process, technological feasibility is established upon thecompletion of a working model. Costs incurred by SupportSoft between thecompletion of the working model and the point at which the product is ready forgeneral release have been insignificant. Accordingly, SupportSoft has chargedall such costs to research and development expense in the accompanyingstatements of operations. SupportSoft did not incur any cost related tosoftware developed or for software obtained for internal use as defined in SOP98-1.

*Sales Commissions*

Sales commissions are theincremental costs that are directly associated with non-cancelable contractswith customers and consist of commissions paid to the Company’s salespersonnel. If the customer contract is a perpetual license, the commissionexpense attributable to the license fees are recorded in the month licenserevenue is recognized. For term licenses and other ratable licensearrangements, sales commissions are deferred and amortized over thenon-cancelable terms of the related customer contracts, which are typically 12to 36 months. The sales commissions, which are paid in the month following thetime an order is consummated or when customer payment is received, are a directand incremental cost of the revenue arrangements. The deferred commissionamounts are recoverable through the future revenue streams under the non-cancelablecustomer contracts. Commissions payments made to sales personnel arenon-refundable unless amounts due from a customer are determined to beuncollectible in which cash commissions paid are generally recoverable by theCompany.

*Advertising Costs*

Advertising costs arerecorded as sales and marketing expense in the period in which they areincurred. Advertising expense was $725,000, $224,000, and $357,000 for the yearsended December 31, 2006, 2005, and 2004, respectively.

53

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

*Net Income (Loss)Per Share*

Basic and diluted net income (loss) per share arepresented in conformity with the Financial Accounting Standards Board’s (“FASB”)Statement of Financial Accounting Standards No. 128, “*Earnings PerShare*” (“FAS 128”), for all periods presented. Basic net income(loss) per share is computed using net income (loss) and the weighted averagenumber of common shares outstanding during the reporting period. Diluted netincome (loss) per share is computed using net income and the weighted averagenumber of common shares outstanding, including the effect from the potentialissuance of common stock such as stock issuable pursuant to the exercise ofstock options using the treasury stock method when dilutive.

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share (in thousands, except per share amounts):

| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                      |       | $                                          | (8,235     | ) | $ | 4,425 |   | $ | 10,154 |   |
| Basic:                                                 |       |                                       |       |   |   |   |   |
| Weighted-average shares of common stock outstanding    |       | 44,113                                     |       | 43,032 |   | 42,355 |   |
| Shares used in computing basic net income per share    |       | 44,113                                     |       | 43,032 |   | 42,355 |   |
| Basic net income (loss) per share                      |       | $                                          | (0.19      | ) | $ | 0.10 |   | $ | 0.24 |   |
| Diluted:                                               |       |                                       |       |   |   |   |   |
| Weighted-average shares of common stock outstanding    |       | 44,113                                     |       | 43,032 |   | 42,355 |   |
| Add: Common equivalent shares outstanding              |       | —                                     |       | 1,487 |   | 3,235 |   |
| Shares used in computing diluted net income per  share |       | 44,113                                     |       | 44,519 |   | 45,590 |   |
| Diluted net  income (loss) per share                   |       | $                                          | (0.19      | ) | $ | 0.10 |   | $ | 0.22 |   |

 

In 2006, SupportSoft hasnot included the effect from the potential issuance of common stock as a resultof the exercise of stock options as the issuance of these shares would beanti-dilutive due to the net loss incurred in the current period.

*Accumulated OtherComprehensive Loss*

The components ofaccumulated other comprehensive loss relate entirely to accumulated foreigncurrency translation losses and unrealized losses on available-for-salesecurities. Accumulated currency translation losses were $697,000 and $528,000as of December 31, 2006 and 2005, respectively, and accumulated unrealizedlosses on available-for-sale securities were $54,000 and $117,000 as of December 31,2006 and 2005, respectively.

*Stock-BasedCompensation*

On January 1, 2006, the Company adopted Statementof Financial Accounting Standards No. 123 (revised 2004), “*Share-Based Payment*,” (“SFAS 123R”) which requires themeasurement and recognition of compensation expense for all stock-based paymentawards, including employee stock options and 

54

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

employee stock purchases fromemployee stock purchase plan. Prior to January 1, 2006, the Companyaccounted for stock-based payments to employees using the intrinsic valuemethod under APB Opinion No. 25, as permitted by SFAS 123R, and, as such,generally recognized no compensation cost for employee stock options oremployees stock purchases.

SupportSoft elected the modified prospectivetransition method for adopting SFAS 123R which required the application of theaccounting standard as of January 1, 2006, the first day of the Company’s2006 fiscal year. Under this transition method, compensation cost recognizedincludes the applicable amounts of: (a) compensation cost for allstock-based payments granted prior to, but not yet vested, as of December 31,2005 based on the grant-date fair value estimated in accordance with theoriginal provisions of SFAS 123R and previously presented in the pro-formafootnote disclosures, and (b) compensation cost of all stock-basedpayments granted subsequent to January 1, 2006 based on the grant-datefair value estimated in accordance with the new provisions of SFAS 123R. Priorperiods have not been restated to reflect the impact of SFAS 123R.

Determining Fair Value

Valuation and Attribution Method: SupportSoftestimates the fair value of stock options granted using the *Black-Scholes option pricing model*. Stock options vest on agraded schedule; however the Company recognizes the expense on a straight-linebasis over the requisite service period of the entire award, net of estimatedforfeitures and subject to the minimum expense requirements of SFAS 123R. Compensationcost recognized is at least equal to the portion of the grant-date fair valueof the award that is vested at that date.

Risk-free Interest Rate: The Company bases itsrisk-free interest rate upon the yield currently available on US Treasury zerocoupon issues for the expected term of the employee stock options.

Expected Term: The Company’s expected term representsthe period that the Company’s stock options are expected to be outstanding andis determined based on historical experience of similar stock optionsconsidering the contractual terms of the stock options, vesting schedules andexpectations of future employee behavior.

Expected Volatility: The Company’s expected volatilityrepresents the amount by which the stock price is expected to fluctuatethroughout the period that the stock option is outstanding. The Company basesits expected volatility on a weighted average calculation combining bothhistorical and implied volatilities as it believes that this combination ismore representative of future stock price trends than historical volatilityalone. The implied volatility factor included in this computation is based upontraded options on the Company’s stock.

Estimated Forfeitures: SFAS 123R requires that thestock option expense recognized be based on awards that are ultimately expectedto vest, and therefore a forfeiture rate should be applied at the time of grantand revised, if necessary, in subsequent periods when actual forfeitures differfrom those estimates. Prior to January 1, 2006, the Company accounted forforfeitures only as they occurred. Commencing in 2006, the Company has estimatedits forfeitures based on historical experience.

Expected Dividend: The Company uses a dividend yieldof zero, as it has never paid cash dividends and does not expect to paydividends in the future.

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1. Organization andSummary of Significant Accounting Policies (Continued)**

The fair value of the Company’s stock-based awards wasestimated using the following assumptions for the years ended December 31,2006, 2005 and 2004:

| ** **                   | ** ** | **Stock Option Plan** | ** ** | **Employee Stock Purchase Plan** | ** ** |
|------------------------------|------------|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                        | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate     |       | 4.8                             | %          | 4.1                                             | %          | 3.4 | % | 4.7 | % | 3.1 | % | 1.2 | % |
| Expected term (in years)     |       | 3.9                             |       | 4.0                                             |       | 4.0 |   | 0.5 to 2.0 |   | 0.5 to 2.0 |   | 0.5 to 2.0 |   |
| Volatility                   |       | 53.5                            | %          | 70.9                                            | %          | 84.0 | % | 54.1 | % | 74.6 | % | 79.5 | % |
| Estimated forfeitures        |       | 8.0                             | %          | 0                                               | %          | 0 | % | 8.0 | % | 0 | % | 0 | % |
| Expected dividend            |       | 0                               | %          | 0                                               | %          | 0 | % | 0 | % | 0 | % | 0 | % |
| Weighted average  fair value |       | $                               | 2.01       |                                            | $          | 2.75 |   | $ | 4.48 |   | $ | 1.66 |   | $ | 2.83 |   | $ | 3.16 |   |
|                              |            |                                 |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Tax Effects of Stock-Based Payments

On November 10, 2005, the Financial AccountingStandards Board (FASB) issued FASB Staff Position No. SFAS-123R-3“*Transition Election Related to Accounting for TaxEffects of Share-Based Payment Awards*” which provides for analternative transition method to calculate the tax effects of stock-basedcompensation expense pursuant to SFAS 123R. We adopted the alternativetransition method provided in the FASB Staff Position for calculating the taxeffects of stock-based compensation pursuant to SFAS 123(R) in the fourthquarter of fiscal 2006. The alternative transition method includes simplifiedmethods to establish the beginning balance of the additional paid-in capitalpool (APIC pool) related to the tax effects of employee stock-basedcompensation, and to determine the subsequent impact on the APIC pool andConsolidated Statements of Cash Flows of the tax effects of employeestock-based compensation awards that are outstanding upon adoption of SFAS123(R). The adoption did not have a material impact on our results ofoperations and financial condition.

Stock Compensation Expense

TheCompany recorded the following stock-based compensation expense for the fiscalyear ended December 31, 2006 (in thousands):

| ** **                                                             | ** ** | **Fiscal Year  Ended December 31,  2006** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Stock option  compensation expense recognized in:                      |       |                                                     |       |   |   |
| Cost of services                                                       |       |                                                     | $          | 292 |   |   |
| Research and  development                                              |       |                                                     | 316        |   |   |
| Sales and  marketing                                                   |       |                                                     | 774        |   |   |
| General and  administrative                                            |       |                                                     | 1,572      |   |   |
|                                                                   |       |                                                     | 2,954      |   |   |
| ESPP compensation  expense recognized in:                              |       |                                                     |       |   |   |
| Cost of services                                                       |       |                                                     | 87         |   |   |
| Research and  development                                              |       |                                                     | 106        |   |   |
| Sales and  marketing                                                   |       |                                                     | 125        |   |   |
| General and  administrative                                            |       |                                                     | 66         |   |   |
|                                                                   |       |                                                     | 384        |   |   |
| Stock-based compensation  expense included in total costs and expenses |       |                                                     | $          | 3,338 |   |   |

** **

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

Included above was $238,000, of stock-basedcompensation expense related to the acceleration of the stock options awardedto the Company’s former chief executive officer in connection with a transitionagreement dated March 12, 2006. Pursuant to the terms of this agreement,provided the former CEO remained an employee of the Company, on the date theBoard of Directors appointed a new CEO, all then outstanding and unvestedoptions would be immediately vested. A new CEO was appointed on April 6,2006 and vesting of 115,625 shares was accelerated.

There was no stock-based compensation expenserecognized for the years ended December 31, 2005 and 2004.

As a result of adopting SFAS 123R, the Company’sloss before income taxes and net loss for the year ended December 31, 2006was $3.3 million higher than if it had continued to account for share-basedcompensation under APB 25. Basic and diluted loss per share for the yearended December 31, 2006 would have both been $0.08 lower if the Companyhad not adopted SFAS 123R.

No income tax benefit was realized from stock optionexercises during the year ended December 31, 2006. In accordance with SFAS123R, we present excess tax benefits from the exercise of stock options, ifany, as cash flow from financing activities in the accompanying ConsolidatedStatements of Cash Flows.

Thetable below reflects the net income (loss) and net income (loss) per share forthe year ended December 31, 2006. Pro-forma information requiredunder SFAS 123R for periods prior to 2006 as if the Company has appliedthe fair value recognition provision under SFAS 123R is as follows:

| ** **                                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income—as  reported for the prior period(1)                                                  |       | $        | N/A        |     | $          | 4,425    |       | $ | 10,154 |   |
| Stock-based compensation  expense relating to:                                                        |       |     |       |     |       |     |       |
| Stock options(2)                                                                                      |       | (2,953   | )          | (20,540  | )          | (8,478   | )          |
| ESPP stock  purchases(2)                                                                              |       | (385     | )          | (575     | )          | (1,042   | )          |
| Net income  (loss), including the effect of stock-based compensation expense(3)                       |       | $        | (8,235     | )        | $          | (16,690  | )          | $ | 634 |   |
| Basic net income  per share—as reported for the prior period                                     |       | N/A      |       | $        | 0.10       |     | $          | 0.24 |   |
| Basic net income  (loss) per share—pro-forma, including the effect of stock-based  compensation  |       | $        | (0.19      | )        | $          | (0.39    | )          | $ | 0.01 |   |
| Diluted net income per share—as reported for the prior period                                    |       | N/A      |       | $        | 0.10       |     | $          | 0.22 |   |
| Diluted net income (loss)  per share—pro-forma, including the effect of stock-based compensation |       | $        | (0.19      | )        | $          | (0.39    | )          | $ | 0.01 |   |

 

----

(1)          Net income and netincome per share prior to January 1, 2006 did not include stock-basedcompensation expense for stock options and employee stock purchases under SFAS123R because the Company had not adopted the recognition provisions of SFAS123R.

(2)          Stock-based compensationexpense, net income (loss) and net income (loss) per share prior to January 1,2006 is calculated based on the pro-forma application of SFAS 123R.

(3)          Net income and netincome (loss) per share prior to fiscal 2006 represents pro-formainformation including the effect of stock-based compensation based on SFAS123R.

Prior to the adoption ofSFAS 123R, our Board of Directors approved the acceleration of vesting ofcertain unvested and out-of-money stock options with exercise prices equal toor greater than $5.00 per 

57

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

sharepreviously awarded to employees, including executive officers, under our equitycompensation plans. The acceleration of vesting was effective for stock optionsoutstanding as of December 21, 2005. Options to purchase approximately3.0 million shares of common stock or 32% of our then outstanding unvestedstock options were subject to this acceleration. The weighted average price ofthe options that were accelerated was $7.02. The options accelerated excludedoptions previously granted to Board of Directors, employees who had terminationspending and foreign employees who opted out of the acceleration for taxreasons. For all officers and vice-presidents (non-officers) the accelerationwas accompanied by restrictions imposed on any shares that may in the future bepurchased through the exercise of accelerated stock options. Those restrictionsprevent the sale of any such shares prior to the date such shares would haveoriginally vested had the optionee been employed on such date (whether or notthe optionee is actually an employee at that time). The purpose of theacceleration was to enable us to avoid recognizing compensation expenseassociated with these options in our Consolidated Statements of Operations uponthe adoption of SFAS 123R on January 1, 2006. The acceleration of the vestingof these stock options resulted in an approximate total savings of $12.0million of future compensation expense that would have impacted expensesthrough the third quarter of 2009.

*Income Taxes*

Income taxes are accountedfor under the asset and liability method. Under this method, deferred taxassets and liabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases, and operatinglosses and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be reversed or settled. The effect on deferredtax assets and liabilities of a change in tax rates is recognized in theconsolidated statements of operations in the period that includes the enactmentdate. A valuation allowance is recorded to reduce the carrying amounts ofdeferred tax assets, if it is more likely than not, that such assets will notbe realized.

*Warranties andIndemnifications*

The Company generally provides a warranty for itssoftware products and services to its customers and accounts for its warrantiesunder the FASB’s Statement of Financial Accounting Standards No. 5, “Accountingfor Contingencies” (“FAS No. 5”). Our standard warranty period is 90 days,but warranty periods can sometimes be longer and vary from customer tocustomer. In the event there is a breach of such warranties, SupportSoftgenerally is obligated to correct the product or service to conform to thewarranty provision or, if SupportSoft is unable to do so, the customer isentitled to seek a refund of the purchase price of the product or service. Incertain contracts a material breach of warranty may involve penalties payableto the customer. SupportSoft did not provide for a warranty accrual as of December 31,2006 or December 31, 2005. To date, SupportSoft’s product warranty expensehas not been significant.

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

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 1.Organization and Summary of Significant Accounting Policies (Continued)**

*Segment Information*

The Company conducts its business in one segment:providing software and related services that automate the resolution oftechnology problems. Revenue from customers located outside the United Stateswas approximately $10.3 million, $12.9 million, and $6.4 million for the yearsended December 31, 2006, 2005, and 2004, respectively.

Sales by the Company tocustomers in different geographic areas, expressed as a percentage of revenue,for the periods ended were:

| ** **                           | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Americas                             |       |                                   | 78         | % |   |   | 80 | % |   |   | 91 | % |   |
| Asia Pacific                         |       |                                   | 1          |   |   |   | 1 |   |   |   | 1 |   |   |
| Europe, the  Middle East, and Africa |       |                                   | 21         |   |   |   | 19 |   |   |   | 8 |   |   |
| Total                                |       |                                   | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

Salesby the Company to customers that exceeded 10% of our total revenue, expressedas a percentage of total revenue, in each of the years in the three year periodended December 31, 2006 were:

| ** ** | ** ** | **Year Ended  December 31,** | ** ** |
|------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Customer A |       |                                   | —     |   |   |   | — |   |   |   | 13 | % |   |
| Customer B |       |                                   | —     |   |   |   | — |   |   |   | 10 | % |   |
| Customer C |       |                                   | —     |   |   |   | — |   |   |   | — |   |   |

 

**Note 2.**         Propertyand Equipment

Propertyand equipment are stated at cost and consist of the following (in thousands):

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Computer  equipment and software |       | $                     | 10,763     |   | $ | 10,092 |   |
| Furniture and  office equipment  |       | 658                   |       | 615 |   |
|                             |       | 11,421                |       | 10,707 |   |
| Accumulated  depreciation        |       | (10,484               | )          | (9,496 | ) |
|                             |       | $                     | 937        |   | $ | 1,211 |   |

 

Depreciation expense was$988,000, $1.1 million, and $766,000, for the years ended December 31,2006, 2005, and 2004, respectively.

**Note 3. BusinessCombinations**

On September 2, 2004, as part of the Company’sstrategy to expand our product portfolio, the Company acquired substantiallyall of the assets of Core Networks Incorporated and certain liabilities forapproximately $16.9 million in cash (the “Acquisition”). Accordingly, theoperations of Core Networks have been included in the accompanying consolidatedstatements of operations from September 2, 2004 

59

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 3.Business Combinations (Continued)**

onward. Core Networksspecialized in software products for network monitoring, management andactivation of advanced digital services for DSL and cable broadband providers.The purchase price for Core Networks exceeded the fair value of Core Networks’net tangible and intangible assets acquired; as a result, we recorded goodwillin connection with this transaction.

Upon consummation of the Acquisition, the Companycharged to expense $1.6 million representing acquired in-process research anddevelopment that had not yet reached technological feasibility and had noalternative future use. The amount of purchase price allocated to acquirein-process research and development was determined by estimating viableproducts, estimating the resulting net cash flows from such products, anddiscounting the net cash flows back to their present value. The discount rateincluded a factor that took into account the inherent risk and expected growthof in-process products.

Thetotal purchase price is summarized as follows (in thousands):

| ** **           | ** ** | **September 2,  2004** | ** ** |
|----------------------|------------|-----------------------------|------------|
| Cash  consideration  |       |                        | $          | 16,850 |   |   |
| Acquisition costs    |       |                        | 713        |   |   |
| Total purchase price |       |                        | $          | 17,563 |   |   |

 

Anallocation among the tangible and identifiable intangible assets andliabilities acquired (including acquired in-process research and development)is summarized as follows. The financial information presented includes purchaseaccounting adjustments to the tangible and intangible assets (in thousands):

| ** **                           | ** ** | **Amount** | ** ** | **Amortization  Period** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------|------------|
| Cash                                 |       | $          | 1          |                     |       | — |   |   |
| Accounts  receivable                 |       | 158        |       |                     | —     |   |   |
| Net fixed assets                     |       | 591        |       |                     | 2 years    |   |   |
| Accrued vacation                     |       | (44        | )          |                     | —     |   |   |
| Amortizable intangible  assets:      |       |       |       |                     |       |   |   |
| Developed and core technology        |       | 4,360      |       |                     | 5 years    |   |   |
| Customer relationships               |       | 1,087      |       |                     | 5 years    |   |   |
| In-process  research and development |       | 1,618      |       |                     | Expensed   |   |   |
| Goodwill                             |       | 9,792      |       |                     | Indefinite |   |   |
| Purchase Price                       |       | $          | 17,563     |                     |       |   |   |   |

 

The goodwill balance recorded in the Company’sCanadian subsidiary is amortized and deducted for Canadian tax purposes but notfor financial statement purposes.

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 3. Business Combinations (Continued)**

The results of operationsof Core Networks were included in our consolidated statements of operationsfrom September 2, 2004, the date of the Acquisition. If we had acquiredthe assets of Core Networks at the beginning of the periods presented, ourunaudited pro forma net revenue, net income and net income per share would havebeen as follows (in thousands, except per share information):

**For theyear ended December 31, 2004 (unaudited):**

| Revenue                       |   | $     | 61,858 |   |
|-------------------------------|--------|-------|--------|--------|
| Net income                    |   | 5,780 |   |
| Basic net income  per share   |   | 0.14  |   |
| Diluted net income per  share |   | 0.13  |   |

 

**Note 4.**        Intangibleassets

As aresult of the Acquisition, we recorded $5.4 million of amortizable intangibleassets with useful lives of 5 years. Amortization expense related toamortizable intangible assets was $1.1 million, $1.1 million, and $363,000 forthe years ended December 31, 2006, 2005, and 2004, respectively.Amortization expense for the next five years and thereafter, as of December 31,2006, is expected to be as follows (in thousands):

| **Years ending December 31,** | ** ** | ** ** | ** ** | **Amortizable  Intangible  Assets** | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------------------|------------|
| 2007                                         |       |       | $          | 1,124                               |       |   |
| 2008                                         |       |       | 1,124      |                                |       |
| 2009                                         |       |       | 657        |                                |       |
| Total expected  amortization expense         |       |       | $          | 2,905                               |       |   |

 

In December 2006, the Company acquired the use of a toll-freetelephone number for cash consideration of $250,000. This asset has anindefinite useful life. The intangible asset will be tested for impairmentannually or more often if events or changes in circumstances indicate that thecarrying value may not be recoverable.

Thefollowing table summarized the components of intangible assets (in thousands).

| ** **                         | ** ** | **Years as of December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Amortizable  intangible assets     |       | $                                           | 5,519      |   | $ | 5,484 |   |
| Accumulated  amortization          |       | (2,614                                      | )          | (1,490 | ) |
| Indefinite-life  intangible assets |       | 250                                         |       | — |   |
| Total intangible assets,  net      |       | $                                           | 3,155      |   | $ | 3,994 |   |

 

**Note 5. Commitments andContingencies**

*Headquarters office lease.**  *In November 2006, the Companyentered into a noncancelable lease agreement for its new headquarters officefacility located in Redwood City, California. The lease commences on January 1,2007 and ends on July 31, 2012. The annual fixed rent will be $738,000,$760,000, $783,000, $783,000, $805,000 and $483,000 for the years ended 2007,2008, 2009, 2010, 2011 and 2012, respectively, as long as the Company is not indefault under the term of the lease. In addition to base rent, commencing on thefirst anniversary of the lease and for each year thereafter, the Company willpay as 

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 5.Commitments and Contingencies (Continued)**

additional rent, with an amount equal to its proportionate share, or27% initially, of the amount exceeding the landlord’s operating expensesincurred in calendar 2007. The Company issued an unsecured irrevocable standbyletter of credit of $400,000 to the landlord as a security deposit under thelease. If the Company is in material compliance with the lease, the depositamount may be reduced to $300,000 on February 1, 2009, $200,000 on February 1,2010, and $100,000 on February 1, 2011.

*Other facility leases.*   TheCompany leases its facilities under noncancelable operating lease agreements,which expire at various dates through 2010. Facility rent expense pursuant toall operating lease agreements was approximately $1.5 million, $1.8 million,and $1.5 million for the years ended December 31, 2006, 2005, and 2004,respectively.

As of December 31, 2006, minimum payments dueunder all noncancelable lease agreements including our new headquarters leasewere as follows (in thousands):

| **Years ending December 31,** | ** ** | ** ** | ** ** | **Operating  Leases** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------|------------|
| 2007                                         |       |       | $          | 1,557                 |       |   |
| 2008                                         |       |       | 1,011      |                  |       |
| 2009                                         |       |       | 977        |                  |       |
| 2010                                         |       |       | 944        |                  |       |
| 2011                                         |       |       | 805        |                  |       |
| thereafter                                   |       |       | 483        |                  |       |
| Total minimum  lease and principal payments  |       |       | $          | 5,777                 |       |   |

 

*Tax contingencies*

Weare required to make periodic filings in the states where we are deemed to havea presence for tax purposes. We have undergone state audits in the past andhave paid assessments arising from these audits. To date, such amounts have notbeen material. We evaluate estimated losses that could arise from similarassessments in accordance with Statement of Financial Accounting StandardNo. 5, “Accounting for Contingencies.” We consider such factors as thedegree of probability of an unfavorable outcome and the ability to make a reasonableestimate of the amount of loss.

*Legal contingencies*

Between December 2004 and January 2005,several purported securities class action suits were filed in the UnitedStates District Court for the Northern District of California against us, ourformer Chief Executive Officer, Radha R. Basu, and our former ChiefFinancial Officer, Brian M. Beattie. These actions were consolidated onMarch 22, 2005 as *In reSupportSoft, Inc. Securities Litigation,* Civil Action No.: c 04-5222SI. The consolidated complaint alleges generally violations of certain federalsecurities laws and seeks unspecified damages on behalf of a class ofpurchasers of our common stock between January 20, 2004 andOctober 1, 2004. Plaintiffs allege, among other things, that defendantsmade false and misleading statements concerning our business and guidance forthe third quarter 2004, purportedly violating Sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder. On June 1, 2006, this action was certified toproceed as a class action on behalf of all persons and entities who purchasedor otherwise acquired the securities of the Company from January 29, 2004to October 1, 2004 and who were allegedly damaged thereby. The case is currentlyin discovery. A trial date has been set for October 29, 2007. Defendantsintend to vigorously defend themselves against the consolidatedlawsuit. While we cannot predict with certainty the outcome of thelitigation, we believe that we have meritorious defenses to such claims.

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 5.Commitments and Contingencies (Continued)**

In December 2005, a purported derivativestockholder complaint was filed in the Superior Court of the State ofCalifornia for the County of San Mateo captioned *White v. Vase et al.*, No. Civ. 451677. This complaintpursues claims—derivatively and on behalf of the Company as a nominal defendant—againstcertain of our directors and former directors: Radha R. Basu, Manuel Diaz,Kevin C. Eichler, Edward S. Russell and James Thanos. The derivativecomplaint alleges, among other things, that the director-defendants harmed usby making or permitting us to make false and misleading statements betweenJanuary 20, 2004 and October 1, 2004 concerning our business andguidance for the third quarter 2004 and by purportedly exposing us to liabilityfor securities fraud in violation of their fiduciary duties. OnOctober 4, 2006, the court denied the defendants’ demurrer to theplaintiffs’ first amended complaint. The defendants’ answered this complaint onNovember 6, 2006. The case is currently in discovery. While we cannotpredict with certainty the outcome of the litigation, we believe we havemeritorious defenses to such claims.

In November 2001, a class action lawsuit wasfiled against us and two of our officers in the United States District Courtfor the Southern District of New York. The lawsuit alleged that ourregistration statement and prospectus dated July 18, 2000 for the issuanceand initial public offering of 4,250,000 shares of our common stock containedmaterial misrepresentations and/or omissions related to alleged inflatedcommissions received by the underwriters of the offering. The defendants namedin the lawsuit are SupportSoft, Radha Basu, Brian Beattie, Credit Suisse FirstBoston Corporation, Bear, Stearns & Co. Inc. and FleetBoston RobertsonStephens Inc. The lawsuit seeks unspecified damages as well as interest, feesand costs. Similar complaints have been filed against 55 underwriters and morethan 300 other companies and other individual officers and directors of thosecompanies. 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 toJune 1, 2003. A final settlement approval hearing on the proposed issuersettlement was held on April 24, 2006. The district court took the matterunder submission and has not yet ruled. Meanwhile the consolidated case againstthe underwriters has proceeded. On October 13, 2004, the district courtcertified a class. On December 5, 2006, however, the Second Circuitreversed, holding that a class could not be certified. The Second Circuit’sholding, while directly affecting only the underwriters, raises some doubt asto whether the proposed issuer settlement will be approved in its present form.On January 5, 2007, plaintiffs petitioned the Second Circuit for rehearingof the Second Circuit’s decision. On January 24, 2007, the Second Circuitasked the underwriter defendants to respond to the petition by February 7,2007. On February 7, 2007, the underwriters filed their response. While wecannot predict with certainty the outcome of the litigation or whether thesettlement will be approved, we believe that the claims against us and ourofficers are without merit.

We are also subject toother routine legal proceedings, as well as demands, claims and threatenedlitigation that arise in the normal course of our business. The ultimate outcomeof any litigation is uncertain, and either unfavorable or favorable outcomescould have a material negative impact. Regardless of outcome, litigation canhave an adverse impact on SupportSoft because of defense costs, diversion ofmanagement resources and other factors.

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 6.**        RestructuringObligations and Other Charges

In 2006, in connection with a business reviewconducted by SupportSoft’s new Chief Executive Officer, the Company reduced itsworkforce by 25 employees, or approximately 10% of its workforce at that time,designed to match staffing with its new initiatives. As a result, the Companyrecorded a restructuring charge of $817,000 in 2006. The restructuring chargewas comprised of severance costs and other personnel-related termination costs.Restructuring expenses included in the Consolidated Statements of Operationswere $33,000 for cost of maintenance, $163,000 for cost of services, $40,000for research and development, $386,000 for sales and marketing and $195,000 forgeneral and administrative. Cash payments of $689,000 were made against thoseobligations.

In 2005, the Company’s management performed a reviewof its business operations and realigned its resources and go-to-marketstrategies to help maximize future revenue opportunities. As a result of thisbusiness review, the Company implemented a restructuring plan that included thetermination of 27 employees, or approximately 10% of its workforce at thattime, and closure of various offices worldwide. All of the employees wereterminated as of December 31, 2005. As a result of the restructuring plan,the Company recorded a restructuring charge of $645,000 for severance costs andlease termination-related costs in 2005.

Thefollowing table summarizes activity associated with the restructuring andrelated expenses incurred for the years ended December 31, 2006 and 2005(in thousands):

| ** **                                         | ** ** | **Severance(1)** | ** ** | **Facilities(2)** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|------------------|------------|-------------------|------------|-----------|------------|
| Restructuring  costs incurred in 2005              |       |             | $          | 456               |       |      |       | $ | 189 |   |   | $ | 645 |   |
| Cash payments                                      |       |             | (346       | )                 |       |      | (34        | ) |   | (380 | ) |
| Restructuring  obligations, December 31, 2005 |       |             | $          | 110               |       |      |       | $ | 155 |   |   | $ | 265 |   |
| Restructuring  costs incurred in 2006              |       |             | $          | 817               |       |      |       | $ | — |   |   | $ | 817 |   |
| Cash payments                                      |       |             | (799       | )                 |       |      | (155       | ) |   | (954 | ) |
| Restructuring  obligations, December 31, 2006 |       |             | $          | 128               |       |      |       | $ | 0 |   |   | $ | 128 |   |

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(1)          Severance costs includethose expenses related to severance pay and related employee benefitobligations.

(2)          Facilitiescosts include obligations under non-cancelable leases for facilities that wewill no longer occupy, as well as penalties associated with early terminationsof leases and disposal of fixed assets. The related leases are short term innature expiring in less than one year. No sublease income has been included.

**Note 7. Stockholders’Equity**

*Common Stock*

At December 31, 2006, SupportSoft has reserved 14,922,969and 1,908,164 shares of common stock for issuance pursuant to stock option andemployee stock purchase plans, respectively.

On April 27, 2005,the Company’s board of directors authorized the repurchase of up to 2,000,000outstanding shares of the Company’s common stock. In the second quarter of2005, the Company repurchased 192,598 shares of outstanding common stock at acost of $922,294 or an average cost of $4.76 per share, excluding commissions.There were no repurchases in 2006. Therefore, as of December 31, 

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 7.Stockholders’ Equity (Continued)**

2006,the maximum number of shares remaining that can be repurchased under thisprogram was 1,807,402.

*Stock Option Plans*

In 1998, SupportSoft adopted the 1998 Stock OptionPlan (the “Plan”). Under this Plan, up to 9,424,434 shares of SupportSoft’scommon stock may be granted as options or sold to eligible participants. Underthe Plan, options to purchase common stock may be granted at no less than 85%of the fair value on the date of the grant (110% of fair value in certaininstances), as determined by the Board of Directors. Options under the Plan canbe immediately exercisable at the Board of Directors’ discretion; however,shares issued are subject to SupportSoft’s right to repurchase such shares atthe original issuance price, which lapses in a series of installments measuredfrom the vesting commencement date of the option.

In February 2000, the Board of Directors approvedSupportSoft’s 2000 Omnibus Equity Incentive Plan (the “2000 Incentive Plan”). Atotal of 4,000,000 shares of common stock were initially reserved for issuanceto eligible participants under the 2000 Incentive Plan. On January 1 ofeach year, the number of shares reserved automatically increases by the lesserof 2,000,000 shares, 5% of outstanding shares, or an amount determined by theboard of directors. On January 1, 2006, the shares reserved under the 2000Incentive Plan were automatically increased by 2,000,000 shares. Under both ofSupportSoft’s option plans, options generally vest over a 48-month periodfrom the date of grant and have a maximum term of 10 years. In the fourthquarter of 2005, SupportSoft began issuing only non-statutory options with acontractual term of 7 years.

As of December 31, 2006, we had approximately 1.3million shares of common stock reserved for future issuance under both of thesestock option plans.

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 7.Stockholders’ Equity (Continued)**

The following tablerepresents stock option activity for the years ended December 31, 2004,2005, and 2006:

| ** **                                        | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value  (in ‘000’s)** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Outstanding  options at December 31, 2003    |       | 8,318,781                  |       |                                       | $          | 6.26                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Granted                                           |       | 3,680,132                  |       |                                       | $          | 7.60                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Exercised                                         |       | (766,027                   | )          |                                       | $          | 3.80                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Forfeited                                         |       | (760,197                   | )          |                                       | $          | 9.83                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Outstanding  options at December 31, 2004    |       | 10,472,689                 |       |                                       | $          | 6.65                                                |       |                                                            |       | 8.04 |   |   |   | $ | 16,675 |   |   |
| Granted                                           |       | 2,209,385                  |       |                                       | $          | 4.90                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Exercised                                         |       | (959,016                   | )          |                                       | $          | 2.25                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Forfeited                                         |       | (1,598,920                 | )          |                                       | $          | 8.05                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Outstanding  options at December 31, 2005    |       | 10,124,138                 |       |                                       | $          | 6.46                                                |       |                                                            |       | 7.37 |   |   |   | $ | 3,573 |   |   |
| Granted                                           |       | 7,102,965                  |       |                                       | $          | 4.44                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Exercised                                         |       | (807,967                   | )          |                                       | $          | 4.71                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Forfeited                                         |       | (2,838,262                 | )          |                                       | $          | 7.64                                                |       |                                                            |       |   |   |   |   |   |   |   |
| Outstanding  options at December 31, 2006    |       | 13,580,874                 |       |                                       | $          | 5.33                                                |       |                                                            |       | 6.44 |   |   |   | $ | 13,048 |   |   |
| Options vested and expected to vest               |       | 13,459,193                 |       |                                       | $          | 5.34                                                |       |                                                            |       | 6.44 |   |   |   | $ | 12,925 |   |   |
| Outstanding  exercisable at the end of the period |       | 6,593,567                  |       |                                       | $          | 6.27                                                |       |                                                            |       | 6.44 |   |   |   | $ | 5,734 |   |   |

 

The aggregate intrinsic value in the table aboverepresents the total pre-tax intrinsic value that would have been received bythe option holders had they all exercised their options on December 31,2006, 2005, and 2004. This amount will change based on the fair market value ofthe Company’s stock. The total aggregate intrinsic value of options exercisedunder the Company’s stock options plans was $1.2 million for the year endedDecember 31, 2006. The total fair value of options vested is $3.1 million asof December 31, 2006.

At December 31, 2006,there was $14.3 million of unrecognized compensation cost related to existingoptions outstanding which is expected to be recognized over a weighted averageperiod of 3.5 years.

*Employee StockPurchase Plan*

In February 2000, the Board of Directors approvedSupportSoft’s 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”). Atotal of 2,000,000 shares of common stock were initially reserved for issuanceunder the 2000 Purchase Plan. On January 1 of each year, the number ofshares reserved automatically increases by the lesser of 2,000,000 shares, 3%of the outstanding shares, or an amount determined by the Board of Directors.For 2006, the Board of Directors elected to have zero shares added to the 2000Purchase Plan. The 2000 Purchase Plan permits eligible employees to acquireshares of SupportSoft’s common stock through periodic payroll deductions of upto 15% of total compensation. Purchases occur on the last day of eachJanuary and July following the end of each six-month purchase period.The price at which the common stock may be purchased is 85% of the lesser ofthe fair market 

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 7.Stockholders’ Equity (Continued)**

value of SupportSoft’scommon stock at the beginning of the applicable offering period or the end ofthe applicable purchase period. Beginning August 1, 2006, the offeringperiod for all new participants in the 2000 Purchase Plan was reduced to sixmonths. Prior to August 1, 2006, all participants were enrolled inoffering periods which could last up to 24 months and contained up to fourseparate purchase periods.

As of December 31,2006, we had approximately 1.9 million shares of common stock reserved forfuture issuance under this ESPP plan.

**Note 8. Income Taxes**

Thecomponents of our net income (loss) before income taxes are as follows (inthousands):

| ** **    | ** ** | **Years Ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $                                           | (9,514     | ) | $ | 3,870 |   | $ | 9,839 |   |
| Foreign       |       | 1,766                                       |       | 957 |   | 625 |   |
| Total         |       | $                                           | (7,748     | ) | $ | 4,827 |   | $ | 10,464 |   |

 

Theprovision for (benefit from) income taxes consisted of the following (inthousands):

| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Federal                           |       |                                        | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| State                             |       |                                        | —     |   |   |   | (3 | ) |   |   | 120 |   |   |
| Foreign                           |       |                                        | 395        |   |   |   | 263 |   |   |   | 190 |   |   |
| Total current                     |       |                                        | 395        |   |   |   | 260 |   |   |   | 310 |   |   |
| Deferred:                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Foreign                           |       |                                        | 92         |   |   |   | 142 |   |   |   | — |   |   |
| Total provision for  income taxes |       |                                        | $          | 487 |   |   |   | $ | 402 |   |   |   | $ | 310 |   |   |

 

Thereconciliation of the federal statutory income tax rate to the Company’seffective income tax rate is as follows (in thousands):

| ** **                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Provision at  federal statutory rate             |       | $                                           | (2,712     | ) | $ | 1,689 |   | $ | 3,662 |   |
| State taxes                                      |       | —                                      |       | (3 | ) | 120 |   |
| Permanent  differences/other                     |       | 35                                          |       | 72 |   | 134 |   |
| Stock-based  compensation                        |       | (4                                          | )          | (472 | ) | (1,060 | ) |
| Federal valuation  allowance (utilized)/provided |       | 3,089                                       |       | (954 | ) | (2,736 | ) |
| Foreign rate  differential                       |       | 79                                          |       | 70 |   | 190 |   |
| Provision for income  taxes                      |       | $                                           | 487        |   | $ | 402 |   | $ | 310 |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax 

67

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 8.Income Taxes (Continued)**

purposes.Significant components of the Company’s deferred tax assets and liabilities areas follows (in thousands):

| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets:                     |       |                  |       |   |   |
| Accruals and reserves                     |       | $                     | 1,743      |   | $ | 580 |   |
| Capitalized research and development      |       | 5                     |       | — |   |
| Deferred revenue                          |       | 829                   |       | 1,046 |   |
| Net operating loss carryforwards          |       | 18,045                |       | 15,034 |   |
| Research and development tax credits |       | 3,973                 |       | 3,958 |   |
| Capitalized research and development      |       | 45                    |       | 66 |   |
| Intangible assets                         |       | 2,647                 |       | 2,724 |   |
| Fixed assets                              |       | 293                   |       | 328 |   |
| Gross deferred tax assets                 |       | 27,580                |       | 23,736 |   |
| Valuation allowance                       |       | (27,378               | )          | (23,590 | ) |
| Total deferred  tax assets                |       | 202                   |       | 146 |   |
| Intangible assets                         |       | (436                  | )          | (288 | ) |
| Total deferred tax  liabilities           |       | (436                  | )          | (288 | ) |
| Net deferred tax  liabilities             |       | $                     | (234       | ) | $ | (142 | ) |

 

The Financial Accounting Standards Board’s Statementof Financial Accounting Standards No. 109 “*Accountingfor Income Taxes*” provides for the recognition of deferred taxassets if realization of such assets is more likely than not to occur. Basedupon the weight of available evidence, which includes its historical operatingperformance, reported cumulative net losses since inception and difficulty inaccurately forecasting its results, the Company provided a full valuationallowance against its net deferred tax assets. The Company reassesses the needfor its valuation allowance on a quarterly basis.

The net valuation allowance (increased) decreased byapproximately $(3.8) million, and $677,000, during the years endedDecember 31, 2006, and 2005, respectively.

As of December 31, 2006, the Company had federaland state net operating loss carryforwards of approximately $48.0 million and$27.9 million, respectively. The Company also had federal and state researchand development credit carryforwards of approximately $2.3 million and $2.2million, respectively. The federal net operating loss and credit carryforwardswill expire at various dates beginning in 2018 through 2026, if not utilized.The state net operating loss carryforwards will expire at various datesbeginning in 2007 through 2016, if not utilized. The state research anddevelopment credit carryforwards do not have an expiration date.

Utilization of the net operating loss carryforwardsand credits may be subject to substantial annual limitation due to theownership change limitations provided by the Internal Revenue Code of 1986, asamended, and similar state provisions. The annual limitation may result inthe expiration of net operating losses and credits before utilization.

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 8.Income Taxes (Continued)**

The Company’s India based subsidiary was granted a taxholiday related to its research and development activities. The tax holidayexpires in 2009. The tax holiday has an immaterial impact on the current yearfinancial statements.

Cumulative unremittedforeign earnings that are considered to be indefinitely reinvested outside theUnited States and on which no U.S. taxes have been provided were approximately$2.6 million at December 31, 2006. If such earnings were distributed, theCompany would not accrue any additional taxes due to the full valuationallowance against its deferred tax assets.

**Note 9. Other-Than-TemporaryImpairment and Its Application to Certain Investments**

The gross unrealized losses related to the Company’sportfolio of available-for-sale securities were primarily due to a decrease inthe fair value of debt securities as result of an increase in interest ratesduring 2006. The Company has determined that the gross unrealized losses on itsavailable-for-sale securities as of December 31, 2006 are temporary innature. The Company has reviewed its investment portfolio to identify andevaluate investments that have indications of possible impairment. Factorsconsidered in determining whether a loss is temporary include the magnitude ofthe decline in market value, the length of time the market value has been belowcost (or adjusted cost), credit quality, and the Company’s ability and intentto hold the securities for a period of time sufficient to allow for anyanticipated recovery in market value.

Thefollowing table sets forth the unrealized losses for the Company investments asof December 31, 2006 (in thousands):

| ** **       | ** ** | **In Loss Position  Less Than 12 Months** | ** ** | **In Loss Position  More Than 12  Months** | ** ** | **Total In Loss Position** | ** ** |
|------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Description**  | ** ** | ** **                                                         | ** ** | **Fair Value**                                            | ** ** | **Unrealized  Losses**                    | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Commercial paper |       |                                                               | $          | 35,360                                                         |       |                                      |       | $ | (30 | ) |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 35,360 |   |   |   | $ | (30 | ) |   |
| Corporate bonds  |       |                                                               | $          | 31,488                                                         |       |                                      |       | $ | (23 | ) |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 31,488 |   |   |   | $ | (23 | ) |   |
| Federal agencies |       |                                                               | $          | 1,999                                                          |       |                                      |       | $ | (1 | ) |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 1,999 |   |   |   | $ | (1 | ) |   |
| Total            |       |                                                               | $          | 68,847                                                         |       |                                      |       | $ | (54 | ) |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 68,847 |   |   |   | $ | (54 | ) |   |
|                  |            |                                                                    |            |                                                                |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**SUPPORTSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Note 10. QuarterlyFinancial Information (Unaudited)**

Selectedquarterly financial information for 2006 and 2005 is as follows:

| ** **                          | ** ** | **Fiscal Year 2006 Quarter Ended**             | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Mar. 31,  2006**                                            | ** ** | **June 30,  2006** | ** ** | **Sept. 30,  2006** | ** ** | **Dec. 31,  2006** | ** ** |
| ** **                          | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statements  of Operations Data:** |       |                                                               |       |   |   |   |   |   |   |
| License fees                        |       | $                                                                  | 2,051      |   | $ | 3,483 |   | $ | 4,479 |   | $ | 6,402 |   |
| Maintenance                         |       | 3,929                                                              |       | 3,893 |   | 3,917 |   | 3,933 |   |
| Services                            |       | 2,257                                                              |       | 3,388 |   | 3,462 |   | 3,834 |   |
| Total revenue                       |       | 8,237                                                              |       | 10,764 |   | 11,858 |   | 14,169 |   |
| Cost of license  fees               |       | 104                                                                |       | 109 |   | 119 |   | 167 |   |
| Cost of  maintenance                |       | 253                                                                |       | 261 |   | 349 |   | 362 |   |
| Cost of services                    |       | 2,890                                                              |       | 3,083 |   | 3,606 |   | 4,020 |   |
| Research and  development           |       | 2,525                                                              |       | 2,332 |   | 2,267 |   | 2,123 |   |
| Sales and  marketing                |       | 5,134                                                              |       | 5,847 |   | 6,013 |   | 6,342 |   |
| General and  administrative         |       | 2,130                                                              |       | 2,859 |   | 2,689 |   | 2,485 |   |
| Loss from  operations               |       | (5,070                                                             | )          | (3,999 | ) | (3,457 | ) | (1,605 | ) |
| Net loss                            |       | (3,932                                                             | )          | (2,536 | ) | (1,687 | ) | (80 | ) |
| Basic net loss  per share           |       | $                                                                  | (0.09      | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.00 | ) |
| Diluted net loss per  share         |       | $                                                                  | (0.09      | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.00 | ) |

 

| ** **                           | ** ** | **Fiscal Year 2005 Quarter Ended**             | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Mar. 31,  2005**                                            | ** ** | **June 30,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Dec. 31,  2005** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statements  of Operations Data:**  |       |                                                               |       |   |   |   |   |   |   |
| License fees                         |       | $                                                                  | 9,022      |   | $ | 9,325 |   | $ | 5,404 |   | $ | 8,986 |   |
| Maintenance                          |       | 3,393                                                              |       | 3,622 |   | 3,569 |   | 3,733 |   |
| Services                             |       | 3,710                                                              |       | 4,062 |   | 4,013 |   | 3,092 |   |
| Total revenue                        |       | 16,125                                                             |       | 17,009 |   | 12,986 |   | 15,811 |   |
| Cost of license  fees                |       | 190                                                                |       | 127 |   | 123 |   | 115 |   |
| Cost of  maintenance                 |       | 164                                                                |       | 269 |   | 301 |   | 254 |   |
| Cost of services                     |       | 3,132                                                              |       | 3,545 |   | 3,229 |   | 3,222 |   |
| Research and  development            |       | 2,933                                                              |       | 2,902 |   | 2,700 |   | 2,650 |   |
| Sales and  marketing                 |       | 6,842                                                              |       | 6,223 |   | 5,304 |   | 6,790 |   |
| General and  administrative          |       | 2,189                                                              |       | 2,119 |   | 2,110 |   | 2,200 |   |
| Income (loss)  from operations       |       | 418                                                                |       | 1,586 |   | (1,071 | ) | 275 |   |
| Net income (loss)                    |       | 1,233                                                              |       | 2,132 |   | (85 | ) | 1,145 |   |
| Basic net income  (loss) per share   |       | $                                                                  | 0.03       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.02 |   |
| Diluted net income  (loss) per share |       | $                                                                  | 0.03       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.02 |   |

 

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**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES.

**Disclosure controlsand 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 meetreasonable assurance standards. Additionally, in designing disclosure controlsand procedures, our management necessarily was required to apply its judgmentin evaluating the cost-benefit relationship of possible disclosure controls andprocedures. The design of any disclosure controls and procedures also is basedin part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions. As described below in ourmanagement’s report on internal control over financial reporting, we haveidentified a material weakness in our internal control over financialreporting, relating to our accounting for our international operations.Therefore, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures were not effective as of December 31,2006.

**Changes in InternalControl over Financial Reporting**

Other than the materialweakness noted below there was no significant change in our internal controlover financial reporting that occurred during the fourth quarter of 2006 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**Report ofManagement on Internal Control over Financial Reporting.**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f). Our internal control systemis designed to provide reasonable assurance to our management and Board ofDirectors regarding the preparation and fair presentation of publishedfinancial statements. All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

Under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in *Internal Control—Integrated Framework***issued by the Committee of Sponsoring Organizations of theTreadway Commission. As part of this evaluation, management establishedan internal control project team, engaged outside consultants and adopted aproject work plan to document and assess the adequacy of our internal controlover financial reporting, address any control deficiencies that wereidentified, and to validate through testing that the controls are functioningas documented.

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A material weakness is a control deficiency orcombination of control deficiencies that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Based on management’s assessmentof our internal control over financial reporting as of December 31, 2006,we have identified the following material weakness.

We did not appropriately quantify the currencytranslation gain or loss upon liquidation of a foreign subsidiary in 2006, nordid we maintain appropriate controls related to the periodic reconciliation ofinter-company balances. Such objectives should have been met by the internalcontrols over our accounting for international operations. In connection withour fiscal 2006 year end audit, a misclassification of the accumulated currencytranslation adjustments, which balances should have been appropriatelyclassified as an inter-company balance between the liquidated subsidiary andthe U.S. parent company, was identified and a corrective adjustment was made toour consolidated financial statements. If the misclassification had remainedundetected, the gain recognized upon the liquidation of the foreign subsidiarywould have been mistated, impacting “other income” reported in the consolidatedstatements of operations.

Because of the material weakness described in thepreceding paragraphs, the Company has concluded its internal control overfinancial reporting was not effective as of December 31, 2006.

Our independent registeredpublic accounting firm, Ernst & Young LLP, has issued an attestationreport on management’s assessment of our internal control over financialreporting, which is included herein.

**Additional Informationand Remediation**

The corrective adjustment discussed above had no effect on theconsolidated financials statements of any year prior to 2006 because currencytranslation adjustments are accumulated as a component of stockholders’ equityand misclassifications between individual entities within the same account haveno effect on the consolidated financial statements until the liquidation of aforeign subsidiary occurs. Furthermore, the misclassification for theliquidated subsidiary was corrected prior to the release of our fourth quarterand fiscal 2006 financial results reported in our current report on Form 8 -K filed with the Securities and ExchangeCommission on February 8, 2007.

We have since evaluated the accumulated currency translation adjustmentsof our foreign subsidiaries in order to determine the accuracy of theentity-specific and consolidated balances. At the conclusion of this review, wedetermined the balances to be properly stated as of December 31, 2006.Going forward, we will review the reasonableness of our recorded currencytranslation balances once a quarter and in connection with the liquidation of aforeign subsidiary.

In March 2007,we discussed the material weakness and remediation described above with ouraudit committee.
| /s/ JOSHUA PICKUS                  |       |
|-----------------------------------------|------------|
| Joshua Pickus                           | ** ** |
| *Chief Executive Officer and President* | ** ** |

 
| /s/ KEN OWYANG                                    |       |
|--------------------------------------------------------|------------|
| Ken Owyang                                             | ** ** |
| *Chief Financial Officer and*                          | ** ** |
| *Senior Vice President of Finance and  Administration* | ** ** |

 

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**Report ofIndependent Registered Public Accounting Firmon Internal Control over Financial Reporting**

The Board of Directors and Stockholders ofSupportSoft, Inc.

We have audited management’s assessment, included inthe accompanying Report of Management on Internal Control over FinancialReporting, that SupportSoft, Inc. (the “Company”) did not maintaineffective internal control over financial reporting as of December 31,2006, because of the effect of the Company’s lack of adequate controls in theaccounting for international operations with regard to review of amountsrecorded for currency translation adjustments, based on criteria established in Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment.

The Company’s internal controls did not appropriatelyquantify the currency translation gain or loss upon liquidation of a foreignsubsidiary in 2006, nor did the Company maintain appropriate controls relatedto the periodic reconciliation of inter-company balances. Such objectives shouldhave been met by the Company’s controls over accounting for internationaloperations. In connection with the fiscal 2006 year end audit, amisclassification of certain accumulated currency translation adjustments,which balances should have been appropriately classified as an inter-companybalance between the liquidated subsidiary 

73

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and the U.S. parentcompany, was identified and a corrective adjustment was made to theconsolidated financial statements. If the misclassification had remainedundetected, the gain recognized upon the liquidation of the foreign subsidiarywould have been misstated, impacting “other income” reported in theconsolidated statements of operations.

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the 2006consolidated financial statements, and this report does not affect our reportdated March 12, 2007 on those financial statements.

In ouropinion, management’s assessment that SupportSoft, Inc. did not maintaineffective internal control over financial reporting as of December 312006, is fairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, because of the effect of the material weakness describedabove on the achievement of the objectives of the control criteria, SupportSoft, Inc.has not maintained effective internal control over financial reporting as of December 31,2006, based on the COSO criteria.

|                       | /s/Ernst &  Young LLP |
|-----------------------|--------------------------------|
| San Jose,  California |
| March 12,  2007  |

 

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**ITEM 9B.**       OTHERINFORMATION.

None.

**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by Item 10 ofForm 10-K with respect to Item 401 of Regulation S-K regardingour directors is incorporated herein by reference from the informationcontained in the section entitled “Directors and Nominees” in ourdefinitive Proxy Statement for the 2007 Annual Meeting of Stockholders (the“Proxy Statement”), a copy of which will be filed with the Securities andExchange Commission on or before April 30, 2007.

The information required by Item 10 ofForm 10-K with respect to Item 405 of Regulation S-K regardingsection 16(a) beneficial ownership compliance is incorporated byreference from the information contained in the section entitled“Section 16(a) Beneficial Ownership Compliance” in our ProxyStatement.

For information with respect to our executiveofficers, see “Executive Officers of the Registrant” at the end of Part Iof this report.

We have adopted a Code ofEthics and Business Conduct for Employees, Officers and Directors which isapplicable to all of our directors, executive officers and employees, includingour Chief Executive Officer and Chief Financial Officer (our principalexecutive officer and principal financial and accounting officer,respectively). The Code of Ethics and Business Conduct for Employees, Officersand Directors is available on our web site athttp://www.supportsoft.com/investors. A copy of the Code of Ethics and BusinessConduct for Employees, Officers and Directors will be provided without chargeto any person who requests it by writing to the address or telephoning thenumber indicated under “SEC Filings and other Available Information” onpage 13. We will disclose on our web site amendments to or waivers fromits Code of Ethics and Business Conduct applicable to our directors orexecutive officers, including our Chairman and Chief Executive Officer and ourChief Financial Officer, in accordance with all applicable laws andregulations.

The information requiredby Item 10 of Form 10-K with respect to Items 407(c)(3), 407(c)(4) and 407(d)(5)is incorporated by reference from the information contained in the sectionsentitled “Director Nominations,’’ “Corporate Governance’’ and “Committees ofthe Board of Directors’’ in our Proxy Statement.

**ITEM 11.**         EXECUTIVECOMPENSATION.

The information requiredby Item 11 of Form 10-K is incorporated herein by referencefrom the information contained in the sections entitled “Executive Compensationand Related Information,” “Director Compensation,’’ “Compensation CommitteeReport” and “Compensation Committee Interlocks and Insider Participation” in ourProxy Statement.

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

The information requiredby Item 12 of Form 10-K with respect to Item 403 ofRegulation S-K regarding security ownership of certain beneficial owners andmanagement is incorporated herein by reference from the information containedin the section entitled “Security Ownership of Certain Beneficial Ownersand Management” in the Proxy Statement.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

**EquityCompensation Plan InformationAs of December 31, 2006**

| ** **                                                     | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants, and rights** | ** ** | **Weighted-  average  exercise  price of  outstanding  options,  warrants,  and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                         | ** ** | ** **                                                                                                                                        | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                                                                                                                                                      | ** ** | **(c)** | ** ** |
| Equity  Compensation Plans approved by security holders(1)     |       |                                                                                                                                              | 13,580,874 |                                                                                               |       |                                                                                                                                                                                                         | $5.334     |   |   |   | 1,342,095 | (2) |   |
| Equity  Compensation Plans not approved by security holders(3) |       |                                                                                                                                              | —     |                                                                                               |       |                                                                                                                                                                                                         | —     |   |   |   | — |   |   |
| Total                                                          |       |                                                                                                                                              | 13,580,874 |                                                                                               |       |                                                                                                                                                                                                         | $5.334     |   |   |   | 1,342,095 | (4) |   |
|                                                                |            |                                                                                                                                                   |            |                                                                                                    |            |                                                                                                                                                                                                              |            |  |  |  |  |  |  |  |  |

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(1)          Includes 1998 StockOption Plan and 2000 Omnibus Equity Incentive Plan. Stock options, restrictedstock, restricted stock units or stock appreciation rights may be awardedunder the 2000 Omnibus Equity Incentive Plan and 1998 Stock Option Plan.

(2)          The number of sharesreserved for issuance under the 2000 Omnibus Equity Incentive Plan (the “2000Incentive Plan”) is subject to an annual increase as follows:

The aggregatenumber of options, SARs, stock units and restricted shares of common stock thatmay be awarded under the 2000 Incentive Plan shall automatically increaseeach year by a number equal to the lesser of (i) 2,000,000 shares ofcommon stock, (ii) 5% of the outstanding shares of common stock on December 31of such year or (iii) a lesser amount determined by our board ofdirectors. The aggregate number of shares of common stock which may beissued under the 2000 Incentive Plan shall at all times be subject toadjustment as a result of stock splits, dividends payable in shares,combinations or consolidations of outstanding stock, recapitalizations, mergersor reorganizations. The number of shares of common stock which are subject tooptions or other rights outstanding at any time under the 2000 Incentive Planshall not exceed the number of shares which then remain available for issuanceunder the 2000 Incentive Plan. During the term of the 2000 Incentive Plan, we shallat all times reserve and keep available sufficient shares of common stock tosatisfy the requirements of the 2000 Incentive Plan.

(3)          None.

(4)          Theamount does not include 1,908,164 shares available for purchase pursuant to our2000 Employee Stock Purchase Plan. Shares of common stock will be purchased ata price equal to 85% of the fair market value per share of common stock oneither the first day preceding the six-month offering period or the last dateof the offering period, whichever is less. The number of shares reserved forissuance shall automatically increase each year by a number equal to the lesserof (i) 2,000,000 shares, 

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(ii) 3% of theoutstanding common stock on that date, or (iii) a lesser amount determinedby our board of directors.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information requiredby Item 13 of Form 10-K is incorporated herein by referencefrom the information contained in the sections entitled “Certain Relationshipsand Related Transactions” and “Director Independence’’ in our Proxy Statement.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES. 

The information required by Item 14 of Form 10-Kis incorporated herein by reference from the information contained in thesections entitled “Principal Accountant Fees and Services” and “Audit CommitteePre-Approval Policies and Procedures’’ in our Proxy Statement.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.

(a)   The following documents are filed as part of this report:

(1)          FinancialStatements—See Index to the Consolidated Financials Statements andSupplementary Data in Item 8 of this report.

(2)          FinancialStatement Schedules—No schedules have been filed because the informationrequired to be set forth therein is not applicable or is shown in the financialstatements or related notes included as part of this report.

(3)          Exhibits—Seein Item 15(b) of this report.

(b)   Exhibits.

| Exhibit           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                               | ** ** | **Description of Document** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
|   3(i)  |       | Restated Certificate of Incorporation, as amended  (incorporated by reference to Exhibit 3.1 of SupportSoft’s annual report  on Form 10-K for the year ended December 31, 2001).                                                                                                                                                     |
|   3(ii) |       | Amended and Restated  Bylaws (incorporated by reference to Exhibit 3.2 of SupportSoft’s annual  report on Form 10-K for the year ended December 31, 2001).                                                                                                                                                                           |
|   4.1   |       | Form of Common  Stock Certificate (incorporated by reference to Exhibit 4.1 of  SupportSoft’s quarterly report on Form 10-Q for the quarter ended  June 30, 2002).                                                                                                                                                              |
|   4.2   |       | Registration Rights  Agreement, dated June 22, 1999, by and among the registrant and the  parties who are signatories thereto (incorporated by reference to Exhibit 4.2  of SupportSoft’s registration statement on Form S-1 (File  No. 333-30674) filed on February 18, 2000).                                            |
|   4.3   |       | Amended and Restated  Registration Rights Agreement, dated March 14, 2000, by and among the  registrant and the parties who are signatories thereto (incorporated be  reference to Exhibit 4.3 of Amendment No. 5 to SupportSoft’s  registration statement on Form S-1 (File No. 333-30674)  filed on June 27, 2000). |
| 10.1*             |       | Registrant’s Amended and  Restated 1998 Stock Option Plan (incorporated by reference to  Exhibit 10.1 of Amendment No. 8 to SupportSoft’s registration  statement on Form S-1 (File No. 333-30674) filed on  March 9, 2000).                                                                                          |
| 10.2*             |       | Registrant’s 2000  Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2  of Amendment No. 8 to SupportSoft’s registration statement on  Form S-1 (File No. 333-30674) filed on July 13,  2000).                                                                                                   |
| 10.3*             |       | Registrant’s 2000  Amended and Restated Employee Stock Purchase Plan (incorporated by reference  to Exhibit 10.1 of SupportSoft’s quarterly report on Form 10-Q  filed on August 4, 2006.                                                                                                                                       |
| 10.4*             |       | Form of Directors  and Officers’ Indemnification Agreement (incorporated by reference to  Exhibit 10.4 registration statement on Form S-1 (File  No. 333-30674) filed on February 18, 2000).                                                                                                                               |
| 10.5*             |       | Employment Agreement, dated  July 15, 1999, by and between the registrant and Radha R. Basu  (incorporated by reference to Exhibit 10.6 of Amendment No. 3 to  SupportSoft’s registration statement on Form S-1 (File  No. 333-30674) filed on April 26, 2000).                                                       |
| 10.6*             |       | Transition Agreement  between Radha R. Basu and SupportSoft, Inc., dated March 12, 2006  (incorporated by reference to Exhibit 10.1 of SupportSoft’s current  report on Form 8-K filed on March 13, 2006).                                                                                                                 |
| 10.7*             |       | Employment Agreement,  dated August 16, 1999, by and between the registrant and Josh Pickus  (incorporated by reference to Exhibit 10.1 of SupportSoft’s current  report on Form 8-K filed on April 6, 2006).                                                                                                                   |

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| 10.8*   |   | Employment Agreement,  dated August 16, 1999, by and between the registrant and Cadir Lee  (incorporated by reference to Exhibit 10.8 of SupportSoft’s registration  statement on Form S-1 (File No. 333-30674) filed on  February 18, 2000).                                          |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9*   |   | Employment  Agreement, dated September 27, 1999, by and between the registrant and  Brian M. Beattie (incorporated by reference to Exhibit 10.9 of  Amendment No. 3 to SupportSoft’s registration statement on Form S-1  (File No. 333-30674) filed on April 26, 2000). |
| 10.10*  |   | Employment  Agreement dated July 25, 2003, by and between registrant and Michael  Sayer, dated April 24, 2006 (incorporated by reference to  Exhibit 10.1 of SupportSoft’s current report on Form 8-K  filed on April 27, 2006).                                                       |
| 10.11*  |   | Employment  Agreement between registrant and Robert Barnum, dated July 21, 2006.                                                                                                                                                                                                                                |
| 10.12*  |   | Employment  Agreement dated May 1, 2003, by and between registrant and Chris M.  Grejtak (incorporated by reference to Exhibit 10.11 of SupportSoft’s  annual report on Form 10-K for the year ended December 31,  2003).                                                                   |
| 10.13*  |   | Employment  Agreement dated November 15, 2004, by and between registrant and Ken Owyang,  as amended on December 28, 2005 and December 27, 2006 (incorporated  by reference to Exhibit 10.1 of SupportSoft’s current report on  Form 8-K filed on March 31, 2006).                |
| 10.14   |   | Form of  Proprietary Information and Inventions Agreement (incorporated by reference  to Exhibit 10.13 of Amendment No. 2 to SupportSoft’s registration  statement on Form S-1 (File No. 333-30674) filed on  March 31, 2000).                                                    |
| 10.15   |   | Lease agreement,  dated October 1, 2001, by and between the registrant and Martin/Campus  LLC (incorporated by reference to Exhibit 10.16 of SupportSoft’s annual  report on Form 10-K for the year ended December 31, 2001).                                                               |
| 10.16   |   | First Amendment  to Lease effective May 31, 2003 by and between MPTP Holding, LLC and the  registrant (incorporated by reference to Exhibit 10.1 of SupportSoft’s  quarterly report on Form 10-Q for the quarter ended June 30,  2003).                                                     |
| 10.17   |   | Second Amendment  to Lease effective as of May 6, 2005 by and between MPTP Holding, LLC  and the Registrant (incorporated by reference to Exhibit 10.1 of  SupportSoft’s quarterly report on Form 10-Q for the quarter ended  March 31, 2005).                                              |
| 10.18   |   | Exercise of Lease  Renewal Option dated December 16, 2005 (incorporated by reference to  Exhibit 10.1 of SupportSoft’s current report on Form 8-K  filed on December 22, 2005).                                                                                                             |
| 10.19   |   | Sublease  Agreement with Nuance Communications, Inc. dated November 9,  2006 (incorporated by reference to Exhibit 10.1 of SupportSoft’s current  report on form 8-K filed on November 15, 2006).                                                                                      |
| 23.1    |   | Consent of  Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                            |
| 24.1    |   | Power of Attorney  (see page 81 of this Form 10-K)                                                                                                                                                                                                                                                         |
| 31.1    |   | Chief Executive  Officer Section 302 Certification.                                                                                                                                                                                                                                                             |
| 31.2    |   | Chief Financial  Officer Section 302 Certification.                                                                                                                                                                                                                                                             |
| 32.1(1) |   | Statement of the  Chief Executive Officer under 18 U.S.C. § 1350                                                                                                                                                                                                                                           |
| 32.2(1) |   | Statement of the Chief  Financial Officer under 18 U.S.C. § 1350                                                                                                                                                                                                                                           |

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*                    Denotesan executive or director compensation plan or arrangement.

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(1)          Thematerial contained in Exhibit 32.1 and 32.2 shall not be deemed “filed”with the SEC and is not to be incorporated by reference into any filing of theCompany under the Securities Act of 1933 or the Securities Exchange Act of1934, whether made before or after the date hereof irrespective of any generalincorporation language contained in such filing, except to the extent that theregistrant specifically incorporates it by reference.

(c)           Financial StatementSchedules.

No schedules have been filed because the informationrequired to be set forth therein is not applicable or is shown in the financialstatements or related notes included as part of this report.

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**SIGNATURES**

Pursuantto the requirements of the Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on this 16th dayof March, 2007.

|        |       |       | SUPPORTSOFT, INC.                   |
|--------|------------|------------|------------------------------------------|
|   |       | By:        | /s/ JOSHUA PICKUS                   |
|   | ** ** | ** ** | *Joshua  Pickus*                         |
|   | ** ** | ** ** | *Chief  Executive Officer and President* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Joshua Pickus and KenOwyang, and each of them individually, as his or her attorney-in-fact, eachwith full power of substitution, for him or her in any and all capacities, tosign any and all amendments to this Report on Form 10-K, and to filethe same, with exhibits thereto and other documents in connection therewith,with the Securities and Exchange Commission, hereby ratifying and confirmingall that said attorney-in-fact, or his or her substitute, may do or causeto be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated:

|                              | **Signature** | ** **                                                | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------------|---------------|-----------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JOSHUA  PICKUS           |          | Chief Executive Officer and President |       | March 16,  2007 |
| Joshua  Pickus               |          | (Principal  Executive Officer)                            |       |                 |
| /s/ KEN OWYANG               |          | Chief Financial Officer and Senior Vice President of      |       | March 16,  2007 |
| Ken  Owyang                  |          | Finance  and Administration                               |       |                 |
|                         |          | (Principal  Financial and Accounting Officer)             |       |                 |
| /s/ KEVIN C.  EICHLER        |          | Chairman of the Board of Directors                        |       | March 16,  2007 |
| Kevin  C. Eichler            |          |                                                      |       |                 |
| /s/ RADHA R.  BASU           |          | Director                                                  |       | March 16,  2007 |
| Radha  R. Basu               |          |                                                      |       |                 |
| /s/ SHAWN  FARSHCHI          |          | Director                                                  |       | March 16,  2007 |
| Shawn  Farshchi              |          |                                                      |       |                 |
| /s/ J. MARTIN  O’MALLEY |          | Director                                                  |       | March 16,  2007 |
| J.  Martin O’Malley     |          |                                                      |       |                 |
| /s/ JIM  STEPHENS            |          | Director                                                  |       | March 16,  2007 |
| Jim  Stephens                |          |                                                      |       |                 |
| /s/ JAMES  THANOS            |          | Director                                                  |       | March 16,  2007 |
| James Thanos                 |          |                                                      |       |                 |

 

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**EXHIBIT INDEX**

|        | **Exhibit** | ** **                                                                                                                                                                                                                                                                                                                                               | ** ** | **Description of Document** |
|--------|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| 3(i)   |        | Restated Certificate of  Incorporation, as amended (incorporated by reference to Exhibit 3.1 of  SupportSoft’s annual report on Form 10-K for the year ended  December 31, 2001).                                                                                                                                                    |
| 3(ii)  |        | Amended and  Restated Bylaws (incorporated by reference to Exhibit 3.2 of  SupportSoft’s annual report on Form 10-K for the year ended  December 31, 2001).                                                                                                                                                                          |
| 4.1    |        | Form of  Common Stock Certificate (incorporated by reference to Exhibit 4.1 of  SupportSoft’s quarterly report on Form 10-Q for the quarter ended  June 30, 2002).                                                                                                                                                              |
| 4.2    |        | Registration  Rights Agreement, dated June 22, 1999, by and among the registrant and  the parties who are signatories thereto (incorporated by reference to  Exhibit 4.2 of SupportSoft’s registration statement on Form S-1  (File No. 333-30674) filed on February 18, 2000).                                            |
| 4.3    |        | Amended and  Restated Registration Rights Agreement, dated March 14, 2000, by and  among the registrant and the parties who are signatories thereto  (incorporated be reference to Exhibit 4.3 of Amendment No. 5 to  SupportSoft’s registration statement on Form S-1 (File  No. 333-30674) filed on June 27, 2000). |
| 10.1*  |        | Registrant’s  Amended and Restated 1998 Stock Option Plan (incorporated by reference to  Exhibit 10.1 of Amendment No. 8 to SupportSoft’s registration  statement on Form S-1 (File No. 333-30674) filed on  March 9, 2000).                                                                                          |
| 10.2*  |        | Registrant’s 2000  Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2  of Amendment No. 8 to SupportSoft’s registration statement on  Form S-1 (File No. 333-30674) filed on July 13,  2000).                                                                                                   |
| 10.3*  |        | Registrant’s 2000  Amended and Restated Employee Stock Purchase Plan (incorporated by reference  to Exhibit 10.1 of SupportSoft’s quarterly report on Form 10-Q  filed on August 4, 2006.                                                                                                                                       |
| 10.4*  |        | Form of  Directors and Officers’ Indemnification Agreement (incorporated by reference  to Exhibit 10.4 registration statement on Form S-1 (File  No. 333-30674) filed on February 18, 2000).                                                                                                                               |
| 10.5*  |        | Employment  Agreement, dated July 15, 1999, by and between the registrant and Radha  R. Basu (incorporated by reference to Exhibit 10.6 of Amendment  No. 3 to SupportSoft’s registration statement on Form S-1  (File No. 333-30674) filed on April 26, 2000).                                                       |
| 10.6*  |        | Transition  Agreement between Radha R. Basu and SupportSoft, Inc., dated  March 12, 2006 (incorporated by reference to Exhibit 10.1 of  SupportSoft’s current report on Form 8-K filed on March 13,  2006).                                                                                                                |
| 10.7*  |        | Employment  Agreement, dated August 16, 1999, by and between the registrant and Josh  Pickus (incorporated by reference to Exhibit 10.1 of SupportSoft’s  current report on Form 8-K filed on April 6, 2006).                                                                                                                   |
| 10.8*  |        | Employment  Agreement, dated August 16, 1999, by and between the registrant and  Cadir Lee (incorporated by reference to Exhibit 10.8 of SupportSoft’s  registration statement on Form S-1 (File No. 333-30674)  filed on February 18, 2000).                                                                              |
| 10.9*  |        | Employment  Agreement, dated September 27, 1999, by and between the registrant and  Brian M. Beattie (incorporated by reference to Exhibit 10.9 of Amendment  No. 3 to SupportSoft’s registration statement on Form S-1  (File No. 333-30674) filed on April 26, 2000).                                          |
| 10.10* |        | Employment  Agreement dated July 25, 2003, by and between registrant and Michael  Sayer, dated April 24, 2006 (incorporated by reference to  Exhibit 10.1 of SupportSoft’s current report on Form 8-K  filed on April 27, 2006).                                                                                           |
| 10.11* |        | Employment  Agreement between registrant and Robert Barnum, dated July 21, 2006.                                                                                                                                                                                                                                                                    |
|   |        |                                                                                                                                                                                                                                                                                                                                                     |

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| 10.12*  |   | Employment  Agreement dated May 1, 2003, by and between registrant and Chris M.  Grejtak (incorporated by reference to Exhibit 10.11 of SupportSoft’s  annual report on Form 10-K for the year ended December 31,  2003).                                                    |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13*  |   | Employment  Agreement dated November 15, 2004, by and between registrant and Ken  Owyang, as amended on December 28, 2005 and December 27, 2006 (incorporated  by reference to Exhibit 10.1 of SupportSoft’s current report on  Form 8-K filed on March 31, 2006). |
| 10.14   |   | Form of  Proprietary Information and Inventions Agreement (incorporated by reference  to Exhibit 10.13 of Amendment No. 2 to SupportSoft’s registration  statement on Form S-1 (File No. 333-30674) filed on  March 31, 2000).                                     |
| 10.15   |   | Lease agreement,  dated October 1, 2001, by and between the registrant and Martin/Campus  LLC (incorporated by reference to Exhibit 10.16 of SupportSoft’s annual  report on Form 10-K for the year ended December 31, 2001).                                                |
| 10.16   |   | First Amendment  to Lease effective May 31, 2003 by and between MPTP Holding, LLC and the  registrant (incorporated by reference to Exhibit 10.1 of SupportSoft’s  quarterly report on Form 10-Q for the quarter ended June 30,  2003).                                      |
| 10.17   |   | Second Amendment  to Lease effective as of May 6, 2005 by and between MPTP Holding, LLC  and the Registrant (incorporated by reference to Exhibit 10.1 of SupportSoft’s  quarterly report on Form 10-Q for the quarter ended March 31,  2005).                               |
| 10.18   |   | Exercise of Lease  Renewal Option dated December 16, 2005 (incorporated by reference to  Exhibit 10.1 of SupportSoft’s current report on Form 8-K  filed on December 22, 2005).                                                                                              |
| 10.19   |   | Sublease  Agreement with Nuance Communications, Inc. dated November 9,  2006 (incorporated by reference to Exhibit 10.1 of SupportSoft’s current  report on form 8-K filed on November 15, 2006).                                                                       |
| 23.1    |   | Consent of  Independent Registered Public Accounting Firm                                                                                                                                                                                                                                             |
| 24.1    |   | Power of Attorney  (see page 81 of this Form 10-K)                                                                                                                                                                                                                                          |
| 31.1    |   | Chief Executive  Officer Section 302 Certification.                                                                                                                                                                                                                                              |
| 31.2    |   | Chief Financial  Officer Section 302 Certification.                                                                                                                                                                                                                                              |
| 32.1(1) |   | Statement of the  Chief Executive Officer under 18 U.S.C. § 1350                                                                                                                                                                                                                            |
| 32.2(1) |   | Statement of the Chief  Financial Officer under 18 U.S.C. § 1350                                                                                                                                                                                                                            |

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*                    Denotes anexecutive or director compensation plan or arrangement.

(1)          The material containedin Exhibit 32.1 and 32.2 shall not be deemed “filed” with the SEC and isnot to be incorporated by reference into any filing of the Company under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof irrespective of any general incorporationlanguage contained in such filing, except to the extent that the registrantspecifically incorporates it by reference.

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