UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 
 FORM
10-K
  x           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 For
the fiscal year ended September 30, 2008
 
 OR
 
            TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from 
to
 
 Commission
File Number: 000-29357
 
 CHORDIANT
SOFTWARE, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              93-1051328(State
      or other jurisdiction of incorporation or
    organization)
              (I.R.S.
      Employer Identification No.)
 
 20400
Stevens Creek Blvd., Suite 400
 Cupertino,
California 95014
 (Address
of principal executive offices, including zip code)
 
 (408)
517-6100
 (Registrant’s
telephone number, including area code)
 
 Securities
Registered Pursuant to Section 12(b) of the Act:
 
 Title
      of each class
              
              Name
      of each exchange on which registeredCommon
      Stock $.001 Par Value per Share
              
              The
      NASDAQ Stock Market LLC(NASDAQ
      Global Market)
 
 Securities
Registered Pursuant to Section 12(g) of the Act:
 None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yesx    No  
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    Yes    No  x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:    Yes  x    No
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer  
              Accelerated
      filer  xNon-accelerated
      filer   (Do not check if a smaller reporting
      company)
              Smaller
      reporting company  
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).    Yes    No  x
 
 State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of March
31, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter: $192,153,017.
  As
of November 12, 2008, there were 30,076,478 shares of the registrant’s common
stock outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
 Part
III-Portions of the registrant’s definitive proxy statement to be issued in
conjunction with registrant’s 2009 Annual Stockholder’s
meeting.
  
  CHORDIANT SOFTWARE, INC.
  ANNUAL
REPORT ON FORM 10-K
  INDEX
 
 PART
    1Item
      1
              BUSINESS
              3Item
      1A.
              RISK
      FACTORS
              12Item
      1B.
              UNRESOLVED STAFF
      COMMENTS
              23Item
      2.
              PROPERTIES
              23Item
      3.
              LEGAL
      PROCEEDINGS
              23Item
      4.
              SUBMISSION OF MATTERS TO A
      VOTE OF SECURITY HOLDERS
              25PART IIItem
      5.
              MARKET FOR REGISTRANT’S COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
      SECURITIES
              26Item
      6.
              SELECTED CONSOLIDATED
      FINANCIAL DATA
              28Item
      7.
              MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              29Item
      7A.
              QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK
              50Item
      8.
              FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA
              52Item
      9.
              CHANGES IN AND DISAGREEMENTS
      WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              91Item
      9A.
              CONTROLS AND
      PROCEDURES
              91Item
      9B.
              OTHER
      INFORMATION
              94PART IIIItem
      10.
              DIRECTORS, EXECUTIVE OFFICERS
      AND COPORATE GOVERNANCE
              94Item
      11.
              EXECUTIVE
      COMPENSATION
              94Item
      12.
              SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS
              94Item
      13.
              CERTAIN RELATIONSHIPS AND
      RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
              94Item
      14.
              PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
              94PART IVItem
      15.
              EXHIBITS AND FINANCIAL
      STATEMENT SCHEDULES
              95SIGNATURES
              102
 
  2
 Table of Contents
  PART I
  FORWARD-LOOKING
INFORMATION
  Except
for the historical information contained herein, this Annual Report contains
certain information that is forward-looking in nature. This information is based
on our current expectations, assumptions, estimates and projections about our
business and our industry, and involves known and unknown risks, uncertainties
and other factors that may cause our or our industry’s results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied
in, or contemplated by the forward-looking statements. Words such as “believe,”
“anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “should,” “estimate,”
“predict,” “guidance,” “potential,” “continue” or the negative of such terms or
other similar expressions identify forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of several factors more fully described under the caption
“Risk Factors” and those discussed elsewhere in this document. These and many
other factors could affect the future financial and operating results of
Chordiant. Chordiant undertakes no obligation to update any forward-looking
statement to reflect events after the date of this report. All references to
“Chordiant”, “we”, “us”, or “the Company” means Chordiant Software, Inc. and its
subsidiaries except where it’s made clear that the term means only the parent
company.
 
 ITEM 1.
              BUSINESS
 
 Chordiant
is an enterprise software company that delivers products and services designed
to improve the “customer experience” in front-office processes for leading
global companies primarily in the insurance, healthcare, telecommunications and
financial services markets. Chordiant provides companies in these markets with
innovative solutions designed to help them more effectively manage their
customer interactions, offering “next best offers” for those customers based on
pre-built business rules.
 
 Our
enterprise-scale software utilizes predictive decisioning, analytical modeling,
and strategy formulation in real-time for decision management and execution at
the point of sale. This capability enables organizations to improve the accuracy
of marketing offers for retention, up-selling, cross selling, and modeling risk
scenarios such as customer churn and the likelihood of default on
payments.
 
 We
believe our solutions add business value and return-on-investment for our
customers by improving their customer retention, reducing operational costs,
reducing their risk exposure, and increasing employee productivity. These
improvements may be realized by automating key business processes and supporting
organizational decision-making associated with the servicing, selling,
marketing, approval, and fulfillment of customer requests across the enterprise.
We offer solutions to our clients that include software applications, business
processes, tools and services that can integrate their customer information and
corporate systems to produce a real-time view of customers across multiple
business channels. Our solutions offer businesses additional flexibility to
create and set their policies and processes to control the quality of servicing,
fulfillment and marketing offers to their customers.
 
 We
have developed and acquired decision management systems that advances the state
of analytics by exploiting the power of predictive data mining, analytical
modeling, and strategy formulation into real-time decision management and
execution. Our patented technology enables organizations to significantly
increase the accuracy of marketing offers for retention, up-selling, cross
selling, and to model risk scenarios such as customer churn and likelihood to
default on payments. We are able to deliver a range of applications for
real-time recommendation, retention, risk management and
recruitment.
 
 Product
Solutions
 
 Our
products are designed for global enterprises seeking to optimize their customer
experiences through effective decision analysis, marketing, selling and
servicing efforts. We have designed our products to integrate customer
information from different data sources and systems of record, automate business
processes based on a customer’s specific profile and requests, and provide
uniform service and information to customers across multiple communication
channels. Our products are designed to enable companies to deliver appropriate
recommendations (also known as “next best action”), services, offers and
information to a targeted customer at the time of customer need while complying
with relevant business policy and industry regulatory requirements.
 
 Our
solutions are designed to address the enterprise requirements of global consumer
companies serving millions of customers across multiple business channels
integrating multiple lines of business. The solution suite is typically licensed
as an integrated set of software products that include one or more vertical
market applications running on top of a common layer of foundational technology
and supporting tools. Chordiant’s software is based on open systems software
standards that are widely adopted by our industry and capable of deployment
throughout an enterprise’s information technology infrastructure. Chordiant
software is built to be highly scalable and adaptable to a customer’s specific
business requirements or technology infrastructure.
  3
 Table of Contents
  
 Products
and Solutions
 
 Historically,
our products have been categorized into three general groups: Enterprise
solutions (including the “Cx” Enterprise Foundation and Call Center and
Customer Service Desktop products), Decision Management products, and the
Marketing Director Suite of products. Our solutions are designed to address a
variety of business needs within our target vertical markets of
insurance, healthcare, telecommunications, and financial
services:
 
 ·
              Call Center and Customer
      Service Desktop (Call Center Advisor – Browser Edition): This
      product is a browser-based guided desktop designed for the effective
      management of customer contacts, service requests, and customer case
      history in the call center channel. The desktop is integrated with leading
      computer telephony integration products, working with our own queue-based
      work management to deliver ‘universal queues’ to the enterprise. This
      product is used by customer services professionals across all our target
      markets. It is designed to meet the high volume transaction and business
      processes common in enterprise contact centers. The desktop also acts as a
      delivery channel for our decision management and marketing products
      together with the other business applications that
      Chordiant offers.
 
 ·
              Marketing Director: This
      suite of product provides applications designed to drive unified,
      personalized marketing campaigns and response management across multiple
      media types and multiple channels including email, web, phone, and mobile
      messaging (MMS/SMS). These products are used by marketing professionals
      across all our target markets to segment and target prospects and
      customers and deliver to them effective marketing campaigns. The Marketing
      Director suite of products integrates with our Decision Management
      products to provide an integrated campaign management
    system.
 
 ·
              Recommendation Advisor:
      This product is designed to provide flexible lead collection and routing
      in a common guided selling desktop, integrated with marketing campaigns
      and product fulfillment. Predictive and adaptive analytics guide staff
      toward best offers and “next best action” in the context of inbound or
      outbound customer interactions. This product is used by sales and service
      professionals across our target markets to manage leads and deliver highly
      effective sales messages.
 
 ·
              Credit Card Disputes,
      Chargebacks and Fraud: These modular applications are designed to
      automate and optimize customer and mid-office functions associated with
      credit card dispute handling and fraud investigation and recovery. The
      applications use Chordiant technology to implement the dispute and
      chargeback regulatory requirements of credit card associations to assist
      organizations in managing their compliance of these complex regulations.
      These applications are used by customer service professionals in the
      credit card segment of banking to drive more cost effective, compliant
      handling of disputes and fraud
cases.
 
 ·
              Teller: This guided
      desktop product is designed to support financial transaction
      components for retail bank tellers/cashiers or other cash-based desktop
      applications. Chordiant Teller is used in the banking and lending sectors
      by customer-facing staff in bank branches or stores to effectively process
      cash and related financial transactions on behalf of the customer. The
      solution utilizes the “Cx” (Customer Experience) Enterprise
      Foundation (described below) to provide company-wide case management,
      customer history, and work management between front office and back office
      operations.
 
 ·
              Lending:This product consists
      of solution components and services which are designed to provide a common
      process-driven lending infrastructure across an organization to increase
      efficiency of loan originations, quoting, account opening and loan risk
      assessment and management such as required by Basel II. Our lending
      solutions are used in banking and lending by a variety of users and
      desktop applications.
 
 ·
              Insurance: This product
      consists of solution components and services which are designed to provide
      a common process-driven insurance infrastructure and services across an
      organization to increase efficiency of case management, claims processing,
      quoting, self-service, and risk management. Our insurance solutions and
      services are used in the insurance sector by a variety of users and
      desktop applications.
 
 ·
              Collections: This
      product is designed to deliver automation and operational efficiency to
      debt recovery and collections professionals. The second generally
      available release, consisting of advanced decisioning, was shipped in the
      fourth quarter  of fiscal year 2008. The product is designed to
      make extensive use of Chordiant’s Decision Management (CDM)
      technology to deliver real-time decisioning that helps collect on
      overdue accounts while preserving the customer
    relationship.
  4
 Table of Contents
  
 Technology
 
 Chordiant
technology is based on open Service Oriented Architecture (SOA). This
architecture provides a framework for large or growing businesses to provide
multi-channel interaction and process orchestration across multiple lines of
business. The Cx Enterprise Foundation framework provides a pre-integrated
environment that supports the business applications required by these large
scale organizations.  With predictive decisioning built-in,
organizations can utilize Chordiant technology to obtain customer behavioral
insight and use this information to drive the most appropriate business
processes, guide staff through the best tasks to increase responsiveness, reduce
errors, shorten cycle times, and present the most relevant offers to customers
in each interaction.
 
 Chordiant’s
architecture leverages J2EE and Web Services extensively to provide a services
oriented architecture for use by Chordiant applications and other systems. The
business services and related business components use a data persistence
foundation with built-in support for Oracle and DB2 databases as well as IBM
WebSphere MQ messaging. Generally, our software is easily integrated with other
data sources, including those built on the Java Connector Architecture
(JCA).
 
 Chordiant’s
web browser technology delivers consistent self-service and agent-driven
customer interaction processes using a rich web-based application platform that
provides desktop interface behavior in a browser-based technology with high
performance, low maintenance costs, and flexibility to meet the differing
demands of a diverse user population.
  Certain
of our products use technology modules from third party technology
providers including IBM, Oracle (as a result of their acquisition of BEA
Systems), Sun Microsystems, and certain non-public entities. Our enterprise
platform solutions support industry standard J2EE application servers including
IBM WebSphere and Oracle WebLogic. Our server software runs on UNIX server
platforms from Sun Microsystems and IBM.
 
 ·
              CxEnterpriseFoundation: Foundation Server, Café, and
      Tools Platform: Consisting of a family of products with
      enterprise-wide process orchestration and case management at its core, the
      Chordiant Cx Enterprise Foundation product family provides a common,
      highly scalable base platform for all Chordiant solutions. The product
      family incorporates industry standards such as J2EE, model driven
      development, AJAX high performance thin client desktops, Java Server Faces
      (JSF), and enterprise open source technologies including Hibernate, and
      Apache Trinidad. The products are supported by process development and
      administration tools that use the Eclipse integrated development
      environment.
 
 The
Enterprise Platform incorporates module ‘servers’ to deliver additional
functionality as needed including business rules, decision management, telephony
integration, connectivity to systems of record and interaction channel
management. These allow organizations to implement only those functions that are
required for their particular business requirement without interfering with
future project requirements.
 
 ·
              Decisioning: Consisting
      of flexible products and tools for adaptive decisioning, predictive
      decisioning, and rules, our Chordiant Decision Management (CDM)
      product family is designed to allow organizations to effectively drive
      application behavior based on industry or organizational models and logic.
      This capability allows business users advanced control over business
      priorities, and enables the business to refine offer and service
      management in real-time. CDM is a suite of products and
      comprises:
 
 •
              Chordiant
      Data Preparation Director—Chordiant Data Preparation Director allows
      non-IT users to combine, manipulate and aggregate customer data using an
      easy to use visual interface.
 
 •
              Chordiant
      Predictive Analytics Director—Chordiant Predictive Analytics Director
      provides marketing professionals functionality which enables in-depth
      analysis of significant amounts of customer information using data-mining
      and predictive analytical
capabilities.
 
 •
              Chordiant
      Strategy Director—Chordiant Strategy Director allows users to design
      customer interaction strategies and marketing offers based on decisions
      and rules that reflect customer behavior, preferences, legislation,
      corporate policies and  desired business outcomes. The resulting
      decision logic is executed in our campaign management solution for
      outbound communication or executed in real-time in multiple channels of
      communication.
 
 •
              Chordiant
      Decision Monitor—Chordiant Decision Monitor provides management with
      insight into business results, measures data analysis effectiveness, and
      allows an organization to learn from current and future data models. It is
      a software module in which decisions are automatically logged and stored
      in a monitoring database together with the relevant data as well as
      subsequent customer information and behavior. This module can be
      integrated and analyzed by third party business intelligence
      tools.
  5
 Table of Contents
  
 •
              Chordiant
      Deployment Manager—Chordiant Deployment Manager provides the
      administrative function to prepare available data in the operational
      environment and implement the decision logic into production campaigns,
      business processes and
applications.
 
 •
              Chordiant
      Real-Time Decisioning Services—Chordiant Real-Time Decisioning Server
      generates a decisioning service that can be hosted in industry-standard
      application servers.
 
 •
              Chordiant
      Database Decisioning Services—The Chordiant Database Decisioning Server
      provides an application for data mining, analysis, and modeling to
      create the optimal decision logic and the appropriate decisions
      outcomes.
 
 Chordiant
Mesh Collaboration
 
 Announced
in fiscal year 2006, Chordiant Mesh is a collaborative development network where
customers, partners, and Chordiant staff can work together on solutions to
respond to customer initiatives. Chordiant Mesh is a development infrastructure
layer that allows organizations to collaborate on a wide variety of solutions,
components, and tools. By applying principles from open source projects to a
member-driven high-end ecosystem, Chordiant Mesh facilitates far greater
collaboration, agility, speed to market, transparency, and quality than
customers are accustomed to receiving from traditional high-end enterprise
software providers.
 
 Key
benefits of Chordiant Mesh are:
 
 ·
              A
      fabric for the maintenance of infrastructure level code and reduction of
      customization and cost of
ownership.
 ·
              A
      set of tools and methodologies for building applications collaboratively
      with Chordiant and its partners.
 ·
              Enables
      and enhances the IT systems “grid” to better support high value SOA −
      based applications.
 ·
              Enhancement
      of the ability of IT departments to provide support, control and
      flexibility.
 ·
              By
      leveraging open-source development models, Chordiant can take
      code revisions submitted by community members − customers, partners and
      Chordiant itself − and allow these to be incorporated into its
      products when appropriate.
 
 This
new Mesh development approach enables Chordiant to be in closer collaboration
with its enterprise customers.
 
 Strategic
Direction
  The
Company is focused on solving problems for our global brand accounts through
helping them improve the quality of the customer experience they deliver in the
insurance, healthcare, telecommunications, and financial services markets.
Chordiant anticipates that it will increasingly deliver business-focused
applications based on an open and adaptable core information technology, or IT
infrastructure that provides high levels of business agility and fast return on
investment for enterprises by allowing rapid changes to their IT systems. Within
the markets above, Chordiant expects to continue to develop domain-level
solutions for these markets, focusing on the most mission-critical business
processes facing our customers.
 
 Customers
  We
target global brand leaders in our core markets. Our customers include: ING,
Canada, Inc., HSBC Technology and Services (USA), Inc., Capital One Services,
Inc., O2 (UK) Limited, Time Warner Cable, Inc., Deutsche Angestellten
Krankenkasse (DAK), Covad Communication Company, 21st Century Insurance,
T-Mobile, Lloyds TSB Bank plc, Bank of Ireland Group, The Royal Bank of Scotland
plc, Metropolitan Life Insurance Company, Signal Iduna, Deutsche Bank AG,
Canadian Tire Financial Services, Canadian Imperial Bank of Commerce, Halifax
plc, British Telecommunications plc, Connecticut General Life Insurance Company,
Citibank Credit Services Inc. (USA), and Sky Subscribers Services Limited. As we
deploy new applications, we anticipate that a certain percentage of these and
new customers will adopt new Chordiant applications and expand their investment
in Chordiant products. For the fiscal year ended September 30, 2008, Citicorp
Credit Services Inc., and Vodafone Group Services Limited accounted for 22%
and 11% of our total revenues, respectively.
 
 Sales
and Marketing
  We
license our solutions and sell services primarily through a direct sales
organization that is complemented by selling and support efforts through
business alliance partners such as IBM Global Services, Tata Consulting
Services, HCL Technologies, Cap Gemini, Accenture, systems integrators and
other technology vendors. Our market focus is the business-to-consumer segment
of the economy with a targeted effort on leading consumer focused industries and
companies using multiple channels as the means of conducting business and
serving customers.
  6
 Table of Contents
   The
sales process generally ranges from approximately three to eighteen months
depending on the level of knowledge that prospective customers need about the
use and benefits of our solutions and the involvement of systems integrators.
During the sales process, we typically approach the senior management teams of
the business and information technology departments of a prospective customer’s
organization. We utilize sales teams consisting of sales and technical
professionals who work with our systems integration partners to create company
specific proposals, presentations and proof of concept demonstrations that
address the needs of the business and its technology requirements.
  Our
corporate offices are located in Cupertino, California, and we maintain an
applications development center in Bedford, New Hampshire. In Europe, we have
offices in the greater metropolitan areas of
London, Madrid, Amsterdam, and Munich. We have sales and support
personnel and consultants in various additional locations in North America and
Europe. In fiscal year 2008, we added sales and services consultants in emerging
markets such as Russia and the Asia Pacific markets, including
Australia.
 
 Our
Services
  We
offer a comprehensive set of customer services including professional consulting
services and product support and training services. We believe that providing
high quality customer service is critical to achieving rapid product
implementation and customer success.
  Professional
Services
  We
provide implementation consulting and customer support services to licensed
customers through our worldwide professional services organization. Our
professional services consulting teams often assist customers and systems
integrator partners in the configuration and implementation of our software
solutions.
  Our
professional services organization deploys consultants as part of the project
team alongside systems integration partners and members of the customer’s
internal team to provide subject matter expertise, technical knowledge, process
engineering guidance, project governance and quality assessments during the
entire solution lifecycle. In the design stage, we provide a variety of
professional services that help determine a customer’s business processes and
the technical requirements of the solutions implementation. In the
implementation stage, we use a delivery methodology to assist customers and
integration partners in planning and managing the implementation. Typically,
systems integrators provide overall program management and coordinate the
implementation of our products with a customer’s existing communications,
applications, databases and transaction systems. In the final phases of an
implementation, the systems integrators provide deployment services to enable a
customer’s internal team to implement the system, train internal users and
provide first-level end-user support.
  Although
our primary strategy is to leverage our strategic systems integration partners
for implementations, our internal professional services organization is often
integral in implementing our enterprise platform software solutions for our
customers. We believe that our consulting services enhance the use and
administration of our software solutions, facilitate the implementation of our
solutions and result in sharing best business practices with client and systems
integrator project teams. In addition to implementing our software, our
professional services organization works closely with our internal research and
development organization to enhance existing software solutions.
 
 In
addition to our internal professional services organization, in calendar 2008,
we renewed for one year our agreement with Ness Technologies Inc., Ness Global
Services, Inc. and Ness Technologies India, Ltd. (collectively, “Ness”), that we
originally entered into in 2003. Ness provides Chordiant with resources focused
on technical product support, sustaining engineering product testing and product
development through their global technical resources and operations center
in Bangalore, India. Ness is an independent contracting company with global
technical resources. The agreement with Ness may be extended for additional one
year terms at our discretion. Our agreement with Ness enables them, at our
direction, to attract, train, assimilate and retain sufficient highly qualified
personnel to perform technical support and certain sustaining engineering
functions.
 
 Educational
Services
  We
provide educational services to train and enable our systems integrators and
customers to use our products and technologies. We offer a comprehensive series
of training modules to provide the knowledge and skills to successfully deploy,
use and maintain our products. These training courses focus on the technical
aspects of our products as well as business issues and processes. We provide
on-site and on-line customized training courses for a fee and, also, through
classroom, lab instructions, and e-learning. In addition, we provide
certification programs for our partners and customers.
  7
 Table of Contents
  
 Customer
Support
  We
provide our customers with support and maintenance services including telephone
support, web-based support and updates to our products and documentation. We
believe that providing a high level of technical support is critical to customer
satisfaction. We also offer training programs to our customers and other
companies with which we have relationships to accelerate the implementation and
adoption of our solutions by the users within a company. Fees for our training
services are typically charged separately from our software license, maintenance
and consulting fees.
 
 Our
customers have a choice of support and maintenance options depending on the
level of service desired. Our technical support services are available to
clients by telephone, over the web, by email and on-site. Additionally, we
provide unspecified product enhancement releases to all customers as part of our
support and maintenance contracts. We use a customer service automation system
to track each customer inquiry until it is resolved. We also make use of our
website and a secured customer forum to provide product information and
technical support information worldwide 24 hours a day, seven days a
week.
  Strategic
Partnerships
 
 Establishing
partnerships and alliances with third parties that provide additional services
and resources for implementing our solutions to enhance our sales and service
organizations’ productivity is an important element of our strategy. These
relationships and alliances fall into the following categories:
  Consulting and System Integration
Relationships. To enhance the productivity of our sales and service
organizations, we have established relationships with systems integrators,
complementary technology providers, and alternative service providers. We have
established relationships and trained professionals at a number of systems
integrators including: Cap Gemini, Accenture, IBM Global Services, Ness
Technologies, Tata Consultancy Services, HCL Technologies, and Patni Telecom
Solutions (UK), LTD. We plan to expand these and/or other similiar relationships
to increase our capacity to license and implement our products. We believe that
expanding our relationships with systems integrators and independent consulting
firms will enable us to gain a greater share of our target markets.
  Technology
Partnerships. We make extensive use of industry platforms and
embrace a number of core technologies in our solution offerings. We have formed
partnerships with vendors of software and hardware technology platforms. We
currently maintain technology relationships with vendors such as Avaya/Lucent,
Alcatel/Genesys,  Cisco Systems, IBM, Oracle, and Sun Microsystems.
Many of these companies voluntarily provide us with early releases of new
technology platforms, education related to those platforms and limited access to
their technical resources to facilitate adoption of their
technology.
 
 Product
Development
  We
have made substantial investments in research and development through internal
development, acquisitions and technology licensing. Our product development
efforts are focused on extending our enterprise software solutions, application
components, industry specific processes and business process functionality, and
continued integration of industry-specific transaction systems and services. Our
product development organization is responsible for new software products,
product architecture, core technologies, product testing, quality assurance and
enabling the compatibility of our products with third party hardware and
software platforms.
  Our
product development resources are organized into a number of development teams
including:
 
 ·
              Cx
      Enterprise Platform, which includes Foundational Server, Tools, and
      Decision Management Products;
 
 ·
              Operations,
      which includes Mesh, Fulfillment, Performance Labs, and Release
      Management;
 
 ·
              Applications,
      which includes our vertical and Marketing
  Applications;
 
 ·
              Product
      Test and Quality.
 
 Our
product development teams have experience in enterprise and distributed
computing, J2EE and object oriented development, data management, process and
workflow engineering, transaction system interfaces, Internet and Web-Services
technologies. Our research and development expenditures were $25.6 million,
$27.5 million and $25.9 million for the years ended September 30,
2008, 2007, and 2006, respectively.
  8
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 Competition
  The
market for our products is competitive, rapidly evolving, and can be affected by
new product introductions and other market activities of industry participants.
The competitive landscape is quickly evolving to address the need for
enterprise-wide integration of IT assets and the convergence of customer
interaction applications, back-office systems and business processes. The most
significant competition we face is from customers’ internal development efforts,
custom system integration, as well as other software providers that offer
integration and development platforms.
 
 Internal
Development
  Many
of our customers and potential customers have in the past attempted to develop
customer service, call center, customer relationship management and new
front-office systems in-house or with the help of systems integrators. Internal
information technology departments have staffed projects to build their own
systems utilizing a variety of tools. In some cases, such internal development
projects have been successful in satisfying the needs of an organization. The
costs of internal development and total cost-of-ownership have risen to become a
primary concern of the business and management. In spite of current ongoing
efforts to reduce IT budgets, we expect that internal development will continue
to be a significant source of competition.
 
 Custom
System Integration Projects
  Another
source of competition results from systems integrators engaged to build a custom
development application. The introduction of a systems integrator typically
increases the likelihood of success for the customer. The competitive factors in
this area require that we demonstrate to the customer the cost savings and
advantages of configurable, upgradeable and commercially supported software
products developed by a dedicated professional software
organization.
  We
frequently rely on system consulting and systems integration firms for
implementation and other global services, as well as recommendations of our
products during the evaluation stage of the purchase process. Many of these
third parties have similar and often more established relationships with our
competitors. We cannot assure that these third parties, many of whom have
significantly greater resources than us, will not market software products in
competition with us.
  Application
Software Competitors
  As
discussed, our primary competition is from internal development at our customers
and potential customers. However, other competitors include providers of
traditional, first-generation customer relationship management, enterprise
resources planning, call center, marketing automation software and sales force
automation software. These vendors include, among others, companies such as:
Oracle Corporation, SAP, Pegasystems, Inc., Unica Corporation, SSA Global
Technologies, Inc., Fidelity National Information Systems, Inc., S1 Corporation,
and Amdocs Limited.
  Some
of these companies have longer operating histories, greater financial, marketing
and other resources, greater name recognition in other markets and a larger base
of customers than we do. In addition, some companies have well-established
relationships with our current and potential customers. As a result, these
competitors may be able to devote greater resources to the development,
promotion and sale of their products than we can.
  We
believe that we compete favorably in the industries we serve based on the
following competitive advantages: process-driven solutions for servicing and
selling; real-time and transactional processes; real-time decision management
and vertical processes implemented in a multi-channel architecture. The
technology advantages include: Chordiant architecture providing an open services
oriented architecture providing for integration with multiple legacy systems,
third party applications and communication channels and advanced browser
based application environment for high volume call center, mid-office and branch
operations.
 
 There
is no one competitor, nor are there a small number of competitors that are
dominant in our market. There are many factors that may increase competition in
the enterprise customer relationship management market, including (i) entry
of new competitors, (ii) mergers and alliances among existing competitors,
(iii) consolidation in the software industry and (iv) technological
changes or changes in the use of the Internet. Increased competition may result
in price reductions, reduced gross margins and loss of market share, any of
which could materially and adversely affect our business, operating results and
financial condition. Continuing consolidation in the software
industry during the past years may indicate that we will face new
competitors in the future. In 2007 and 2008 IBM acquired ILOG, Cognos,
DataMirror and Watchfire Corporation; Oracle completed its acquisitions of
Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL and SAP
acquired BusinessObjects, YASU Technologies and Pilot Software. While we do not
believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot
Software have been significant competitors of Chordiant in the past, the
acquisition of
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  these
companies by IBM, Oracle, Sun Microsystems and SAP may indicate that we will
face increased competition from larger and more established entities in the
future.
 
 We
cannot assure that we will be able to compete successfully against current and
future competitors or that the competitive pressure faced by us will not
materially and adversely affect our business, operating results and financial
condition.
  Intellectual
Property and Proprietary Rights
  Our
success is in part dependent upon our ability to develop and protect proprietary
technology and intellectual proprietary rights. We rely primarily on a
combination of contractual provisions, confidentiality procedures, patents
pending, trade secrets, and copyright and trademark laws to protect our
intellectual property and proprietary rights.
  We
license our products through non-exclusive license agreements that impose
restrictions on customers’ ability to utilize the software. In addition, we seek
to avoid disclosure of our trade secrets, including requiring employees,
customers and others with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code. We
also seek to protect our rights in our products, documentation and other written
materials under trade secret and copyright laws. Due to rapid technological
change, we believe factors such as the technological and creative skills of our
personnel, new product developments and enhancements to our existing products
are more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
 
 We
integrate third party software into our products. Costs associated with
integrated technology provided by third parties historically accounts for
approximately 2% to 5% of total license revenues. The third party software may
not continue to be available on commercially reasonable terms or at all. If we
cannot maintain licenses to key third party software, shipments of our products
could be delayed until equivalent software is developed or licensed and
integrated into our products. Moreover, although we are generally indemnified
against claims if technology licensed from third parties infringes the
intellectual property and proprietary rights of others, this indemnification is
not always available for all types of intellectual property and proprietary
rights and in some cases the scope of this indemnification is limited. There can
be no assurance that infringement or invalidity claims arising from the
incorporation of third party technology or claims for indemnification from
our customers resulting from these claims will not be asserted or prosecuted
against us. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources, in addition to
potential product redevelopment costs and delays.
  Despite
our efforts to protect our proprietary rights, existing laws afford only limited
protection. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary. There
can be no assurance that we will be able to protect our proprietary rights
against unauthorized third party copying or use. Use by others of our
proprietary rights could materially harm our business. Furthermore, policing the
unauthorized use of our products is difficult and expensive litigation may be
necessary in the future to enforce our intellectual property
rights.
  Third
parties may claim, and have claimed, that we have infringed, or currently
infringe, their current or future products. We expect that software developers
will increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, can be
time-consuming, result in costly litigation, prevent product shipment, cause
delays, or require us to enter into royalty or licensing agreements, any of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. If an infringement claim against us
was successful and we could not obtain a license on acceptable terms, license a
substitute technology or redesign to avoid infringement, our business could be
harmed.
 
 In
fiscal year 2008, we neither filed for nor received patents. In fiscal year
2007, Chordiant received 2 patents from the US Patent and Trademark Office. The
first patent was US Patent Number 7,178,109 for innovative user interface
design, first introduced in its family of browser-based applications in 2003.
The second was US Patent Number 7,194,380 which covers the Decision Management
Suite.
 
 Employees
  As
of September 30, 2008, we employed 272 full time employees. Of that total, 85
were primarily engaged in product development, engineering or systems
engineering, 85 were engaged in sales and marketing, 47 were engaged in
professional services and 55 were engaged in operational, financial and
administrative functions.
  None
of our employees are represented by a labor union and we have never experienced
a work stoppage. We believe that our relations with our employees are good. We
believe our future success will depend in part on our continued ability to
recruit and retain highly skilled technical, sales, finance, management and
marketing personnel.
   10
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 Financial
Information about Geographic Areas
  For
a detailed description of our sales by geographic region, we incorporate by
reference the information in Note 14 to our consolidated financial statements
contained in Item 8 of this Annual Report on Form 10-K. Although the Company’s
revenues are not considered seasonal, our international operations do experience
a slowdown in the summer months and professional services provided on an hourly
basis decline due to the holidays in the quarterly periods ended December 31.
For information relating to the risks attendant to our foreign operations, we
incorporate by reference the information under the headings “—Risk Factors—If we
fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely affected” and
“—Risk Factors—Fluctuations in the value of the U.S. Dollar relative to foreign
currencies could negatively affect our operating results and cash
flows.”
 
 Financial
Information about Segments
  The
Company has one segment. For a detailed description of our revenues, profit and
loss, and total assets, we incorporate by reference the information in Item 6 of
this Annual Report on Form 10-K.
 
 Backlog
 
 For
a detailed discussion of backlog, we incorporate by reference the information in
Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” under the heading Financial Trends.
 
 Available
Information
  We
were incorporated in California in March 1991 and were reincorporated in
Delaware in October 1997.
  We
maintain a site on the worldwide web at www.chordiant.com; however, information
found on our website is not incorporated by reference into this Annual Report on
Form 10-K. We make available free of charge on or through our website our
filings with the Securities and Exchange Commission or SEC, including our Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Further, a copy of this
annual report on Form 10-K is located at the SEC’s Public Reference Room at 100
F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of
the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding our filings at
http://www.sec.gov.
 
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  ITEM 1A.
              RISK
      FACTORS
 
 Recent
worldwide credit market turmoil may adversely affect our customers which
directly impacts our business and results of operations.
 
 The
Company’s operations and performance depend on our customers having adequate
resources to purchase our products and services. The unprecedented turmoil in
the credit markets and the global economic downturn generally will adversely
impact our customers and potential customers. These economic conditions have
continued to deteriorate despite government intervention globally, and may
remain volatile and uncertain for the foreseeable future. Customers have altered
and may continue to alter their purchasing activities in response to lack of
credit, economic uncertainty and concern about the stability of markets in
general, and these customers may reduce, delay or terminate purchases of
our products and services or other sales activities that affect purchases of our
products and services. Recently,
many of our current and prior customers have merged with others, been forced to
raise significant amounts of capital, or received loans or equity investments
from the government which actions may result in less demand for our products and
services.If
we are unable to adequately respond to changes in demand resulting from
deteriorating economic conditions, our financial condition and operating results
may be materially and adversely affected.
 
 We
are exposed to credit risk and payment delinquencies on our accounts receivable.
This risk is heightened during periods when economic conditions
worsen.
 
 A
substantial majority of our outstanding accounts receivables are not covered by
collateral. In addition, our standard terms and conditions permit payment within
a specified number of days following the receipt of our product. While we have
procedures to monitor and limit exposure to credit risk on our receivables,
there can be no assurance such procedures will effectively limit our credit risk
and avoid losses. As economic conditions deteriorate, certain of our customers
may face liquidity concerns and may delay or be unable to satisfy their payment
obligations, which would have a material adverse effect on our financial
condition and operating results.
 
 Our
cash and cash equivalents could be adversely affected if the financial
institutions in which we hold our cash and cash equivalents fail.
 
 Our
cash and cash equivalents are highly liquid investments with original maturities
of three months or less at the time of purchase. We maintain the cash and cash
equivalents with reputable major financial institutions. Deposits with these
banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits
or similar limits in foreign jurisdictions. While we monitor daily the cash
balances in the operating accounts and adjust the balances as appropriate, these
balances could be impacted if one or more of the financial institutions with
which we deposit fails or is subject to other adverse conditions in the
financial or credit markets. To date we have experienced no loss or lack of
access to our invested cash or cash equivalents; however, we can provide no
assurance that access to our invested cash and cash equivalents will not be
impacted by adverse conditions in the financial and credit markets.
 
 To
date, our sales have been concentrated in the insurance, healthcare,
telecommunications and financial services markets, and if we are unable to
continue sales in these markets or successfully penetrate new markets, our
revenues may decline.
 
 Sales
of our products and services in several large markets—insurance, healthcare,
telecommunications and financial services, accounted for approximately 92% and
91% of our total revenues for the years ended September 30, 2008 and 2007,
respectively. We expect that revenues from these markets will continue to
account for a substantial portion of our total revenues for the foreseeable
future. However, we are seeking to expand in other markets. If we are unable to
successfully increase penetration of our existing markets or achieve sales in
additional markets, or if the overall economic conditions in our target markets
further deteriorates, our revenues may decline. Some of our current or
prospective customers, especially those in the financial services and insurance
industries, may face severe financial difficulties given their exposure to
deteriorating financial and credit markets, as well as the mortgage and
homebuilder sectors of the economy. This may cause our current or prospective
customers to reduce, delay or terminate their spending on technology, which in
turn would have an adverse impact on our sales and revenues.
 
 Because
a small number of customers account for a substantial portion of our revenues,
the loss of a significant customer could cause a substantial decline in our
revenues.
 
 We
derive a significant portion of our license and service revenue from a limited
number of customers. The loss of a major customer could cause a decrease in
revenues and net income. For the fiscal year ended September 30, 2008, Citicorp
Credit Services, Inc. and Vodafone Group Services Limited accounted for 22% and
11% of our total revenue, respectively. For the fiscal year ended September
30, 2007, Citicorp Credit Services, Inc. and International Business Machines
accounted for 23% and 16% of our total revenue, respectively. While our customer
concentration has fluctuated, we expect that a limited number of customers will
continue to account for a substantial portion of our revenues in any given
period. As a result, if we lose a major customer, or if a contract
is
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  delayed
or cancelled or we do not contract with new major customers, our revenues and
net income would be adversely affected. In addition, customers that have
accounted for significant revenues in the past may not generate revenues in any
future period, causing our failure to obtain additional orders from existing
customers which may materially affect our operating results. The deteriorating
economic environment has resulted in failures of financial institutions and
significant consolidation within the financial services industry from which we
derive a significant portion of our customers and revenues. Accordingly, the
risk that we could lose a significant customer is exacerbated in the current
economic environment.
 
 Historically,
some of our products and services have assisted companies in attracting and
retaining customers.  To the extent financial institutions and other large
companies wish to shrink the size of their customer base, the demand for
these products may be reduced.
 
 Some
of our customers have used our products to aggressively expand the size of their
customer base. Our marketing, decisioning and enterprise solutions have been
used to varying degrees on projects intended to manage leads, personalize
marketing campaigns and deliver highly effective sales messages. Due to the
current economic climate, many large financial institutions have been forced to
deleverage, sell parts of their businesses, or otherwise reduce the size of
their organizations. In these situations it is possible that the demand for our
products may be reduced, resulting in lower revenues in the future.
 
 Over
the near term we plan to increase the focus of our sales staff towards
Decisioning Management products and reduce the focus on Enterprise Foundation
products to reflect market conditions. There can be no assurance that such a
migration will be fully successful.
 
 Sales
of Enterprise Foundation solutions generally have a much higher cost to a
customer than Decisioning Management solutions. The magnitude of the
professional services required to implement Foundation projects is also much
higher and often can take long periods of time to complete. Decisioning products
are generally faster to implement and can produce a positive return on
investment in a shorter period of time. Due to the current economic
climate, our customers may focus on those projects that are smaller and faster
to complete. Accordingly, our sales force plans to increase their focus on
selling these types of solutions. This change in focus may not be successful
and, as a result, revenues may not meet our expectations.
 
 Fluctuations
in the value of the U.S. dollar relative to foreign currencies could negatively
affect our operating results and cash flows.
 
 A
significant portion of our sales and operating expenses result from transactions
outside of the U.S., often denominated in foreign currencies. These currencies
include the United Kingdom Pound Sterling, the Euro and the Canadian Dollar. Our
international sales comprised 48% of our total sales for the fiscal year
ended September 30, 2008. Our international sales comprised 47% of our total
sales for the fiscal year ended September 30, 2007. Our future operating
results, including cash and deferred revenue, will continue to be subject to
fluctuations in foreign currency rates, especially if international sales
increase as a percentage of our total sales, and we may be negatively impacted
by fluctuations in foreign currency rates in the future. For the fiscal
year ended September 30, 2008, we had a foreign currency transaction loss of
$0.3 million. See Item 7A Quantitative and Qualitative Disclosures about Market
Risk for further discussions.
 
 We
may experience a shortfall in bookings, revenue, earnings, cash flow or
otherwise fail to meet public market expectations, which could materially and
adversely affect our business and the market price of our common
stock.
  Our
revenues and operating results may fluctuate significantly because of a number
of factors, many of which are outside of our control. Some of these factors may
include:
 
 •
              Additional
      deterioration and changes in domestic and foreign markets and economies,
      including those impacted by the turmoil in the financial services,
      mortgage and credit markets;
 
 •
              Size
      and timing of individual license
transactions;
  •
              Delay,
      deferral or termination of customer implementations of our products and
      subsequent impact on revenues;
  •
              Lengthening
      of our sales cycle;
  •
              Success
      in expanding our global services organization, direct sales force and
      indirect distribution channels;
  •
              Timing
      of new product introductions and product
  enhancements;
 
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 •
              Appropriate
      mix of products licensed and services
sold;
  •
              Levels
      of international transactions;
  •
              Activities
      of and acquisitions by competitors;
 
 •
              Product
      and price competition; and
  •
              Our
      ability to develop and market new products and control
    costs.
  One
or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our revenues and
operating results to fluctuate significantly. Based upon the preceding factors,
we may experience a shortfall in revenues and earnings or otherwise fail to meet
public market expectations, which could materially and adversely affect our
business, financial condition, results of operations and the market price of our
common stock.
 
 Low
gross margin in services revenues could adversely impact our overall gross
margin and income.
 
 Our
services revenues have had lower gross margins than our license revenues.
Service revenue comprised 70% and 57% of our total revenues for the years ended
September 30, 2008 and 2007, respectively. Gross margin on service revenue was
57% for both years ended September 30, 2008 and 2007. License revenues
comprised 30% and 43% of our total revenues for the years ended September 30,
2008 and 2007, respectively. Gross margins on license revenues
were 97% for both years ended September 30, 2008 and 2007. As a
result, an increase in the percentage of total revenues represented by services
revenues, or an unexpected decrease in license revenues, could have a
detrimental impact on our overall gross margins. To increase services revenues,
we may expand our services organization, requiring us to successfully recruit
and train a sufficient number of qualified services personnel, enter into new
implementation projects and obtain renewals of current maintenance contracts by
our customers. This expansion could further reduce gross margins in our services
revenues. In addition, given the current economic environment, customers and
potential customers may seek discounts on our services, or services at no
charge, which would further reduce our services gross margins and materially and
adversely affect our business, financial condition and results of
operations.
 
 Our
revenues decreased in fiscal 2008 as compared to fiscal 2007 and until the
fiscal year ended September 30, 2007, we were not profitable, which may raise
vendor viability concerns about us thereby making it more difficult to
consummate license transactions with new and existing customers.
  Our
revenues decreased materially in fiscal 2008 as compared to fiscal 2007. In
addition, while we were profitable for the years ended September 30, 2007 and
September 30, 2008, we were not profitable for the years prior to September 30,
2007. As of September 30, 2008, we had an accumulated deficit of $225.9 million.
We may incur losses in the future and cannot be certain that we can generate
sufficient revenues to continue to achieve profitability. Continued losses or
decreased revenues may leave many customers reluctant to enter into new large
value license transactions without some assurance that we will operate
profitably. If we fail to enter into new large value license transactions due to
vendor profitability and/or viability concerns, our revenues will decline, which
could further adversely affect our operating results. This concern over vendor
viability is exacerbated in the current economic environment.
 
 Anti-takeover
provisions could make it more difficult for a third-party to acquire
us.
 
  We
have adopted a stockholder rights plan and initially declared a dividend
distribution of one right for each outstanding share of common stock to
stockholders of record as of July 21, 2008. Each right entitles the holder
to purchase one one-hundredth of a share of our Series A Junior
Participating Preferred Stock for $20. Under certain circumstances, if a person
or group acquires 20 percent or more of our outstanding common stock,
holders of the rights (other than the person or group triggering their exercise)
will be able to purchase, in exchange for the $20 exercise price, shares of our
common stock or of any company into which we are merged having a value of $40.
The rights expire on July 21, 2011, unless extended by our Board of Directors.
Because the rights may substantially dilute the stock ownership of a person or
group attempting to take us over without the approval of our Board of Directors,
our rights plan could make it more difficult for a third-party to acquire us (or
a significant percentage of our outstanding capital stock) without first
negotiating with our Board of Directors regarding that acquisition.
  
 In
addition, our Board of Directors has the authority to issue up to
51 million shares of Preferred Stock (of which 500,000 shares have been
designated as Series A Junior Participating Preferred Stock) and to fix the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof.
  14
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 The
rights of the holders of our common stock may be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock may have the effect of
delaying, deterring or preventing a change of control of Chordiant without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of our common stock. Further, certain provisions of our
charter documents, including limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the
effect of delaying or preventing changes in control or management of Chordiant,
which could have an adverse effect on the market price of our stock. In
addition, our charter documents do not permit cumulative voting, which may make
it more difficult for a third party to gain control of our Board of Directors.
Similarly, we have a classified Board of Directors whereby approximately
one-third of our Board members are elected annually to serve for three-year
terms, which may also make it more difficult for a third party to gain control
of our Board of Directors.  Further, we are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which will prohibit us from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, even if such
combination is favored by a majority of stockholders, unless the business
combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change
of control or management.
 
 Our
known backlog of business may not result in revenue.
  We
define backlog as contractual commitments by our customers through purchase
orders or contracts. Backlog is comprised of software license orders which have
not been accepted by customers or have not otherwise met all of the required
criteria for revenue recognition, deferred revenue from customer support
contracts, and deferred consulting and education orders for services not yet
completed or delivered. Backlog is not necessarily indicative of revenues to be
recognized in a specified future period. There are many factors that would
impact the Company’s filling of backlog, such as the Company’s progress in
completing projects for its customers and Chordiant’s customers’ meeting
anticipated schedules for customer-dependent deliverables. The Company provides
no assurances that any portion of its backlog will be filled during any fiscal
year or at all or that its backlog will be recognized as revenues in any given
period. In addition, it is possible that customers from whom we expect to derive
revenue from backlog will default and as a result we may not be able to
recognize expected revenue from backlog. The risk that customers will reduce the
scope of, delay or terminate projects, thus delaying or eliminating our ability
to recognize backlog as revenue, is exacerbated in the current economic
environment.
 
 Our primary products have a long
sales and implementation cycle, which makes it difficult to predict our
quarterly results and may cause our operating results to vary
significantly.
 
 The
period between initial contact with a prospective customer and the
implementation of our products is unpredictable and often lengthy, ranging from
three to eighteen months. Thus, revenue and cash receipts could vary
significantly from quarter to quarter. Any delays in the implementation of our
products could cause reductions in our revenues. The licensing of our products
is often an enterprise-wide decision that generally requires us to provide a
significant level of education to prospective customers about the use and
benefits of our products. The implementation of our products involves
significant commitment of technical and financial resources that may be
performed by us, by the customer or by third-party systems integrators. If we
underestimate the resources required to meet the expectations we have set with a
customer when we set prices, then we may experience a net loss on that customer
engagement. If this happens with a large customer engagement, then this could
have a material adverse effect on our financial results. Customers generally
consider a wide range of issues before committing to purchase our products,
including product benefits, ability to operate with existing and future computer
systems, vendor financial stability and longevity, ability to accommodate
increased transaction volume and product reliability. Certain of our customers
have become more cautious regarding their IT purchases given the
current economic conditions and specifically the issues that continue to
impact the financial and credit markets. The result is that our sales cycles
have lengthened in some instances, requiring more time to finalize transactions.
In particular, in each of the past several quarters transactions that we
expected to close before the end of the quarter were delayed or
suspended.
 
 Competition
in our markets is intense and could reduce our sales and prevent us from
achieving profitability.
  Increased
competition in our markets could result in price reductions for our products and
services, reduced gross margins and loss of market share, any one of which could
reduce our future revenues. The market for our products is intensely
competitive, evolving and subject to rapid technological change. Historically,
our primary competition has been from internal development, custom systems
integration projects and application software competitors. In particular, we
compete with:
  •
              Internal information
      technology departments: in-house information technology departments
      of potential customers have developed or may develop systems that provide
      some or all of the functionality of our products. We expect that
      internally developed application integration and process automation
      efforts will continue to be a significant source of
      competition.
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 •
              Custom systems integration
      projects: we compete with large systems integrators who may develop
      custom solutions for specific companies which may reduce the likelihood
      that they would purchase our products and
  services.
 
 •
              Point application
      vendors: we compete with providers of stand-alone point solutions
      for web-based customer relationship management and traditional
      client/server-based, call-center service customer and sales-force
      automation solution providers.
 
 The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. For example, in 2007 and 2008, IBM
acquired ILOG, Cognos, DataMirror and Watchfire Corporation; Oracle
acquired Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL;
and SAP acquired BusinessObjects, YASU Technologies and Pilot Software. While we
do not believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot
Software have been significant competitors of Chordiant in the past, the
acquisition of these companies by IBM, Oracle, Sun Microsystems and SAP may
indicate that we will face increased competition from larger and more
established entities in the future.
 
 Many
of our competitors have greater resources, broader customer relationships and
broader product and service offerings than we do. In addition, many of these
competitors have extensive knowledge of our industry. Current and potential
competitors have established, or may further establish, cooperative
relationships among themselves or with third parties to offer a single solution
and to increase the ability of their products to address customer
needs.
 
 Our
operating results and cash flows fluctuate significantly and delays in delivery
or implementation of our products or changes in the payment terms with customers
may cause unanticipated declines in revenues or cash flow, which could
disappoint investors and result in a decline in our stock price.
  A
portion of our quarterly revenues depend primarily upon product implementation
by our customers. We have historically recognized a significant portion of our
license and services revenue through the percentage-of-completion accounting
method, using labor hours incurred as the measure of progress towards completion
of implementation of our products, and we expect this practice to continue. The
percentage-of-completion accounting method requires ongoing estimates of
progress of complicated and frequently changing technology projects. Documenting
the measure of progress towards completion of implementation is subject to
potential errors and changes in estimates. As a result, even minor errors or
minor changes in estimates may lead to significant changes in accounting results
which may be revised in later quarters due to subsequent information and events.
Thus, delays or changes in customer business goals or direction when
implementing our software may adversely impact our quarterly revenue.
Additionally, we may increasingly enter into term, subscription or
transaction-based licensing transactions that would cause us to recognize
license revenue for such transactions over a longer period of time than we have
historically experienced for our perpetual licenses. In addition, a significant
portion of new customer orders have been booked in the third month of each
calendar quarter, with many of these bookings occurring in the last two weeks of
the third month. We expect this trend to continue and, therefore, any failure or
delay in bookings would decrease our quarterly revenue and cash flows. The terms
and conditions of individual license agreements with customers vary from
transaction to transaction. Historically, the Company has been able to obtain
prepayments for product in some cases, but more recently we have entered
into large transactions with payments from customers due over one or more years.
Other transactions link payment to the delivery or acceptance of products. If we
are unable to negotiate prepayments of fees our cash flows and financial ratios
with respect to accounts receivable would be adversely impacted. If our
revenues, operating margins or cash flows are below the expectations of the
investment community, our stock price is likely to decline.
 
 If
we are not able to successfully manage our partner operations in India, our
operations and financial results may be adversely affected.
 
 In
2003, we entered into an agreement with Ness Technologies Inc., Ness Global
Services, Inc. and Ness Technologies India, Ltd. (collectively, “Ness”), an
independent contracting company with global technical resources and an
operations center in Bangalore, India and operations in other locations. The
agreement provides for Ness, at our direction, to attract, train, assimilate and
retain sufficient highly qualified personnel to perform staffing for consulting
projects, technical support, product testing and certain sustaining engineering
functions. As of September 30, 2008, we use the services of approximately 148
consultants through Ness. In addition, as a result of the reductions in our
workforce that took place in July 2005, October 2006, May 2008, and October
2008, by approximately 10% - 15% in each instance, we continue to have a
significant dependence on Ness. This agreement is an important component of our
strategy to address the business needs of our customers and manage our expenses.
The success of this operation will depend on our ability and Ness’s ability to
attract, train, assimilate and retain highly qualified personnel in the required
periods. A disruption or termination of our relationship with Ness could
adversely affect our operations. Failure to effectively manage the organization
and operations will harm our business and financial results.
  16
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 If
we become subject to intellectual property infringement claims, including
copyright or patent infringement claims, these claims could be costly and
time-consuming to defend, divert management’s attention, cause product delays
and have an adverse effect on our revenues and net income.
  We
expect that software product developers and providers of software in markets
similar to our target markets will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and the
functionality of products overlap. Additionally, we are seeing copyright
infringement claims being asserted by certain third party software developers.
Any claims, with or without merit, could be costly and time-consuming to defend,
divert our management’s attention or cause product delays. If any of our
products were found to infringe a third party’s proprietary rights, we could be
required to enter into royalty or licensing agreements to be able to sell our
products. Royalty and licensing agreements, if required, may not be available on
terms acceptable to us or at all.
 
 In
particular, if we are sued for patent infringement by a patent holding company,
one which has acquired large numbers of patents solely for the purpose of
bringing suit against alleged infringers rather than practicing the patents, it
may be costly to defend such suit. We have received a letter from one such
patent holding company alleging that our products may infringe one or more of
their patents. We are also the subject of a suit by a person claiming that
certain of our products infringe his copyrights. If any of our products were
found to infringe such patent or copyrights, the patent or copyright holder
could seek an injunction to enjoin our use of the infringing product. If we were
not able to remove or replace the infringing portions of software with
non-infringing software, and were no longer able to license some or all of our
software products, such an injunction would have an extremely detrimental effect
on our business. If we were required to settle such claim, it could be costly. A
patent or copyright infringement claim could have a material adverse effect on
our business, operating results and financial condition.
 
 If
we fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely
affected.
 
 For
the fiscal year ended September 30, 2008, international revenues were $54.2
million or approximately 48% of our total revenues. For the fiscal year
ended September 30, 2007, international revenues were $58.8 million or
approximately 47% of our total revenues. International revenues will continue to
represent a significant portion of our total revenues in future periods. We have
faced, and will continue to face, difficulties in managing international
operations which include:
 
 •
              Difficulties
      in hiring qualified local
personnel;
 
 •
              Seasonal
      fluctuations in customer orders;
 
 •
              Longer
      accounts receivable collection
cycles;
 
 •
              Expenses
      associated with licensing products and servicing customers in foreign
      markets;
 
 •
              Economic
      downturns and political uncertainty in international
      economies;
 
 •
              Income
      tax withholding issues in countries in which we do not have a physical
      presence, resulting in non-recoverable tax
  payments;
 
 •
              Complex
      transfer pricing arrangements between legal
  entities;
 
 •
              Doing
      business and licensing our software to customers in countries with weaker
      intellectual property protection laws and enforcement
      capabilities;
 
 •
              Difficulties
      in commencing new operations in countries where the Company has not
      previously conducted business, including those associated with tax laws,
      employment laws, government regulation, product warranty laws and adopting
      to local customs and culture; and
  Any
of these factors could have a significant impact on our ability to license
products and provide services on a competitive and timely basis and could
adversely affect our operating expenses and net income. Additionally we closed
our only French office in the first fiscal quarter of 2007.  The
absence of a business office in France may harm our ability to attract and
retain customers in that country.
  17
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 Because
competition for qualified personnel is intense, we may not be able to retain or
recruit personnel, which could impact the development and sales of our
products.
  If
we are unable to hire or retain qualified personnel, or if newly hired personnel
fail to develop the necessary skills or fail to reach expected levels of
productivity, our ability to develop and market our products will be weakened.
Our success depends largely on the continued contributions of our key
management, finance, engineering, sales, marketing and professional services
personnel. In particular, in prior years we have had significant turnover of our
executives as well as in our sales, marketing and finance organizations, and
many key positions are held by people who have less than two years of experience
in their roles with the Company. If these people are not well suited to their
new roles, then this could result in the Company having problems in executing
its strategy or in reporting its financial results. Because of the dependency on
a small number of large deals, we are uniquely dependent upon the talents and
relationships of a few executives and have no guarantee of their retention.
Changes in key sales management could affect our ability to maintain existing
customer relationships or to close pending transactions. In addition, in July
2005, October 2006, May 2008 and October 2008, we reduced the size of our
workforce by approximately 10% - 15% in each instance, which may have a negative
effect on our ability to attract and retain qualified personnel. Further,
particularly in the current economic environment, employees or potential
employees may choose to work for larger, more stable companies.
 
 The
application of percentage-of-completion and completed contract accounting to our
business is complex and may result in delays in the reporting of our financial
results and revenue not being recognized as we expect.
  Although
we attempt to use standardized license agreements designed to meet current
revenue recognition criteria under generally accepted accounting principles, we
must often negotiate and revise terms and conditions of these
standardized agreements, particularly in multi-product transactions. At the
time of entering into a transaction, we assess whether any services included
within the arrangement require us to perform significant implementation or
customization essential to the functionality of our products. For contracts
involving significant implementation or customization essential to the
functionality of our products, we recognize the license and professional
consulting services revenues using the percentage-of-completion accounting
method using labor hours incurred as the measure of progress towards completion.
The application of the percentage-of-completion method of accounting is complex
and involves judgments and estimates, which may change significantly based on
customer requirements. This complexity combined with changing customer
requirements could result in delays in the proper determination of our
percentage-of-completion estimates and revenue not being recognized as we
expect.
 
 In
the past we have also entered into co-development projects with our customers to
jointly develop new vertical applications, often over the course of a year or
longer. In such cases we may only be able to recognize revenue upon delivery of
the new application. The accounting treatment for these co-development projects
could result in delays in the recognition of revenue. The failure to
successfully complete these projects to the satisfaction of the customer could
have a material adverse effect on our business, operating results and financial
condition.
  Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
  Our
revenues may further decrease in fiscal year 2009 or beyond if we are
unable to enter into new large-scale license transactions with new and existing
customers. The current state of the credit markets and the global economic
decline generally have left many customers reluctant to enter into new large
value license transactions without some assurance that the economy both in the
customer’s home country and globally will stabilize. Geopolitical instability
will continue to make closing large license transactions difficult. In addition,
we cannot predict what effect the U.S. military presence overseas or potential
or actual political or military conflict have had or are continuing to have on
our existing and prospective customers’ decision-making process with respect to
licensing or implementing enterprise-level products such as ours. Our ability to
enter into new large license transactions also directly affects our ability to
create additional consulting services and maintenance revenues, on which we also
depend.
 
 The
company's common stock price has historically been and may continue be volatile,
which could result in substantial losses for stockholders.
 
 The
market price of shares of the Company’s common stock has been, and is likely to
continue to be, highly volatile and may be significantly affected by factors
such as the following:
 
 •
              Actual
      or anticipated fluctuations in our operating
  results;
 
 •
              Changes
      in economic and political conditions in the United States and
      abroad;
 
 •
              Terrorist
      attacks, war or the threat of terrorist attacks and
  war;
  18
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 •
              The
      announcement of mergers or acquisitions by the Company or its
      competitors;
 
 •
              Financial
      difficulties or poor operating results announced by significant
      customers;
 
 •
              Developments
      in ongoing or threatened
litigation;
 
 •
              Announcements
      of technological innovations;
 
 •
              Failure
      to comply with the requirements of Section 404 of the Sarbanes-Oxley
      Act;
 
 •
              New
      products or new contracts announced by it or its
    competitors;
 
 •
              Developments
      with respect to intellectual property
laws;
 
 •
              Price
      and volume fluctuations in the stock
market;
 
 •
              Changes
      in corporate purchasing of software by companies in the industry verticals
      supported by the Company;
 
 •
              Adoption
      of new accounting standards affecting the software industry;
      and
 
 •
              Changes
      in financial estimates by securities
analysts.
 
 In
addition, following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has often been brought
against such companies. If the Company is involved in such litigation, it could
result in substantial costs and a diversion of management’s attention and
resources and could materially harm the Company’s business, operating results
and financial condition.
 
 If
we fail to maintain and expand our relationships with systems integrators and
other business partners, our ability to develop, market, sell, and support our
products may be adversely affected.
  Our
development, marketing and distribution strategies rely on our ability to form
and maintain long-term strategic relationships with systems integrators, in
particular, existing business alliance partners IBM, Ness, Electronic Data
Systems, Tata Consultancy Services and HCL Technologies. These business
relationships often consist of joint marketing programs, technology partnerships
and resale and distribution arrangements. Although most aspects of these
relationships are contractual in nature, many important aspects of these
relationships depend on the continued cooperation between the parties.
Divergence in strategy, change in focus, competitive product offerings or
potential contract defaults may interfere with our ability to develop, market,
sell, or support our products, which in turn could harm our business. If any of
IBM, Ness, Electronic Data Systems, Tata Consultancy Services or HCL
Technologies were to terminate their agreements with us or our relationship were
to deteriorate, it could have a material adverse effect on our business,
financial condition and results of operations. In many cases, these parties have
extensive relationships with our existing and potential customers and influence
the decisions of these customers. A number of our competitors have stronger
relationships with IBM, Ness, Electronic Data Systems, Tata Consultancy
Services and HCL Technologies and, as a result, these systems integrators
may be more likely to recommend competitors’ products and services. In 2007 and
2008, IBM acquired ILOG, Cognos, DataMirror and Watchfire Corporation.
While we do not believe that ILOG, Cognos, DataMirror or Watchfire Corporation
had been a direct competitor of Chordiant in the past, IBM’s acquisition of
these companies may indicate that IBM will become a competitor of ours in the
future. While the Company currently has good relationship with IBM, this
relationship and the Company’s strategic relationship agreement with IBM may be
harmed if the Company increasingly finds itself competing with IBM. Our
relationships with systems integrators and their willingness to recommend our
products to their customers could be harmed if the Company were to be subject to
a takeover attempt from a competitor of such systems integrators.
 
 If
systems integrators fail to properly implement our software, our business,
reputation and financial results may be harmed.
  We
are increasingly relying on systems integrators to implement our products, and
this trend may continue. As a result, we have less quality control over the
implementation of our software with respect to these transactions and are more
reliant on the ability of our systems integrators to correctly implement our
software. If these systems integrators fail to properly implement our software,
our business, reputation and financial results may be harmed.
  19
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 If
we do not maintain effective internal controls over financial reporting,
investors could lose confidence in our financial reporting and customers may
delay purchasing decisions, which would harm our business and the market price
of our common stock.
  Effective
internal controls are necessary for us to provide reliable financial reports. If
we cannot provide reliable financial reports, our business could be harmed. We
are a complex company with complex accounting issues and thus subject to related
risks of errors in financial reporting which may cause problems in corporate
governance, the costs of which may outweigh the costs of the underlying errors
themselves. For example, the Audit Committee of the Company’s Board of
Directors, with the assistance of outside legal counsel, conducted a review of
our stock option practices covering the time from the Company’s initial public
offering in 2000 through September 2006. The Audit Committee reached a
conclusion that incorrect measurement dates were used for financial accounting
purposes for stock option grants in certain prior periods. As a result, the
Company recorded an additional non-cash stock-based compensation expense, and
related tax effects, related to stock option grants and concluded that a
material weakness surrounding the control activities relating to the stock
option grants existed at September 30, 2006. To correct these accounting errors,
we restated the Consolidated Financial Statements contained in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2006 and our Quarterly
Report on Form 10-Q for the three months ended June 30, 2006. As a result of
this need to restate financial statements, management and the Audit Committee
determined that material weaknesses in our internal control over financial
reporting existed as of September 30, 2006. These material weaknesses were
remediated during fiscal year 2007 and management concluded internal controls
over financial reporting were effective for the reporting period.
 
 If
we are not successful in maintaining effective internal controls over financial
reporting, customers may delay purchasing decisions or we may lose customers,
create investor uncertainty, face litigation and the market price of our common
stock may decline. For more information, please refer to the discussion under
the heading “Item 9A. Controls and Procedures” in the 2006 Annual Report on Form
10-K.
 
 If
our products do not operate effectively in a company-wide environment, we may
lose sales and suffer decreased revenues.
  If
existing customers have difficulty deploying our products or choose not to fully
deploy our products, it could damage our reputation and reduce revenues. Our
success requires that our products be highly scalable, and able to accommodate
substantial increases in the number of users. Our products are expected to be
deployed on a variety of computer software and hardware platforms and to be used
in connection with a number of third-party software applications by personnel
who may not have previously used application software systems or our products.
These deployments present very significant technical challenges, which are
difficult or impossible to predict. If these deployments do not succeed, we may
lose future sales opportunities and suffer decreased revenues. If we
underestimate the resources required to meet the expectations we have set with a
customer when we set prices, then we may experience a net loss on that customer
engagement. If this happens with a large customer engagement then this could
have a material adverse effect on our financial results.
 
 Defects
in our products could diminish demand for our products and result in decreased
revenues, decreased market acceptance and injury to our reputation.
 
 Errors
may be found from time-to-time in our new, acquired or enhanced products. Any
significant software errors in our products may result in decreased revenues,
decreased sales, and injury to our reputation and/or increased warranty and
repair costs. Although we conduct extensive product testing during product
development, we have in the past discovered software errors in our products as
well as in third-party products, and as a result have experienced delays in the
shipment of our new products.
 
 We
may not have the workforce necessary to support our platform of products if
demand for our products substantially increased, and, if we need to rebuild our
workforce in the future, we may not be able to recruit personnel in a timely
manner, which could negatively impact the development, sales and support of our
products.
  In
July 2005, October 2006, May 2008 and October 2008, we reduced the size of our
workforce by approximately 10% - 15% in each instance. In the event that demand
for our products increases, we may need to rebuild our workforce or increase
outsourced functions to companies based in foreign jurisdictions and we may be
unable to hire, train or retain qualified personnel in a timely manner, which
may weaken our ability to market our products in a timely manner, negatively
impacting our operations. Our success depends largely on ensuring that we have
adequate personnel to support our platform of products as well as the continued
contributions of our key management, finance, engineering, sales, marketing and
professional services personnel.
 
 If
we fail to introduce new versions and releases of functional and scalable
products in a timely manner, customers may license competing products and our
revenues may decline.
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 If
we are unable to ship or implement enhancements to our products when planned, or
fail to achieve timely market acceptance of these enhancements, we may suffer
lost sales and could fail to achieve anticipated revenues. We have in the past,
and expect in the future, to derive a significant portion of our total revenues
from the license of our primary product suite. Our future operating results will
depend on the demand for the product suite by future customers, including new
and enhanced releases that are subsequently introduced. If our competitors
release new products that are superior to our products in performance or price,
or if we fail to enhance our products or introduce new products, features and
functionality in a timely manner, demand for our products may decline. We have
in the past experienced delays in the planned release dates of new products or
new versions of our software products and upgrades. New versions of our products
may not be released on schedule or may contain defects when
released.
 
 We
depend on technology licensed to us by third parties, and the loss or inability
to maintain these licenses could prevent or delay sales of our
products.
 
 We
license from several software providers technologies that are incorporated into
our products. We anticipate that we will continue to license technology from
third parties in the future. This software may not continue to be available on
commercially reasonable terms, if at all. While currently we are not materially
dependent on any single third party for such licenses, the loss of the
technology licenses could result in delays in the license of our products until
equivalent technology is developed or identified, licensed and integrated into
our products. Given the current economic environment, the risk that one or more
of our suppliers or vendors may go out of business or be unable to meet their
contractual obligations to us is exacerbated. Even if substitute technologies
are available, there can be no guarantee that we will be able to license these
technologies on commercially reasonable terms, if at all.
 
 Defects
in third party products associated with our products could impair our products’
functionality and injure our reputation.
  The
effective implementation of our products depends upon the successful operation
of third-party products in conjunction with our products. Any undetected defects
in these third-party products could prevent the implementation or impair the
functionality of our products, delay new product introductions or injure our
reputation. In the past, while our business has not been materially harmed,
product releases have been delayed as a result of errors in third-party software
and we have incurred significant expenses fixing and investigating the cause of
these errors.
 
 Our
customers and systems integration partners may have the ability to alter our
source code and resulting inappropriate alterations could adversely affect the
performance of our products, cause injury to our reputation and increase
operating expenses.
  Customers
and systems integration partners may have access to the computer source code for
certain elements of our products and may alter the source code. Alteration of
our source code may lead to implementation, operation, technical support and
upgrade problems for our customers. This could adversely affect the market
acceptance of our products, and any necessary investigative work and repairs
could cause us to incur significant expenses and delays in
implementation.
  If
our products do not operate with the hardware and software platforms used by our
customers, our customers may license competing products and our revenues will
decline.
 
 If
our products fail to satisfy advancing technological requirements of our
customers and potential customers, the market acceptance of these products could
be reduced. We currently serve a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. Customer
acceptance of our products depends on many factors, including our ability to
integrate our products with multiple platforms and existing or legacy systems;
and our ability to anticipate and support new standards, especially Internet and
enterprise Java standards.
 
 A
failure in our attempt to deploy our software through a Software-as-a-Service
(SaaS) model could cause injury to our reputation and impair our ability to
develop, market and sell our products under a SaaS model.
 
 In
the fiscal year ended September 30, 2007, we entered into a license with a third
party that will allow that third party to develop and host in their data centers
applications based on our software, to provide services to their customers, most
of whom are in markets that we do not currently penetrate.  As we have
no previous experience in deploying our software in a SaaS model, a failure of
this effort could have a detrimental effect to our ability to attract other
third parties to use our software in their SaaS businesses.
 
 Our
failure to successfully integrate with future acquired or merged companies and
technologies could prevent us from operating efficiently.
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 Our
business strategy includes pursuing opportunities to grow our business, both
through internal growth and through merger, acquisition and technology and other
asset transactions. To implement this strategy, we may be involved in merger and
acquisition activity and additional technology and asset purchase transactions.
Merger and acquisition transactions are motivated by many factors, including,
among others, our desire to grow our business, acquire skilled personnel, obtain
new technologies and expand and enhance our product offerings. Mergers and
acquisitions of high-technology companies are inherently risky, and the Company
cannot be certain that any acquisition will be successful and will not
materially harm the Company’s business, operating results or financial
condition. Generally, acquisitions involve numerous risks, including the
following: (i) the benefits of the acquisition (such as cost savings and
synergies) not materializing as planned or not materializing within the time
periods or to the extent anticipated; (ii) the Company’s ability to manage
acquired entities’ people and processes that are headquartered in separate
geographical locations from the Company’s headquarters; (iii) the possibility
that the Company will pay more than the value it derives from the acquisition;
(iv) difficulties in integration of the operations, technologies, content and
products of the acquired companies; (v) the assumption of certain known and
unknown liabilities of the acquired companies; (vi) difficulties in retaining
key relationships with customers, partners and suppliers of the acquired
company; (vi) the risk of diverting management’s attention from normal daily
operations of the business; (vii) the Company’s ability to issue new releases of
the acquired company’s products on existing or other platforms; (viii) negative
impact to the Company’s financial condition and results of operations and the
potential write down of impaired goodwill and intangible assets resulting from
combining the acquired company’s financial condition and results of operations
with our financial statements; (ix) risks of entering markets in which the
Company has no or limited direct prior experience; and (x) the potential loss of
key employees of the acquired company. Realization of any of these risks in
connection with any technology transaction or asset purchase we have entered
into, or may enter into, could have a material adverse effect on our business,
operating results and financial condition.
  Changes
in our revenue recognition model could result in short-term declines to
revenue.
 
 Historically,
we have accounted for a high percentage of our license revenues on the
percentage-of-completion method of accounting or recognized as revenue upon the
delivery of product. If we were to enter into new types of transactions
accounted for on a subscription or term basis, revenues might be recognized over
a longer period of time. The impact of this change would make revenue
recognition more predictable over the long term, but it might also result in a
short-term reduction of revenue as the new transactions took
effect.
 
 We
may encounter unexpected delays in maintaining the requisite internal controls
over financial reporting and we expect to incur additional expenses and
diversion of management’s time as a result of performing future system and
process evaluation, testing and remediation required to comply with future
management assessment and auditor attestation requirements.
  In
future periods, management must report on, and our independent registered public
accounting firm must attest to, our internal control over financial reporting as
required by Section 404 of SOX, within the time frame required by
Section 404. We may encounter unexpected delays in implementing those
requirements, therefore, we cannot be certain about the timely completion of our
evaluation, testing and remediation actions or the impact that these activities
will have on our operations. We also expect to incur additional expenses and
diversion of management’s time as a result of performing the system and process
evaluation, testing and remediation required to comply with management’s
assessment and auditor attestation requirements. If we are not able to timely
comply with the requirements set forth in Section 404 in future periods, we
might be subject to sanctions or investigation by the regulatory authorities.
Any such action could adversely affect our business or financial
results.
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 ITEM 1B.
              UNRESOLVED
      STAFF COMMENTS
 
 None.
 
 ITEM 2.
              PROPERTIES
 
 Our
headquarters are located in offices that are approximately 25,000 square feet in
Cupertino, California pursuant to an office lease expiring in December 2013. We
also lease office space in Bedford, New Hampshire. Outside of the United States,
we have offices in the greater metropolitan areas of London, Madrid, Amsterdam,
and Munich. We believe our existing facilities meet our current needs and that
we will be able to obtain additional commercial space as needed.
  ITEM 3.
              LEGAL
      PROCEEDINGS
 
 IPO
Laddering
 
 Beginning
in July 2001, the Company and certain of its officers and directors, or
Individuals, were named as defendants in a series of class action stockholder
complaints filed in the United States District Court for the Southern District
of New York, now consolidated under the caption, “In re Chordiant Software, Inc.
Initial Public Offering Securities Litigation, Case No. 01-CV-6222”. In the
amended complaint, filed in April 2002, the plaintiffs allege that the Company,
the Individuals, and the underwriters of the Company’s initial public offering,
or IPO, violated section 11 of the Securities Act of 1933 and section 10(b) of
the Exchange Act of 1934 based on allegations that the Company’s registration
statement and prospectus failed to disclose material facts regarding the
compensation to be received by, and the stock allocation practices of, the
Company’s IPO underwriters. The complaint also contains claims against the
Individuals for control person liability under Securities Act section 15 and
Exchange Act section 20. The plaintiffs seek unspecified monetary damages and
other relief. Similar complaints were filed in the same court against hundreds
of other public companies, or Issuers, that conducted IPO’s of their common
stock in the late 1990’s or in the year 2000 (collectively, the “IPO
Lawsuits”).
 
 In
August 2001, all of the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New
York. In July 2002, the Company joined in a global motion to dismiss the IPO
Lawsuits filed by all of the Issuers (among others). In October 2002, the Court
entered an order dismissing the Individuals from the IPO Lawsuits without
prejudice, pursuant to an agreement tolling the statute of limitations with
respect to the Individuals. In February 2003, the court issued a decision
denying the motion to dismiss against Chordiant and many of the other
Issuers.
 
 In
June 2003, Issuers and plaintiffs reached a tentative settlement agreement that
would, among other things, result in the dismissal with prejudice of all claims
against the Issuers and Individuals in the IPO Lawsuits, and the assignment to
plaintiffs of certain potential claims that the Issuers may have against the
underwriters. The tentative settlement also provides that, in the event that
plaintiffs ultimately recover less than a guaranteed sum of $1 billion from the
IPO underwriters, plaintiffs would be entitled to payment by each participating
Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs’
guaranteed recovery. In September 2003, in connection with the possible
settlement, those Individuals who had entered tolling agreements with plaintiffs
(described above) agreed to extend those agreements so that they would not
expire prior to any settlement being finalized. In June 2004, Chordiant and
almost all of the other Issuers entered into a formal settlement agreement with
the plaintiffs. On February 15, 2005, the Court issued a decision
certifying a class action for settlement purposes, and granting preliminary
approval of the settlement subject to modification of certain bar orders
contemplated by the settlement. On August 31, 2005, the Court reaffirmed class
certification and preliminary approval of the modified settlement in a
comprehensive Order, and directed that Notice of the settlement be published and
mailed to class members beginning November 15, 2005. On February 24, 2006, the
Court dismissed litigation filed against certain underwriters in connection with
the claims to be assigned to the plaintiffs under the settlement. On April 24,
2006, the Court held a Final Fairness Hearing to determine whether to grant
final approval of the settlement. On December 5, 2006, the Second Circuit Court
of Appeals vacated the lower Court's earlier decision certifying as class
actions the six IPO Lawsuits designated as "focus cases." Thereafter, the
District Court ordered a stay of all proceedings in all of the IPO Cases pending
the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc.
On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but
clarified that the plaintiffs may seek to certify a more limited class in the
district court. Accordingly, the settlement will not be finally approved.
Plaintiffs filed amended complaints in six “focus cases” on or about August 14,
2007. The Company is not a focus case. In September 2007, the Company's named
officers and directors again extended the tolling agreement with plaintiffs. On
or about September 27, 2007, plaintiffs moved to certify the classes alleged in
the focus cases and to appoint class representatives and class counsel in those
cases. The focus case issuers filed motions to dismiss the claims against them
on or about November 9, 2007 and an opposition to plaintiffs' motion for
class certification on December 21, 2007. On March 16, 2008, the court
denied the motions to dismiss in the focus cases. On October 2, 2008, the
plaintiffs withdrew their class certification motion. A deadline for the focus
case defendants to answer the amended complaints has not been set. This action
may divert the efforts and attention of our management and, if determined
adversely to us, could have a material impact on our business, results of
operations, financial condition or cash flows.
  23
 Table of Contents
  
 Derivative
Class Action
 
 On
August 1, 2006, a stockholder derivative complaint was filed in the United
States District Court for the Northern District of California by Jesse Brown
under the caption Brown v. Kelly, et al. Case No. C06-04671 JW (N.D. Cal.). On
September 13, 2006, a second stockholder derivative complaint was filed in the
United States District Court for the Northern District of California by Louis
Suba under the caption Suba v. Kelly et al., Case No. C06-05603 JW (N.D. Cal.).
Both complaints were brought purportedly on behalf of the Company against
certain current and former officers and directors. On November 27, 2006, the
court entered an order consolidating these actions and requiring the plaintiffs
to file a consolidated complaint. The consolidated complaint was filed on
January 11, 2007. The consolidated complaint alleges, among other things, that
the named officers and directors: (a) breached their fiduciary duties as they
colluded with each other to backdate stock options, (b) violated section 10(b),
14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder through their alleged actions, and (c) were unjustly
enriched by their receipt and retention of such stock options. On May 21, 2007,
the Company filed a motion to dismiss the entire action on the grounds that the
plaintiffs failed to take the steps necessary to bring a derivative action.
Instead of opposing the motion to dismiss, on November 14, 2007, the plaintiffs
filed an Amended Complaint adding new allegations against five more current and
former officer and directors. The substantive allegations in the Amended
Complaint were similar to those in the previous complaint. On June 30, 2008, the
parties signed a Stipulation of Compromise and Settlement ("the Settlement"),
which was subject to court approval. On July 7, 2008, the Court preliminarily
approved the Settlement. On October 22, 2008, the Court entered a final order
approving the Settlement and entering judgment in accordance with the
Settlement. The Company’s cash contribution toward the Settlement is not
material to the financial statements.
 
 Patent
Claim
 
 In
September 2006, the Company received a letter from Acacia Technologies Group, a
patent holding company, suggesting that the Company may be infringing on two
patents, designated by United States Patent Numbers 5,537,590 and 5,701,400,
which are held by one of their patent licensing and enforcement subsidiaries.
The Company is currently reviewing the validity of these patents and whether the
Company’s products may infringe upon them. The Company has not formed a view of
whether the Company may have liability for infringement of these patents. Any
related claims, whether or not they have merit, could be costly and
time-consuming to defend, divert management’s attention or cause product delays.
If any of the Company’s products were found to infringe such patents, the patent
holder could seek an injunction to enjoin use of the infringing product and we
could be found liable for monetary damages. This action may divert the efforts
and attention of our management and, if determined adversely to us, could have a
material impact on our business, results of operations, financial condition or
cash flows.
 
 Yue
vs. Chordiant Software, Inc.
 
 On
January 2, 2008, the Company and certain of our officers and one other employee
were named in a complaint filed in the United States District Court for the
Northern District of California by Dongxiao Yue under the caption Dongxiao Yue
v. Chordiant Software, Inc. et al. Case No. CV 08-0019 BZ (N.D. Cal.). The
complaint alleges that the Company’s Marketing Director software product
infringed copyrights in certain software referred to as the “PowerRPC software,”
copyrights which had been owned by Netbula LLC and assigned to Mr. Yue, the sole
employee and owner of Netbula. The alleged infringement includes (a)
distributing more copies of the PowerRPC software than had originally been
authorized in a run time license Netbula granted to Chordiant Software, Intl.,
(b) infringement of a software developer kit (“SDK”) by making copies of the SDK
in excess of those that had been licensed by Netbula, (c) making unauthorized
derivative works of the SDK, (d) unauthorized distribution of PowerRPC for
products operating on the Windows Vista platform, (e) unauthorized distribution
of PowerRPC for server based products. Plaintiff also claims that the license
Netbula granted to Chordiant Software, Int’l Ltd. should not be construed to
authorize uses by its parent company, Chordiant Software, Inc. The plaintiff
seeks monetary damages, disgorgement of profits, and injunctive relief according
to proof. On February 5, 2008, the Company and its officers and employees have
filed a motion to dismiss the complaint for failure to state a claim upon which
relief could be granted, and as to lack of personal jurisdiction as to one
employee. On July 23, 2008 the Court issued an order that (1) denied Plaintiff's
motion to disqualify counsel; (2) granted Oliver Wilson's motion to dismiss for
lack of personal jurisdiction, with prejudice, and (3) granted the Company's
motion to dismiss, ruling that Plaintiff's company, Netbula LLC, is the real
party in interest and must appear through counsel. The Court ruled that Netbula
LLC may file an amended complaint within 45 days, and that Plaintiff may also
join as an individual Plaintiff at that time.
 
 On
September 9, 2008, Plaintiff Yue and Plaintiff Netbula LLC filed a First Amended
Complaint asserting four causes of action relating to the Company’s alleged
unauthorized use and distribution of Plaintiffs’ PowerRPC software: claims for
copyright infringement, unfair competition, and “accession and confusion of
property” against the company, and a claim for vicarious copyright infringement
against the company’s Chief Executive Offer and its former Vice President,
General Counsel and Secretary.
  24
 Table of Contents
  
 On
September 20, 2008, the parties filed a stipulation allowing Plaintiffs to file
a Second Amended Complaint, which contains the two causes of action for
copyright infringement and vicarious copyright infringement, but does not
include the unfair competition and accession and confusion claims. The Second
Amended Complaint seeks monetary damages, disgorgement of profits, and
injunctive relief according to proof. On November 10, 2008, the Company filed an
answer to the Second Amended Complaint denying liability, and the Company's
Chief Executive Officer and its former Vice President, General Counsel and
Secretary filed a motion to dismiss with respect to the vicarious liability
claim asserted against them individually. At a status conference on November 17,
2008, the Court orally ordered that discovery would proceed in stages, with the
first stage focusing on Chordiant's defense that it had an express or implied
license from Netbula, as well as on the number of copies made by Chordiant of
the Netbula software in question.  The Court directed that Chordiant's
motion for summary judgment on the license defense would be heard on April 6,
2009, with any discovery on other issues, and any depositions of third parties,
to proceed only if that motion were denied. No trial date has been set. This
action may divert the efforts and attention of our management and, if determined
adversely to us, could have a material impact on our business, results of
operations, financial condition or cash flows.
 
 The
Company, from time to time, is also subject to various other claims and legal
actions arising in the ordinary course of business. The ultimate disposition of
these various other claims and legal actions is not expected to have a material
effect on our business, financial condition, results of operations or cash
flows. However, litigation is subject to inherent uncertainties.
 
 ITEM 4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None.
  25
 Table of Contents
  PART II
  ITEM 5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
 
 Our
common stock is traded on the Nasdaq Global Market under the symbol “CHRD.” The
following table sets forth the range of high and low per share sales prices of
our common stock as reported for each period indicated:
 
 High
              
              LowYear
      Ended September 30, 2008First
      Quarter (October 1 - December 31)
              $
              16.60
              
              $
              7.75Second
      Quarter (January 1 - March 31)
              $
              9.00
              
              $
              5.69Third
      Quarter (April 1 - June 30)
              $
              6.42
              
              $
              4.55Fourth
      Quarter (July 1 - September 30)
              $
              6.28
              
              $
              4.50Year
      Ended September 30, 2007First
      Quarter (October 1 - December 31)
              $
              8.27
              
              $
              6.95Second
      Quarter (January 1 - March 31)
              $
              10.35
              
              $
              7.82Third
      Quarter (April 1 - June 30)
              $
              16.02
              
              $
              10.37Fourth
      Quarter (July 1 - September 30)
              $
              16.25
              
              $
              12.94
 
 As
of November12, 2008, there were approximately 70 holders of record of our common
stock who together held approximately 186,577 shares of our common stock. The
remainder of our outstanding shares are held by brokers and other institutions
on behalf of stockholders. We have never paid or declared any cash dividends and
do not intend to pay dividends for the foreseeable future. We currently expect
to retain working capital for use in the operation and expansion of our business
and therefore do not anticipate paying any cash dividends.
  In
response to the SEC’s adoption of Rule 10b5-1 under the Securities Exchange Act
of 1934, we approved amendments to our insider trading policy on July 20,
2001 to permit our directors, executive officers and certain key employees to
enter into trading plans or arrangements for systematic trading in our
securities. As of September 30, 2008, the Company had no directors or
executive officers who had any such active trading plans. We anticipate that, as
permitted by Rule 10b5-1 and our insider trading policy, some or all of our
directors, executive officers and employees may establish trading plans at some
date in the future.
  Securities
Authorized for Issuance Under Equity Compensation Plans
  Information
regarding our equity compensation plans, including both stockholder approved
plans and non-stockholder approved plans, will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under the
caption “Equity Compensation Plan Information,” and is incorporated by reference
into this report.
  Issuer
Purchases of Equity Securities
 
 None.
  26
 Table of Contents
  STOCK
PERFORMANCE GRAPH AND CUMULATIVE TOTAL RETURN
 
 The
following graph shows the five-year cumulative total stockholder return of an
investment of $100 in cash on September 30, 2003 for:
 
 (i)
              
              Our
      common stock;(ii)
              
              The
      Nasdaq Composite Index;(iii)
              
              The
      Standard & Poor’s Application Software
  Index.
 
 Historic
stock price performance is not necessarily indicative of future stock price
performance. All values assume reinvestment of the full amount of all dividends,
of which there were none, and are calculated as of September 30 of each
year.
   
 
      9/03
              
              9/04
              
              9/05
              
              9/06
              
              9/07
              
              9/08Chordiant
      Software, Inc.
              $
              100.00
              
              $
              96.36
              
              $
              94.37
              
              $
              101.66
              
              $
              183.58
              
              $
              67.95NASDAQ
      Composite
              $
              100.00
              
              $
              107.74
              
              $
              123.03
              
              $
              131.60
              
              $
              158.88
              
              $
              119.05S&P
      Application Software
              $
              100.00
              
              $
              103.58
              
              $
              143.93
              
              $
              149.68
              
              $
              171.97
              
              $
              145.05
 
  27
 Table of Contents
  
 ITEM 6.
              SELECTED
      CONSOLIDATED FINANCIAL DATA
 
 We
derived the selected financial data as of September 30, 2008 and 2007 and for
the years ended September 30, 2008, 2007, and 2006 from our audited consolidated
financial statements and notes thereto appearing in this Form 10-K. We derived
the selected financial data as of September 30, 2006, 2005 and for the year
ended September 30, 2005 and for the nine-months ended September 30, 2004 from
our 2007 Consolidated Financial Statements in the 2007 Annual Report on
Form 10-K. The consolidated balance sheet as of September 30, 2004 has
been (previously) restated to conform to the (previously) restated consolidated
financial statements and are presented herein on an unaudited basis. The
following selected financial data set forth below is not necessarily indicative
of results of future operations, and should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the Consolidated Financial Statements and related notes thereto
included in Item 8 of this Annual Report on Form 10-K to fully understand
factors that may affect the comparability of the information presented
below.
 
 Years
      Ended September 30
              
              
              Nine
      Months
                Ended
                September
      30,2008
              
              
              
              2007
              
              
              
              2006
              
              
              
              2005
              
              
              
              2004(amounts
      in thousands, except per share data)Consolidated
      Statement of Operations Data:Revenues
              $
              112,964
              
              
              $
              124,547
              
              
              $
              97,536
              
              
              $
              83,725
              
              
              $
              61,023Net
      income (loss)
              
              1,065
              
              
              
              6,028
              
              
              
              (16,001
              )
              
              
              (19,865
              )
              
              
              (1,371
              )Net
      income (loss) per share—basic
              
              0.03
              
              
              
              0.19
              
              
              
              (0.51
              )
              
              
              (0.67
              )
              
              
              (0.05
              )Net
      income (loss) per share—diluted
              $
              0.03
              
              
              $
              0.18
              
              
              $
              (0.51
              )
              
              $
              (0.67
              )
              
              $
              (0.05
              )Weighted
      average shares used in computing net income (loss) per
      share—basic
              
              31,658
              
              
              
              32,425
              
              
              
              31,073
              
              
              
              29,780
              
              
              
              27,904Weighted
      average shares used in computing net income (loss) per
      share—diluted
              
              31,957
              
              
              
              33,261
              
              
              
              31,073
              
              
              
              29,780
              
              
              
              27,904As
      of September 30,2008
              
              
              
              2007
              
              
              
              2006
              
              
              
              2005
              
              
              
              2004(unaudited)(amounts
      in thousands)Consolidated
      Balance Sheet Data:Cash,
      cash equivalents, and marketable securities
              $
              55,516
              
              
              $
              90,146
              
              
              $
              45,278
              
              
              $
              38,546
              
              
              $
              59,748Working
      capital
              
              37,887
              
              
              
              56,447
              
              
              
              22,323
              
              
              
              23,733
              
              
              
              46,296Total
      assets
              
              124,700
              
              
              
              164,815
              
              
              
              111,503
              
              
              
              107,250
              
              
              
              115,340Current
      and long term portion of capital lease obligations
              
              —
              
              
              
              —
              
              
              
              95
              
              
              
              309
              
              
              
              508Short-term
      and long-term deferred revenue
              
              46,334
              
              
              
              67,982
              
              
              
              29,505
              
              
              
              26,197
              
              
              
              20,581Stockholders’
      equity
              $
              59,852
              
              
              $
              73,361
              
              
              $
              57,225
              
              
              $
              65,157
              
              
              $
              75,912
 
 Effective
October 1, 2005, the Company adopted SFAS No. 123R as more fully described in
Note 2 to the Consolidated Financial Statements contained in this Annual
Report.
  28
 Table of Contents
  ITEM 7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 Safe Harbor
 
 The
following discussion and analysis contains forward-looking statements. These
statements are based on our current expectations, assumptions, estimates and
projections about our business and our industry, and involve known and unknown
risks, uncertainties and other factors that may cause our or our industry’s
results, levels of activity, performance or achievement to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied in or contemplated by the forward-looking
statements. Words such as “believe,” “anticipate,” “expect,” “intend,” “plan,”
“will,” “may,” “should,” “estimate,” “predict,” “guidance,” “potential,”
“continue” or the negative of such terms or other similar expressions, identify
forward-looking statements. Our actual results and the timing of events may
differ significantly from those discussed in the forward-looking statements as a
result of various factors, including but not limited to, those discussed in Item
1A of this Form 10-K under the caption “Risk Factors” and those discussed
elsewhere in this Annual Report and in our other filings with the Securities and
Exchange Commission. Chordiant undertakes no obligation to update any
forward-looking statement to reflect events after the date of this
report.
 
 Executive
Overview
  As
an enterprise software vendor, we generate substantially all of our revenues
from insurance, healthcare, telecommunications, financial services and retail
markets. Our customers typically fund purchases of our software and services out
of their lines of business and information technology budgets. As a result, our
revenues are heavily influenced by our customers’ long-term business outlook and
willingness to invest in new enterprise information systems and business
applications.
 
 Our
business has been adversely impacted by the recent worldwide credit market
turmoil, the result of which is that customers are hesitant to make large
commitments and some customers are merging.
 
 The
Company’s operations and performance depend on our customers having adequate
resources to purchase our products and services. The unprecedented turmoil in
the credit markets and the global economic downturn generally will adversely
impact our customers and potential customers. These economic conditions have
continued to deteriorate despite government intervention globally, and may
remain volatile and uncertain for the foreseeable future. Customers may alter
their purchasing activities in response to lack of credit, economic uncertainty
and concern about the stability of markets in general, and these customers may
reduce, delay or terminate purchases of our products and services or other
sales activities that affect purchases of our products and services. If we are
unable to adequately respond to changes in demand resulting from deteriorating
economic conditions, our financial condition and operating results may be
materially and adversely affected.
 
 Several
of the Company’s current and prior customers have recently merged with others,
been forced to raise significant levels of new capital, or received funds and/or
equity infusions from regulators or governmental entities. This list of
companies is extensive and includes Wachovia Corporation, AIG, Halifax Bank of
Scotland, Royal Bank of Scotland, Barclays, and Lloyds. The impact of these
mergers and changes in ownership on Chordiant’s near term business is uncertain.
Customers who have recently reorganized, merged or face new regulations may
delay or terminated their software purchasing decisions, and as an acquired or
merged entity may lose the ability to make such purchasing decisions, resulting
in declines in our bookings, revenues and cash flows.
 
 For
the fiscal year ended September 30, 2008, we recorded revenue of $113.0 million.
We generated $1.1 million of net income and ended the fiscal year with over
$55.5 million in cash, cash equivalents, and marketable securities as compared
to $90.1 million for fiscal year ended September 30, 2007. In addition, we
repurchased $18.6 million of our common stock during the year.
 
 Total
revenue for the fiscal year ended September 30, 2008 decreased 9% to $113.0
million from $124.5 million of the prior year. The decrease in revenue was
primarily from license revenue, decreasing $19.9 million as the Company had
fewer license transactions. Service revenue increased $8.4 million from prior
year. The increase in service revenue was primarily composed of an increase
of $6.3 million associated with support and maintenance revenue, $0.5
million from consulting revenue, $0.8 million in training revenue and
$0.8 million in expense reimbursement revenue.
  29
 Table of Contents
  
 Software
Industry Consolidation and Possible Increased Competition
 
 The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. In 2007 and 2008 IBM acquired ILOG,
Cognos, DataMirror and Watchfire Corporation; Oracle completed its acquisitions
of Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL and SAP
acquired BusinessObjects, YASU Technologies and Pilot Software. While we do not
believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot
Software have been significant competitors of Chordiant in the past, the
acquisition of these companies by IBM, Oracle, Sun Microsystems and SAP may
indicate that we may face increased competition from larger and more established
entities in the future.
 
 Financial
Trends
 
 Backlog. Our revenues have
primarily been derived from large customer transactions. For some of these
transactions, the associated professional services provided to the customer can
span over a period greater than one year. If the services delivery period is
over a prolonged period of time, it will cause the associated backlog to be
recognized as revenue over a similar period of time. As of September 30, 2008
and 2007, we had approximately $70.1 million and $75.4 million in backlog,
respectively, which we define as contractual commitments by our customers
through purchase orders or contracts. This decrease in backlog is partially
reflected in the decrease of deferred revenue recorded on our balance sheet. For
the period ended September 30, 2007 to September 30, 2008 deferred revenue
decreased $21.6 million due to a decrease of $11.0 million in short-term
deferred revenue and a $10.6 million decrease in long-term deferred revenue.
 Backlog is comprised of:
  •
              software
      license orders for which the delivered products have not been accepted by
      customers or have not otherwise met all of the required criteria for
      revenue recognition. This component includes billed amounts classified as
      deferred revenue;
 
 •
              contractual
      commitments received from customers through purchase orders or contracts
      that have yet to be delivered;
 
 •
              deferred
      revenue from customer support contracts;
and
  •
              consulting
      service orders representing the unbilled remaining balances of consulting
      contracts not yet completed or delivered, plus deferred consulting revenue
      where we have not otherwise met all of the required criteria for revenue
      recognition. Consulting service orders that have expired are excluded from
      backlog.
  Backlog
is not necessarily indicative of revenues to be recognized in a specified future
period. There are many factors that could impact Chordiant’s conversion of
backlog as recognizable revenue, such as Chordiant’s progress in completing
projects for its customers, Chordiant’s customers’ meeting anticipated schedules
for customer-dependent deliverables and customers increasing the scope or
duration of a contract causing license revenue to be deferred for a longer
period of time.
  Chordiant
provides no assurances that any portion of its backlog will be recognized as
revenue during any fiscal year or at all, or that its backlog will be recognized
as revenues in any given period. In addition, it is possible that customers from
whom we expect to derive revenue from backlog will default, and as a result, we
may not be able to recognize expected revenue from backlog.
 
 For
the fiscal year ended September 30, 2007, we entered into several large customer
orders resulting in a significant portion of our near term license revenues
being recognized under the percentage-of-completion method of accounting such
that our deferred revenue balance increased. A portion of these orders continue
to require consulting services that are essential to the functionality of the
respective licenses.
 
 Implementation by Third
Parties. Over time, as our products mature and system integrators become
more familiar with our products, our involvement with implementations has
diminished on some projects. If this trend continues to evolve, certain
agreements with customers may transition from a contract accounting model to a
more traditional revenue model whereby revenues are recorded upon delivery
..
 
 ServiceRevenues.Service revenues as
a percentage of total revenues were 70%, 57%, and 58% for the years ended
September 30, 2008, 2007, and 2006, respectively. We expect that service
revenues will represent between 55% and 70% of our total revenues in the
foreseeable future.
  30
 Table of Contents
  
 Revenues fromInternationalCustomers versusNorth America. For all periods presented,
revenues were principally derived from customer accounts in North America and
Europe. For the fiscal years ended September 30, 2008, 2007, and 2006,
international revenues were $54.2 million, $58.8 million, and $37.5
million or approximately 48%, 47% and 38% of our total revenues,
respectively. We believe international revenues will continue to represent a
significant portion of our total revenues in future periods. The significant
increase in international revenue for year ended September 30, 2007 as compared
to the year ended September 30, 2006 was due to an improved economy for the
region as well as an improved sales production for the region resulting from the
new management team that was put in place during fiscal year 2007. International
revenues were favorably impacted for the year ended September 30, 2007, as
compared to the year ended September 30, 2006, as both the British Pound and the
Euro increased in average value by approximately 9% and 8%, respectively, as
compared to the U.S. Dollar. In future periods, the Company plans to pursue
revenue opportunities in several emerging markets including Eastern Europe,
Russia, China, and India. We believe international revenues will represent a
larger portion of our total revenues as we expand into emerging
markets.
 
 For
the fiscal years ended September 30, 2008, 2007, and 2006, North America
revenues were $58.8 million, $65.7 million, and $60.0 million or approximately
52%, 53%, and 62% of our total revenues, respectively. We believe North America
revenues will continue to represent 40% to 60% of our total revenues in the
future.
  GrossMargins. Management focuses on
license and service gross margins in evaluating our financial condition and
operating performance. Gross margins on license revenues were 97%, 97%, and 96%
for the fiscal years ended September 30, 2008, 2007, and 2006, respectively. We
expect license gross margin on current products to range from 95% to 97% in the
foreseeable future. The margin will fluctuate with the mix of products sold.
Historically, the enterprise solution products have higher associated third
party royalty expense than the marketing solution products and decision
management products.
 
 Gross
margins on service revenues were 57%, 57%, and 46% for the fiscal years ended
September 30, 2008, 2007, and 2006, respectively. The increase in gross margins
for the year ended September 30, 2007 is primarily due to improved consulting
services utilization rates and increased support and maintenance revenue. We
expect that gross margins on service revenue to range between 50% and 60% in the
foreseeable future.
 
 CostsRelated toCompliance with the Sarbanes-Oxley
Act of 2002.In addition to audit fees, significant professional
service expenses are included in general and administrative costs relating to
efforts to comply with the Sarbanes-Oxley Act of 2002. For the fiscal years
ended September 30, 2008, 2007, and 2006, these costs were $0.5 million, $1.0
million, and $1.8 million, respectively. While these costs are expected to
continue into the next fiscal year, the decline in amount and timing of the
costs through fiscal year 2009 is uncertain as compared to the costs incurred
for the year ended September 30, 2008.
 
 CostsRelated toStockOptionInvestigation. For the fiscal
years ended September 30, 2007 and 2006, significant outside professional
services are included in general and administrative expense associated with the
Company’s stock option investigation which began in July 2006 and was completed
during the quarter ended March 31, 2007. This issue is more fully described in
the in Note 3, “Restatement of Previously Issued Consolidated Financial
Statements” in Notes to Consolidated Financial Statements of the Annual
Report on Form 10-K for the year ended September 30, 2006. For the year ended
September 30, 2007 and 2006, these costs were $1.8 and $1.2 million,
respectively. We have not incurred any additional costs since the quarter ended
March 31, 2007 and do not expect to incur such costs in future
periods.
 
 Cost to Amend Eligible Options.In July 2006, our Board of Directors, or the Board, initiated a review of
our historical stock option grant practices and appointed the Audit Committee to
oversee the investigation. The Audit Committee determined that the correct
measurement dates for a number of stock option grants made by us during the
period 2000 to 2006, or Review Period, differed from the measurement dates
previously used to account for such option grants. The Audit Committee
identified errors related to the determination of the measurement dates for
grants of options where the price of our common stock on the selected grant date
was lower than the price on the actual grant date which would permit recipients
to exercise these options at a lower exercise price. As such, these affected
stock options are deemed, for accounting purposes, to have been granted at a
discount. Based on the determination made for accounting purposes, the
discounted options (for accounting purposes) may now be deemed to have been
granted at a discount for tax purposes, which may expose the holders of these
impacted stock option grants to potentially adverse tax treatment under Section
409A of the Internal Revenue Code and state law equivalents. As more fully
described on Form SC TO-I filed with the SEC on March 29, 2007, Chordiant
offered certain optionees the opportunity to increase the exercise price of the
discounted options to limit the potential adverse personal tax consequences that
may apply to those stock options under Section 409A of the Internal Revenue Code
and state law equivalents. On April 26, 2007, eligible optionees finalized their
elections under the offer and were awarded a cash payment equal to the price
differential of the Amended Options. These payments were treated as bonus
payments. These cash payments were approximately $0.3 million and were paid out
in January 2008.
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 Reductionsin Workforce.Subsequent to
our fiscal year ended September 30, 2008, the Company initiated a restructuring
plan, the 2008 Restructuring, intended to align its resources and cost structure
with expected future revenues. The 2008 Restructuring plan included reductions
in headcount and third party consultants across all functional areas in both
North America and Europe. The 2008 Restructuring plan included a reduction of
approximately 13% of the Company’s permanent workforce. A significant portion of
the positions eliminated were in North America.
 
 As
a result of the cost-cutting measures, the Company estimates that it will record
pre-tax cash restructuring charges in the first quarter of fiscal year 2009, of
approximately $0.8 to $0.9 million, including $0.7 to $ 0.8 million for
severance costs and approximately $0.1 million for other contract termination
costs. The Company anticipates that all of the aggregate charges will result in
cash expenditures, the majority of which are to be paid in the first quarter of
fiscal year 2009.
 
 On
May 1, 2008, Chordiant implemented a reduction of approximately 10% of its
workforce. The Company reduced its headcount across all functions of the
organization. Chordiant plans to reallocate resources in support of growth
opportunities in emerging markets as well as adding headcount in revenue
generating areas such as sales and alliances. Chordiant incurred approximately
$0.5 million in expenses in the third quarter of fiscal year 2008 in connection
with this reduction of force. As these costs did not meet the criteria of SFAS
146 to qualify as restructuring expenses, the expenses were charged as operating
expenses to the respective functional areas.
 
 In
October 2006, the Company initiated a restructuring plan intended to align its
resources and cost structure with expected future revenues. The restructuring
plan included a balancing of services resources worldwide, an elimination of
duplicative functions internationally, and a shift in the U.S. field
organization toward a focus on domain-based sales and pre-sales
teams.
 
 The
restructuring plan included an immediate reduction in positions of slightly more
than 10% of the Company's workforce, consolidation of our European facilities,
and the closure of our France office. A majority of the positions eliminated
were in Europe. The plan was committed to on October 24, 2006, and we began
notifying employees on October 25, 2006.
 
 We
recorded a pre-tax cash restructuring expense of $6.1 million as calculated
using the net present value of the related costs as required by SFAS 146. The
expense was composed of costs for severance and exiting excess facilities.
During the three months ended March 31, 2007, we incurred an additional charge
of $0.1 million for employee severance costs associated with the closure of our
France office. Also during the three months ended March 31, 2007, we negotiated
an early termination of the France office lease associated with its closure,
resulting in a $0.2 million reduction in the excess facility liability. This
reduction was recorded as an offset to restructuring expense in the period. In
quarter ended December 31, 2007, we negotiated a break clause in the lease
allowing for an early termination of the United Kingdom facility which released
us from any future rent liabilities subsequent to January 2008. All termination
payments have now been made.
 
 In
July 2005, we undertook an approximate 10% reduction in our workforce. In
connection with this action, we incurred a one-time cash expense of
approximately $1.1 million in the fourth quarter ended September 30, 2005
for severance benefits. During the three months ended March 31, 2007, the
Company incurred an additional charge of less than $0.1 million for additional
severance expense for an employee located in France.
 
 During
fiscal year 2002, we restructured several areas of the Company to reduce
expenses and improve revenues. As part of this restructuring, we closed an
office facility in Boston, Massachusetts and recorded an expense associated with
the long-term lease which expires in January 2011. During the three months ended
March 31, 2007, we completed a new sublease with a sub-lessee for the remaining
term of our lease at a rate lower than that which was forecasted when the
original restructuring expense was recorded in 2002. This change in estimate
resulted in a $0.4 million restructuring expense for the fiscal year ended
September 30, 2007.
  PastResultsmay not beIndicative ofFuturePerformance.We believe that
period-to-period comparisons of our operating results should not be relied upon
as indicative of future performance. Our prospects must be considered given the
risks, expenses and difficulties frequently encountered by companies in new and
rapidly evolving businesses. There can be no assurance we will be successful in
addressing these risks and difficulties. Moreover, we may not achieve or
maintain profitability in the future.
 
 Critical
Accounting Estimates
  Our
discussion and analysis of our financial condition and results of operations are
based upon our Consolidated Financial Statements, which have been prepared in
accordance with Generally Accepted Accounting Principles or GAAP in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.
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 On
an on-going basis, we evaluate the estimates, including those related to our
allowance for doubtful accounts, valuation of stock-based compensation,
valuation of goodwill and intangible assets, valuation of deferred tax assets,
restructuring expenses, contingencies, vendor specific objective evidence, or
VSOE, of fair value in multiple element arrangements and the estimates
associated with the percentage-of-completion method of accounting for certain of
our revenue contracts. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
 
 We
believe the following critical accounting judgments and estimates are used in
the preparation of our Consolidated Financial Statements:
  •
              Revenue
      recognition, including estimating the total estimated time required to
      complete sales arrangements involving significant implementation or
      customization essential to the functionality of our
    products;
  •
              Estimating
      valuation allowances and accrued liabilities, specifically the allowance
      for doubtful accounts, and assessment of the probability of the outcome of
      our current litigation;
 
 •
              Stock-based
      compensation expense;
 
 •
              Accounting
      for income taxes;
 
 •
              Valuation
      of long-lived and intangible assets and
  goodwill;
  •
              Restructuring
      expenses; and
  •
              Determining
      functional currencies for the purposes of consolidating our international
      operations.
  Revenue Recognition.We
derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support services or PCS, training and consulting. The
amount and timing of our revenue is difficult to predict and any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to period to period and could result in
operating losses. The accounting rules related to revenue recognition are
complex and are affected by interpretation of the rules and an understanding of
industry practices, both of which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
estimates based on judgment.
 
 Software
license revenue is recognized in accordance with the American Institute of
Certified Public Accountant’s or AICPA’s Statement of Position No. 97-2
“Software Revenue Recognition,” as amended by Statement of Position No. 98-9
“Software Revenue Recognition with Respect to Certain Arrangements”, or
collectively SOP 97-2.
 
 For
arrangements with multiple elements, we recognize revenue for services and PCS
based upon the fair value VSOE of the respective elements. The fair value VSOE
of the services element is based upon the standard hourly rates we charge for
the services when such services are sold separately. The fair value VSOE for
annual PCS is generally established with the contractual future renewal rates
included in the contracts, when the renewal rate is substantive and consistent
with the fees when support services are sold separately. When contracts contain
multiple elements and fair value VSOE exists for all undelivered elements, we
account for the delivered elements, principally the license portion, based upon
the “residual method” as prescribed by SOP 97-2. In multiple element
transactions where VSOE is not established for an undelivered element, we
recognize revenue upon the establishment of VSOE for that element or when the
element is delivered.
 
 At
the time we enter into a transaction, we assess whether any services included
within the arrangement related to significant implementation or customization
essential to the functionality of our products. For contracts for products that
do not involve significant implementation or customization that is essential to
the product functionality, we recognize license revenues when there is
persuasive evidence of an arrangement, the fee is fixed or determinable,
collection of the fee is probable and delivery has occurred as prescribed by SOP
97-2. For contracts that involve significant implementation or customization
essential to the functionality of our products, we recognize the license and
professional consulting services revenue using either the
percentage-of-completion method or the completed contract method as prescribed
by Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Product-Type Contracts”, or SOP
81-1.
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 Table of Contents
  
 The
percentage-of-completion method is applied when we have the ability to make
reasonably dependable estimates of the total effort required for completion
using labor hours incurred as the measure of progress towards completion. The
progress toward completion is measured based on the “go-live” date. We define
the “go-live” date as the date the essential product functionality has been
delivered or the application enters into a production environment or the point
at which no significant additional Chordiant supplied professional service
resources are required. Estimates are subject to revisions as the contract
progresses to completion. We account for the changes as changes in accounting
estimates when the information becomes known. Information impacting estimates
obtained after the balance sheet date but before the issuance of the financial
statements is used to update the estimates. Provisions for estimated contract
losses, if any, are recognized in the period in which the loss becomes probable
and can be reasonably estimated. When we sell additional licenses related to the
original licensing agreement, revenue is recognized upon delivery if the project
has reached the go-live date, or if the project has not reached the go-live
date, revenue is recognized under the percentage-of-completion method. We
classify revenues from these arrangements as license and service revenue based
upon the estimated fair value of each element using the residual
method.
 
 The
completed contract method is applied when we are unable to obtain reasonably
dependable estimates of the total effort required for completion. Under the
completed contract method, all revenue and related costs of revenue are deferred
and recognized upon completion.
 
 For
product co-development arrangements relating to software products in development
prior to the consummation of the individual arrangements where we retain the
intellectual property being developed and intend to sell the resulting products
to other customers, license revenue is deferred until the delivery of the final
product, provided all other requirements of SOP 97-2 are met. Expenses
associated with these co-development arrangements are accounted for under SFAS
86 and are normally expensed as incurred as they are considered to be research
and development costs that do not qualify for capitalization or
deferral.
 
 Revenue
from subscription or term license agreements, which include software and rights
to unspecified future products or maintenance, is recognized ratably over the
term of the subscription period. Revenue from subscription or term license
agreements, which include software, but exclude rights to unspecified future
products and maintenance, is recognized upon delivery of the software if all
conditions of recognizing revenue have been met including that the related
agreement is non-cancelable, non-refundable and provided on an unsupported
basis.
 
 For
transactions involving extended payment terms, we deem these fees not to be
fixed or determinable for revenue recognition purposes and revenue is deferred
until the fees become payable and due.
 
 For
arrangements with multiple elements accounted for under SOP 97-2 where we
determine we can account for the elements separately and the fees are not fixed
or determinable due to extended payment terms, revenue is recognized in the
following manner. If the undelivered element is PCS, or other services, an
amount equal to the estimated value of the services to be rendered prior to the
next payment becoming due is allocated to the undelivered services. The residual
of the payment is allocated to the delivered elements of the
arrangement.
 
 For
arrangements with multiple elements accounted for under SOP 81-1 where we
determine we can account for the elements separately and the fees are not fixed
or determinable due to extended payment terms, revenue is recognized in the
following manner. Amounts are first allocated to the undelivered elements
included in the arrangement, as payments become due or are received, the
residual is allocated to the delivered elements.
 
 We
recognize revenue for PCS ratably over the support period which typically ranges
from one to five years.
 
 Our
training and consulting services revenues are recognized as such services are
performed on an hourly or daily basis for time and material contracts. For
consulting services arrangements with a fixed fee, we recognize revenue on a
percentage-of-completion method.
 
 For
all sales we use either a signed license agreement or a binding purchase order
where we have a master license agreement as evidence of an arrangement. Sales
through our third party systems integrators are evidenced by a master agreement
governing the relationship together with binding purchase orders or order forms
on a transaction-by-transaction basis. Revenues from reseller arrangements are
recognized on the “sell-through” method, when the reseller reports to us the
sale of our software products to end-users. Our agreements with customers and
resellers do not contain product return rights.
 
 We
assess collectibility based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We
generally do not request collateral from our customers. If we determine that the
collection of a fee is not probable, we recognize revenue at the time collection
becomes probable, which is generally upon the receipt of cash.
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 Table of Contents
  
 Allowance forDoubtfulAccounts.We must make
estimates of the uncollectability of our accounts receivables. We specifically
analyze accounts receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. Generally, we
require no collateral from our customers. Our gross accounts receivable balance
was $25.5 million with an allowance for doubtful accounts of $0.6 million
as of September 30, 2008. Our gross accounts receivable balance was $28.5
million (including long-term accounts receivable of $0.9 million) with an
allowance for doubtful accounts of $0.2 million as of September 30, 2007. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would be
required. Based upon current economic conditions, the Company has reviewed
accounts receivable and has recorded allowances as deemed
necessary.
 
 Stock-based Compensation Expense.Upon adoption of SFAS 123(R) on October 1, 2005, we began estimating
the value of employee stock options on the date of grant using the Black-Scholes
model. Prior to the adoption of SFAS 123(R), the value of each employee stock
option was estimated on the date of grant using the Black-Scholes model for the
purpose of the pro forma financial disclosure in accordance with SFAS 123.
The determination of fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors.
 
 With
the adoption of SFAS 123(R) on October 1, 2005, we used the trinomial
lattice valuation technique to determine the assumptions used in the
Black-Scholes model. The trinomial lattice valuation technique was used to
provide better estimates of fair values and meet the fair value objectives of
SFAS 123(R). The expected term of options granted is derived from
historical data on employee exercises and post-vesting employment termination
behavior. The expected volatility is based on the historical volatility of our
stock.
 
 As
stock-based compensation expense recognized in the Consolidated Statement of
Operations for fiscal year 2008 is based on awards ultimately expected to vest,
it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.
 
 If
factors change and we employ different assumptions in the application of SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period. The estimated value of a stock option is most sensitive to the
volatility assumption. Based on the September 30, 2008 variables, it is
estimated that a change of 10% in either the volatility, expected life or
interest rate assumption would result in a corresponding 8%, 5% or 1% change in
the estimated value of the option being valued using the Black-Scholes
model. See Note 12 to the Consolidated Financial Statements for detailed
information regarding stock-based compensation expense.
 
 Accounting for Income Taxes.
As part of the process of preparing our Consolidated Financial Statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our Consolidated Balance Sheet. We must then assess the likelihood that
our net deferred tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the Consolidated Statement of Operations.
 
 At
September 30, 2008, we have $75.8 million in gross deferred tax assets (DTAs)
attributable principally to our net operating losses (NOLs). Historically, we
have maintained a 100% valuation allowance on our DTAs because we have
previously been unable to conclude that it is more-likely-than-not that we will
realize the tax benefits of these DTAs. Based on recent operating results and
the reorganization of our intellectual property into the U.S., our current
projections of disaggregated future taxable income have enabled us to conclude
that it is more-likely-than-not that we will have future taxable income
sufficient to realize $10.0 million of tax benefits from our deferred tax
assets, which consist of that portion of our net deferred tax assets
attributable to our net operating losses (NOLs) residing in the United Kingdom.
Accordingly, we have released (eliminated) $10.0 million of the valuation
allowance on our DTAs, of which $9.5 million is recognized as an offsetting
reduction to goodwill (representing pre-acquisition NOLs) and $0.5 million is
recognized as a credit (reduction) to the provision for income taxes. In future
periods, we expect to incur tax expense related to the United Kingdom which will
result in an increase in overall expense; however, to the extent that such tax
expense is offset by the utilization of NOLs, the recognition of this additional
tax expense will be a non-cash item.
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 Table of Contents
  
 The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to our U.S. generated deferred tax assets, we have recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. Our estimate of future
taxable income considers available positive and negative evidence regarding our
current and future operations, including projections of income in various states
and foreign jurisdictions. We believe our estimate of future taxable income is
reasonable; however, it is inherently uncertain, and if our future operations
generate taxable income greater than projected, further adjustments to reduce
the valuation allowance are possible. Conversely, if we realize unforeseen
material losses in the future, or our ability to generate future taxable income
necessary to realize a portion of the net deferred tax asset is materially
reduced, additions to the valuation allowance could be recorded. At September
30, 2008, the balance of the deferred tax valuation allowance was approximately
$65.9 million.
 
 Effective
October 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. The application of FIN 48 is discussed in Note 11
to the Consolidated Financial Statements.
 
 Valuation ofLong-lived andIntangibleAssets andGoodwill. We assess the
impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Furthermore, we assess the impairment of goodwill annually. Factors
we consider important which could trigger an impairment review include the
following:
  •
              Significant
      underperformance relative to expected historical or projected future
      operating results;
  •
              Significant
      changes in the manner of our use of the acquired assets or the strategy
      for our overall business;
 
 •
              Significant
      negative industry or economic
trends;
 
 •
              Significant
      decline in our stock price for a sustained
  period;
  •
              Market
      capitalization declines relative to net book value;
  and
  •
              A
      current expectation that, more likely than not, a long-lived asset will be
      sold or otherwise disposed of significantly before the end of its
      previously estimated useful life.
  When
one or more of the above indicators of impairment occurs we estimate the value
of long-lived assets and intangible assets to determine whether there is
impairment. We measure any impairment based on the projected discounted cash
flow method, which requires us to make several estimates including the estimated
cash flows associated with the asset, the period over which these cash flows
will be generated and a discount rate commensurate with the risk inherent in our
current business model. These estimates are subjective and if we made different
estimates, it could materially impact the estimated fair value of these assets
and the conclusions we reached regarding impairment. To date, we have not
identified any triggering events noted above. While the recent decline in our
stock price and negative economic trends have lowered our market capitalization
at September 30, 2008, our market capitalization is still at the levels
significantly higher than our book value.
 
 We
are required to perform an impairment review of our goodwill balance on at least
an annual basis. This impairment review involves a two-step process as
follows:
  Step
1—We compare the fair value of our reporting units to the carrying value,
including goodwill, of each of those units. For each reporting unit where the
carrying value, including goodwill, exceeds the unit’s fair value, we proceed on
to Step 2. If a unit’s fair value exceeds the carrying value, no further work is
performed and no impairment charge is necessary.
 
 Step
2—We perform an allocation of the fair value of the reporting unit to our
identifiable tangible and non-goodwill intangible assets and liabilities. This
derives an implied fair value for the reporting unit’s goodwill. We then compare
the implied fair value of the reporting unit’s goodwill with the carrying amount
of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s
goodwill is greater than the implied fair value of its goodwill, an impairment
charge would be recognized for the excess.
   36
 Table of Contents
  
 We
determined that we have one reporting unit. We completed a goodwill impairment
review for the period including September 30, 2008 and 2007 and performed
Step 1 of the goodwill impairment analysis required by SFAS No. 142,
“Goodwill and Other Intangible Assets,” and concluded that goodwill was not
impaired as of September 30, 2008 and 2007 using the methodology described
above. Accordingly, Step 2 was not performed. We will continue to test for
impairment on an annual basis and on an interim basis if an event occurs or
circumstances change that would more likely than not reduce the fair value of
our reporting units below their carrying amount.
 
 In
the fiscal year ended September 30, 2008, we reduced goodwill by $9.5 million.
The adjustment relates to a tax benefit attributable to our acquisition in the
United Kingdom. The adjustment of goodwill is discussed in Note 11 to the
Consolidated Financial Statements.
 
 RestructuringExpenses. In the past several
years, we have implemented various cost-reduction plans as part of our continued
effort to streamline our operations to reduce ongoing operating expenses. These
plans resulted in restructuring expenses related to, among others, the
consolidation of excess facilities. These charges relate to facilities and
portions of facilities we no longer utilize and either seek to terminate early
or sublease. Lease termination costs and brokerage fees for the abandoned
facilities were estimated for the remaining lease obligations and were offset by
estimated sublease income. Estimates related to sublease costs and income are
based on assumptions regarding the period required to locate and contract with
suitable sub-lessees and sublease rates which can be achieved using market trend
information analyses provided by a commercial real estate brokerage retained by
us. Each reporting period we review these estimates and to the extent that these
assumptions change due to new agreements with landlords, new subleases with
tenants, or changes in the market, the ultimate restructuring expenses for these
abandoned facilities could vary by material amounts. See Note 6 to the
Consolidated Financial Statements for detailed information regarding
restructuring expenses.
 
 DeterminingFunctionalCurrencies for thePurpose ofConsolidation.We have several foreign
subsidiaries that together account for a significant portion of our revenues,
expenses, assets and liabilities.
  In
preparing our Consolidated Financial Statements, we are required to translate
the financial statements of the foreign subsidiaries from the currency in which
they keep their accounting records, generally the local currency, into United
States Dollars. This process results in exchange gains and losses which, under
the relevant accounting guidance are either included within the Consolidated
Statement of Operations or as a separate part of the Consolidated Statements of
Stockholders Equity and Comprehensive Income (Loss) under the caption
“Accumulated Other Comprehensive Income (Loss).” Under the relevant accounting
guidance, the treatment of these translation gains or losses is dependent upon
management’s determination of the functional currency of each subsidiary. The
functional currency is determined based on management’s judgment and involves
consideration of all relevant economic facts and circumstances affecting the
subsidiary. Generally, the currency in which the subsidiary conducts a majority
of its transactions, including billings, financing, payroll and other
expenditures would be considered the functional currency but any dependency upon
the parent and the nature of the subsidiary’s operations must also be
considered.
 
 If
any subsidiary’s functional currency were deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary’s financial
statements would be included in cumulative translation adjustments. However, if
the functional currency were deemed to be the United States Dollar then any gain
or loss associated with the translation of these financial statements would be
included within our Consolidated Statement of Operations. If we dispose of any
of our subsidiaries, any cumulative translation gains or losses would be
recognized in our Consolidated Statement of Operations. If we determine that
there has been a change in the functional currency of a subsidiary to the United
States Dollar, any translation gains or losses arising after the date of change
would be included within our Consolidated Statement of Operations.
 
 Based
on our assessment of the factors discussed above, we consider the relevant
subsidiary’s local currency to be the functional currency for each of our
international subsidiaries. Accordingly, foreign currency translation gains and
loses are included as part of Accumulated Other Comprehensive Income within our
Consolidated Balance Sheet for all periods presented.
  Historically
the settlement of long term intercompany balances has not been planned or
anticipated. As a result, accumulated foreign currency gains and losses
associated with these intercompany balances have been included in “Accumulated
Other Comprehensive Income (Loss)” on the Consolidated Balance Sheets. While the
Company has no current intent to settle these long term accounts, circumstances
could change at some point in the future. For example, the transfer of cash
balances currently held by international subsidiaries to the parent company in
the U.S. might be considered as a source of funds for potential merger and
acquisition activity or additional share repurchase programs. In the event that
the entities were to plan to settle such long term intercompany balances, any
associated accumulated foreign currency gain or loss would need to be
reclassified to the Consolidated Statement of Operations, resulting in a
realized gain or loss. The amount of the gain or loss would be dependent upon
the exchange rates in effect when settlement was planned or
anticipated.
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 Table of Contents
  
 The
foreign currency gains or losses are dependent upon movements in the exchange
rates of the foreign currencies in which we transact business against the United
States Dollar. These currencies include the United Kingdom Pound Sterling,
the Euro and the Canadian Dollar. Any future translation gains or losses could
be significantly different than those reported in previous periods. At September
30, 2008, approximately $39.3 million of our cash and cash equivalents were held
by our subsidiaries outside of the United States.
 
 Recent
Accounting Pronouncements
 
 See
Note 5 to the Consolidated Financial Statements for detailed information
regarding status of new accounting standards that are not yet effective for
us.
 
 Results
of Operations
 
 The
following table sets forth, in dollars (in thousands) and as a percentage of
total revenues, Consolidated Statements of Operations data for the periods
indicated. This information has been derived from the Consolidated Financial
Statements included elsewhere in this Annual Report.
 
 Years
      Ended September 30,2008
              
              2007
              
              2006Consolidated
      Statements of Operations Data:Revenues:License
              
              $
              34,111
              
              
              30
              %
              
              $
              54,052
              
              
              43
              %
              
              $
              40,514
              
              
              42
              %Service
              
              
              78,853
              
              
              70
              
              
              
              70,495
              
              
              57
              
              
              
              57,022
              
              
              58Total
      revenues
              
              
              112,964
              
              
              100
              
              
              
              124,547
              
              
              100
              
              
              
              97,536
              
              
              100Cost
      of revenues:License
              
              
              1,059
              
              
              1
              
              
              
              1,813
              
              
              2
              
              
              
              1,690
              
              
              2Service
              
              
              34,012
              
              
              30
              
              
              
              30,329
              
              
              24
              
              
              
              30,566
              
              
              31Amortization
      of intangible assets
              
              
              1,211
              
              
              1
              
              
              
              1,211
              
              
              1
              
              
              
              1,211
              
              
              1Total
      cost of revenues
              
              
              36,282
              
              
              32
              
              
              
              33,353
              
              
              27
              
              
              
              33,467
              
              
              34Gross
      profit
              
              
              76,682
              
              
              68
              
              
              
              91,194
              
              
              73
              
              
              
              64,069
              
              
              66Operating
      expenses:Sales
      and marketing
              
              
              34,722
              
              
              31
              
              
              
              32,597
              
              
              26
              
              
              
              33,616
              
              
              34Research
      and development
              
              
              25,598
              
              
              22
              
              
              
              27,546
              
              
              22
              
              
              
              25,858
              
              
              27General
      and administrative
              
              
              17,995
              
              
              16
              
              
              
              19,898
              
              
              16
              
              
              
              20,445
              
              
              21Restructuring
      expense
              
              
              —
              
              
              —
              
              
              
              6,543
              
              
              6
              
              
              
              —
              
              
              —Total
      operating expenses
              
              
              78,315
              
              
              69
              
              
              
              86,584
              
              
              70
              
              
              
              79,919
              
              
              82Income
      (loss) from operations
              
              
              (1,633
              )
              
              (1
              )
              
              
              4,610
              
              
              3
              
              
              
              (15,850
              )
              
              (16
              )Interest
      income, net
              
              
              2,383
              
              
              2
              
              
              
              2,198
              
              
              2
              
              
              
              1,120
              
              
              1Other
      income (expense), net
              
              
              417
              
              
              —
              
              
              
              822
              
              
              1
              
              
              
              (627
              )
              
              —Income
      (loss) before income taxes
              
              
              1,167
              
              
              1
              
              
              
              7,630
              
              
              6
              
              
              
              (15,357
              )
              
              (15
              )Provision
      for income taxes
              
              
              102
              
              
              —
              
              
              
              1,602
              
              
              1
              
              
              
              644
              
              
              1Net
      income (loss)
              
              $
              1,065
              
              
              1
              %
              
              $
              6,028
              
              
              5
              %
              
              $
              (16,001
              )
              
              (16
              )%
 
 Comparison
of the Year Ended September 30, 2008 to the Year Ended September 30,
2007
 
 Revenues
 
 LicenseRevenue.The increase or
decrease of license revenue occurring within the three different product groups
is dependent on the timing of when a sales transaction is completed and whether
a license transaction was sold with essential consulting services. Licenses sold
with essential consulting services are generally recognized as revenue
under the percentage-of-completion method of accounting. The timing and amount
of revenue for those transactions being recognized under the
percentage-of-completion method is influenced by the progress of work performed
relative to the project length of customer contracts and the dollar value of
such contracts. These orders typically involve consulting services that are
essential to functionality of the respective licenses. The following table sets
forth our license revenue by product emphasis for the years ended September 30,
2008 and 2007 (in thousands, except percentages):
  38
 Table of Contents
  
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %License
      Revenue:Enterprise
      solutions
              $
              19,615
              
              
              $
              37,648
              
              
              $
              (18,033
              )
              
              
              (48
              )%Marketing
      solutions
              
              6,744
              
              
              
              6,013
              
              
              
              731
              
              
              
              12Decision
      management solutions
              
              7,752
              
              
              
              10,391
              
              
              
              (2,639
              )
              
              
              (25
              )Total
      license revenue
              $
              34,111
              
              
              $
              54,052
              
              
              $
              (19,941
              )
              
              
              (37
              )%
 
 Total
license revenue decreased $19.9 million, or 37%, for the year ended September
30, 2008 compared to the same period of the prior year. The decrease in license
revenue is the result of fewer sales transactions and transactions of smaller
magnitude being executed in the current year. In the quarter ended June 30,
2007, we recognized license revenue that was deferred in the previous quarters.
These revenues were deferred as they were related to an undelivered license
element that was subsequently delivered in the June 2007 quarter.
 
 ServiceRevenue. Service revenue is
primarily composed of consulting implementation and integration, consulting
customization, training, PCS, and certain reimbursable out-of-pocket expenses.
The increase or decrease of service revenue within the three different product
emphases is primarily due to the timing of when license transactions are
completed, whether or not the license was sold with essential consulting
services, the sophistication of the customer’s application, and the expertise of
the customer’s internal development team. For non-essential service
transactions, service revenue will lag in timing compared to the period of when
the license revenue is recognized. The following table sets forth our service
revenue by product emphasis for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Service
      Revenue:Enterprise
      solutions
              $
              54,805
              
              
              $
              51,584
              
              
              $
              3,221
              
              
              
              6
              %Marketing
      solutions
              
              12,721
              
              
              
              12,369
              
              
              
              352
              
              
              
              3Decision
      management solutions
              
              11,327
              
              
              
              6,542
              
              
              
              4,785
              
              
              
              73Total
      service revenue
              $
              78,853
              
              
              $
              70,495
              
              
              $
              8,358
              
              
              
              12
              %
 
 Total
service revenue increased $8.4 million or 12 % for the year ended September 30,
2008 compared to the same period of the prior year. The increase in
service revenue is primarily related to increases from $6.3 million of
support and maintenance revenue, $0.5 million from consulting revenue,
$0.8 million from training revenue and $0.8 million from expense
reimbursement revenue. Support and maintenance revenue increased due to an
increase number of customers subscribing to the service. If existing customers
do not renew support and maintenance contracts, service revenues could decline.
The changes in foreign exchange rates may also cause revenues related to prepaid
contracts to be lower than ultimately recognized as revenue.
  Cost
of Revenues
  License. Cost of license
revenue includes third-party software royalties and amortization of capitalized
software development costs. Royalty expenses can vary depending upon the mix of
products sold within the period. In addition, not all license products have
associated royalty expense. Capitalized software development costs pertain to a
banking product that was completed and available for general release in August
2005 and third party costs associated with the porting of existing products to
new platforms. The following table sets forth our cost of license revenues for
the years ended September 30, 2008 and 2007 (in thousands, except
percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Cost
      of license revenue
              $
              1,059
              
              
              $
              1,813
              
              
              $
              (754
              )
              
              
              (42
              )%Percentage
      of total revenue
              
              1
              %
              
              
              2
              %
 
 Cost
of license revenues decreased $0.7 million or 42% for the year ended September
30, 2008 as compared to the same period of the prior year. The decrease was
primarily from the reduction of royalty expense resulting from the decrease of
37% in license revenue.
  Service.Cost of service
revenues consists primarily of personnel, third party consulting, facility
costs, and travel costs incurred to provide consulting implementation and
integration, consulting customization, training, and PCS. The following
table sets forth our cost of service revenues for the years ended September 30,
2008 and 2007 (in thousands, except percentages):
  39
 Table of Contents
  
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Cost
      of service revenue
              $
              34,012
              
              
              $
              30,329
              
              
              $
              3,683
              
              
              
              12
              %Percentage
      of total revenue
              
              30
              %
              
              
              24
              %
 
 Cost
of service revenue increased by $3.7 million or 12% for the year ended September
30, 2008 as compared to the same period of the prior year. The increase was
primarily from increases of $0.3 million in employee related costs, $3.5
million of consultant expense, $0.2 million of sales events, $0.1 million
in travel expense offset by decreases of $0.1 million in legal services and $0.3
million in support and maintenance expense. The increase in consultant
expense is the result of reduction of average headcount of 25% year over year.
The 12% increase in cost is consistent with the 12% increase in service
revenue.
 
 Amortization ofIntangibleAssets (included inCost ofRevenues).Amortization of
intangible assets cost consists of the amortization of amounts paid for
developed technologies, customer lists and trade-names resulting from business
acquisitions. The following table sets forth our costs associated with
amortization of intangible assets for the years ended September 30, 2008 and
2007 (in thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Amortization
      of intangible assets
              $
              1,211
              
              
              $
              1,211
              
              
              $
              —
              
              
              
              —
              %Percentage
      of total revenue
              
              1
              %
              
              
              1
              %
 
 These
costs are solely related to the $6.1 million of intangible assets associated
with the acquisition of KiQ in December 2004. We expect amortization expense for
intangible assets to be $1.2 million in fiscal year 2009 and $0.3 million in
fiscal year 2010.
 
 Operating
Expenses
  Sales and Marketing.Sales
and marketing expenses is composed primarily of costs associated with selling,
promoting and advertising our products, product demonstrations and customer
sales calls. These costs consist primarily of employee compensation and
benefits, commissions and bonuses, facilities, travel expenses and promotional
and advertising expenses. The following table sets forth our sales and
marketing expenses for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Sales
      and marketing costs
              $
              34,722
              
              
              $
              32,597
              
              
              $
              2,125
              
              
              
              7
              %Percentage
      of total revenue
              
              31
              %
              
              
              26
              %
 
 Sales
and marketing expenses increased $2.1 million or 7% for the year ended
September 30, 2008 as compared to the same period of the prior year. The
increase was primary from increases of $1.8 million in third party
consultant and commission expense, $0.2 million in recruiting expense, $0.2
million in facility expense, and $0.2 million in travel expense offset by
decrease of $0.2 million in employee related costs. Employee related costs
decreased primarily from the decrease of $3.5 million of commissions paid offset
by increases of $2.8 million of employee salaries and related costs as we
increased headcount for sales personnel year over year, $0.3 million in bonuses
paid, and $0.2 million of stock-based compensation. The increase in consultant
expense is primarily from hiring of consultants in emerging
markets.
 
 Research and
Development.Research and
development expenses are composed primarily of costs associated with the
development of new products, enhancements of existing products and quality
assurance activities. These costs consist primarily of employee compensation and
benefits, facilities, the cost of software and development tools, equipment and
consulting costs, including costs for offshore consultants. The following table
sets forth our research and development expenses for the years ended September
30, 2008 and 2007 (in thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Research
      and development costs
              $
              25,598
              
              
              $
              27,546
              
              
              $
              (1,948
              )
              
              
              (7
              )%Percentage
      of total revenue
              
              22
              %
              
              
              22
              %
 
 Research
and development expense decreased $1.9 million or 7% for the year ended
September 30, 2008 as compared to the same period of the prior year. The
decrease was primarily from decreases of $1.4 million in employee related costs,
$0.1 million in
  40
 Table of Contents
  consultant
expense, $0.2 million in facility expense, and $0.3 million in travel expense
offset by an increase of $0.1 million in recruiting expense. Employee related
costs decreased primarily from decreases in employee bonuses paid.
  General andAdministrative.General and
administrative expenses is composed primarily of costs associated with our
executive and administrative personnel (e.g. the office of the CEO, legal, human
resources and finance personnel). These costs consist primarily of employee
compensation and benefits, bonuses, stock compensation expense, facilities,
professional fees, including audit costs and costs for Sarbanes-Oxley Act of
2002 (SOX) consultants. The following table sets forth our general and
administrative expenses for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %General
      and administrative costs
              $
              17,995
              
              
              $
              19,898
              
              
              $
              (1,903
              )
              
              
              (10
              )%Percentage
      of total revenue
              
              16
              %
              
              
              16
              %
 
 General
and administrative expense decreased $1.9 million or 10% for the year ended
September 30, 2008 as compared to the same period of the prior year. The
decrease is primarily from decreases of $1.1 million from professional
services, $0.7 million in employee related costs, $0.3 million in consultant
expense, and $0.4 million in facility expense offset by increases of $0.5
million in other expenses related to U.S. state franchise taxes and bad debt
expense. The decrease in professional services is primarily related to the stock
option investigation that occurred in fiscal year 2007. Employee related costs
decreased primarily from decreases in the level of employee bonuses
earned.
 
 RestructuringExpense. In October 2006,
we initiated a restructuring plan that included an immediate reduction in
positions of slightly more than 10% of the Company's workforce, consolidation of
our European facilities, and the closure of our French office. A majority of the
positions eliminated were in Europe. We recorded a pre-tax cash restructuring
charge of $6.1 million as calculated using the net present value of the related
costs as required by SFAS 146. During the quarter ended March 31, 2007, the
Company incurred an additional charge of $0.1 million for employee severance
costs associated with the closure of the France office. Also during March 2007,
the Company negotiated an early termination of the France office lease
associated with its closure resulting in a $0.2 million reduction in the
restructure facility liability. This reduction was recorded as an offset to
restructuring expense in the period. In quarter ended December 31, 2007, we
negotiated a break clause in the lease allowing for an early termination of the
United Kingdom facility which released us from any future rent liabilities
subsequent to January 2008. All termination payments have now been
made.
 
 In
July 2005, we undertook an approximate 10% reduction in our workforce. In
connection with this action, we incurred a one-time cash expense of
approximately $1.1 million in the fourth quarter ended September 30, 2005
for severance benefits. During the three months ended March 31, 2007, the
Company incurred an additional charge of less than $0.1 million for additional
severance expense for an employee located in France.
 
 During
fiscal year 2002, we restructured several areas of the Company to reduce
expenses and improve revenues. As part of this restructuring, we closed an
office facility in Boston, Massachusetts and recorded a charge associated with
the long term lease which expires in January 2011. In the March 2007 quarter, we
completed a new sublease with a sub-lessee for the remaining term of our lease
at a rate lower than that which was forecasted when the original restructure
charge was recorded in 2002. This change in estimate resulted in a $0.4 million
charge to restructuring in the quarter ended March 31, 2007.
 
 Stock-basedCompensation (includedin individualOperatingExpense andCost ofRevenueCategories).The following
table sets forth our stock-based compensation expense in terms of absolute
dollars and functional breakdown for the years ended September 30, 2008 and 2007
(in thousands):
 
 Years
      Ended September 30,2008
              
              
              
              2007Stock-based
      compensation expense:Cost
      of revenues
              $
              490
              
              
              $
              313Sales
      and marketing
              
              922
              
              
              
              744Research
      and development
              
              586
              
              
              
              546General
      and administrative
              
              2,127
              
              
              
              1,417Total
      stock-based compensation expense
              $
              4,125
              
              
              $
              3,020
 
 For
the year ended September 30, 2008, the aggregate stock-based compensation cost
included in cost of revenues and in operating expenses was $4.1 million which is
a combination of $3.8 million associated with stock options, $0.3 million
associated
  41
 Table of Contents
  with
restricted stock awards or RSAs, and zero associated with restricted stock
awards or RSUs. For the year ended September 30, 2007, the aggregate
stock-based compensation cost included in cost of revenues and in operating
expenses was $3.0 million which is a combination of $2.8 million associated with
stock options and $0.2 million associated with RSAs. Stock option expense
increased from fiscal year 2007 to 2008, in part, due to lower expected
forfeiture rate for 2008.
 
 Interest
Income, Net
 
 InterestIncome,Net.Interest income, net,
consists primarily of interest income generated from our cash, cash equivalents
and marketable securities, offset by interest expense incurred in connection
with our capital leases and letters of credit and imputed under SFAS 146
restructuring accruals. The following table sets forth our interest income, net,
in terms of absolute dollars for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Interest
      income, net
              $
              2,383
              
              
              $
              2,198
              
              
              $
              185
              
              
              
              8
              %Percentage
      of total revenue
              
              2
              %
              
              
              2
              %
 
 Interest
income, net, increased $0.2 million or 8% for the year ended September 30, 2008
as compared to the same period of the prior year. The increase is primarily from
interest income earned from the United Kingdom where the Company held cash
and cash equivalents in accounts that earned a higher return of interest income
than in the prior year. Average balances were also higher for the first half of
the fiscal year.
 
 Other
Income (Expense), Net
 
 OtherIncome (Expense),Net.These gains and losses
are primarily associated with foreign currency transaction gains or losses and
the re-measurement of our short-term intercompany balances between the U.S. and
our foreign subsidiaries with different functional currencies than the U.S.
Dollar. The following table sets forth our other income (expense), net in terms
of absolute dollars for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              Change
              
              
              
              %Other
      income (expense), net
              $
              417
              
              
              $
              822
              
              
              $
              (405
              )
              
              
              (49
              )%Percentage
      of total revenue
              
              —
              %
              
              
              1
              %
 
 Other
income decreased $0.4 million or 51% for the year ended September 30, 2008 as
compared to the same period of the prior year primarily due to higher net
transaction losses associated with the re-measurement of our short-term
intercompany balances.
 
 Provision
for Income Taxes
 
 Provision for Income Taxes.
Our provision for income taxes is $0.1 million and $1.6 million for the years
ended September 30, 2008 and 2007, respectively. The $1.5 million decrease in
income taxes is primarily due to the reduction of taxable income, the reversal
of valuation allowance on deferred tax assets of $0.5 million and a decrease of
$0.6 million in unrecoverable withholding tax payments related to sales
transactions that occurred in Turkey and Poland compared to fiscal year 2007.
The remainder of our provision is attributable to taxes on earnings from our
foreign subsidiaries and certain U.S. state income taxes.
  At
September 30, 2008, we have $75.8 million in gross DTAs attributable principally
to our NOLs. Historically, we have maintained a 100% valuation allowance on our
DTAs because we have previously been unable to conclude that it is
more-likely-than-not that we will realize the tax benefits of these DTAs. Based
on recent operating results and the reorganization of our intellectual property
into the U.S., our current projections of disaggregated future taxable income
have enabled us to conclude that it is more-likely-than-not that we will have
future taxable income sufficient to realize $10.0 million of tax benefits from
our deferred tax assets, which consist of that portion of our net deferred tax
assets attributable to our NOLs residing in the United Kingdom. Accordingly, we
have released (eliminated) $10.0 million of the valuation allowance on our DTAs,
of which $9.5 million is recognized as an offsetting reduction to goodwill
(representing pre-acquisition NOLs) and $0.5 million is recognized as a credit
(reduction) to the provision for income taxes. In future periods, we expect to
incur tax expense related to the United Kingdom which will result in an increase
in overall expense; however, to the extent that such tax expense is offset by
the utilization of NOLs, the recognition of this additional tax expense will be
a non-cash item.
  42
 Table of Contents
  
 The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to our U.S. generated deferred tax assets, we have recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. At September 30, 2008, the
balance of the deferred tax valuation allowance was approximately $65.9
million.
 
 Comparison
of the Year Ended September 30, 2007 to the Year Ended September 30,
2006
 
 Revenues
 
 LicenseRevenue.The increase or
decrease of license revenue occurring within the three different product groups
is dependent on the timing of when a sales transaction is completed and whether
a license transaction was sold with essential consulting services. Products
licensed with essential consulting services are generally recognized as
revenue under the percentage-of-completion method of accounting. The timing and
amount of revenue for those transactions being recognized under the
percentage-of-completion is influenced by the progress of work performed
relative to the project length of customer contracts and the dollar value of
such contracts. The following table sets forth our license revenue by
product emphasis for the years ended September 30, 2007 and 2006 (in thousands,
except percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %License
      Revenue:Enterprise
      solutions
              $
              37,648
              
              
              $
              30,351
              
              
              $
              7,297
              
              
              
              24
              %Marketing
      solutions
              
              6,013
              
              
              
              6,396
              
              
              
              (383
              )
              
              
              (6
              )Decision
      management solutions
              
              10,391
              
              
              
              3,767
              
              
              
              6,624
              
              
              
              176Total
      license revenue
              $
              54,052
              
              
              $
              40,514
              
              
              $
              13,538
              
              
              
              33
              %
 
 Total
license revenue increased $13.5 million, or 33%, for the year ended September
30, 2007 compared to the same period of the prior year. A significant portion of
this increase is attributable to a single customer that purchased a perpetual
product license as part of a $20.0 million agreement. The value of this
agreement has been allocated as follows: $12.2 million to license fees, $7.1
million to support and maintenance fees expected to be recognized over a five
year period, and $0.7 million to consulting fees. The license amount was
recorded as deferred license revenue at the inception of the agreement
and was recognized on a percentage-of-completion basis due to the essential
services required for the functionality of the software. For the year ended
September 30, 2007, $11.3 million of license revenue had been recognized in
connection with this agreement.
 
 In
addition to the revenue contribution from the aforementioned customer, the
increase in license revenue for the year ended September 30, 2007 was primarily
due to the growth in the absolute dollar size of transactions in excess of $1
million as compared to the same period of the prior year.
 
 ServiceRevenue. Service revenue is
primarily composed of consulting implementation and integration, consulting
customization, training, PCS, and certain reimbursable out-of-pocket expenses.
The increase or decrease of service revenue within the three different product
emphases is primarily due to the timing of when license transactions are
completed, whether or not the license was sold with essential consulting
services, the sophistication of the customer’s application, and the expertise of
the customer’s internal development team. For other service transactions,
service revenue will lag in timing compared to the period of when the license
revenue is recognized. The following table sets forth our service revenue by
product emphasis for the years ended September 30, 2007 and 2006 (in thousands,
except percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Service
      Revenue:Enterprise
      solutions
              $
              51,584
              
              
              $
              39,911
              
              
              $
              11,673
              
              
              
              29
              %Marketing
      solutions
              
              12,369
              
              
              
              12,996
              
              
              
              (627
              )
              
              
              (5
              )Decision
      management solutions
              
              6,542
              
              
              
              4,115
              
              
              
              2,427
              
              
              
              59Total
      service revenue
              $
              70,495
              
              
              $
              57,022
              
              
              $
              13,473
              
              
              
              24
              %
 
 Total
service revenue increased $13.5 million or 24% for the year ended September
30, 2007 compared to the same period of the prior year. The $13.5 million
increase is primarily related to increases of $8.9 million in PCS revenue, $5.2
million in consulting revenue, $0.5 million in reimbursement of
out-of-pocket expense revenue offset by a decrease of $1.0 million in training
revenue. The increase in PCS revenue is a function of the growth in new license
bookings sold with PCS agreements combined with the renewal of
  43
 Table of Contents
  existing
PCS customers at a rate in excess of existing customers, declining the service
in the year of renewal. The increase in consulting revenue is a direct result of
the growth in license revenue as the majority of our customers normally use some
form of our consulting services in connection with their project.
  Cost
of Revenues
  License. Cost of license
revenue includes third-party software royalties and amortization of capitalized
software development costs. Royalty expenses can vary depending upon the mix of
products sold within the period. In addition, not all license products have
associated royalty expense. Capitalized software development costs pertain to a
banking product that was completed and available for general release in August
2005 and third party costs associated with the porting of existing products to
new platforms. The following table sets forth our cost of license revenues for
the years ended September 30, 2007 and 2006 (in thousands, except
percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Cost
      of license revenue
              $
              1,813
              
              
              $
              1,690
              
              
              $
              123
              
              
              
              7
              %Percentage
      of total revenue
              
              2
              %
              
              
              2
              %
 
 Cost
of license revenues increased $0.1 million or 7% for the year ended September
30, 2007 as compared to the same period of the prior year. The primary reason
for the increase was due to the growth of license revenue year-over-year leading
to an increase in third party royalty costs combined with the higher
amortization costs.
  Service.Cost of service
revenues consists primarily of personnel, third party consulting, facility and
travel costs incurred to provide consulting implementation and integration,
consulting customization, training, PCS support services. The following
table sets forth our cost of service revenues for the years ended September 30,
2007 and 2006 (in thousands, except percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Cost
      of service revenue
              $
              30,329
              
              
              $
              30,566
              
              
              $
              (237
              )
              
              
              (1
              )%Percentage
      of total revenue
              
              24
              %
              
              
              31
              %
 
 Cost
of service revenue decreased by $0.2 million or 1% for the year ended September
30, 2007 as compared to the same period of the prior year. This change is
primarily due to a decrease in personnel and related costs of $2.5 million
associated with a decrease in headcount which was offset by an increase in third
party consulting costs of $2.1 million and third party PCS costs of $0.1
million. Service costs were able to remain constant while service revenue
increased due to improved utilization of our internal consultant teams,
replacing full time employees with third party consultants (converting a fixed
cost to a variable cost) and increasing PCS revenue, which to a limited degree
is not based on a variable cost model, so there is not a direct relationship of
revenue to costs.
 
 Amortization ofIntangibleAssets (included inCost ofRevenues).Amortization of
intangible assets cost consists of the amortization of amounts paid for
developed technologies, customer lists and trade-names resulting from business
acquisitions. The following table sets forth our costs associated with
amortization of intangible assets for the years ended September 30, 2007 and
2006 (in thousands, except percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Amortization
      of intangible assets
              $
              1,211
              
              
              $
              1,211
              
              
              $
              —
              
              
              
              —
              %Percentage
      of total revenue
              
              1
              %
              
              
              1
              %
 
 These
costs are solely related to the $6.1 million of intangible assets associated
with the acquisition of KiQ in December 2004. We expect amortization expense for
intangible assets to be $1.2 million in fiscal year 2008, $1.2 million in fiscal
year 2009 and $0.3 million in fiscal year 2010.
 
 Operating
Expenses
  Sales and Marketing.Sales
and marketing expenses are composed primarily of costs associated with selling,
promoting and advertising our products, product demonstrations and customer
sales calls. These costs consist primarily of employee salaries, commissions and
bonuses, benefits, facilities, travel expenses and promotional and advertising
expenses. The following table sets forth our sales and marketing expenses
in terms of absolute dollars for the years ended September 30, 2007 and 2006 (in
thousands, except percentages):
  44
 Table of Contents
  
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Sales
      and marketing costs
              $
              32,597
              
              
              $
              33,616
              
              
              $
              (1,019
              )
              
              
              (3
              )%Percentage
      of total revenue
              
              26
              %
              
              
              34
              %
 
 Sales
and marketing expenses decreased $1.0 million or 3% for the year ended
September 30, 2007 as compared to the same period of the prior year. The primary
reason for the decrease was due to a decrease of $1.5 million in personnel
related costs and a decrease of $0.4 million in travel costs offset by
an increase of $0.7 million in sales and marketing program costs. The decrease
in personnel costs is mainly attributed to a 22% decrease in average headcount
year-over-year.
 
 Research and
Development.Research and
development expenses is composed primarily of costs associated with the
development of new products, enhancements of existing products and quality
assurance activities. These costs consist primarily of employee salaries and
benefits, facilities, the cost of software and development tools and equipment
and consulting costs, including costs for offshore consultants. The following
table sets forth our research and development expenses in terms of absolute
dollars for the years ended September 30, 2007 and 2006 (in thousands, except
percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Research
      and development costs
              $
              27,546
              
              
              $
              25,858
              
              
              $
              1,688
              
              
              
              7
              %Percentage
      of total revenue
              
              22
              %
              
              
              27
              %
 
 Research
and development expense increased $1.7 million or 7% for the year ended
September 30, 2007 as compared to the same period of the prior year. The
primarily reason for the increase was due to a $3.4 million increase in
personnel related expense offset by a decrease of $1.6 million in third party
consulting costs and a decrease of $0.2 million in travel costs. The increase in
personnel costs was driven by a 13% increase in average headcount for the
comparative periods. Third party consulting costs decreased as the result of the
completion of a large co-development project in September 2006 that utilized a
large number of outside consultants.
  General andAdministrative.General and
administrative expenses is composed primarily of costs associated with our
executive and administrative personnel (e.g. the office of the CEO, legal, human
resources and finance personnel). These costs consist primarily of employee
salaries, bonuses, stock compensation expense, benefits, facilities,
professional fees, including audit costs and costs for Sarbanes-Oxley Act of
2002 (SOX) consultants and the concluded stock option review. The following
table sets forth our general and administrative expenses in terms of absolute
dollars for the years ended September 30, 2007 and 2006 (in thousands, except
percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %General
      and administrative costs
              $
              19,898
              
              
              $
              20,445
              
              
              $
              (547
              )
              
              
              (3
              )%Percentage
      of total revenue
              
              16
              %
              
              
              21
              %
 
 General
and administrative expense decreased $0.5 million or 3% for the year ended
September 30, 2007 as compared to the same period of the prior year. This
decrease is primarily due to a decrease of $0.6 million in professional fees and
a decrease of $0.3 million in personnel and related costs offset by an increase
of $0.4 million in other miscellaneous costs of which $0.2 million of the
miscellaneous costs were related to U.S. state franchise taxes.
 
 RestructuringExpense. In October 2006,
we initiated a restructuring plan that included an immediate reduction in
positions of slightly more than ten percent of the Company's workforce,
consolidation of our European facilities, and the closure of our French office.
A majority of the positions eliminated were in Europe. See Note 6 to the
Consolidated Financial Statements for detailed information regarding
restructuring expenses.
 
 Stock-basedCompensation (includedin individualOperatingExpense andCost ofRevenueCategories).The following
table sets forth our stock-based compensation expense in terms of absolute
dollars and functional breakdown for the years ended September 30, 2007 and 2006
(in thousands):
  45
 Table of Contents
  
 Years
      Ended September 30,2007
              
              
              
              2006Stock-based
      compensation expense:Cost
      of revenues
              $
              313
              
              
              $
              248Sales
      and marketing
              
              744
              
              
              
              2,327Research
      and development
              
              546
              
              
              
              332General
      and administrative
              
              1,417
              
              
              
              1,788Total
      stock-based compensation expense
              $
              3,020
              
              
              $
              4,695
 
 For
the year ended September 30, 2007, the aggregate stock-based compensation cost
included in cost of revenues and in operating expenses was $3.0 million which is
a combination of $2.8 million associated with stock options and $0.2 million
associated with restricted stock awards. For the year ended September 30,
2006, the aggregate stock-based compensation cost included in cost of revenues
and in operating expenses was $4.7 million which was a combination of $2.7
million related to stock options and $2.0 million associated with restricted
stock awards. The decrease in total compensation expense of $1.7 million
year-over-year is primarily attributed to a reduction in restricted stock
expense of $1.8 million, of which $1.0 million of the reduction is due to the
restricted stock associated with the KIQ acquisition which became fully
amortized during 2007. The remaining decrease is the result of restricted stock
cancellations granted in prior years to two key executives who left the company
in the quarter ending December 2006.
 
 InterestIncome,Net.Interest income, net,
consists primarily of interest income generated from our cash, cash equivalents
and marketable securities, offset by interest expense incurred in connection
with our capital leases and letters of credit and imputed under SFAS 146
restructuring accruals. The following table sets forth our interest income, net,
in terms of absolute dollars for the years ended September 30, 2007 and 2006 (in
thousands, except percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Interest
      income, net
              $
              2,198
              
              
              $
              1,120
              
              
              $
              1,078
              
              
              
              96
              %Percentage
      of total revenue
              
              2
              %
              
              
              1
              %
 
 Interest
income, net, increased $1.1 million or 97% for the year ended September 30, 2007
as compared to the same period of the prior year. This increase is primarily due
to improved interest rates related to interest-bearing cash and cash equivalents
accounts and a higher average cash balance during 2007 as compared to 2006.
In addition, during the quarter ended June 30, 2007, a portion of our funds were
transferred into marketable securities which earned a higher return of interest
than other investments we utilized in the prior year. During the quarter ended
June 30, 2007, the capital equipment lease obligations were paid in full and the
associated interest expense was eliminated.
 
 Other
Income (Expense), Net
 
 OtherIncome (Expense),Net.These gains and losses
are primarily associated with foreign currency transaction gains or losses and
the re-measurement of our short-term intercompany balances between the U.S. and
our foreign subsidiaries with different functional currencies than the U.S.
Dollar. The following table sets forth our other income (expense), net in terms
of absolute dollars for the years ended September 30, 2007 and 2006 (in
thousands, except percentages):
 
 Years
      Ended September 30,2007
              
              
              
              2006
              
              
              
              Change
              
              
              
              %Other
      income (expense), net
              $
              822
              
              
              $
              (627
              )
              
              $
              1,449
              
              
              
              231
              %Percentage
      of total revenue
              
              1
              %
              
              
              —
              %
 
 Other
income increased $1.4 million or 231% for the year ended September 30, 2007 as
compared to the same period of the prior year primarily due to transaction gains
as well as gains associated with the re-measurement of our short-term
intercompany balances. The intercompany gains are due to the majority of our
subsidiaries holding net payable balances due to the U.S., denominated in U.S.
Dollars; consequently, during the year as the Euro and the British Pound
increased in strength against the U.S. Dollar, foreign currency gains
resulted.
  46
 Table of Contents
  
 Provision
for Income Taxes
  Provision forIncomeTaxes. Our provision for
income taxes was $1.6 million and $0.6 million for the years ended
September 30, 2007 and 2006, respectively. The $1.0 million increase income
taxes was primarily due to $0.8 million of unrecoverable withholding tax
payments related to sales transactions that occurred in Turkey and Poland during
the year ended September 30, 2007. The remainder of our provision is
attributable to taxes on earnings from our foreign subsidiaries, U.S. federal
alternative minimum taxes and certain U.S. state income taxes.
  Our
deferred tax assets at September 30, 2007 and 2006 primarily related to net
operating loss carryforwards, nondeductible allowances and research and
development tax credits. We had recorded a valuation allowance for the full
amount of our net deferred tax assets, as the future realization of the tax
benefit was not considered by management to be more-likely-than-not at September
30, 2007 and 2006..
 
 Liquidity
and Capital Resources
 
 Prior
to the fiscal year ended September 30, 2007, we had not been profitable and we
had financed any shortfall from our operating activities through the issuance of
our common stock. In fiscal year 2008, we used cash in operating and financing
activities, but generated cash from investing activities. In addition, we
repurchased and retired $18.6 million of our common stock. It is anticipated
that our current cash balances are adequate to fund operations for fiscal year
2009.
 
 Our
cash, cash equivalents, and restricted cash are principally held in operating
accounts, money market accounts, and certificates of deposit. The balances of
these accounts totaled $55.5 million and $78.3 million at September 30, 2008 and
2007, respectively.
 
 Operating
      Activities
 
 Cash
used in operating activities was $13.7 million during the year ended September
30, 2008, which consisted primarily of our net income of $1.1 million adjusted
for non-cash items (depreciation, amortization, non-cash stock-based
compensation expense, provision for doubtful accounts, and other non-cash
charges) aggregating approximately $8.1 million and the net cash outflow effect
from changes in assets and liabilities of approximately $22.9 million. This net
cash outflow effect from changes in assets and liabilities was primarily related
to decreases in deferred revenue of $19.4 million, other liabilities of $4.2
million, other assets of $0.3 million, accounts payable of $0.2 million offset
by increases in accounts receivable of $1.1 million and prepaid expenses and
other current assets of $0.1 million. Deferred revenues declined as revenues
were recognized at a rate faster than new bookings were recorded.
 
 Cash
provided by operating activities was $38.9 million during the year ended
September 30, 2007, which consisted primarily of our net income of $6.0
million adjusted for non-cash items (depreciation, amortization, non-cash
stock-based compensation expense, provision for doubtful accounts, loss on
disposal of assets and other non-cash charges) aggregating approximately $7.8
million and the net cash inflow effect from changes in assets and liabilities of
approximately $25.1 million. This net cash inflow effect from changes in assets
and liabilities was primarily related to changes in deferred revenue of $36.6
million offset by changes in accounts receivable of $11.8 million The increase
in deferred revenue is the result of sales transactions that were completed
during the year ended September 30, 2007 for which revenue will not be
recognized until subsequent periods.
 
 Cash
provided by operating activities was $3.2 million during the year ended
September 30, 2006, which consisted primarily of our net loss of $16.0
million adjusted for non-cash items (depreciation, amortization, non-cash
stock-based compensation expense, provision for doubtful accounts, loss on
disposal of assets and other non-cash charges) aggregating approximately $8.2
million and the net cash inflow effect from changes in assets and liabilities of
approximately $11.0 million. This net cash inflow was primarily caused by an
increase in liability balances for accrued expenses and other liabilities of
$6.1 million, accounts payable of $3.0 million and deferred revenue of $2.8
million offset by cash outflows related to an increase in prepaid expenses of
$1.0 million. The increase in accrued expenses, other liabilities and accounts
payable is primarily due to the timing of when the payments were made for these
liabilities. The increase in deferred revenue was primarily due to an increase
in deferred license revenue for the year.
 
 Investing
      Activities
 
 Cash
provided by investing activities during the year ended September 30, 2008 was
$10.7 million. The cash provided was primarily from $17.3 million of proceeds
from the maturity of marketable securities and $0.2 million from the release of
restricted cash. The cash provided was offset by $5.1 million purchase of
marketable securities, $1.3 million for the purchased property and equipment and
$0.4 million of capitalized porting software costs. The purchase of property and
equipment was primarily for computer equipment and software used for day-to-day
operations.
  47
 Table of Contents
  
 Cash
used in investing activities during the year ended September 30, 2007 was $14.9
million. The cash was used primarily for the purchase of $18.0 million of
marketable securities, the purchase of $2.8 million of property and equipment,
and the capitalization of $0.3 million of software development costs associated
with the porting an existing product to a new platform. This use of cash was
offset by $6.0 million of proceeds from the maturity of marketable securities
and the release of $0.2 million of restricted cash during the period. The
majority of the property and equipment purchased was associated with the closure
of the old European headquarters office and the opening of the new smaller
European headquarters office during the period. The remainder of the property
and equipment purchases was primarily computer equipment use in for day-to-day
operations.
 
 Cash
used in investing activities during the year ended September 30, 2006 was
less than $0.1 million. The cash used primarily related to the purchase of
$1.7 million of property and equipment and the capitalization of $0.3 million of
software development costs associated with the porting an existing product to a
new platform. This use of cash was offset by the release of $1.9 million of
restricted cash during the period.
 
 Financing
      Activities
 
 Cash
used in financing activities during the year ended September 30, 2008 was $17.9
million. The amount includes $18.6 million used in the repurchase of common
stock offset by $0.7 million in proceeds from stock option exercises. The
majority of stock options outstanding have strike prices that exceed the current
market value, accordingly we do not anticipate significant proceeds from stock
option exercises in the near term.
 
 Cash
provided by financing activities during the year ended September 30, 2007 was
$6.2 million. The amount relates to $6.2 million in proceeds from stock option
exercises and $0.1 million from excess tax benefits from stock based
compensation, offset by payments of $0.1 million on capital lease obligations.
We paid off the remainder of the capital lease obligations during the year ended
September 30, 2007.
 
 Cash
provided by financing activities during the year ended September 30, 2006 was
$2.0 million. The amount relates to $2.2 million in proceeds from stock option
exercises, offset by payments of $0.2 million on capital lease
obligations.
 
 Revolving
Line of Credit
 
 See
Note 8 to the Consolidated Financial Statements for detailed information
regarding our revolving line of credit.
 
 Contractual
Obligations
 
 Ness
  We
entered into an agreement with Ness Technologies Inc., Ness Global Services,
Inc. and Ness Technologies India, Ltd. (collectively, “Ness”), effective
December 15, 2003, pursuant to which Ness provides our customers with technical
product support through a worldwide help desk facility, a sustaining engineering
function that serves as the interface between technical product support and our
internal engineering organization, product testing services and product
development services (collectively, the “Services”). The agreement had an
initial term of three years and was extended for two additional one year terms.
Under the terms of the agreement, we pay for services rendered on a monthly fee
basis, including the requirement to reimburse Ness for approved out-of-pocket
expenses. The agreement may be terminated for convenience by us, subject to the
payment of a termination fee. From 2004 to 2008 we further expanded our
agreement with Ness whereby Ness is providing certain additional technical and
consulting services. The additional agreements can be cancelled at the option of
us without the payment of a termination fee. In addition to service agreements,
we also guaranteed certain equipment lease obligations of Ness (see Note 8 to
the Consolidated Financial Statements). Ness may procure equipment to be used in
performance of the Services, either through leasing arrangements or direct cash
purchases, for which we are obligated under the agreement to reimburse them. In
connection with the procurement of equipment, Ness has entered into a 36 month
equipment lease agreement with IBM India and, in connection with the lease
agreement we have an outstanding standby letter of credit in the amount of $0.2
million in guarantee of Ness’ financial commitments under the lease. Over the
term of the lease, our obligation to reimburse Ness is approximately equal to
the amount of the guarantee.
 
 Leases
 
 Operating
lease obligations in the table below include approximately $1.6 million for our
Boston, Massachusetts facility operating lease commitments that are included in
Restructuring expenses. As of September 30, 2008, the Company has $0.7 million
in sublease income contractually committed for future periods relating to this
facility. See Notes 6 and 9 to the Consolidated Financial Statements for further
discussion.
  48
 Table of Contents
  
 The
office lease for our Cupertino headquarters was scheduled to expire on December
31, 2008. In July 2008, the Company renewed the lease for a five year period
with an option to renew for an additional five years. The table below includes
this lease commitment.
 
 We
have asset retirement obligations, associated with commitments to return
property subject to operating leases to original condition upon lease
termination. As of September 30, 2008, we estimate that approximately $0.3
million will be required to fulfill these obligations
 
 We
have no material commitments for capital expenditures and do not anticipate
capital expenditures to fluctuate significantly from historic
levels.
 
 The
following table presents certain payments due under contractual obligations as
of September 30, 2008 based on fiscal years (in thousands):
 
 Payments
      Due By PeriodTotal
              
              
              
              Due
      in
                2009
              
              
              
              Due
      in
                2010-2011
              
              
              
              Due
      in
                2012-2013
              
              
              
              ThereafterOperating
      lease obligations
              $
              12,757
              
              
              $
              3,163
              
              
              $
              5,853
              
              
              $
              3,480
              
              
              $
              261Asset
      retirement obligations
              
              334
              
              
              
              —
              
              
              
              146
              
              
              
              188
              
              
              
              —Total
              $
              13,091
              
              
              $
              3,163
              
              
              $
              5,999
              
              
              $
              3,668
              
              
              $
              261
 
 Effective
October 1, 2007, the Company adopted FIN No. 48 and reclassified $0.2 million of
gross unrecognized tax benefits to Other Long-Term Liabilities in our
Consolidated Balance Sheets. In fiscal year 2008, less than $0.3 million of
gross unrecognized tax benefits is related to long term FIN 48 liabilities. As
of September 30, 2008, the Company cannot make a reasonably reliable estimate of
the period in which these liabilities may be settled with the respective tax
authorities. See Note 11 to the Consolidated Financial Statements for additional
information.
 
 We
believe that the effects of our strategic actions implemented to reduce costs in
a period of declining revenues will be adequate to generate sufficient cash
flows from operations, which, when combined with existing cash balances, we
anticipate will be sufficient to meet our working capital and operating resource
expenditure requirements for the near term. If the global economy weakens
further, additional declines in cash balances could occur.
 
 We
anticipate that operating expenses will continue to be a material use of our
cash resources. We may continue to utilize cash resources to fund acquisitions
or investments in other businesses, technologies or product lines or repurchase
and retire additional shares of outstanding common stock. In the long-term, we
may require additional funds to support our working capital and operating
expense requirements or for other purposes, and may seek to raise these
additional funds through public or private debt or equity financings. There can
be no assurance that this additional financing will be available, or if
available, will be on reasonable terms. Failure to generate sufficient revenues
or to control spending could adversely affect our ability to achieve our
business objectives.
 
 Indemnification
 
 See
Note 9 to the Consolidated Financial Statements for detailed information
regarding our indemnifications.
 
 Off
Balance Sheet Arrangements
 
 None.
 
  49
 Table of Contents
  ITEM 7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 We
are exposed to the impact of interest rate changes and foreign currency
fluctuations.
 
 The
following table presents the amounts of restricted cash that are subject to
interest rate risk by year of expected maturity and average interest rates as of
September 30, 2008 (in thousands):
 
 September
      30, 2008
              
              
              Fair
      Value
              
              Average
                Interest
      RatesRestricted
      cash invested in short-term investments
              $
              89
              
              $
              89
              
              2.0
              %Total
      restricted cash and marketable securities
              $
              89
              
              $
              89
              
              2.0
              %
 
 The
following table presents the amounts of restricted cash and marketable
securities that are subject to interest rate risk by year of expected maturity
and average interest rates as of September 30, 2007 (in
thousands):
 
 September
      30, 2007
              
              
              Fair
      Value
              
              Average
                Interest
      RatesRestricted
      cash invested in short-term investments
              $
              311
              
              $
              311
              
              2.8
              %Marketable
      securities
              
              12,159
              
              
              12,159
              
              5.0
              %Total
      restricted cash and marketable securities
              $
              12,470
              
              $
              12,470
              
              4.9
              %
 
 Interest Rate Risk. As of
September 30, 2008, our exposure to market rate risk for changes in interest
rates relates primarily to money market accounts, and short-term certificates of
deposit. We currently invest our excess cash in money market accounts and
certificates-of-deposit with maturities of less than one year. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates. Due in part to these factors, our future investment income may
fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell our fixed rate securities which have
declined in market value due to changes in interest rates. As of September 30,
2008, the Company held no fixed rate securities.
 
 To
provide a meaningful assessment of the interest rate risk associated with the
Company’s total restricted cash and marketable securities, the Company performed
a sensitivity analysis to determine the hypothetical impact of a decrease in
interest rate of 100 basis points. Assuming consistent investment levels as of
September 30, 2008, interest income would decline by less than $0.1 million.
Assuming consistent investment levels as of September 30, 2007, interest income
would decline by $0.1 million.
 
 Foreign Currency Risk.
International revenues accounted for approximately 48% of total revenues for the
year ended September 30, 2008, compared to 47% of total revenues for the
year ended September 30, 2007. International revenues decreased $4.7 million or
8% compared to the prior year. The Company’s international operations increased
our exposure to foreign currency fluctuations. Revenues and related expense
generated from our international subsidiaries are generally denominated in the
functional currencies of the local countries. Primary currencies
include the United Kingdom Pound Sterling, the Euro and the Canadian
Dollar. The Statement of Operations is translated into United States Dollars at
the average exchange rates in each applicable period. To the extent the United
States Dollar strengthens against foreign currencies, the translation of these
foreign currencies denominated transactions results in reduced revenues,
operating expense, and net income for our international operations. Similarly,
our revenues, operating expenses, and net income will increase for our
international operations, if the United States Dollar weakens against foreign
currencies. Using the average foreign currency exchange rates from 2008, our
international revenues for 2008 would have been higher than we reported by
approximately $0.2 million and our international income from operations would
have been higher than $0.1 million. Using the average foreign currency exchange
rates from 2007, our international revenues for 2008 would have been lower than
we reported by approximately $1.8 million and our international income from
operations would have been lower than we reported by $0.3
million.
  50
 Table of Contents
  
 We
are also exposed to foreign exchange rate fluctuations as we convert the
financial statements of our foreign subsidiaries and our investments in equity
interests into United States dollars in consolidation. If there is a change in
foreign currency exchange rates, the conversion of the foreign subsidiaries’
financial statements into United States dollars will lead to a translation gain
or loss which is recorded as a component of Accumulated Other Comprehensive
Income which is a component of Stockholders’ Equity. In addition, we have
certain assets and liabilities that are denominated in currencies other than the
relevant entity’s functional currency. Changes in the functional currency value
of these assets and liabilities create fluctuations that will lead to a
transaction gain or loss. For the years ended September 30, 2008, 2007 and 2006,
we recorded net foreign currency transaction gains and (losses), of
approximately ($0.3) million, $0.6 million, and ($0.5 million), respectively,
which were recorded in Other income (expense), net, in the Consolidated
Statements of Operations.
 
 During
the quarter ended September 30, 2008, the value of the Pound Sterling and Euro
decreased approximately 5% and 7% against the US dollar, respectively. In
addition for the month of October 2008, the value of the Pound Sterling and the
Euro decreased an additional 6% and 7% against the US dollar,
respectively.
 
  51
 Table of Contents
  ITEM 8.
              CONSOLIDATED
      FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
 
 Index
to Consolidated Financial Statements
  Chordiant
Software, Inc. and Subsidiaries: Consolidated Financial Statements for the Years
Ended September 30, 2008, 2007 and 2006.
  Consolidated
      Financial Statements:Report of Independent Registered
      Public Accounting Firm
              53Consolidated Balance Sheets as of
      September30, 2008and
      2007
              54Consolidated Statements of
      Operations for the years ended September30,
      2008, 2007, and
      2006
              55Consolidated Statements of
      Stockholders’ Equityand
      Comprehensive Income (Loss)for the
      years ended September 30, 2008,
      2007, and 2006
              56Consolidated Statements of Cash
      Flows for the years ended September30,
      2008, 2007, and
      2006
              57Notes to Consolidated
      Financial Statements
              58Financial
      Statement Schedule:Schedule II—Valuation and
      Qualifying Accounts for the yearsended September30, 2008,
      2007, and 2006
              95
 
 All
other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
  52
 Table of Contents
  
  Report
of Independent Registered Public Accounting Firm
  
  To
the Board of Directors and Stockholders
 Chordiant
Software, Inc.
 Cupertino,
California
 
 We
have audited the accompanying consolidated balance sheets of Chordiant Software,
Inc. (the “Company”) as of September 30, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
September 30, 2008.  We have also audited the financial statement
schedule listed in the accompanying index.  These financial statements
and schedule are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and schedule are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and schedule.
 An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule.  We believe
that our audits provide a reasonable basis for our opinion.
  In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chordiant Software,
Inc. at September 30, 2008 and 2007, and the results of its operations and its
cash flows for each of the three years in the period ended September 30,
2008,
in conformity with accounting principles generally accepted in the United States
of America.
  Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
  We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Chordiant
Software, Inc.’s internal control over financial reporting as of September 30,
2008, based on criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated November 18, 2008 expressed an
unqualified opinion thereon.
 
 
 /s/
BDO Seidman, LLP
 
 San
Jose, California
 November
18, 2008
  53
 Table of Contents
  CHORDIANT SOFTWARE, INC.
 
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except per share data)
  September
      30,2008
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              55,516
              
              
              $
              77,987Marketable
      securities
              
              
              —
              
              
              
              12,159Accounts
      receivable, net
              
              
              24,873
              
              
              
              27,381Prepaid
      expenses and other current assets
              
              
              8,168
              
              
              
              5,352Total
      current assets
              
              
              88,557
              
              
              
              122,879Property
      and equipment, net
              
              
              3,165
              
              
              
              3,638Goodwill
              
              
              22,608
              
              
              
              32,044Intangible
      assets, net
              
              
              1,514
              
              
              
              2,725Deferred
      tax assets—non-current
              
              
              6,849
              
              
              
              —Other
      assets
              
              
              2,007
              
              
              
              3,529Total
      assets
              
              $
              124,700
              
              
              $
              164,815LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              7,711
              
              
              $
              8,080Accrued
      expenses
              
              
              9,456
              
              
              
              13,804Deferred
      revenue, including related party balances of nil and $116 at
      September 30, 2008 and 2007, respectively
              
              
              33,503
              
              
              
              44,548Total
      current liabilities
              
              
              50,670
              
              
              
              66,432Deferred
      revenue—long-term
              
              
              12,831
              
              
              
              23,434Other
      liabilities—non-current
              
              
              818
              
              
              
              646Restructuring
      costs, net of current portion
              
              
              529
              
              
              
              942Total
      liabilities
              
              
              64,848
              
              
              
              91,454Commitments
      and contingencies (Notes 6, 8, 9, and 10)Stockholders’
      equity:Preferred
      stock, $0.001 par value; 51,000 shares authorized (500 shares designated
      as Series A Junior Participating Preferred Stock); none issued and
      outstanding at September 30, 2008 and 2007
              
              
              —
              
              
              
              —Common
      stock, $0.001 par value; 300,000 shares authorized; 30,076 and 33,221
      shares issued and outstanding at September 30, 2008 and 2007,
      respectively
              
              
              30
              
              
              
              33Additional
      paid-in capital
              
              
              281,910
              
              
              
              295,650Accumulated
      deficit
              
              
              (225,850
              )
              
              
              (226,915
              )Accumulated
      other comprehensive income
              
              
              3,762
              
              
              
              4,593Total
      stockholders’ equity
              
              
              59,852
              
              
              
              73,361Total
      liabilities and stockholders’ equity
              
              $
              124,700
              
              
              $
              164,815
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  54
 Table of Contents
  CHORDIANT SOFTWARE, INC.
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except per share data)
  Years
      Ended September 30,2008
              
              2007
              
              2006Revenues:License
              
              $
              34,111
              
              
              $
              54,052
              
              
              $
              40,514Service,
      including related party items aggregating $116, $252, and $663 for years
      ended September 30, 2008, 2007, and 2006,
respectively
              
              
              78,853
              
              
              
              70,495
              
              
              
              57,022Total
      revenues
              
              
              112,964
              
              
              
              124,547
              
              
              
              97,536Cost
      of revenues:License
              
              
              1,059
              
              
              
              1,813
              
              
              
              1,690Service,
      including related party items aggregating nil, $72, and $669 for the years
      ended September 30, 2008, 2007, and 2006, respectively
              
              
              34,012
              
              
              
              30,329
              
              
              
              30,566Amortization
      of intangible assets
              
              
              1,211
              
              
              
              1,211
              
              
              
              1,211Total
      cost of revenues
              
              
              36,282
              
              
              
              33,353
              
              
              
              33,467Gross
      profit
              
              
              76,682
              
              
              
              91,194
              
              
              
              64,069Operating
      expenses:Sales
      and marketing
              
              
              34,722
              
              
              
              32,597
              
              
              
              33,616Research
      and development
              
              
              25,598
              
              
              
              27,546
              
              
              
              25,858General
      and administrative
              
              
              17,995
              
              
              
              19,898
              
              
              
              20,445Restructuring
      expense
              
              
              —
              
              
              
              6,543
              
              
              
              —Total
      operating expenses
              
              
              78,315
              
              
              
              86,584
              
              
              
              79,919Income
      (loss) from operations
              
              
              (1,633
              )
              
              
              4,610
              
              
              
              (15,850
              )Interest
      income, net
              
              
              2,383
              
              
              
              2,198
              
              
              
              1,120Other
      income (expense), net
              
              
              417
              
              
              
              822
              
              
              
              (627
              )Income
      (loss) before income taxes
              
              
              1,167
              
              
              
              7,630
              
              
              
              (15,357
              )Provision
      for income taxes
              
              
              102
              
              
              
              1,602
              
              
              
              644Net
      income (loss)
              
              $
              1,065
              
              
              $
              6,028
              
              
              $
              (16,001
              )Net
      income (loss) per share:Basic
              
              $
              0.03
              
              
              $
              0.19
              
              
              $
              (0.51
              )Diluted
              
              $
              0.03
              
              
              $
              0.18
              
              
              $
              (0.51
              )Weighted
      average shares used in computing net income (loss) per
    share:Basic
              
              
              31,658
              
              
              
              32,425
              
              
              
              31,073Diluted
              
              
              31,957
              
              
              
              33,261
              
              
              
              31,073
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
  55
 Table of Contents
  CHORDIANT SOFTWARE, INC.
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (in
thousands)
 
 Common
      StockShares
              
              
              
              Amount
              
              
              
              Additional
                Paid-in
                Capital
              
              
              
              Deferred
                Stock-Based
                Compensation
              
              
              
              Accumulated
                Deficit
              
              
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              
              
              Total
                Stockholders’
                EquityBalance
      at September30, 2005
              
              
              31,395
              
              
              $
              31
              
              
              $
              281,696
              
              
              $
              (2,112
              )
              
              $
              216,942
              
              
              $
              2,484
              
              
              $
              65,157Comprehensive
      loss:Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (16,001
              )
              
              
              —
              
              
              
              (16,001
              )Foreign
      currency translation gain
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,212
              
              
              
              1,212Total
      comprehensive loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (14,789
              )Exercise
      of stock options and warrants
              
              
              513
              
              
              
              1
              
              
              
              2,025
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,026Stock-based
      compensation-stock options related to acquisitions
              
              
              —
              
              
              
              —
              
              
              
              756
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              756Stock-based
      compensation-stock options
              
              
              —
              
              
              
              —
              
              
              
              3,475
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,475Stock-based
      compensation-restricted stock
              
              
              —
              
              
              
              —
              
              
              
              463
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              463Cancellation
      of restricted stock
              
              
              (8
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
      of restricted stock
              
              
              130
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
      of common stock, net of offering costs, and restricted stock related to
      acquisitions
              
              
              —
              
              
              
              —
              
              
              
              137
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              137Reclassification
      of deferred compensation due to adoption of SFAS 123R
              
              
              —
              
              
              
              —
              
              
              
              (2,112
              )
              
              
              2,112
              
              
              
              —
              
              
              
              —
              
              
              
              —Balance
      at September 30, 2006
              
              
              32,030
              
              
              
              32
              
              
              
              286,440
              
              
              
              —
              
              
              
              (232,943
              )
              
              
              3,696
              
              
              
              57,225Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              6,028
              
              
              
              —
              
              
              
              6,028Unrealized
      gain/loss on marketable securities, net
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2
              )
              
              
              (2
              )Foreign
      currency translation gain
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              899
              
              
              
              899Total
      comprehensive income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              6,925Exercise
      of stock options
              
              
              1,328
              
              
              
              1
              
              
              
              6,113
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              6,114Cancellation
      of restricted stock
              
              
              (137
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Stock-based
      compensation-stock options
              
              
              —
              
              
              
              —
              
              
              
              2,870
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,870Stock-based
      compensation-restricted stock
              
              
              —
              
              
              
              —
              
              
              
              150
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              150Tax
      benefit from stock options
              
              
              —
              
              
              
              —
              
              
              
              77
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              77Balance
      at September 30, 2007
              
              
              33,221
              
              
              
              33
              
              
              
              295,650
              
              
              
              —
              
              
              
              (226,915
              )
              
              
              4,593
              
              
              
              73,361Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,065
              
              
              
              —
              
              
              
              1,065Unrealized
      gain/loss on marketable securities, net
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2
              
              
              
              2Foreign
      currency translation loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (833
              )
              
              
              (833
              )Comprehensive
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              234Exercise
      of stock options
              
              
              135
              
              
              
              0
              
              
              
              730
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              730Issuance
      of restricted stock
              
              
              71
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Repurchase
      and retirement of common stock
              
              
              (3,351
              )
              
              
              (3
              )
              
              
              (18,595
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (18,598
              )Stock-based
      compensation-stock options
              
              
              —
              
              
              
              —
              
              
              
              3,777
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,777Stock-based
      compensation-restricted stock
              
              
              —
              
              
              
              —
              
              
              
              348
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              348Stock-based
      compensation-restricted stock units
              
              
              —
              
              
              
              —
              
              
              
              0
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Balance
      at September 30, 2008
              
              
              30,076
              
              
              $
              30
              
              
              $
              281,910
              
              
              $
              —
              
              
              $
              (225,850
              )
              
              $
              3,762
              
              
              $
              59,852
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  56
 Table of Contents
  CHORDIANT SOFTWARE, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
  Years
      Ended September 30,2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income (loss)
              
              $
              1,065
              
              
              $
              6,028
              
              
              $
              (16,001
              )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              1,766
              
              
              
              1,611
              
              
              
              1,238Amortization
      of intangibles and capitalized software
              
              
              2,149
              
              
              
              2,133
              
              
              
              2,111Non-cash
      stock-based compensation expense
              
              
              4,125
              
              
              
              3,020
              
              
              
              4,695Excess
      tax benefits from stock-based compensation
              
              
              —
              
              
              
              (77
              )
              
              
              —Provision
      (reversal) for doubtful accounts
              
              
              663
              
              
              
              82
              
              
              
              (9
              )Benefit
      from income tax- non-cash
              
              
              (511
              )
              
              
              —
              
              
              
              —(Gain)/loss
      on disposal of assets
              
              
              (8
              )
              
              
              673
              
              
              
              40Accretion
      of discounts on investments
              
              
              (56
              )
              
              
              (131
              )
              
              
              —Other
      non-cash charges
              
              
              —
              
              
              
              445
              
              
              
              140Changes
      in assets and liabilities:Accounts
      receivable
              
              
              1,129
              
              
              
              (11,825
              )
              
              
              292Prepaid
      expenses and other current assets
              
              
              96
              
              
              
              (59
              )
              
              
              (1,028
              )Other
      assets
              
              
              (249
              )
              
              
              2,585
              
              
              
              (136
              )Accounts
      payable
              
              
              (222
              )
              
              
              238
              
              
              
              3,004Accrued
      expenses, other long term liabilities and restructuring
              
              
              (4,245
              )
              
              
              (2,383
              )
              
              
              6,106Deferred
      revenue
              
              
              (19,383
              )
              
              
              36,573
              
              
              
              2,793Net
      cash provided by (used in) operating activities
              
              
              (13,681
              )
              
              
              38,913
              
              
              
              3,245Cash
      flows from investing activities:Property
      and equipment purchases
              
              
              (1,353
              )
              
              
              (2,809
              )
              
              
              (1,694
              )Capitalized
      product development costs
              
              
              (413
              )
              
              
              (257
              )
              
              
              (250
              )Proceeds
      from disposal of property and equipment
              
              
              —
              
              
              
              —
              
              
              
              11Proceeds
      from release of restricted cash
              
              
              223
              
              
              
              215
              
              
              
              1,893Purchases
      of marketable securities and short term investments
              
              
              (5,099
              )
              
              
              (18,028
              )
              
              
              —Proceeds
      from sale and maturities of short term investments
              
              
              17,322
              
              
              
              6,000
              
              
              
              —Net
      cash provided by (used in) investing activities
              
              
              10,680
              
              
              
              (14,879
              )
              
              
              (40
              )Cash
      flows from financing activities:Proceeds
      from exercise of stock options
              
              
              730
              
              
              
              6,191
              
              
              
              2,250Repurchase
      of common stock
              
              
              (18,598
              )
              
              
              —
              
              
              
              —Payment
      on capital leases
              
              
              —
              
              
              
              (96
              )
              
              
              (213
              )Excess
      tax benefits from stock-based compensation
              
              
              —
              
              
              
              77
              
              
              
              —Net
      cash provided by (used in) financing activities
              
              
              (17,868
              )
              
              
              6,172
              
              
              
              2,037Effect
      of exchange rate changes
              
              
              (1,602
              )
              
              
              2,503
              
              
              
              1,490Net
      increase (decrease) in cash and cash equivalents
              
              
              (22,471
              )
              
              
              32,709
              
              
              
              6,732Cash
      and cash equivalents at beginning of the year
              
              
              77,987
              
              
              
              45,278
              
              
              
              38,546Cash
      and cash equivalents at end of the year
              
              $
              55,516
              
              
              $
              77,987
              
              
              $
              45,278Supplemental
      cash flow information:Cash
      paid for interest
              
              $
              2
              
              
              $
              3
              
              
              $
              17Cash
      paid for taxes
              
              $
              567
              
              
              $
              1,669
              
              
              $
              360Supplemental
      non-cash investing and financing activities:Receivable
      related to issuance of stock options
              
              $
              —
              
              
              $
              —
              
              
              $
              77Cashless
      exercise of stock warrants
              
              $
              —
              
              
              $
              —
              
              
              $
              450
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  57
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1—THE COMPANY
 
 Chordiant
Software, Inc., or the Company, or Chordiant, is an enterprise
software vendor that offers software solutions for global business-to-consumer
companies that seek to improve the quality of their customer interactions and to
reduce costs through increased employee productivity and process efficiencies.
The Company concentrates on serving global customers in insurance, healthcare,
telecommunications, financial services, retail and other consumer direct
industries.. The Company was incorporated in California in March 1991 and
reincorporated in Delaware in October 1997.
 
 The
Company delivers customer solutions that include software applications and
tools and services that enable businesses to integrate their customer
information and corporate systems so that they can have an accurate, real-time
view of their customers across multiple forms of customer
interaction.
 
 The
Company believes its solutions offer flexibility to businesses to set
business policies and processes to control the quality of servicing, fulfillment
and marketing to their customers. The Company’s solutions enable its customers
to control and change their business policies and processes. The Company
believes that it is a leader in providing business process driven solutions for
customer management.
 
 The
Company’s software solutions and architecture are based on leading industry
standards that are widely adopted by business customers in the industries the
Company serves. The Company believes these solutions are capable of being the
foundation for contemporary distributed computing environments required by
global business-to-consumer enterprises.
 
 NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation.
  Use
of Estimates
 
 The
preparation of Consolidated Financial Statements in conformity with GAAP in the
United States of America requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods.
 
 On
an on-going basis, the Company evaluates the estimates, including those related
to our allowance for doubtful accounts, valuation of stock-based compensation,
valuation of goodwill and intangible assets, valuation of deferred tax assets,
restructuring expenses, contingencies, fair value of Vendor Specific Objective
Evidence or VSOE in multiple element arrangements and the estimates associated
with the percentage-of-completion method of accounting for certain of our
revenue contracts. The Company bases the estimates on historical experience
and on various other assumptions that are believed to be reasonable. Actual
results may differ materially from these estimates under different assumptions
or conditions.
 
 Reclassifications
 
 Certain
reclassifications have been made to the prior year Consolidated Financial
Statements to conform to the current year’s presentation.
 
 Cash,
Cash Equivalents and Marketable Securities
 
 Cash
equivalents consist of highly liquid instruments purchased with an original
maturity of three months or less. The Company invests primarily in money market
funds as these investments have historically been subject to minimal credit and
market risks.
 
  58
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
 
 Historically
the Company’s marketable securities have been classified as available-for-sale.
In accordance with Statement of Financial Accounting Standards, or SFAS,
No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” available-for-sale securities are carried at fair value with
unrealized gains and losses included as a separate component of Stockholder’s
Equity, net of any tax effect. Realized gains and losses and declines in value
determined by management to be other than temporary on these investments are
included in interest income and expense when held. The Company periodically
evaluates these investments for other-than-temporary impairment. For the
purposes of computing realized gains and losses, cost is identified on a
specific identification basis. As of September 30, 2008 and 2007, there
were zero and $12.2 million, respectively of marketable securities
held by the Company, respectively.
  Restricted
Cash
 
 At
September 30, 2008 and 2007, interest bearing certificates of deposit were
classified as restricted cash. These restricted cash balances serve as
collateral for letters of credit securing certain lease
obligations.  These restricted cash balances are classified in Prepaid
Expenses and Other Current Assets and in Other Assets in the Consolidated
Balance Sheets.  See Note 3 for restricted cash balances at each
balance sheet date.
 
 Fair
Value of Financial Instruments
 
 The
Company’s financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and borrowings are carried at cost, which
approximates fair value because of the short-term nature of these instruments.
The reported amount of borrowings approximates fair value because of the market
value interest rates that these debts bear.
  During
the years ended September 30, 2008, 2007, and 2006, the Company did not enter
into any foreign currency forward exchange contracts.
  Revenue
Recognition
 
 The
Company derives revenue from licensing software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support, or PCS, training and consulting. All revenue
amounts are presented net of sales taxes in the Company’s Consolidated
Statements of Operations. The amount and timing of revenue is difficult to
predict and any shortfall in revenue or delay in recognizing revenue could cause
operating results to vary significantly from period to period and could result
in operating losses. The accounting rules related to revenue recognition are
complex and are affected by the interpretation of the rules and an understanding
of industry practices, both of which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
estimates based on judgment.
 
 Software
license revenue is recognized in accordance with the AICPA’s Statement of
Position No. 97-2 “Software Revenue Recognition,” as amended by Statement of
Position No. 98-9 “Software Revenue Recognition with Respect to Certain
Arrangements” or collectively SOP 97-2.
 
 For
arrangements with multiple elements, the Company recognizes revenue for services
and PCS based upon the fair value VSOE of the respective elements. The fair
value VSOE of the services element is based upon the standard hourly rates
charged for the services when such services are sold separately. The fair value
VSOE for annual PCS is generally established with the contractual future renewal
rates included in the contracts, when the renewal rate is substantive and
consistent with the fees when support services are sold separately. When
contracts contain multiple elements and fair value VSOE exists for all
undelivered elements, the Company accounts for the delivered elements,
principally the license portion, based upon the “residual method” as prescribed
by SOP 97-2. In multiple element transactions where VSOE is not established for
an undelivered element, revenue is recognized upon the establishment of VSOE for
that element or when the element is delivered.
 
 At
the time a transaction is entered into, the Company assesses whether any
services included within the arrangement relate to significant implementation or
customization essential to the functionality of our products. For contracts for
products that do not involve significant implementation or customization that is
essential to the product functionality, the Company recognizes license revenue
when there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection of the fee is probable and delivery has occurred as
prescribed by SOP 97-2. For contracts that involve significant
implementation
  59
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  CHORDIANT
SOFTWARE, INC.
  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
 
 or
customization services essential to the functionality of our products, the
license and professional consulting services revenue is recognized using either
the percentage-of-completion method or the completed contract method as
prescribed by Statement of Position No. 81-1, “Accounting for Performance of
Construction-Type and Certain Product-Type Contracts”, or SOP 81-1.
 
 The
percentage-of-completion method is applied when the Company has the ability to
make reasonably dependable estimates of the total effort required for completion
using labor hours incurred as the measure of progress towards completion. The
progress toward completion is measured based on the “go-live” date. The
“go-live” date is defined as the date the essential product functionality has
been delivered or the application enters into a production environment or the
point at which no significant additional Chordiant supplied professional service
resources are required. Estimates are subject to revisions as the contract
progresses to completion and these changes are accounted for as changes in
accounting estimates when the information becomes known. Information impacting
estimates obtained after the balance sheet date but before the issuance of the
financial statements is used to update the estimates. Provisions for estimated
contract losses, if any, are recognized in the period in which the loss becomes
probable and can be reasonably estimated. When additional licenses are sold
related to the original licensing agreement, revenue is recognized upon delivery
if the project has reached the go-live date, or if the project has not reached
the go-live date, revenue is recognized under the percentage-of-completion
method. Revenue from these arrangements is classified as license and service
revenue based upon the estimated fair value of each element using the residual
method.
 
 The
completed contract method is applied when the Company is unable to obtain
reasonably dependable estimates of the total effort required for completion.
Under the completed contract method, all revenue and related costs of revenue
are deferred and recognized upon completion.
 
 For
product co-development arrangements relating to software products in development
prior to the consummation of the individual arrangements, where the Company
retains the intellectual property being developed, and intends to sell the
resulting products to other customers, license revenue is deferred until the
delivery of the final product, provided all other requirements of SOP 97-2 are
met. Expenses associated with these co-development arrangements are accounted
for under SFAS No. 86, “Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed” and are normally expensed as incurred as
they are considered to be research and development costs that do not qualify for
capitalization or deferral.
 
 Revenue
from subscription or term license agreements, which include software and rights
to unspecified future products or maintenance, is recognized ratably over the
term of the subscription period. Revenue from subscription or term license
agreements, which include software, but exclude rights to unspecified future
products and maintenance, is recognized upon delivery of the software if all
conditions of recognizing revenue have been met including that the related
agreement is non-cancelable, non-refundable and provided on an unsupported
basis.
 
 For
transactions involving extended payment terms, the Company deems these fees not
to be fixed or determinable for revenue recognition purposes and revenue is
deferred until the fees become due and payable.
 
 For
arrangements with multiple elements accounted for under SOP 97-2 where the
Company determines it can account for the elements separately and the fees are
not fixed or determinable due to extended payment terms, revenue is recognized
in the following manner. If the undelivered element is PCS, or other services,
an amount equal to the estimated value of the services to be rendered prior to
the next payment becoming due is allocated to the undelivered services. The
residual of the payment is allocated to the delivered elements of the
arrangement.
 
 For
arrangements with multiple elements accounted for under SOP 81-1 where the
Company determines it can account for the elements separately and the fees are
not fixed or determinable due to extended payment terms, revenue is recognized
in the following manner. Amounts are first allocated to the undelivered elements
included in the arrangement, as payments become due or are received, the
residual is allocated to the delivered elements.
 
 Revenue
for PCS is recognized ratably over the support period which typically ranges
from one to five years.
 
 Training
and consulting services revenue is recognized as such services are performed on
an hourly or daily basis for time and material contracts. For consulting
services arrangements with a fixed fee, revenue is recognized on a
percentage-of-completion basis.
  60
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
 
 For
all sales, either a signed license agreement or a binding purchase order with an
underlying master license agreement is used as evidence of an arrangement. Sales
through third party systems integrators are evidenced by a master agreement
governing the relationship together with binding purchase orders or order forms
on a transaction-by-transaction basis. Revenues from reseller arrangements are
recognized on the “sell-through” method, when the reseller reports to the
Company the sale of software products to end-users. The Company’s agreements
with customers and resellers do not contain product return rights.
 
 Collectibility
is assessed based on a number of factors, including past transaction history
with the customer and the credit-worthiness of the customer. Collateral is
generally not requested from customers. If it is determined that the collection
of a fee is not probable, the revenue is recognized at the time the collection
becomes probable, which is generally upon the receipt of cash.
 
 Stock-based
Compensation
 
 On
October 1, 2005, the Company adopted SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors including employee stock options, restricted stock
awards or RSAs, restricted stock units or RSUs, and employee stock purchases
related to the Employee Stock Purchase Plan, or ESPP, based on estimated fair
values. SFAS 123(R) supersedes the Company’s previous accounting using the
intrinsic value method under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”, or APB 25. In March 2005, the SEC
issued Staff Accounting Bulletin No. 107, or SAB 107, which provided
supplemental implementation guidance for SFAS 123(R). The Company has applied
the provisions of SAB 107 in the adoption of SFAS 123(R).
 
 The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of October 1,
2005, the first day of the Company’s fiscal year 2006. The Consolidated
Financial Statements for the years ended September 30, 2008, 2007 and 2006
reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the Consolidated Financial Statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS
123(R).
 
 SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Consolidated Statement of
Operations. Prior to the adoption of SFAS 123(R), the Company accounted for
stock-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under SFAS No. 123, “Accounting for
Stock-Based Compensation”, or SFAS 123. Under the intrinsic value method, when
the exercise price of the Company’s fixed stock options granted to employees and
directors was equal to the fair market value of the underlying stock at the date
of grant, no stock-based compensation was required to be recognized under
APB 25.
 
 Stock-based
compensation expense recognized during the period under SFAS 123(R) is based on
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Stock-based compensation expense recognized
in the Company’s Consolidated Statement of Operations for the years ended
September 30, 2008, 2007 and 2006 includes: (i) compensation expense for
share-based payment awards granted prior to, but not yet vested as of
September 30, 2005 based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS 123, and (ii) compensation
expense for the share-based payment awards granted subsequent to
September 30, 2005 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). In conjunction with the adoption
of SFAS 123(R), the Company changed the method of expense attribution from the
vested graded to the straight-line method. Compensation expense for all
share-based payment awards granted on or prior to September 30, 2005 will
continue to be recognized using the vested graded method of expense attribution
while compensation expense for all share-based payment awards granted subsequent
to September 30, 2005 will be recognized using the straight-line method of
expense attribution. As stock-based compensation expense recognized in the
Consolidated Statement of Operations for the years ended September 30, 2008,
2007, and 2006 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
  61
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS-(Continued)
 
 Upon
adoption of SFAS 123(R), the Company has continued to utilize the Black-Scholes
option-pricing model, or Black-Scholes model. The Company’s determination of
fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Company’s stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to the Company’s expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors. Because changes in the subjective assumptions can
materially affect the estimated value, in management’s opinion, the existing
valuation models may not provide an accurate measure of the fair value of the
Company’s employee stock options. Although the fair value of employee stock
options is determined in accordance with SFAS 123(R) and SAB 107 using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
 
 There
was no stock-based compensation expense related to the ESPP recognized during
the years ended September 30, 2008, 2007 and 2006. See Note 12 for additional
information.
 
 Concentrations
of Credit Risk
 
 Financial
instruments that potentially subject the Company to concentrations of credit
risk consist of cash, cash equivalents, restricted cash, and accounts
receivable. To date, the Company has invested excess funds in money market
accounts, commercial paper, corporate bonds, and certificates-of-deposit. The
Company has cash and cash equivalents with various large banks and institutions
domestically and internationally. As of September 30, 2008, the Company held no
marketable securities.
 
 The
Company’s accounts receivable are derived from sales to customers located in
North America, Europe, and elsewhere in the world. The Company performs ongoing
credit evaluations of customers’ financial condition and, generally, requires no
collateral from customers. The Company maintains an allowance for doubtful
accounts when deemed necessary. The Company estimates its allowance for doubtful
accounts by analyzing accounts receivable for specific risk accounts as well as
providing for a general allowance amount based on historical bad debt and
billing dispute percentages. The estimate considers historical bad debts,
customer concentrations, customer credit-worthiness and current economic trends.
Based upon current economic conditions, the Company reviewed accounts receivable
and has recorded allowances as deemed necessary.
 
 Some
of our current or prospective customers have recently been facing financial
difficulties. Customers that have accounted for significant revenues in the past
may not generate revenues in any future period, causing any failure to obtain
new significant customers or additional orders from existing customers to
materially affect our operating result. The following table summarizes the
revenues from customers that accounted for 10% or more of total
revenues:
 
 Year EndedSeptember 30,2008
              
              2007
              
              2006Citicorp
      Credit Services, Inc.
              22
              %
              
              23
              %
              
              12
              %International
      Business Machine (IBM)
              *
              
              
              16
              %
              
              *Vodafone
      Group Services Limited and affiliated companies
              11
              %
              
              *
              
              
              *
 *      Represents
less than 10% of total revenues.
 
 At
September 30, 2008, Citicorp Credit Services, Inc., Vodafone Group Services
Limited and IBM accounted for approximately 19%, 18% and 13% of our
accounts receivable, respectively. At September 30, 2007, Wellpoint, Inc., IBM
and Citicorp Credit Services, Inc. accounted for approximately 28%, 17% and
15% of our accounts receivable, respectively.
 
 Research
and Development
 
 Software
development costs are expensed as incurred until technological feasibility of
the underlying software product is achieved. After technological feasibility is
established, software development costs are capitalized until general
availability of the product. Capitalized costs are then amortized at the greater
of a straight line basis over the estimated product life, or the ratio of
current revenue to total projected product revenue.
  62
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 During
fiscal year 2008, technological feasibility to port existing products to new
platforms was established through the completion of detailed program designs.
Costs aggregating $0.4 million associated with these products have been
capitalized and included in Other Assets as of September 30, 2008. As porting of
these products are completed, the capitalized costs are being amortized using
the straight-line method over the estimated economic life of the product which
is 36 months. For the year ended September 30, 2008, amortization expense,
included in cost of revenue for licenses related to these products was less than
$0.1 million. As of September 30, 2008, the unamortized expense was
approximately $0.4 million.
 
 During
the quarter ended September 30, 2006, technological feasibility to port an
existing product to a new platform was established through the completion of a
detailed program design. Costs aggregating $0.5 million associated with this
product were capitalized and included in Other Assets as of September 30,
2007. This product was completed and became available for general release in
July 2007, accordingly, the capitalized costs are being amortized using the
straight-line method over the remaining estimated economic life of the product
which is 36 months. For the years ended September 30, 2008 and 2007,
amortization expense, included in cost of revenue for license related to this
product was $0.2 million and less than $0.1 million, respectively. As of
September 30, 2008, the unamortized expense was $0.3 million.
 
 During
the quarter ended September 30, 2004, technological feasibility for an
acquired banking product was established through the completion of a detailed
program design. Costs aggregating $2.7 million associated with this product were
capitalized and included in Other Assets as of September 30, 2005. During
the quarter ended September 30, 2005, the product became available for
general release and, accordingly, the costs capitalized commenced to be
amortized. The capitalized costs were amortized using the straight-line method
over the estimated economic life of the product which was 36 months. For the
years ended September 30, 2008, 2007, and 2006, amortization expense
related to this product was $0.7 million, $0.9 million and $0.9 million,
respectively. As of September 30, 2008, the product has been fully
amortized.
 
 Property
and Equipment
 
 Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method based upon the estimated useful lives of assets, which
range from three to seven years. Amortization of leasehold improvements is
calculated using the straight-line method over the shorter of the economic life
of the asset or the lease term. Purchased internal-use software consists
primarily of amounts paid for perpetual licenses to third party software
applications, which are amortized over their estimated useful lives, generally
three years. Depreciation and amortization expense was approximately $1.7
million, $1.5 million, and $1.2 million for the years ended September 30,
2008, 2007, and 2006, respectively.
  As
required by SFAS No.143 “Accounting for Asset Retirement
Obligations”,  or SFAS 143, and Interpretation No. 47, “Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143”, or FIN 47, the Company has recorded an Asset Retirement Obligation
(ARO) of approximately $0.3 million and a corresponding increase in leasehold
improvements. SFAS 143 and FIN 47 requires the recognition of a liability for
the fair value of a legally required conditional asset retirement obligation
when incurred, if the liability’s fair value can be reasonability estimated. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is amortized over the life of the
asset.
 
 The
Company’s ARO is associated with leasehold improvements to facilities where the
Company is the lessee and the lease agreement contains a reinstatement clause,
which generally requires any leasehold improvements the Company makes to the
leased property be restored to their original condition at the end of the lease.
This amount represents the present value of the ARO and will be amortized over
the term of the lease.
 
 Goodwill
and Intangible Assets
 
 As
required by SFAS No. 142, “Goodwill and Other Intangible Assets”, the Company
tests for impairment of goodwill and other indefiniate-lived assets on an annual
basis, or more frequently if indicators of impairment are present. Goodwill
represents the excess of the purchase price in a business combination over the
fair value of net tangible and intangible assets acquired. Intangible assets
that are not considered to have an indefinite useful life are amortized over
their useful lives, which range from one and one half to five years (See Note 3
to the Consolidated Financial Statements). The carrying amount of these assets
is reviewed whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of these
assets is measured on a projected discounted cash flow method using a discount
rate determined by management to be commensurate with the
  63
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 risk
inherent in our current business model. If the asset is considered to be
impaired, the amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired asset.  The Company
did not recognize any goodwill or intangible asset impairment charges in the
years ended September 30, 2008, 2007, and 2006.
 
 In
the fiscal year ended September 30, 2008, the Company reduced goodwill by $9.5
million. The adjustment relates to a tax benefit attributable to our acquisition
in the United Kingdom. The adjustment of goodwill is discussed in Note
11.
 
 Royalties
  The
Company has certain royalty commitments associated with the shipment and
licensing of certain products or components of products. Royalty expense is
generally based on a percentage of the underlying revenue and subject to minimum
and maximum amounts. Royalty expense was approximately $0.5 million, $1.8
million, and $1.5 million for the years ended September 30, 2008, 2007, and
2006, respectively. With respect to a licensed banking product, the Company
obtained exclusive, irrevocable worldwide rights to the product. Under the terms
of the agreement, if the Company did not achieve agreed upon annual minimum
royalty targets, the licensor had the ability to cancel the exclusivity rights.
During the year ended September 30, 2006, the minimum targets were not met and
the rights to distribute the product are no longer exclusive.
  Advertising
Costs
  Advertising
costs are expensed to sales and marketing expense as incurred. Advertising costs
for the year ended September 30, 2008, 2007, and 2006 totaled approximately
$0.2 million, $0.5 million, and $0.2 million, respectively.
 
 Foreign
Currency Translation
  The
functional currency of our foreign entities is their respective local currency.
Foreign currency assets and liabilities are translated at the current exchange
rates at each balance sheet date. Revenues and expenses are translated at
weighted average exchange rates in effect during the year. The related
unrealized gains and losses from foreign currency translation are recorded in
Accumulated Other Comprehensive Income (Loss) as a separate component of
stockholders’ equity. Net gains and losses resulting from foreign exchange
transactions are included in Other Income (Expense), Net. For the years
ended September 30, 2008 and 2007, the Company recorded net foreign
currency transaction gains and (losses) of approximately ($0.3) million and $0.6
million, respectively.
 
 Income
Taxes
 
 Income
taxes are accounted for using an asset and liability approach, which requires
the recognition of taxes payable or refundable for the current period and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
 
 Effective
October 1, 2007, the Company adopted FIN 48. FIN 48 prescribes a recognition
threshold and measurement guidance for the financial statement reporting of
uncertain tax positions taken or expected to be taken in a company’s income tax
return. The application of FIN 48 is discussed in Note 11.
 
 Net
Income (Loss) Per Share
 
 The
Company computes net income (loss) per share in accordance with SFAS 128,
“Earnings per Share”, or SFAS 128. Under the provisions of SFAS 128, basic net
income (loss) per share is computed by dividing the net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share is computed by dividing the net income (loss) for
the period by the weighted average number of common and potentially dilutive
shares outstanding during the period. Potentially dilutive shares, which consist
of incremental shares issuable upon the exercise of stock options and unvested
restricted stock (using the treasury stock method), are included in the
calculation of diluted net income per share, in periods in which net income is
reported, to the extent such shares are dilutive. The calculation of diluted net
loss per share excludes potential common shares as their effect is anti-dilutive
for the year ended September 30, 2006.
  64
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except for
per share data):
 
 YearsendedSeptember30,2008
              
              
              2007
              
              
              2006Net
      income (loss) available to common stockholders
              
              $
              1,065
              
              
              $
              6,028
              
              
              $
              (16,001
              )Denominator:Weighted
      average common stock outstanding
              
              
              31,658
              
              
              
              32,650
              
              
              
              31,476Common
      stock subject to repurchase
              
              
              —
              
              
              
              (225
              )
              
              
              (403
              )Denominator
      for basic calculations
              
              
              31,658
              
              
              
              32,425
              
              
              
              31,073Effect
      of dilutive potential common shares
              
              
              252
              
              
              
              836
              
              
              
              —
              (1)Effect
      of dilutive common stock subject to repurchase
              
              
              47
              
              
              
              —
              
              
              
              —Denominator
      for diluted calculations
              
              
              31,957
              
              
              
              33,261
              
              
              
              31,073Net
      income (loss) per share—basic
              
              $
              0.03
              
              
              $
              0.19
              
              
              $
              (0.51
              )Net
      income (loss) per share—diluted
              
              $
              0.03
              
              
              $
              0.18
              
              
              $
              (0.51
              )
 
 (1)
– Dilutive potential common shares are excluded from the calculation of diluted
net loss per share.
 
 The
following table sets forth the potential total common shares that are excluded
from the calculation of diluted net loss per share as their effect is
anti-dilutive as of the dates indicated (in thousands):
 
 September
      30,
                2006Warrants
      outstanding
              
              
              
              
              
              345Employee
      stock options
              
              
              
              
              
              4,105Restricted
      stock awards
              
              
              
              
              
              4034,853
 
 NOTE
3— BALANCE SHEET COMPONENTS
 
 Accounts
Receivable, Net
 
 Accounts
receivable, net, consists of the following (in thousands):
 
 September 30,2008
              
              
              
              2007Accounts
      receivable, net:Accounts
      receivable
              $
              25,502
              
              
              $
              27,546Less:
      allowance for doubtful accounts
              
              (629
              )
              
              
              (165
              )$
              24,873
              
              
              $
              27,381
 
  65
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Prepaid
Expenses and Other Current Assets
 
 Prepaid
expense and other current assets consists of the following (in
thousands):
 
 September 30,2008
              
              
              
              2007Prepaid
      expense and other current assets:Prepaid
      commissions and royalties
              $
              2,171
              
              
              $
              3,104Restricted
      cash
              
              —
              
              
              
              46Deferred
      tax assets
              
              3,102
              
              
              
              —Other
      prepaid expenses and current assets
              
              2,895
              
              
              
              2,202$
              8,168
              
              
              $
              5,352
 
 Property
and Equipment, Net
 
 Property
and equipment, net, consists of the following (in thousands):
 
 September 30,2008
              
              
              
              2007Property
      and equipment, net:Computer
      hardware (useful lives of 3 years)
              $
              4,744
              
              
              $
              4,167Purchased
      internal-use software (useful lives of 3 years)
              
              3,323
              
              
              
              2,685Furniture
      and equipment (useful lives of 3 to 7 years)
              
              749
              
              
              
              739Leasehold
      improvements (shorter of 7 years or the term of the lease)
              
              2,811
              
              
              
              2,88311,627
              
              
              
              10,474Accumulated
      depreciation and amortization
              
              (8,462
              )
              
              
              (6,836
              )$
              3,165
              
              
              $
              3,638
 
 Goodwill
 
 As
required by SFAS No. 142, “Goodwill and Other Intangible Assets”, the Company
completed its annual impairment test as of September 30, 2008 and no goodwill
impairment was deemed necessary. However, at September 30, 2008, the Company
reduced goodwill by $9.5 million relating to a tax benefit attributable to our
acquisition in the United Kingdom. The adjustment of goodwill is discussed in
Note 11. The following is a summary of goodwill for the year ended September 30,
2008 (in thousands):
 
 GoodwillBalance
      at September 20, 2007
              
              
              $
              32,044Recognition
      of deferred tax asset related to acquired NOL
carryforwards
              
              
              
              (9,436
              )Balance
      at September 20, 2008
              
              
              $
              22,608
 
 Intangible
Assets, Net
 
 Intangible
assets, net, consists of the following (in thousands):
  September
      30, 2008
              
              September 30,
      2007Gross
                Carrying
                Amount
              
              
              
              Accumulated
                Amortization
              
              
              
              Net
                Carrying
                Amount
              
              
              
              Gross
                Carrying
                Amount
              
              
              
              Accumulated
                Amortization
              
              
              
              Net
                Carrying
                AmountIntangible
      assets, net:Developed
      technologies
              
              $
              6,904
              
              
              $
              (5,765
              )
              
              $
              1,139
              
              
              $
              6,904
              
              
              $
              (4,869
              )
              
              $
              2,035Customer
      list and trade-names
              
              
              2,731
              
              
              
              (2,356
              )
              
              
              375
              
              
              
              2,731
              
              
              
              (2,041
              )
              
              
              690$
              9,635
              
              
              $
              (8,121
              )
              
              $
              1,514
              
              
              $
              9,635
              
              
              $
              (6,910
              )
              
              $
              2,725
  66
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 All
of the Company’s acquired intangible assets are subject to amortization and are
carried at cost less accumulated amortization. Amortization is computed on a
straight-line basis over the assets estimated useful lives which are as follows:
Developed technologies—one and one half to five years; trade-names—three to five
years; and customer list—three to five years. Aggregate amortization expense for
intangible assets totaled $1.2 million, $1.2 million, and $1.2 million for the
years ended September 30, 2008, 2007, and 2006, respectively. The Company
expects amortization expense on acquired intangible assets to be $1.2 million in
fiscal year 2009, and $0.3 million in fiscal year 2010.
  Other
Assets
 
 Other
assets consists of the following (in thousands):
 
 September 30,2008
              
              
              
              2007Other
      assets:Long-term
      accounts receivable
              $
              —
              
              
              $
              984Long-term
      restricted cash
              
              89
              
              
              
              265Other
      assets
              
              1,918
              
              
              
              2,280$
              2,007
              
              
              $
              3,529
 
 The
long-term accounts receivable balance at September 30, 2007 represented a
receivable from a single customer related to a sale transaction that occurred
during the quarter ended December 31, 2006. This amount represents the third and
final payment which is due in the quarter ending December 2008. All revenue
associated with this receivable has been deferred and will not be recognized
until the payment becomes due. As of September 30, 2008, this receivable has
been recorded as a current accounts receivable.
 
 Accrued
Expenses
  Accrued
expenses consists of the following (in thousands):
  September 30,2008
              
              
              
              2007Accrued
      expenses:Accrued
      payroll, payroll taxes and related expenses
              $
              5,088
              
              
              $
              6,781Accrued
      restructuring expenses, current portion (Note 6)
              
              538
              
              
              
              3,044Accrued
      third party consulting fees
              
              1,264
              
              
              
              1,264Accrued
      income, sales and other taxes
              
              1,678
              
              
              
              1,143Other
      accrued liabilities
              
              888
              
              
              
              1,572$
              9,456
              
              
              $
              13,804
 
 Deferred
Revenue
 
 Deferred
revenue consists of the following (in thousands):
 September 30,2008
              
              
              
              2007Deferred
      revenue:License
              $
              12,465
              
              
              $
              27,409Support
      and maintenance
              
              32,908
              
              
              
              39,292Other
              
              961
              
              
              
              1,28146,334
              
              
              
              67,982Less:
      current portion
              
              (33,503
              )
              
              
              (44,548
              )Long-term
      deferred revenue
              $
              12,831
              
              
              $
              23,434
 
  67
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 NOTE
4—MARKETABLE SECURITIES
 
 The
Company had the following marketable securities (in
thousands):
 
 September
      30, 2007Amortized
                Cost
              
              
              
              Gross
                Unrealized
                Gain
              
              
              
              Gross
                Unrealized
                Loss
              
              
              
              Fair
                ValueMarketable
      Securities:Commercial
      paper
              $
              3,008
              
              
              $
              —
              
              
              $
              (1
              )
              
              $
              3,007Corporate
      bonds
              
              9,153
              
              
              
              3
              
              
              
              (4
              )
              
              
              9,152Total
              $
              12,161
              
              
              $
              3
              
              
              $
              (5
              )
              
              $
              12,159
 
 The
Company had no marketable securities as of September 30, 2008. As of September
30, 2007, all marketable securities had maturity dates less than one year. For
the year ended September 30, 2008, less than $0.1 million of gains were realized
on the sale of marketable securities. For the year ended September 30,
2007, no gains or losses were realized on the sale of marketable
securities.
 
 NOTE
5—RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
June 2008, the Financial Accounting Standards Board or FASB issued FASB Staff Position or FSP Emerging Issues Task Force or EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities”, or FSP EITF 03-6-1. FSP EITF 03-6-1 clarified that
all outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating securities and
the two-class method of computing basic and diluted earnings per share must be
applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December
15, 2008. The Company has evaluated the new FSP and has determined that they
will not have a significant impact on the determination or reporting of our
financial results.
 
 In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB statement No. 60”.SFAS 163
requires recognition of an insurance claim liability prior to an event of
default when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years, except for some disclosures about the
insurance enterprise’s risk-management activities. The Company has evaluated the
new standard and has determined that it will not have a significant impact on
the determination or reporting of our financial results.
 
 In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy).SFAS162 will become
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.”The Company has evaluated the new standard
and has determined that it will not have a significant impact on the
determination or reporting of our financial results.
 
 In
April 2008, the FASB finalized FASB FSP No. 142-3,“Determination of the
Useful Life of Intangible Assets.” The position amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB SFAS No. 142,
“Goodwill and Other Intangible Assets.” The position applies to intangible
assets that are acquired individually or with a group of other assets and both
intangible assets acquired in business combinations and asset acquisitions.
FSP142-3 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The Company is currently
evaluating the effects of implementing this new FSP.
  68
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No. 133” or
SFAS 161. SFAS 161 requires enhanced disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedge items
are accounted for under Statement 133 and its related interpretations, and how
derivative instruments and related hedged items affected an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
fiscal years beginning after November 15, 2008, with early application
encouraged. The Company has evaluated the new standard and has determined that
it will not have a significant impact on the determination or reporting of our
financial results.
 
 In
February 2008, the FASB issued FSP No. FAS 157-1 and FSP No. FAS 157-2. FSP No.
157-1 amends SFAS No. 157, “Fair Value Measurements,” to exclude SFAS No. 13,
“Accounting for Leases,” and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
Statement 13. FSP No. 157-2 delays the effective date of SFAS No. 157 for
nonfinancial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company has evaluated the new FSPs and has determined that they will
not have a significant impact on the determination or reporting of our financial
results.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin, or SAB No. 110,
“Share-Based Payment”. SAB 110 allows for the continued use of the “simplified
method” allowed under SAB 107 in developing an estimate of expected term “plain
vanilla” share options in accordance with SFAS 123(R). The guidance is
applicable after December 31, 2007. The Company has evaluated the new standard
and has determined that it will not have a significant impact on the
determination or reporting of our financial results.
 
 In
December 2007, the FASB issued SFAS No.141(R), “Business Combinations”, or SFAS
141(R). SFAS 141(R) replaces SFAS No. 141. SFAS 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company
has evaluated the new standard and has determined that it will not have a
significant impact on the determination or reporting of our prior financial
results.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51”, or SFAS 160. SFAS 160 establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No.
160 is effective for fiscal years beginning after December 15, 2008. The Company
has evaluated the new standard and has determined that it will not have a
significant impact on the determination or reporting of our financial
results.
 
 In
November 2007, the SEC issued SAB No. 109, “Written Loan Commitments Recorded at
Fair Value Through Earnings”. SAB 109 provides guidance on written loan
commitments that the expected net future cash flows related to the associated
servicing of the loan should be included in the measurement of all written loan
commitments that are accounted for at fair value through earnings. The guidance
is applicable for fiscal years beginning after December 15, 2007. The Company
has evaluated the new standard and has determined that it will not have a
significant impact on the determination or reporting of our financial
results.
  69
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 NOTE
6—RESTRUCTURING
 
 Restructuring
Costs
  Through
September 30, 2008, the Company approved certain restructuring plans to, among
other things, reduce its workforce and consolidate facilities. Restructuring and
asset impairment expenses have been recorded to align the Company’s cost
structure with changing market conditions and to create a more efficient
organization. The Company’s restructuring expenses have been comprised primarily
of: (i) severance and termination benefit costs related to the reduction of our
workforce; and (ii) lease termination costs and costs associated with
permanently vacating certain facilities. The Company accounted for each of these
costs in accordance with SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” or SFAS 146 or previous guidance under
Emerging Issues Task Force 94-3 “Liabilities Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)”, or EITF 94-3.
  Retroactive
application of SFAS 146 to periods prior to January 1, 2003, was prohibited;
accordingly, the accrual relating to facilities vacated prior to the effective
date of SFAS 146 continues to be accounted for in accordance with the guidance
of EITF 94-3. Accruals for facilities that were restructured prior to 2003 do
not reflect any adjustments relating to the estimated net present value of cash
flows associated with the facilities.
  For
each of the periods presented herein, restructuring expenses consist solely
of:
 
 •
              Severance
      and Termination Benefits—These costs represent severance and payroll taxes
      related to restructuring plans.
 
 •
              Excess
      Facilities—These costs represent future minimum lease payments related to
      excess and abandoned office space under leases, the disposal of property
      and equipment including facility leasehold improvements, and net of
      estimated sublease income.
 
 As
of September 30, 2008, the total restructuring accrual consisted of the
following (in thousands):
 
 Current
              
              
              
              Non-Current
              
              
              
              TotalSeverance
      and termination benefits
              $
              123
              
              
              $
              —
              
              
              $
              123Excess
      facilities
              
              414
              
              
              
              529
              
              
              
              943Total
              $
              537
              
              
              $
              529
              
              
              $
              1,066
 
 As
of September 30, 2008 and 2007, $0.5 million and $3.0 million, respectively, of
the restructuring reserve are included in the Accrued Expenses line item on the
Consolidated Balance Sheets. The allocation between current portion and long
term portion is based on the current lease agreements or the anticipated
settlement dates.
 
 The
Company expects the remaining severance and termination benefit accrual will be
substantially paid by September 30, 2009.
 
 Company
expects to pay the excess facilities amounts related to the restructured or
vacated leased office space as follows (in thousands):
 
 Fiscal Year
      Ended September 30,
              
              
              
              
              
              Total
      Net Future
                Minimum
      Lease
                Payments2009
              
              
              
              
              $
              4152010
              
              
              
              
              
              4052011
              
              
              
              
              
              123Total
              
              
              
              
              $
              943
 
 Included
in the future minimum lease payments schedule above is an offset of $0.7 million
of contractually committed sublease rental income.
  70
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Fiscal
Year 2007 Restructuring
 
 In
October 2006, the Company initiated a restructuring plan intended to align its
resources and cost structure with expected future revenues. The restructuring
plan included a balancing of service resources worldwide, elimination of
duplicative functions internationally, and a shift in the U.S. field
organization toward a focus on domain–based sales and pre-sales teams. As a
result of the restructuring plan, management undertook a reduction of 33
positions or approximately 10% of the Company’s workforce and consolidation of
the European headquarters in the United Kingdom and the closure of the France
office or 2007 Restructuring.
 
 As
part of the fiscal year 2007 Restructuring, the Company incurred a one-time
restructuring expense of $6.1 million for severance and termination benefits,
and excess facilities expensed to Restructuring Expense in the Consolidated
Statements of Operations. The Company accrued lease costs pertaining to the
consolidation of excess facilities relating to lease terminations and
non-cancelable lease costs in France and the United Kingdom. During the three
months ended March 31, 2007, the Company incurred an additional charge of $0.1
million for employee severance costs associated with the closure of the France
office. In March 2007, the Company negotiated an early termination of the France
office lease associated with its closure resulting in a $0.2 million reduction
in the restructure facility liability. This reduction was recorded as an offset
to restructuring expense in the period. The Company was able to terminate the
France facility lease during the year ended September 30, 2007. In the quarter
ended December 31, 2007, the Company negotiated an early termination option for
the United Kingdom lease which terminated the lease in January 2008. All
termination payments have now been made.
 
 The
following table summarizes the activity related to the 2007 Restructuring
(in thousands):
 
 Severance
                and
      Benefits
              
              
              
              Excess
                Facilities
              
              
              
              TotalTotal
      expenses
              $
              1,752
              
              
              $
              4,378
              
              
              $
              6,130Non-cash
              
              4
              
              
              
              (947
              )
              
              
              (943
              )Cash
      paid
              
              (1,756
              )
              
              
              (905
              )
              
              
              (2,661
              )Reserve
      balance as of September 30, 2007
              $
              —
              
              
              $
              2,526
              
              
              $
              2,526Provision
      adjustment
              
              —
              
              
              
              (36
              )
              
              
              (36
              )Non-cash
              
              —
              
              
              
              (62
              )
              
              
              (62
              )Cash
      paid
              
              —
              
              
              
              (2,428
              )
              
              
              (2,428
              )Reserve
      balance as of September 30, 2008
              $
              —
              
              
              $
              —
              
              
              $
              —
 
 Fiscal
Year 2005 Restructuring
 
 In
May 2005, the Company appointed a task force to improve profitability and
control expenses. The goal of the task force was to create a better alignment of
functions within the Company, to make full utilization of the Company’s India
development center, to develop a closer relationship between the Company’s field
operations and customers, to review the sales and implementation models, as well
adjust the organization model to flatten management levels, to review the
Company’s product line, and to enhance the Company’s business model for
profitability and operating leverage. This work resulted in an approximate 10%
reduction in the Company’s workforce, or 2005 Restructuring, and in July
2005 affected employees were notified. As part of the 2005 Restructuring, the
Company incurred a one-time restructuring charge of $1.1 million in the fourth
quarter ended September 30, 2005 for severance and termination
benefits.
 
 During
the quarter ended March 31, 2007, the Company incurred an additional charge of
less than $0.1 million for additional severance expense for an employee located
in France.
 
 The
following table summarizes the activity related to the 2005 Restructuring (in
thousands):
 
 
  71
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
following table summarizes the activity related to the fiscal year 2005
Restructuring (in thousands):
 
 Severance
                and Termination
                BenefitsReserve
      balance as of September 30, 2005
              $
              469Non-Cash
              
              1Cash
      paid
              
              (438
              )Reserve
      balance as of September 30, 2006
              
              32Provision
      adjustment
              
              60Non-Cash
              
              8Cash
      paid
              
              —Reserve
      balance as of September 30, 2007
              
              100Provision
      adjustment
              
              38Non-cash
              
              (15
              )Cash
      paid
              
              —Reserve
      balance as of September 30, 2008
              $
              123
 
 Prior
Restructurings
 
 During
fiscal year 2002, based upon the Company’s continued evaluation of economic
conditions in the information technology industry and our expectations regarding
revenue levels, the Company restructured several areas so as to reduce expenses
and improve revenue per employee, or 2002 Restructuring. As part of the
2002 Restructuring, the Company recorded a total workforce reduction
expense relating to severance and termination benefits of approximately $2.0
million and $3.8 million for years ended December 31, 2003 and 2002,
respectively. In addition to these costs, the Company accrued lease costs
related to excess facilities of $0.2 million and $2.8 million during the years
ended December 31, 2003 and 2002, respectively, pertaining to the consolidation
of excess facilities relating to lease terminations and non-cancelable lease
costs. This expense was net of estimated sublease income based on current
comparable rates for leases in the respective markets.
 
 During
the year ended September 30, 2007, the Company entered into a new sublease for
the last remaining facility lease associated with the 2002 Restructuring. As a
result of this sublease rental income being lower than previously estimated as
part of the restructure facility reserve, the Company recorded an additional
$0.4 million of restructuring expense during the year ended September 30, 2007.
The sublease term is through the entire remaining term of the Company’s
lease obligation for the facility.
 
 The
following table summarizes the activity related to the 2002 Restructuring (in
thousands):
  Excess
      FacilitiesReserve
      balance as of September 30, 2005
              $
              2,497Non-cash
              
              (298
              )Cash
      paid
              
              (337
              )Reserve
      balance as of September 30, 2006
              
              1,862Provision
      adjustment
              
              353Non-cash
              
              1Cash
      paid
              
              (856
              )Reserve
      balance as of September 30, 2007
              
              1,360Non-cash
              
              —Cash
      paid
              
              (417
              )Reserve
      balance as of September 30, 2008
              $
              943
 
  72
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 NOTE
7—RELATED PARTY TRANSACTIONS
 
 In
August 2005, the Company entered into a service provider agreement with Infogain
Corporation, or Infogain. Samuel T. Spadafora, a former directors and executive
officers of the Company, is a director of Infogain. Mr. Spadafora terminated his
relationship with the Company in November 2006.
 
 Charles
E. Hoffman, a former director of the Company, is the former President and Chief
Executive Officer of Covad Communications Group, Inc. (“Covad”), a customer of
ours.
 
 David
A. Weymouth is a former director of the Company. Through June 2005,
Mr. Weymouth was the Corporate Responsibility Director of Barclay’s Group,
a customer of ours. Mr. Weymouth terminated his relationship with Barclay’s
Group and became an associate with Deloitte & Touche LLP, a prior provider
of tax services to the Company. Mr. Weymouth resigned as a member of the Board
of Directors of the Company in February 2008.
 
 In
February 2008, Dan Gaudreau became a director of the Company. Mr. Gaudreau is
the Chief Financial Officer of Actuate Corporation, a provider of licensed
technology to the Company.
 
 The
following presents the related party transactions balances (in
thousands):
 
 Revenue
              
              Cost
      of Revenues
              
              PaymentsYear
      Ended September 30,2008
              
              
              2007
              
              
              2006
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2008
              
              
              2007
              
              
              2006Infogain
      Corporation
              $
              —
              
              $
              —
              
              $
              426
              
              $
              —
              
              $
              72
              
              $
              669
              
              $
              —
              
              $
              204
              
              $
              952Covad
      Communications
              
              116
              
              
              252
              
              
              237
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Deloitte
      & Touche LLP
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              98Actuate
      Corporation
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3
              
              
              20
              
              
              121$
              116
              
              $
              252
              
              $
              663
              
              $
              —
              
              $
              72
              
              $
              669
              
              $
              3
              
              $
              224
              
              $
              1,171
 
 Accounts Receivable
              
              Accounts
      Payable
              
              Deferred
      RevenueAs
      of September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Covad
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              116$
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              116
 
 NOTE
8—BORROWINGS
 
 Revolving
Line of Credit
 
  The
Company’s revolving line of credit with Comerica Bank expires on June 7, 2010.
The terms of the agreement include a $5.0 million line of credit, available on a
non-formula basis, and requires the Company to maintain (i) at least a $5.0
million cash balance in Comerica Bank accounts, (ii) a minimum quick ratio of 2
to 1, (iii) a liquidity ratio of at least 1 to 1 at all times, and (iv)
subordinate any debt issuances subsequent to the effective date of the
agreement, and certain other covenants. All assets of the Company have been
pledged as collateral on the credit facility.
  
  73
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
revolving line of credit contains a provision for a sub-limit of up to $5.0
million for issuances of standby commercial letters of credit. As of September
30, 2008, the Company had utilized $0.4 million of the standby commercial
letters of credit limit which serves as collateral for computer equipment leases
for Ness (see Note 9) of approximately $0.2 million and collateral for our
Brighton facility of approximately $0.2 million. The revolving line of credit
also contains a provision for a sub-limit of up to $3.0 million for issuances of
foreign exchange forward contracts. As of September 30, 2008, the Company had
not entered into any foreign exchange forward contracts. Pursuant to the March
2006 amended agreement, the Company is required to secure the standby commercial
letters of credit and foreign exchange forward contracts through June 7, 2010.
If these have not been secured to Comerica Bank’s satisfaction, the Company’s
cash and cash equivalent balances held by Comerica Bank automatically secure
such obligations to the extent of the then continuing or outstanding and undrawn
letters of credit or foreign exchange contracts.
 
 Borrowings
under the revolving line of credit bear interest at the lending bank’s prime
rate. Except for the standby commercial letters of credit, as of September 30,
2008, there were no outstanding balances on the revolving line of
credit.
 
 NOTE
9—COMMITMENTS AND CONTINGENCIES
 
 Lease
Commitments
 
 The
Company leases its facilities and certain equipment under non-cancelable
operating leases that expire on various dates through 2013. Rent expense is
recognized on a straight line basis over the lease terms.
 
 Future
minimum lease payments as of September 30, 2008 are as follows (in
thousands):
 
 Operating
                Leases
              
              
              
              Operating
                Sublease
                Income
              
              
              
              Net
                Operating
                LeasesFiscal
      year ended September 30:2009
              $
              3,163
              
              
              $
              (283
              )
              
              $
              2,8802010
              
              3,206
              
              
              
              (293
              )
              
              
              2,9132011
              
              2,647
              
              
              
              (86
              )
              
              
              2,5612012
              
              1,820
              
              
              
              —
              
              
              
              1,8202013
              
              1,660
              
              
              
              —
              
              
              
              1,660Thereafter
              
              261
              
              
              
              —
              
              
              
              261Total
      minimum payments
              $
              12,757
              
              
              $
              (662
              )
              
              $
              12,095
 
 Operating
lease obligations in the table above include approximately $1.6 million for our
Boston, Massachusetts facility operating lease commitment that is included
in Restructuring Expense. As of September 30, 2008, the Company has $0.7
million in sublease income contractually committed for future periods relating
to this facility. See Note 6 for further discussion.
 
 The
office lease for our Cupertino headquarters was scheduled to expire on December
31, 2008. In July 2008, the Company renewed the lease for a five year period
with an option to renew for an additional five years. The table above includes
our lease commitment for our Cupertino headquarters.
 
 Rent
expense for the years ended September 30, 2008, 2007, and 2006 totaled $2.3
million, $2.5 million, and $2.5 million, respectively. Certain operating leases
included in the table above are part of our restructuring activities and lease
payments on such leases are charged against the restructuring
accrual.
 
 Asset
Retirement Obligations
 
 As
required by SFAS No.143 “Accounting for Asset Retirement Obligations”, or SFAS
143, and Interpretation No. 47, “Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143”, or FIN 47, the
Company recorded an Asset Retirement Obligation (ARO) of approximately $0.3
million and a corresponding increase in leasehold improvements in the fiscal
year 2007. SFAS 143 and FIN 47 requires the recognition of a liability for the
fair value of a legally required conditional asset retirement obligation when
incurred, if the liability’s fair value can be reasonability estimated. The fair
value of the liability is added to the carrying amount of the associated asset
and this additional carrying amount is amortized over the life of the
asset.
  74
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
Company’s asset retirement obligations are associated with commitments to return
property subject to operating leases to original condition upon lease
termination. As of September 30, 2008, the Company estimated that gross expected
cash flows of approximately $0.3 million will be required to fulfill these
obligations.
 
 Asset
retirement obligation payments as of September 30, 2008 are included in Other
Long-term Liabilities in the Consolidated Balance Sheets and are estimated as
follows (in thousands):
 
 PaymentsFiscal
      year ended September 30:2009
              
              
              
              
              $
              —2010
              
              
              
              
              
              —2011
              
              
              
              
              
              1462012
              
              
              
              
              
              188Total
              
              
              
              
              $
              334
 
 Other
Obligations
 
 The
Company entered into an agreement with Ness Technologies Inc., Ness USA, Inc.
(formerly Ness Global Services, Inc.) and Ness Technologies India, Ltd.
(collectively, “Ness”), effective December 15, 2003, pursuant to which Ness
provides the Company’s customers with technical product support through a
worldwide help desk facility, a sustaining engineering function that serves as
the interface between technical product support and internal engineering
organization, product testing services and product development services
(collectively, the “Services”). The agreement had an initial term of three years
and was extended for two additional one year terms. Under the terms of the
agreement, the Company pays for services rendered on a monthly fee basis,
including the requirement to reimburse Ness for approved out-of-pocket expenses.
The agreement may be terminated for convenience by the Company, subject to the
payment of a termination fee. From 2004 to 2008, the Company further expanded
its agreement with Ness whereby Ness is providing certain additional technical
and consulting services. The additional agreements can be cancelled at the
option of the Company without the payment of a termination fee. In addition to
service agreements, the Company has also guaranteed certain equipment lease
obligations of Ness (see Note 8). Ness may procure equipment to be used in
performance of the Services, either through leasing arrangements or direct cash
purchases, for which the Company is obligated under the agreement to reimburse
them. In connection with the procurement of equipment, Ness has entered into a
36 month equipment lease agreement with IBM India and, in connection with the
lease agreement the Company has an outstanding standby letter of credit in the
amount of $0.2 million in guarantee of Ness’ financial commitments under the
lease. Over the term of the lease, the Company’s obligation to reimburse Ness is
approximately equal to the amount of the guarantee.
 
 Indemnification
 
 As
permitted under Delaware law, the Company has agreements whereby the Company has
indemnified our officers, directors and certain employees for certain events or
occurrences while the employee, officer or director is, or was serving, at the
Company’s request in such capacity. The term of the indemnification period is
for the officer’s or director’s lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a Directorand Officer insurance
policy that limits the Company’s exposure and may enable the Company to recover
a portion of any future amounts paid. Future payments may be required to defend
current and former directors in the derivative class action lawsuit described in
Note 10. As a result of insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
September 30, 2008.
 
 The
Company enters into standard indemnification agreements in our ordinary course
of business. Pursuant to these agreements, the Company agrees to indemnify,
defend, hold harmless, and to reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally the Company’s business
partners or customers, in connection with any patent, copyright or other
intellectual property infringement claim by any third party with respect to the
Company’s products. The term of these indemnification agreements is generally
perpetual after execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has not incurred
significant costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company believes the estimated fair value of
these agreements is minimal.  Accordingly, the Company has no
liabilities recorded for these agreements as of September 30,
2008.
  75
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
Company enters into arrangements with our business partners, whereby the
business partners agree to provide services as subcontractors for the Company’s
implementations. The Company may, at its discretion and in the ordinary course
of business, subcontract the performance of any of these services. Accordingly,
the Company enters into standard indemnification agreements with its customers,
whereby the Company indemnifies them for other acts, such as personal property
damage by its subcontractors. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has general and umbrella insurance
policies that may enable the Company to recover a portion of any amounts paid.
The Company has not incurred significant costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, the Company
believes the estimated fair value of these agreements is minimal. Accordingly,
the Company has no liabilities recorded for these agreements as of September 30,
2008.
 
 When,
as part of an acquisition, the Company acquires all of the stock or all of the
assets and liabilities of a company, the Company may assume the liability for
certain events or occurrences that took place prior to the date of acquisition.
The maximum potential amount of future payments, if any, the Company could be
required to make for such obligations is undeterminable at this time.
Accordingly, the Company has no amounts recorded for these contingent
liabilities as of September 30, 2008.
 
 The
Company warrants that software products will perform in all material respects in
accordance with standard published specifications and documentation in effect at
the time of delivery of the licensed products to the customer for a specified
period of time. Additionally, the Company warrants that maintenance and
consulting services will be performed consistent with generally accepted
industry standards. If necessary, the Company would provide for the estimated
cost of product and service warranties based on specific warranty claims and
claim history, however, the Company has not incurred significant expense under
product or services warranties to date. As a result, the Company believes the
estimated fair value on these warranties is minimal. Accordingly, the Company
has no amounts recorded for these contingent liabilities as of September 30,
2008.
 
 NOTE
10—LITIGATION
 
 IPO
Laddering
 
 Beginning
in July 2001, the Company and certain of its officers and directors, or
Individuals, were named as defendants in a series of class action stockholder
complaints filed in the United States District Court for the Southern District
of New York, now consolidated under the caption, “In re Chordiant Software, Inc.
Initial Public Offering Securities Litigation, Case No. 01-CV-6222”. In the
amended complaint, filed in April 2002, the plaintiffs allege that the Company,
the Individuals, and the underwriters of the Company’s initial public offering,
or IPO, violated section 11 of the Securities Act of 1933 and section 10(b) of
the Exchange Act of 1934 based on allegations that the Company’s registration
statement and prospectus failed to disclose material facts regarding the
compensation to be received by, and the stock allocation practices of, the
Company’s IPO underwriters. The complaint also contains claims against the
Individuals for control person liability under Securities Act section 15 and
Exchange Act section 20. The plaintiffs seek unspecified monetary damages and
other relief. Similar complaints were filed in the same court against hundreds
of other public companies, or Issuers, that conducted IPO’s of their common
stock in the late 1990’s or in the year 2000 (collectively, the “IPO
Lawsuits”).
 
 In
August 2001, all of the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New
York. In July 2002, the Company joined in a global motion to dismiss the IPO
Lawsuits filed by all of the Issuers (among others). In October 2002, the Court
entered an order dismissing the Individuals from the IPO Lawsuits without
prejudice, pursuant to an agreement tolling the statute of limitations with
respect to the Individuals. In February 2003, the court issued a decision
denying the motion to dismiss against Chordiant and many of the other
Issuers.
 
 In
June 2003, Issuers and plaintiffs reached a tentative settlement agreement that
would, among other things, result in the dismissal with prejudice of all claims
against the Issuers and Individuals in the IPO Lawsuits, and the assignment to
plaintiffs of certain potential claims that the Issuers may have against the
underwriters. The tentative settlement also provides that, in the event that
plaintiffs ultimately recover less than a guaranteed sum of $1 billion from the
IPO underwriters, plaintiffs would be entitled to payment by each participating
Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs’
guaranteed recovery. In September 2003, in connection with the possible
settlement, those Individuals who had entered tolling agreements with plaintiffs
(described above) agreed to extend those agreements so that they would not
expire prior to any settlement being finalized. In June 2004, Chordiant and
almost all of the other Issuers entered into a formal settlement agreement with
the plaintiffs. On February 15, 2005, the
  76
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Court
issued a decision certifying a class action for settlement purposes, and
granting preliminary approval of the settlement subject to modification of
certain bar orders contemplated by the settlement. On August 31, 2005, the Court
reaffirmed class certification and preliminary approval of the modified
settlement in a comprehensive Order, and directed that Notice of the settlement
be published and mailed to class members beginning November 15, 2005. On
February 24, 2006, the Court dismissed litigation filed against certain
underwriters in connection with the claims to be assigned to the plaintiffs
under the settlement. On April 24, 2006, the Court held a Final Fairness Hearing
to determine whether to grant final approval of the settlement. On December 5,
2006, the Second Circuit Court of Appeals vacated the lower Court's earlier
decision certifying as class actions the six IPO Lawsuits designated as "focus
cases." Thereafter, the District Court ordered a stay of all proceedings in all
of the IPO Cases pending the outcome of plaintiffs’ petition to the Second
Circuit for rehearing en banc. On April 6, 2007, the Second Circuit denied
plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to
certify a more limited class in the district court. Accordingly, the settlement
will not be finally approved. Plaintiffs filed amended complaints in six “focus
cases” on or about August 14, 2007. The Company is not a focus case. In
September 2007, the Company's named officers and directors again
extended the tolling agreement with plaintiffs. On or about September 27,
2007, plaintiffs moved to certify the classes alleged in the focus cases and to
appoint class representatives and class counsel in those cases. The focus
case issuers filed motions to dismiss the claims against them on or
about November 9, 2007 and an opposition to plaintiffs' motion
for class certification on December 21, 2007. On March 16, 2008, the court
denied the motions to dismiss in the focus cases. On October 2, 2008, the
plaintiffs withdrew their class certification motion. A deadline for the focus
case defendants to answer the amended complaints has not been set. This
action may divert the efforts and attention of our management and, if determined
adversely to us, could have a material impact on our business, results of
operations, financial condition or cash flows.
 
 Derivative
Class Action
 
 On
August 1, 2006, a stockholder derivative complaint was filed in the United
States District Court for the Northern District of California by Jesse Brown
under the caption Brown v. Kelly, et al. Case No. C06-04671 JW (N.D. Cal.). On
September 13, 2006, a second stockholder derivative complaint was filed in the
United States District Court for the Northern District of California by Louis
Suba under the caption Suba v. Kelly et al., Case No. C06-05603 JW (N.D. Cal.).
Both complaints were brought purportedly on behalf of the Company against
certain current and former officers and directors. On November 27, 2006, the
court entered an order consolidating these actions and requiring the plaintiffs
to file a consolidated complaint. The consolidated complaint was filed on
January 11, 2007. The consolidated complaint alleges, among other things, that
the named officers and directors: (a) breached their fiduciary duties as they
colluded with each other to backdate stock options, (b) violated section 10(b),
14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder through their alleged actions, and (c) were unjustly
enriched by their receipt and retention of such stock options. On May 21, 2007,
the Company filed a motion to dismiss the entire action on the grounds that the
plaintiffs failed to take the steps necessary to bring a derivative action.
Instead of opposing the motion to dismiss, on November 14, 2007, the plaintiffs
filed an Amended Complaint adding new allegations against five more current and
former officer and directors. The substantive allegations in the Amended
Complaint were similar to those in the previous complaint. On June 30, 2008, the
parties signed a Stipulation of Compromise and Settlement ("the Settlement"),
which was subject to court approval. On July 7, 2008, the Court preliminarily
approved the Settlement. On October 22, 2008, the Court entered a final order
approving the Settlement and entering judgment in accordance with the
Settlement. The Company’s cash contribution toward the Settlement is not
material to the financial statements.
 
 Patent
Claim
 
 In
September 2006, the Company received a letter from Acacia Technologies Group, a
patent holding company, suggesting that the Company may be infringing on two
patents, designated by United States Patent Numbers 5,537,590 and 5,701,400,
which are held by one of their patent licensing and enforcement subsidiaries.
The Company is currently reviewing the validity of these patents and whether the
Company’s products may infringe upon them. The Company has not formed a view of
whether the Company may have liability for infringement of these patents. Any
related claims, whether or not they have merit, could be costly and
time-consuming to defend, divert management’s attention or cause product delays.
If any of the Company’s products were found to infringe such patents, the patent
holder could seek an injunction to enjoin use of the infringing product and we
could be found liable for monetary damages.  This action may divert
the efforts and attention of our management and, if determined adversely to us,
could have a material impact on our business, results of operations, financial
condition or cash flows.
  77
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Yue
vs. Chordiant Software, Inc.
 
 On
January 2, 2008, the Company and certain of our officers and one other employee
were named in a complaint filed in the United States District Court for the
Northern District of California by Dongxiao Yue under the caption Dongxiao Yue
v. Chordiant Software, Inc. et al. Case No. CV 08-0019 BZ (N.D. Cal.). The
complaint alleges that the Company’s Marketing Director software product
infringed copyrights in certain software referred to as the “PowerRPC software,”
copyrights which had been owned by Netbula LLC and assigned to Mr. Yue, the sole
employee and owner of Netbula. The alleged infringement includes (a)
distributing more copies of the PowerRPC software than had originally been
authorized in a run time license Netbula granted to Chordiant Software, Intl.,
(b) infringement of a software developer kit (“SDK”) by making copies of the SDK
in excess of those that had been licensed by Netbula, (c) making unauthorized
derivative works of the SDK, (d) unauthorized distribution of PowerRPC for
products operating on the Windows Vista platform, (e) unauthorized distribution
of PowerRPC for server based products. Plaintiff also claims that the license
Netbula granted to Chordiant Software, Int’l Ltd. should not be construed to
authorize uses by its parent company, Chordiant Software, Inc. The plaintiff
seeks monetary damages, disgorgement of profits, and injunctive relief according
to proof. On February 5, 2008, the Company and its officers and employees have
filed a motion to dismiss the complaint for failure to state a claim upon which
relief could be granted, and as to lack of personal jurisdiction as to one
employee. On July 23, 2008 the Court issued an order that (1) denied Plaintiff's
motion to disqualify counsel; (2) granted Oliver Wilson's motion to dismiss for
lack of personal jurisdiction, with prejudice, and (3) granted the Company's
motion to dismiss, ruling that Plaintiff's company, Netbula LLC, is the real
party in interest and must appear through counsel. The Court ruled that Netbula
LLC may file an amended complaint within 45 days, and that Plaintiff may also
join as an individual Plaintiff at that time.
 
 On
September 9, 2008, Plaintiff Yue and Plaintiff Netbula LLC filed a First Amended
Complaint asserting four causes of action relating to the Company’s alleged
unauthorized use and distribution of Plaintiffs’ PowerRPC software: claims for
copyright infringement, unfair competition, and “accession and confusion of
property” against the company, and a claim for vicarious copyright infringement
against the company’s Chief Executive Offer and its former Vice President,
General Counsel and Secretary.
 
 On
September 20, 2008, the parties filed a stipulation allowing Plaintiffs to file
a Second Amended Complaint, which contains the two causes of action for
copyright infringement and vicarious copyright infringement, but does not
include the unfair competition and accession and confusion claims. The Second
Amended Complaint seeks monetary damages, disgorgement of profits, and
injunctive relief according to proof. On November 10, 2008, the Company filed an
answer to the Second Amended Complaint denying liability, and the Company's
Chief Executive Officer and its former Vice President, General Counsel and
Secretary filed a motion to dismiss with respect to the vicarious liability
claim asserted against them individually. At a status conference on November 17,
2008, the Court orally ordered that discovery would proceed in stages, with the
first stage focusing on Chordiant's defense that it had an express or implied
license from Netbula, as well as on the number of copies made by Chordiant of
the Netbula software in question. The Court directed that Chordiant's motion for
summary judgment on the license defense would be heard on April 6, 2009, with
any discovery on other issues, and any depositions of third parties, to proceed
only if that motion were denied. No trial date has been set. This action may
divert the efforts and attention of our management and, if determined adversely
to us, could have a material impact on our business, results of operations,
financial condition or cash flows.
 
 The
Company, from time to time, is also subject to various other claims and legal
actions arising in the ordinary course of business. The ultimate disposition of
these various other claims and legal actions is not expected to have a material
effect on our business, financial condition, results of operations or cash
flows. However, litigation is subject to inherent uncertainties.
 
 NOTE
11—INCOME TAXES
  The
components of income (loss) before income taxes are as follows (in
thousands):
  Years
      ended September 30,2008
              
              
              
              2007
              
              
              
              2006United
      States
              $
              (657
              )
              
              $
              (2,363
              )
              
              $
              (16,759
              )Foreign
              
              1,824
              
              
              
              9,993
              
              
              
              1,402$
              1,167
              
              
              $
              7,630
              
              
              $
              (15,357
              )
 
  78
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
provision for income tax expense (benefit) was comprised of the following (in
thousands):
 
 Years
      ended September 30,2008
              
              
              
              2007
              
              
              
              2006CurrentUnited
      States
              $
              —
              
              
              $
              150
              
              
              $
              —International
              
              586
              
              
              
              1,431
              
              
              
              377State
              
              27
              
              
              
              21
              
              
              
              267613
              
              
              
              1,602
              
              
              
              644DeferredUnited
      States
              
              —
              
              
              
              —
              
              
              
              —International
              
              (511
              )
              
              
              —
              
              
              
              —State
              
              —
              
              
              
              —
              
              
              
              —(511
              )
              
              
              —
              
              
              
              —$
              102
              
              
              $
              1,602
              
              
              $
              644
 
 The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax as follows (in thousands):
 
 Years
      ended September 30,2008
              
              
              
              2007
              
              
              
              2006Income
      (loss) before income taxes
              $
              1,167
              
              
              $
              7,630
              
              
              $
              (15,357)Federal
      tax at 35 % statutory rate
              $
              408
              
              
              $
              2,670
              
              
              $
              (5,375
              )State
      taxes, net of federal tax benefit
              
              42
              
              
              
              14
              
              
              
              267Stock-based
      compensation
              
              599
              
              
              
              531
              
              
              
              1,643Subpart
      F Income
              
              444
              
              
              
              —
              
              
              
              —Expenses
      not deductible for tax
              
              73
              
              
              
              81
              
              
              
              —Foreign
      tax at other than US rates
              
              (53
              )
              
              
              (2,067
              )
              
              
              377UK
      Deferred Tax Benefit
              
              (511
              )
              
              
              —
              
              
              
              —Valuation
      allowance
              
              (900
              )
              
              
              373
              
              
              
              3,732Provision
      for income taxes
              $
              102
              
              
              $
              1,602
              
              
              $
              644
 
 The
income tax expense for fiscal year 2008 is primarily related to foreign income
taxes netted with a partial valuation allowance release that was recorded as a
credit to income tax expense.
 
 Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our deferred
tax assets are as follows (in thousands):
 
 September 30,2008
              
              
              
              2007Net
      operating loss carryforwards
              $
              59,923
              
              
              $
              64,239Accrued
      expenses and provisions
              
              1,180
              
              
              
              1,486Tax
      credit carryforwards
              
              3,899
              
              
              
              5,566Deferred
      revenue
              
              7,033
              
              
              
              13,997Stock-based
      compensation
              
              1,902
              
              
              
              1,087Depreciation
      and amortization
              
              1,866
              
              
              
              2,524Gross
      deferred tax assets
              
              75,803
              
              
              
              88,899Deferred
      tax valuation allowance
              
              (65,852
              )
              
              
              (88,899
              )Net
      deferred tax assets
              $
              9,951
              
              
              $
              —
  79
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
valuation allowance decreased by $23.0 million for period ending September 30,
2008. The Company records a valuation allowance to reduce deferred tax assets to
the amount that is more likely than not to be realized in future periods. In
evaluating the Company’s ability to recover deferred tax assets, the Company
considers all available positive and negative evidence, including operating
results, reversal of deferred tax liabilities, history of losses and forecasts
of future taxable income.
 
 At
September 30, 2008, the Company has $75.8 million in gross deferred tax assets
(DTAs) attributable principally to net operating losses (NOLs). Historically,
the Company has maintained a 100% valuation allowance on DTAs because it
previously was unable to conclude that it is more-likely-than-not that it will
realize the tax benefits of these DTAs.  Based on recent operating
results and the reorganization of the Company’s intellectual property into the
U.S., current projections of disaggregated future taxable income has enabled the
Company to conclude that it is more-likely-than-not that it will have future
taxable income sufficient to realize $10.0 million of tax benefits from its
deferred tax assets, which consist of that portion of net deferred tax assets
attributable to net operating losses (NOLs) residing in the United
Kingdom.  Accordingly, the Company has released (eliminated) $10.0
million of the valuation allowance on its DTAs, of which $9.5 million is
recognized as an offsetting reduction to goodwill (representing pre-acquisition
NOLs) and $0.5 million is recognized as a credit (reduction) to the provision
for income taxes. In future periods, the Company expects to incur tax expense
related to the United Kingdom which will result in an increase in overall
expense; however, to the extent that such tax expense is offset by the
utilization of NOLs, the recognition of this additional tax expense will be a
non-cash item.
 
 The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to U.S. generated deferred tax assets, the Company recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. The Company’s estimate of
future taxable income considers available positive and negative evidence
regarding current and future operations, including projections of income in
various states and foreign jurisdictions.  The Company
believes the estimate of future taxable income is reasonable; however, it
is inherently uncertain, and if future operations generate taxable income
greater than projected, further adjustments to reduce the valuation allowance
are possible.  Conversely, if the Company realizes unforeseen material
losses in the future, or the ability to generate future taxable income necessary
to realize a portion of the net deferred tax asset is materially reduced,
additions to the valuation allowance could be recorded. At September 30, 2008,
the balance of deferred tax valuation allowance was approximately $65.9
million.
 
 At
September 30, 2008, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $139.1 million and $26.4
million, respectively. Approximately $18.1 million of the federal net operating
loss carryforwards represent net operating loss carryforwards related to Prime
Response. Approximately $27.8 million of additional net operating loss
carryforwards were generated in the United Kingdom, none of which will expire.
Approximately $4.1 million of additional net operating loss carryforwards are
related to stock option deductions which, if utilized, will be accounted for as
an addition to equity rather than as a reduction of the provision for income
taxes. These carryforwards are available to offset future federal and state
taxable income and expire in fiscal years 2011 through 2028 and 2009 through
2028, respectively. At September 30, 2008, there are approximately $1.4
million of federal research and development credits and alternative minimum tax
credits that expire in 2025 through 2028. At September 30, 2008, there were
also California state credits of approximately $3.7 million of which $3.6
million does not expire.
 
 On
September 23, 2008, the state of California enacted tax legislation on the
utilization of net operating losses and credit limitations.  Effective
fiscal year 2009, any California net operating losses that the Company generates
will have a 20 year carryforward period and effective for fiscal year 2012, will
have a two year carryback period. In addition, for fiscal year 2009 through
fiscal year 2010, the Company will be unable to utilize California net operating
losses as they are being temporarily disallowed as a result of this legislation.
This may give rise to tax expense for any such taxable income rising out of the
disallowable 2 year period. Any disallowed California net operating losses that
cannot be utilized during the disallowed period will be extended by two
years.  For fiscal year 2012, the carryback amount cannot exceed 50%
of the net operating loss, for fiscal year 2013, the carryback cannot exceed 75%
of the net operating loss, and for fiscal year 2014, the carryback cannot exceed
100% of the net operating loss.
 
 Effective
fiscal year 2009, California business tax credits will be limited to 50% of the
Company’s tax liability.  The carryover period for disallowed credit
will be extended by the number of tax years that the credit was
disallowed.
  80
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Under
the Tax Reform Act of 1986, the amounts of and the benefit from net operating
losses that can be carried forward may be impaired or limited in certain
circumstances. Under Section 382 of the Internal Revenue Code (IRC), as amended,
a cumulative stock ownership change of more than 50% over a three-year period
can cause such limitations. The Company has analyzed its historical ownership
changes and removed any net operating loss carryforwards that will expire
unutilized from its deferred tax balances as a result of an IRC 382
limitation.
 
 At
September 30, 2008, the Company has not provided for U.S. federal and state
income taxes on foreign earnings which are expected to be invested outside of
the U.S. indefinitely. Upon distribution of those earnings, the Company will be
subject to U.S. income taxes (subject to a reduction of the foreign tax credit)
and withholding taxes payable to the foreign countries where the foreign
operations are located, if any.
 
 The
Company adopted FIN 48 effective October 1, 2007. As a result of the
implementation of FIN 48, the Company did not recognize a cumulative adjustment
to the October 1, 2007 balance of retained earnings as the amount was deemed
immaterial.
 
 As
of October 1, 2007, the Company had gross unrecognized tax benefits of
approximately $0.8 million. As of September 30, 2008, the Company had gross
unrecognized tax benefits of approximately $1.0 million. The Company does not
anticipate the total amount of our unrecognized tax benefits to significantly
change over the next 12 months.
 
 In
accordance with FIN 48, paragraph 19, the Company has elected to classify
interest and penalties related to uncertain tax positions as a component of our
provision for income taxes. Accrued interest and penalties relating to the
income tax on unrecognized tax benefits as of September 30, 2008 was less than
$0.1 million.
 
 Total
amount of unrecognized tax benefits (in thousands)
 
 Opening
      balance at October 1, 2007
              $
              831Increase
      in balance due to current year tax position
              
              153Increase
      in balance due to prior year tax position
              
              —Reduction
      for prior year tax positions
              
              (33)Settlements
              
              —Closing
      balance at September 30, 2008
              $
              951
 
 NOTE
12—EMPLOYEE BENEFIT PLANS
 
 Common
Stock and Restricted Stock Awards
 
 In
February 2006, the Board of Directors approved a grant of 50,000 shares of the
Company’s RSA’s to the Chairman of the Board or Chairman at that time. In
November 2006, the Chairman entered into a separation agreement with the
Company. Based upon the separation agreement, the shares ceased to vest at the
separation date. At the date of Chairman’s termination, 24,000 shares had vested
and 26,000 shares were cancelled.
 
 In
August 2005, the Board of Directors approved three grants of 80,000 shares of
each RSA’s to an executive of the Company at that time, to occur on
August 2005, April 2006 and April 2007. In August 2006, the executive
entered into a separation agreement with the Company, whereby he continued as an
employee until December 31, 2006 at which time vesting of his shares ceased. At
the date of executive’s separation, 53,333 shares had vested and 106,667 shares
were cancelled (the April 2007 80,000 shares were never granted).
 
 In
June 2005, the Company granted 100,000 shares of our RSAs to executives of the
Company. These shares vested on April 1, 2006.
 
  81
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 2005
Equity Incentive Plan
 
 The
2005 Equity Incentive Plan, or 2005 Plan, was approved at the annual meeting on
September 27, 2005. The 2005 Plan replaces the 1999 Equity Incentive Plan,
or 1999 Plan and provides for the grant of incentive stock options, nonstatutory
stock options, stock purchase awards, RSAs, and other forms of equity
compensation (collectively, the “stock awards”). The option price shall not be
less than the fair market value of the shares on the date of grant and no
portion may be exercised beyond ten years from that date. However, during the
stock option review (see Note 3 in Notes to Consolidated Financial
Statements of the 2006 Form 10-K), it was discovered that some options granted
had the option price less than the fair market value of the shares on the date
of grant. As more fully described on Form SC TO-I filed with the SEC on
March 29, 2007, Chordiant amended these eligible options. Under the 2005 Plan,
stock options generally vest over a period of four years in equal monthly
installments with 25% of the shares vesting after one year, and the remainder
vesting in equal monthly installments over the remaining three years. Stock
option grant agreements allow for the early exercise of options granted to
employees. Exercised but unvested shares are subject to repurchase by the
Company at the initial exercise price. Beginning September 27, 2005, no
additional stock awards will be granted under the 1999 Plan. Shares
remaining available for issuance pursuant to the exercise of options or
settlement of stock awards under the 1999 Plan of approximately 0.5 million
shares were added to the share reserve of the 2005 Plan and, as of
September 27, 2005, became available for issuance pursuant to stock awards
granted under the 2005 Plan. All outstanding stock awards granted under the 1999
Plan will remain subject to the terms of the 1999 Plan, except that the Board
may elect to extend one or more of the features of the 2005 Plan to stock awards
granted under the 1999 Plan. Any shares subject to outstanding stock awards
granted under the 1999 Plan that expire or terminate for any reason prior to
exercise or settlement shall be added to the share reserve of the 2005 Plan and
become available for issuance pursuant to stock awards granted under the 2005
Plan. The 2005 Plan increased the number of shares available for issuance by 2.2
million shares of common stock from an aggregate total of approximately 0.5
million shares available under the 1999 Plan as of September 27, 2005,
resulting in an aggregate of approximately 2.7 million shares available for
future grant and issuance under the 2005 Plan at that date. In January 2007 and
December 2007, the Board amended the 2005 plan to increase the number of shares
reserved for future issuance by 1.6 million and 0.7 million shares respectively.
These amendments were approved by the stockholders at the 2007 and 2008 Annual
Meetings of Stockholders. As of September 30, 2008, there were approximately 2.9
million shares reserved for future issuance and approximately 3.1 million
options that were outstanding under the 2005 Plan.
  In
the quarter ended December 31, 2007, the Company granted 0.2 million
performance-based RSUs to selected executives of the Company pursuant to the
2005 Plan. In addition, new executives to the Company were also enrolled into
the program during fiscal year 2008. The performance-based RSUs cliff vest
at the end of a two year requisite service period, constituting the Company’s
fiscal years 2008 and 2009, upon achievement of specified performance criteria
established by the Compensation Committee of our Board of Directors. The award
agreements for RSUs generally provide that vesting will be accelerated in
certain events related to changes in control of the Company. Total compensation
cost for these awards is based on the fair market value of the shares at the
date of grant. The portion of the total compensation cost related to the
performance-based awards is subject to adjustment each quarter based on
management’s assessment of the likelihood of achieving the two year performance
criteria. As of September 30, 2008, management believes achieving the two year
performance criteria is unlikely.
 
 2000
Nonstatutory Equity Incentive Plan
 
 In
March 2000, the Board adopted the 2000 Nonstatutory Equity Incentive Plan, or
2000 Plan. Stockholder approval of this plan was not required and has not been
obtained by the Company. In October 2002, the Board approved increases to the
number of shares reserved under the 2000 Plan to 1.8 million shares, also
without stockholder approval as such approval was not required by the 2000 Plan
or by applicable law. The 2000 Plan does not have a termination date, and will
continue indefinitely until suspended or terminated by the Board. The 2000 Plan
provides for the grant of nonstatutory stock options and the issuance of
restricted stock and stock bonuses to employees (other than officers, directors,
or beneficial owners of ten percent (10%) or more of the Company’s common
stock and consultants who meet certain eligibility requirements. The terms and
price of nonstatutory stock options granted under the 2000 Plan are determined
by the Board (or a committee of the Board) and are set forth in each optionee’s
option agreement. The exercise price of nonstatutory stock options granted under
the 2000 Plan has been 100% of the fair market value on the date of grant, and
the term of the options has been ten years. Generally, stock options under the
2000 Plan vest over a period of four years in equal monthly installments with
25% of the shares vesting after one year, and the remainder vesting in equal
monthly installments over the remaining three years. In the future, stock
options may have the same or different vesting terms as determined by the Board
(or a committee of the Board). The Board (or a committee of the Board) sets the
terms of stock bonuses and rights to purchase restricted stock. In January 2007,
the Board amended the 2000 Plan to reduce the number of shares available for
future issuance to zero. No additional stock options will be granted under the
2000 Nonstatutory Equity Incentive Plan. As of September 30, 2008, there
were approximately 0.4 million options outstanding under the 2000
Plan.
  82
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 1999
Equity Incentive Plan
 
 The
1999 Equity Incentive Plan, or 1999 Plan, provided for the grant to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 and for grants to employees, directors and consultants of
nonstatutory stock options and stock purchase rights. Unless terminated sooner,
the 1999 Plan will terminate automatically in 2009. The option price shall not
be less than the fair market value of the shares on the date of grant and no
portion may be exercised beyond ten years from that date. Under the 1999 Plan,
stock options vest over a period that is limited to five years, but were
typically granted with a four-year vesting period. Each option outstanding under
the 1999 Plan may be exercised in whole or in part at any time. Exercised but
unvested shares are subject to repurchase by us at the initial exercise price.
As of September 27, 2005, approximately 0.5 million available shares under
the 1999 Plan were added to the share reserve of the 2005 Plan and additional
stock options have been granted under the 1999 Plan since that time. Any shares
subject to outstanding stock awards granted under the 1999 Plan that expire or
terminate for any reason prior to the exercise or settlement are added to the
share reserve of the 2005 Plan and become available for issuance under the 2005
Plan.
 
 1999
Non-Employee Director Option Plan
 
 The
1999 Non-Employee Director Stock Option Plan, or 1999 Director Plan, was
adopted by the Board of Directors and became effective on the date of the
Company’s initial public offering. The 1999 Director Plan was amended by
the stockholders at the 2007 Annual Meeting of Stockholders’ held on April 24,
2007. Under the amended 1999 Directors’ Plan, Directors will no longer receive stock
options under the Directors’ Plan. Instead, continuing directors will be issued
a single grant at each year’s annual meeting of the stockholders equal to a
number of shares of restricted stock equal to $100,000 divided by the fair
market value of the Company’s common stock on the date of the Annual meeting.
These shares of restricted stock will vest on the earlier to occur of (1) the
next annual meeting or (2) twelve (12) months from the date of grant. New
non-employee directors will receive a grant of restricted stock on substantially
the same terms but with the number of shares and vesting schedule prorated in
proportion to the amount time remaining between the grant and the first
anniversary of the most recent annual meeting of stockholders.Such
shares of restricted stock will be subject to a post-vesting holding period,
such that the director may not sell or otherwise transfer any of the shares
until the earliest of (1) the second anniversary of the vesting date, (2) the
closing of a merger or sale of substantially all of the assets of the Company,
(3) the certification by the Board that the director has suffered an
unforeseeable emergency or (4) the death or disability of the director. Shares
sold or withheld by the Company to cover applicable tax withholdings will not be
deemed a violation of this holding period. Prior to January 2007, the amount
reserved under the Directors’ Plan automatically increased on October 1st
of each year by the greater of (1) 0.5% outstanding shares on such date or
(2) the number of shares subject to stock awards made under the Directors’
Plan during the prior year. The Board amended and restated the Directors’ Plan
to decrease the number of shares reserved for future issuance to 0.3 million
shares and eliminated the automatic increase provision. As of September 30,
2008, approximately 0.2 million shares of common stock have been reserved for
issuance and 0.2 million options are outstanding under the 1999 Director
Plan.
 
 On
February 1, 2008, the Company’s Board members were granted 71,088 RSAs for their
annual service award under the Directors’ Plan. The RSAs cliff vest at the
earlier of the date of the first anniversary of the most recent Annual Meeting
or on the date of the next Annual meeting.
 
 Shareholder
Rights Plan
 
 On
July 7, 2008, the Board of Directors declared a dividend of one preferred share
purchase right (a “Right”) for each outstanding share of common stock, par value
$0.001 per share (the “Common Shares”), of the Company. The dividend is
effective as of July 21, 2008 (the “Record Date”) with respect to the
stockholders of record on that date. The Rights will also attach to new Common
Shares issued after the Record Date. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $0.001 per share (the “Preferred
Shares”), of the Company at a price of $20.00 per one one-hundredth of a
Preferred Share (the “Purchase Price”), subject to adjustment. Each Preferred
Share is designed to be the economic equivalent of one hundred (100) Common
Shares.
 
 The
Rights are exercisable only if a person or group acquires beneficial ownership
of, or makes a tender for, 20 percent or more of our outstanding common
stock.
 
 
  83
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 If
any person becomes the beneficial owner of 20 percent or more of our
outstanding common stock, each Right not owned by such person or certain related
parties will entitle its holder to purchase at the Right's then current exercise
price shares of our common stock having a market value equal to twice the then
current exercise price
 
 Our
Board of Directors will be entitled to redeem the Rights at $0.001 per Right at
any time prior to a person or group acquiring 20 percent or more of our
common stock. Otherwise, the Rights will expire on July 21,
2011.
 
 In
conjunction with the Right’s Plan 500,000 shares of Preferred Stock, $0.001 par
value per share, have been designated as Series A Junior Participating Preferred
Stock. Preferred Shares purchasable upon exercise of the Rights will not be
redeemable.  Each Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of one dollar ($l.00) per share but will
be entitled to an aggregate dividend of one hundred times (100x) the dividend
declared per Common Share. In the event of liquidation, the holders of the
Preferred Shares will be entitled to a minimum preferential liquidation payment
of one hundred dollars ($100) per share but will be entitled to an aggregate
payment of one hundred (100x) times the payment made per Common Share. Each
Preferred Share will have one hundred (100) votes, voting together with the
Common Shares. Finally, in the event of any merger, consolidation or other
transaction in which Common Shares are exchanged, each Preferred Share will be
entitled to receive one hundred times (100x) the amount received per Common
Share.
 
 Stock
Option Activity
  The
following table summarizes stock options, RSAs and RSUs activity under the
Company’s stock option plans (in thousands, except per share
data):
 
 Options
      OutstandingShares Available
                for Grant
              
              
              Shares
              
              
              Weighted Average
                Exercise
      PriceBalance
      at September 30, 2005
              3,248
              
              
              3,385
              
              
              $
              5.70Authorized
              122
              
              
              —
              
              
              
              —Options
      granted
              (1,505
              )
              
              1,505
              
              
              
              7.63Restricted
      stock granted
              (130
              )
              
              —
              
              
              
              —Options
      exercised
              —
              
              
              (493
              )
              
              
              4.10Cancellation
      of unvested restricted stock
              178
              
              
              —
              
              
              
              —Options
      cancelled/forfeited
              708
              
              
              (708
              )
              
              
              7.45Balance
      at September 30, 2006
              2,621
              
              
              3,689
              
              
              
              6.33Authorized
              1,766
              
              
              —
              
              
              
              —Options
      granted
              (1,354
              )
              
              1,354
              
              
              
              9.11Options
      exercised
              —
              
              
              (1,328
              )
              
              
              4.57Cancellation
      of unvested restricted stock
              137
              
              
              —
              
              
              
              —Options
      cancelled/forfeited
              537
              
              
              (537
              )
              
              
              8.86Authorized
      reduction in shares from existing plans
              (649
              )
              
              —
              
              
              
              —Balance
      at September 30, 2007
              3,058
              
              
              3,178
              
              
              
              7.96Authorized
              700
              
              
              —
              
              
              
              —Options
      granted
              (1,112
              )
              
              1,112
              
              
              
              9.04Restricted
      stock granted
              (71
              )
              
              —
              
              
              
              —Restricted
      stock units granted  *
              —
              
              
              —
              
              
              
              —Options
      exercised
              —
              
              
              (135
              )
              
              
              5.40Options
      cancelled/forfeited
              493
              
              
              (493
              )
              
              
              9.34Authorized
      reduction in shares from existing plans
              (12
              )
              
              —
              
              
              
              —Balance
      at September 30, 2008
              3,056
              
              
              3,662
              
              
              $
              8.19
 *The number of
RSUs granted is an estimate based upon management’s assessment of the likelihood
of achieving the two year performance criteria.
  84
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 The
following table summarizes information about stock options outstanding and
exercisable at September 30, 2008 (in thousands, except exercise prices and
contractual life data):
 
 Options
      Outstanding and Exercisable
              
              Options
      VestedRange
      of
                Exercise
      Prices
              
              Number
                Outstanding
              
              Weighted
                Average
                Remaining
                Contractual
                Life
      (Years)
              
              Weighted
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                Value
                Closing
                Price
      at
                09/30/2008
                of
      $5.13
              
              Number
                Exercisable
              
              Weighted
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                Value
                Closing
                Price
      at
                09/30/08
                of
      $5.13$0.35
      – 4.90
              
              
              436
              
              
              5.45
              
              $
              3.67
              
              $
              636
              
              
              366
              
              $
              3.46
              
              $
              6124.95
      – 7.38
              
              
              409
              
              
              5.03
              
              
              6.20
              
              
              4
              
              
              315
              
              
              6.30
              
              
              47.40
      – 7.88
              
              
              276
              
              
              6.45
              
              
              7.50
              
              
              —
              
              
              183
              
              
              7.51
              
              
              —7.98
      – 8.15
              
              
              428
              
              
              6.98
              
              
              7.98
              
              
              —
              
              
              286
              
              
              7.98
              
              
              —8.25
      – 8.25
              
              
              724
              
              
              7.82
              
              
              8.25
              
              
              —
              
              
              341
              
              
              8.25
              
              
              —8.28
      – 9.25
              
              
              876
              
              
              8.47
              
              
              9.10
              
              
              —
              
              
              269
              
              
              8.96
              
              
              —9.26
      – 45.00
              
              
              513
              
              
              6.42
              
              
              12.55
              
              
              —
              
              
              342
              
              
              12.57
              
              
              —$0.35
      – 45.00
              
              
              3,662
              
              
              6.98
              
              $
              8.19
              
              $
              640
              
              
              2,102
              
              $
              7.82
              
              $
              616
 
 The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $5.13 as of September 30,
2008, which would have been received by the option holders had all option
holders exercised their options as of that date. The total intrinsic value of
options exercised during the years ended September 30, 2008, 2007, and 2006 was
$0.8 million, $8.5 million, and $1.8 million, respectively. As of September 30,
2008, total unrecognized compensation costs related to non-vested stock options
was $6.0 million, which is expected to be recognized as expense over a
weighted-average period of approximately 2.4 years. As of September 30, 2007,
total unrecognized compensation costs related to non-vested stock options was
$5.2 million, which was expected to be recognized as expense over a
weighted-average period of approximately 2.7 years.
 
 On
February 1, 2008, the Company’s Board members were granted 71,088 RSAs for their
annual service award under the Directors’ Plan. The Company had 0.1 million
unvested RSAs as of September 30, 2008, which were excluded from the preceding
table. The total fair value of the unvested RSAs at grant date was $0.6 million.
The aggregate intrinsic value of the unvested RSAs at September 30, 2008 was
$0.4 million. During the fiscal year ended September 30, 2008, zero shares
vested related to the RSAs. The weighted average fair value at grant date of the
unvested RSAs was $8.44 per share as of September 30, 2008. As of September 30,
2008, total unrecognized compensation costs related to unvested RSAs was $0.2
million which is expected to be recognized as expense over a weighted average
period of approximately 0.3 year.
 
 The
Company had zero unvested RSAs as of September 30, 2007. Approximately 0.3
million shares of RSAs vested during the year ended September 30, 2007. There
were no shares of RSAs awarded during the year ended September 30,
2007.
 
 As
of September 30, 2008, the total fair value and number of vested RSUs was zero.
Based upon management’s assessment of the likelihood of achieving the two year
performance criteria, the Company has estimated that zero out of a maximum
of 0.2 million of unvested RSUs with an average fair value of $13.04 per unit
will be awarded at the end of the measurement period. During the fiscal
year 2008, zero stock compensation expense related to the performance-based RSUs
has been recognized. If the maximum target of RSUs outstanding were assumed
to be earned, total unrecognized compensation costs would be approximately $3.2
million which would be expected to be recognized as expense over a weighted
average period of approximately 12 months.
 
 The
Company settles stock option exercises, RSAs and RSUs with newly issued common
shares.
 
 Valuation
and Expense Information under SFAS 123(R)
  On
October 1, 2005, the Company adopted SFAS 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to the Company’s employees and directors including employee stock
options, RSAs, RSUs, and employee stock purchases related to the ESPP based on
estimated fair values. The following table summarizes stock-based compensation
expense related to employee stock options, RSAs, and RSUs for years ended
September 30, 2008, 2007, and 2006 which was allocated as follows (in
thousands):
  85
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              2006Stock-based
      compensation expense:Cost
      of revenues
              $
              490
              
              
              $
              313
              
              
              $
              248Sales
      and marketing
              
              922
              
              
              
              744
              
              
              
              2,327Research
      and development
              
              586
              
              
              
              546
              
              
              
              332General
      and administrative
              
              2,127
              
              
              
              1,417
              
              
              
              1,788Total
      stock-based compensation expense
              $
              4,125
              
              
              $
              3,020
              
              
              $
              4,695
 
 Stock-based
compensation expense recognized under SFAS 123(R) for the year ended September
30, 2008 was $4.1 million which consisted of stock-based compensation expense
related to employee stock options of $3.8 million and stock-based compensation
expense related to RSAs of $0.3 million, and zero stock-based compensation
expense related to RSUs. Stock-based compensation expense recognized under SFAS
123(R) for the year ended September 30, 2007 was $3.0 million which consisted of
stock-based compensation expense related to employee stock options of $2.8
million and stock-based compensation expense related to RSAs of $0.2
million. Stock-based compensation expense recognized under SFAS 123(R) for
the year ended September 30, 2006 was $4.7 million which consisted of
stock-based compensation expense related to employee stock options of $2.7
million and stock-based compensation expense related to RSAs of $2.0
million.
 
 The
weighted-average estimated fair value of stock options granted for the years
ended September 30, 2008, 2007, and 2006 was $4.12, $4.41, and $4.98 per share,
respectively, using the Black-Scholes model with the following weighted-average
assumptions:
 
 2008
              
              2007
              
              2006Expected
      lives in years
              
              3.5
              
              
              
              3.5
              
              
              
              3.9Risk
      free interest rates
              
              3.2
              %
              
              
              4.7
              %
              
              
              4.8
              %Volatility
              
              59
              %
              
              
              63
              %
              
              
              88
              %Dividend
      yield
              
              0
              %
              
              
              0
              %
              
              
              0
              %
 
 The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with the weighted-average assumptions for
volatility, expected term, and risk free interest rate. With the adoption of
SFAS 123(R) on October 1, 2005, the Company uses the trinomial lattice
valuation technique to determine the assumptions used in the Black-Scholes
model. The trinomial lattice valuation technique was used to provide a better
estimate of fair values and meet the fair value objectives of SFAS 123(R).
The expected term of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The risk-free rate
is based on the U.S. Treasury rates in effect during the corresponding period of
grant. The expected volatility is based on the historical volatility of the
Company’s stock price. The estimated value of a stock option is most sensitive
to the volatility assumption. Based on the September 30, 2008 variables, it is
estimated that a change of 10% in either the volatility, expected life or
interest rate assumption would result in a corresponding 8%, 5% or 1% change in
the estimated value of the option being valued using the Black-Scholes
model.
 
 Stock-based
compensation expense recognized in the Consolidated Statement of Operations for
the years ended September 30, 2008, 2007, and 2006 is based on awards ultimately
expected to vest. Fiscal years 2008, 2007 and 2006 have been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company’s estimated forfeiture rate
for the year ended September 30, 2008 was based on historical forfeiture
experience.
 
 During
the quarter ended June 30, 2007, the Company completed a tender offer which
resulted in the modification of certain options. The Company increased the
exercise price of options previously issued at a discount to limit the potential
adverse personal tax consequences that may apply to those stock options under
Section 409A of the Internal Revenue Code and state law equivalents. When
combined with the related cash bonus to be paid to the option holders in
connection with the exchange, the net charge to compensation expense for during
the quarter was $0.1 million.
 
 On
May 1, 2008, Chordiant implemented a reduction of approximately 10% of its
workforce. As part of the reduction in workforce, an executive left the Company
which resulted in the modification of his stock options as the right to exercise
the stock options was extended by the Board of Directors. The net charge to
stock compensation expense for the modification was less than $0.1
million.
  86
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 Accuracy
of Fair Value Estimates
 
 The
Company uses third party analyses to assist in developing the assumptions
based on a trinomial lattice valuation technique used in the Black-Scholes
model. The Company is responsible for determining the assumptions used in
estimating the fair value of share-based payment awards.
 
 This
determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company’s stock price as well
as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the Company’s expected stock
price volatility over the term of the awards, and actual and projected employee
stock option exercise behaviors. Because the Company’s employee stock options
have certain characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can materially affect
the estimated value, in management’s opinion, the existing valuation models may
not provide an accurate measure of the fair value of the Company’s employee
stock options and RSAs. Although the fair value of employee stock options
and RSAs is determined in accordance with SFAS 123(R) and SAB 107 using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
 
 401(k)
Savings Plan
  The
Company sponsors a 401(k) Savings Plan (the “Plan”) for full-time employees in
the United States. Under the Plan, each participant may elect to contribute up
to 15% of their pre-tax compensation subject to annual maximum limitations. The
Plan allows the Company to match up to 50% the employee contributions. For each
of the years ended September 30, 2008, 2007, 2006, the Company matched up to 25%
of the employee contributions. Employee contributions are fully vested, whereas
vesting in the Company’s matching contributions occurs at a rate of
33.3% per year of employment. The Company’s contributions to the 401(k)
Plan totaled approximately $0.6 million, $0.4 million, and $0.4 million for the
years ended September 30, 2008, 2007, and 2006, respectively.
 
 Defined
Contribution Plan
  The
Company also sponsors a defined contribution pension plan for the employees of
Canada, the United Kingdom, the Netherlands, and Germany. The Company’s
contributions to the pension plan totaled approximately $0.6 million, $0.4
million, and $0.5 million for the years ended September 30, 2008, 2007, and
2006, respectively.
 
 1999
Employee Stock Purchase Plan
 
 The
1999 ESPP was adopted by the Board of Directors and became effective on
February 14, 2000, the date of the Company’s initial public offering. The
number of shares reserved under the 1999 ESPP automatically increases on
October 1st of each year by the greater of (1) 2% outstanding shares on
such date or (2) the number of shares subject to stock awards made under this
plan during the prior year. However, the automatic increase is subject to
reduction by the Board of Directors. Notwithstanding the foregoing, the
aggregate number of shares that may be sold under the 1999 ESPP shall not exceed
5.2 million shares. There were no purchases of common stock under the ESPP for
the years ended September 2008, 2007 and 2006, as the plan is currently
suspended. In January 2007, the Board amended the ESPP to reduce the number of
shares available for future issuance to 0.4 million. Subsequently, on October 1,
2007 and October 1, 2008, the shares reserved under the 1999 ESPP automatically
increase by an additional 0.7 million and 0.6 million shares at each
date.
 
 NOTE
13—WARRANTS
 
 On
September 4, 2006, warrants issued to Accenture plc to purchase up to 0.2
million shares of common stock at $17.63 expired. On September 20, 2006,
IBM exercised warrants in a cashless transaction resulting in 19,230 of the
Company’s shares being issued to IBM. In December 2006, warrants issued to
Accenture plc and General Atlantic Partners from the acquisition of Prime
Response in 2001 to purchase up to 0.4 million shares of the Company expired. As
of September 30, 2008 and 2007, there were no remaining warrants
outstanding.
 
  87
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 NOTE
14—SEGMENT INFORMATION
  The
Company’s chief operating decision maker reviews financial information presented
on a consolidated basis, accompanied by desegregated information about revenues
by geographic region for purposes of making operating decisions and assessing
financial performance. Accordingly, the Company has concluded that the Company
has one reportable segment.
  The
following table summarizes license revenues by product emphasis (in
thousands):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              2006License revenueEnterprise
      solutions
              $
              19,615
              
              
              $
              37,648
              
              
              $
              30,351Marketing
      solutions
              
              6,744
              
              
              
              6,013
              
              
              
              6,396Decision
      management solutions
              
              7,752
              
              
              
              10,391
              
              
              
              3,767Total
              $
              34,111
              
              
              $
              54,052
              
              
              $
              40,514
 
 
 The
following table summarizes service revenues by product emphasis consisting of
consulting assistance and implementation, customization and integration,
training, certain reimbursable out-of-pocket expense and post-contract customer
support (in thousands):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              2006Service
      revenueEnterprise
      solutions
              $
              54,805
              
              
              $
              51,584
              
              
              $
              39,911Marketing
      solutions
              
              12,721
              
              
              
              12,369
              
              
              
              12,996Decision
      management solutions
              
              11,327
              
              
              
              6,542
              
              
              
              4,115Total
              $
              78,853
              
              
              $
              70,495
              
              
              $
              57,022
 
 Foreign
revenues are based on the country in which the customer order is generated. The
following is a summary of total revenues by geographic area (in
thousands):
 
 Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              2006North
      America
              $
              58,813
              
              
              $
              65,701
              
              
              $
              60,008Europe
              
              54,151
              
              
              
              58,846
              
              
              
              37,528Total
              $
              112,964
              
              
              $
              124,547
              
              
              $
              97,536
 
 Included
in foreign revenue results for Europe is revenue from the United Kingdom
of $24.7 million, $28.3 million, and $16.1 million for the years ended
September 30, 2008, 2007, and 2006, respectively.
 
 Property
and equipment information is based on the physical location of the assets. The
following is a summary of property and equipment, net by geographic area (in
thousands):
  Years
      Ended September 30,2008
              
              
              
              2007
              
              
              
              2006North
      America
              $
              2,250
              
              
              $
              2,346
              
              
              $
              1,844Europe
              
              915
              
              
              
              1,292
              
              
              
              786Total
              $
              3,165
              
              
              $
              3,638
              
              
              $
              2,630
 
  88
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 NOTE
15—QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following tables set forth a summary of the Company’s quarterly financial
information for each of the four quarters for the years ended September 30, 2008
and 2007:
 
 Year
ended September 30, 2008:
 
 Quarters
      -EndedSeptember30,
                2008
              
              June
      30,
                2008
              
              March
      31,
                2008
              
              December
      31,
                2007(in
      thousands, except per share data)Revenues
              $
              28,398
              
              
              $
              30,716
              
              
              $
              24,716
              
              
              $
              29,134Gross
      profit
              $
              19,667
              
              
              $
              21,398
              
              
              $
              15,598
              
              
              $
              20,019Net
      income (loss)
              $
              1,260
              
              
              $
              759
              
              
              $
              (1,159
              )
              
              $
              205Net
      income (loss) per share:Basic
              $
              .04
              
              
              $
              0.03
              
              
              $
              (0.04
              )
              
              $
              0.01Diluted
              $
              .04
              
              
              $
              0.02
              
              
              $
              (0.04
              )
              
              $
              0.01Weighted
      average shares used in computing net income (loss) per
    share:Basic
              
              29,995
              
              
              
              30,262
              
              
              
              33,066
              
              
              
              33,292Diluted
              
              30,208
              
              
              
              30,474
              
              
              
              33,066
              
              
              
              33,864
 
 Year
ended September 30, 2007:
 
 Quarters
      -EndedSeptember30,
                2007
              
              June
      30,
                2007
              
              March
      31,
                2007
              
              December
      31,
                2006(in
      thousands, except per share data)Revenues
              $
              32,082
              
              
              $
              36,761
              
              
              $
              32,765
              
              
              $
              22,939Gross
      profit
              $
              23,446
              
              
              $
              26,775
              
              
              $
              26,257
              
              
              $
              14,716Net
      income (loss)
              $
              5,349
              
              
              $
              6,453
              
              
              $
              4,975
              
              
              $
              (10,749
              )Net
      income (loss) per share:Basic
              $
              0.16
              
              
              $
              0.20
              
              
              $
              0.15
              
              
              $
              (0.34
              )Diluted
              $
              0.16
              
              
              $
              0.19
              
              
              $
              0.15
              
              
              $
              (0.34
              )Weighted
      average shares used in computing net income (loss) per
    share:Basic
              
              33,066
              
              
              
              32,743
              
              
              
              32,153
              
              
              
              31,725Diluted
              
              34,217
              
              
              
              34,384
              
              
              
              33,216
              
              
              
              31,725
 
 NOTE
16—STOCK REPURCHASE
 
 On
February 28, 2008, the Company’s Board of Directors authorized a program or 2008
Repurchase Plan, to repurchase up to $25 million of the Company’s common stock
over a one year period, , which started on March 4, 2008. In conjunction with
the 2008 Repurchase Plan, the Company entered into a written trading plan with a
broker under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to
effect the repurchases. On April 30, 2008, the Company terminated the 2008
Repurchase Plan after repurchasing a total of 3.4 million shares of common stock
for $18.6 million at an average price of $5.55 per share. Repurchased shares
were immediately retired and will resume the status of authorized but unissued
shares.
 
 There
were no repurchases of the Company’s common stock during the years ended
September 30, 2007 and 2006.
  89
 Table of Contents
  CHORDIANT
SOFTWARE, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 NOTE
17—SUBSEQUENT EVENTS
 
 Equity
Compensation
 
 In
October 2008, the Company granted 537,950 shares of Stock Options to employees.
The options vest monthly over a two year period.
  Restructuring
 
 In
October 2008, the Company initiated a restructuring plan, the 2008
Restructuring, intended to align its resources and cost structure with expected
future revenues. The 2008 Restructuring plan includes reductions in headcount
and third party consultants across all functional areas in both North America
and Europe. The 2008 Restructuring plan includes a reduction of approximately
13% of the Company’s permanent workforce. A significant portion of the positions
eliminated were in North America.
 
 As
a result of the cost-cutting measures, the Company estimates that it will record
pre-tax cash restructuring charges in the first quarter of fiscal year 2009, of
approximately $0.8 to $0.9 million, including $0.7 to $ 0.8 million for
severance costs and approximately $0.1 million for other contract termination
costs. The Company anticipates that all of the aggregate charges will result in
cash expenditures, the majority of which are to be paid in the first quarter of
fiscal year 2009.
 
 Legal
Proceedings
 
 Derivative
Class Action
 
 In
connection with the Derivative Class Action lawsuit described in Note 11, on
October 22, 2008, the Court entered a final order approving the Settlement and
entering judgment in accordance with the Settlement. The Company’s cash
contribution toward the Settlement is not material to its financial
statements.
 
 Grant
of RSU’s and Change to Directors Annual Grants - Unaudited
 
 On
November 19, 2008, the Company’s Board of Directors approved the grant of
520,000 Restricted Stock Units, equal to an equivalent number of shares of
Common Stock, to executive officers and management team members. Vesting of the
shares are time based with one third of the RSU’s vesting each year after the
date of grant for a period of three years. In the event of certain changes in
control of the Company, any unvested shares would automatically
vest.
 
 On
November 19, 2008, the Board amended the 1999 Director Plan such that the
maximum number of shares of restricted stock that a Board member may receive in
connection with the annual grant of restricted stock under the 1999 Director
Plan be 15,000 shares. The amendment does not require stockholder
approval.
 
  90
 Table of Contents
  ITEM 9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 None
  ITEM 9A.
              CONTROLS
      AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
  We
conducted an evaluation of the effectiveness of the design and operation of our
“disclosure controls and procedures” (Disclosure Controls) as of
September 30, 2008, the end of the period covered by this Form 10-K.
The controls evaluation was conducted under the supervision and with the
participation of management, including our CEO and CFO. Disclosure Controls are
controls and procedures designed to reasonably assure that information required
to be disclosed in our reports filed under the Exchange Act, such as this
Form 10-K, is recorded, processed, summarized and reported within the time
periods specified in the U.S. Securities and Exchange Commission’s (SEC’s) rules
and forms. Disclosure Controls are also designed to reasonably assure that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our quarterly evaluation of Disclosure Controls includes an evaluation of some
components of our internal control over financial reporting, and internal
control over financial reporting is also separately evaluated on an annual basis
for purposes of providing the management report which is set forth
below.
 
 The
evaluation of our Disclosure Controls included a review of the controls’
objectives and design, the Company’s implementation of the controls and the
effect of the controls on the information generated for use in this Form 10-K.
In the course of the controls evaluation, we sought to identify any past
instances of data errors, control problems or acts of fraud and sought to
confirm that appropriate corrective actions, including process improvements,
were being undertaken. This type of evaluation is performed on a quarterly basis
so that the conclusions of management, including the CEO and CFO, concerning the
effectiveness of the Disclosure Controls can be reported in our periodic reports
on Form 10-Q and Form 10-K. Many of the components of our Disclosure Controls
are also evaluated on an ongoing basis by our finance organization. The goals of
these various evaluation activities are to monitor our Disclosure Controls, and
to modify them as necessary. Our intent is to maintain the Disclosure Controls
as dynamic systems that change as conditions warrant.
 
 In
this evaluation, unless otherwise indicated, a “significant deficiency” is
defined as a control deficiency, or combination of deficiencies, that adversely
affects the Company’s ability to initiate, authorize, record, process or report
external financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the company’s annual or interim financial statements that is
more than inconsequential will not be prevented or detected. A “material
weakness” is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
 
 Based
on the controls evaluation, our CEO and CFO have concluded that as of September
30, 2008, our Disclosure Controls were effective.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
 
 MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such terms are defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of September 30, 2008 based on the
guidelines established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Because of its inherent limitations, internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives. Internal control over financial reporting is a
process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with established policies or procedures may deteriorate.
  91
 Table of Contents
  
 In
connection with the Company’s assessment of the effectiveness of internal
control over financial reporting, our management has concluded that our internal
over financial reporting was effective as of September 30, 2008.
 
 BDO
Seidman, LLP, our independent registered public accounting firm has audited the
effectiveness of our internal control over financial reporting as of
September 30, 2008. BDO Seidman, LLP’s report on the audit of internal
control over financial reporting is included in Item 9A of this
Form 10-K.
  92
 Table of Contents
  Report
of Independent Registered Public Accounting Firm
  
 To
the Board of Directors and Stockholders
 Chordiant
Software, Inc.
 Cupertino,
California
 
 We
have audited Chordiant Software, Inc.’s internal control over financial
reporting as of September 30, 2008, based on
criteria established in Internal Control–Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria).  Chordiant
Software, Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Item 9A,
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In
our opinion, Chordiant Software, Inc. maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2008,
based on the COSO criteria.
  We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Chordiant Software, Inc. as of September 30, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
September 30, 2008 and our report dated November 18, 2008 expressed an
unqualified opinion thereon.
   /s/
BDO Seidman, LLP
  San
Jose, California
 November
18, 2008
  93
 Table of Contents
  ITEM 9B.
              OTHER
      INFORMATION
 
 None.
 
 PART III
 
 ITEM 10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 The
information required by this Item is incorporated by reference from the
information contained in our definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for our 2009 Annual Meeting of Stockholders (the “Proxy Statement”). The
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the end of our fiscal year ended September 30,
2008.
 
 ITEM 11.
              EXECUTIVE
      COMPENSATION
 
 The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.
 
 ITEM 12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
 
 The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.
 
 ITEM 13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDANCE
 
 The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.
 
 ITEM 14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
 
 The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.
 
  94
 Table of Contents
  PART IV
  ITEM 15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
 
 (a)
  1.
              Index
      to Financial Statements
  Please see the accompanying Index to
Consolidated Financial Statements, which appears on page52of this report. The Report of
Independent Registered Public Accounting Firm, Financial Statements and Notes to
Financial Statements which are listed in the Index to Financial Statements and
which appear beginning on page58of this report are included in Item
8 above.
  2.
              Financial
      Statement Schedule
  Schedule
II—Valuation and Qualifying Accounts for the years ended September 30,
2008, 2007, and 2006 are as follows (in thousands):
  
 Balance at
                Beginning
                of
      Period
              
              Charged to
                Expenses
              
              
              Deductions
              
              
              Balance at
                End of PeriodAllowance
      for doubtful accounts2008
              
              $
              165
              
              $
              663
              
              
              $
              (199
              )
              
              $
              6292007
              
              $
              83
              
              $
              82
              
              
              $
              —
              
              
              $
              1652006
              
              $
              214
              
              $
              (9
              )
              
              $
              (122
              )
              
              $
              83Deferred
      tax asset valuation allowance2008
              
              $
              88,899
              
              $
              (511
              )
              
              $
              (22,536
              )
              
              $
              65,8522007
              
              $
              88,917
              
              $
              —
              
              
              $
              (18
              )
              
              $
              88,8992006
              
              $
              83,350
              
              $
              5,567
              
              
              $
              —
              
              
              $
              88,917
 
 Schedules
not listed have been omitted because the information required to be set forth
therein is not applicable or is included in the Financial Statements or notes
thereto.
  3.
              Exhibits
 
 
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed
      Herewith2.1
              
              Share
      Purchase Agreement, dated December 8, 2004, between Chordiant Software
      International, Inc. and the persons named therein (1).
              
              Form
      8-K
              
              12/27/20043.1
              
              Amended
      and Restated Certificate of Incorporation of Chordiant Software,
      Inc.
              
              
              
              
              
              X3.2
              
              Certificate
      of Designation of Series A. Junior Participating Preferred
      Stock.
              
              Form
      8-K
              
              7/11/20083.3
              
              Amended
      and Restated Bylaws of Chordiant Software, Inc.
              
              Form 8-K
              
              6/3/20084.1
              
              Specimen
      Common Stock Certificate.
              
              Form
      S-11 (No. 333-92187)
              
              2/7/2000
  95
 Table of Contents
  
 
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed
      Herewith4.2
              
              Warrant
      agreement, dated August 12, 2002, by and between Chordiant Software, Inc.
      and International Business Machines Corporation (“IBM”).
              
              Form
      10-Q
              
              5/15/20034.3
              
              Registration
      Rights Agreement, dated January 22, 2004, by and between Chordiant
      Software, Inc., and Acqua Wellington Opportunity I
Limited.
              
              Form
      8-K
              
              1/26/20044.4
              
              Rights
      Agreement dated as of July 10, 2008, by and between Chordiant Software,
      Inc. and American Stock Transfer & Trust Company, LLC
              
              Form
      8-K
              
              7/11/20084.5
              
              Form
      of Rights Certificate
              
              Form
      8-K
              
              7/11/200810.1*
              
              1999
      Equity Incentive Plan and Form of Stock Option Agreement.
              
              Form
      S-1
                (No.
      333-92187)
              
              12/6/199910.2*
              
              1999
      Employee Stock Purchase Plan.
              
              Form
      S-1
                (No.
      333-92187)
              
              12/6/199910.3*
              
              Amended
      and Restated 1999 Non-Employee Directors' Plan as amended and
      restated.
              
              Schedule
      14A
              
              3/15/200710.4*
              
              Form
      of Stock Option Agreement of 1999 Non-Employee Directors'
      Plan.
              
              Form
      S-1 (No. 333-92187)
              
              1/19/200010.5*
              
              2000
      Nonstatutory Equity Incentive Plan.
              
              S-8
                (No.
      333-42844)
              
              8/2/200010.6*
              
              2005
      Equity Incentive Plan, as amended.
              
              Schedule
      14A
              
              3/15/200710.7*
              
              Form
      of Director Agreement by and between Chordiant Software, Inc. and certain
      officers and directors of Chordiant Software, Inc.
              
              Form
      10-K/T
              
              3/29/200510.8*
              
              Form
      of Indemnification Agreement, by and between Chordiant Software, Inc. and
      certain officers and directors of Chordiant Software, Inc.
              
              Form
      10-Q
              
              5/15/200210.9*
              
              Form
      of 2008-2009 Performance Share Unit Program Award Grant
      Notice.
              
              Form
      10-K
              
              11/15/200710.10*††
              
              Fiscal
      Year 2008 Executive Incentive Bonus Plan.
              
              Form
      10-K
              
              11/15/200710.11*††
              
              Fiscal
      Year 2008 General Counsel Incentive Bonus Plan.
              
              Form
      10-K
              
              11/15/200710.12*††
              
              Fiscal
      Year 2008 Compensation Plan for Worldwide Vice President, Professional
      Services.
              
              Form
      10-K
              
              11/15/200710.13*††
              
              Fiscal
      Year 2008 Bonus Plan for Worldwide Vice President, Sales.
              
              Form
      10-K
              
              11/15/200710.14*
              
              Fiscal
      Year 2008 Compensation Plan for Worldwide Vice President,
      Sales.
              
              Form
      10-K
              
              11/15/2007
  96
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.15*††
              
              2008-2009
      Performance Share Unit Program.
              
              Form
      10-K
              
              11/15/200710.16*
              
              A
      description of certain compensation arrangements between Chordiant
      Software, Inc. and its executive officers.
              
              Form
      8-K
              
              10/16/200710.17
              
              Amended
      and Restated Loan and Security Agreement dated August 31, 2000, by and
      between Chordiant Software, Inc. and Imperial Bank.
              
              Form
      10-Q
              
              5/15/200210.18
              
              First
      Amendment to Amended and Restated Loan and Security Agreement, dated
      October 19, 2001, by and between Chordiant Software, Inc. and Comerica
      Bank-California, successor in interest to Imperial Bank.
              
              Form
      10-Q
              
              5/15/200210.19
              
              Second
      Amendment to Amended and Restated Loan and Security Agreement by and
      between Chordiant Software, Inc. and Comerica Bank-California, successor
      in interest to Imperial Bank, dated March 28, 2003.
              
              Form
      10-Q
              
              8/14/200310.20
              
              Second
      Amended and Restated Loan and Security Agreement by and between Chordiant
      Software, Inc. and Comerica Bank-California, successor in interest to
      Imperial Bank, dated March 8, 2006.
              
              Form
      10-Q
              
              5/4/200610.21
              
              Modification
      to Second Amended and Restated Loan and Security Agreement dated June 30,
      2008, by and between Chordiant Software, Inc., and Comerica
      Bank-California.
              
              Form
      10-Q
              
              07/31/200810.22
              
              Master
      Agreement for Subcontracted Services dated June 14, 2002 by and between
      Chordiant Software, Inc. and International Business Machines
      Corporation.
              
              Form
      10-K
              
              2/9/200710.23
              
              Amendment
      Number One dated May 31, 2005 to the Master Agreement for Subcontracted
      Services dated June 14, 2006 by and between Chordiant Software, Inc. and
      International Business Machines Corporation.
              
              Form
      10-K
              
              2/9/200710.24
              
              Amendment
      Number Two dated October 12, 2006 to the Master Agreement for
      Subcontracted Services dated June 14, 2006 by and between Chordiant
      Software, Inc. and International Business Machines
      Corporation.
              
              Form
      10-K
              
              2/9/200710.25††
              
              Statement
      of Work dated September 28, 2006 by and between Chordiant Software, Inc.
      and International Business Machines Corporation.
              
              Form
      10-K
              
              2/9/200710.26†
              
              Order
      Form Agreement dated September 28, 2006 by and between Chordiant Software,
      Inc. and International Business Machines Corporation.
              
              Form
      10-K
              
              2/9/200710.27††
              
              Software
      License and Services Agreement dated September 28, 2006 by and between
      Chordiant Software, Inc. and Connecticut General Life Insurance
      Company.
              
              Form
      10-K
              
              11/15/2007
  97
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.28†
              
              Master
      Software License and Support Agreement dated March 21, 2006 by and between
      Chordiant Software, Inc. and Citicorp Credit Services, Inc.
      (USA).
              
              Form
      10-K
              
              2/9/200710.29
              
              Master
      Professional Services Agreement dated May 7, 2006 by and between Chordiant
      Software, Inc. and Citicorp Credit Services, Inc. (USA).
              
              Form
      10-K
              
              2/9/200710.30††
              
              License
      Schedule #5 dated December 8, 2006 to the Master Software License and
      Support Agreement dated March 21, 2006 by and between Chordiant Software
      and Citicorp Credit Services, Inc. (USA).
              
              Form
      10-K
              
              11/15/200710.31
              
              Amendment
      No. 1 to the Master Software License and Support Agreement dated March 21,
      2006 by and between Chordiant Software and Citicorp Credit Services, Inc.
      (USA).
              
              Form
      10-K
              
              2/9/200710.32
              
              Order
      Form Agreement dated December 19, 2006 by and between Chordiant Software
      International GmbH and IBM Deustchland GmbH.
              
              Form
      10-K
              
              2/9/200710.33
              
              Software
      License and Services Agreement dated December 19, 2006 by and between
      Chordiant Software International GmbH and Deutsche Angestellten
      Krankenkasse.
              
              Form
      10-K
              
              2/9/200710.34††
              
              Master
      Agreement dated June 28, 2007 by and between WellPoint, Inc. and Chordiant
      Software, Inc.
              
              Form
      10-Q
              
              8/10/200710.35†††
              
              Master
      Services Agreement By and Between Chordiant Software, Inc. and Ness
      Technologies, Inc., Ness Global Services, Inc. and Ness Technologies India
      Ltd., dated December 15, 2003, as amended.
              
              Form
      10-K
              
              11/15/200710.36
              
              Addendum
      A to Master Services Agreement dated September 11, 2006 by and between
      Chordiant Software, Inc. and Ness USA, Inc.
              
              Form
      10-K
              
              2/9/200710.37
              
              Addendum
      A to the Master Services Agreement dated October 25, 2007 by and between
      Chordiant Software, Inc. and Ness USA, Inc.
              
              Form
      10-K
              
              11/15/200710.38
              
              Addendum
      A to Master Services Agreement dated August 15, 2008 by and between
      Chordiant Software, Inc. and Ness USA, Inc..
              
              Form
      8-K
              
              08/29/200810.39†
              
              Addendum
      B to Master Services Agreement dated March 28, 2006 by and among Chordiant
      Software, Inc., Ness USA, Inc., Ness Technologies, India Ltd. and Ness
      Technologies, Inc.
              
              
              
              
              
              X10.40
              
              Addendum
      A to Master Services Agreement dated September 12, 2005 by and among
      Chordiant Software, Inc., Ness Global Services, Inc., Ness Technologies
      India Ltd. and Ness Technologies, Inc.
              
              
              
              
              
              X
  98
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.41††
              
              Global
      Framework Agreement dated December 21, 2007 by and between Chordiant
      Software, Inc. and Vodafone Group Services Limited.
              
              Form
      10-Q
              
              02/07/200810.42
              
              Memorandum
      of Understanding re Compromise and Settlement, dated May 29,
      2008.
              
              Form
      8-K
              
              06/03/200810.43
              
              Cupertino
      City Center Net Office Lease, dated June 19, 1998, by and between
      Cupertino City Center Buildings, as Lessor, and Chordiant Software, Inc.,
      as Lessee.
              
              Form
      S-1
                (No.
      333-92187)
              
              1/19/200010.44
              
              First
      amendment to Cupertino City Center Net Office Lease, dated December 10,
      2003, by and between Cupertino City Center Buildings, as Lessor, and
      Chordiant Software, Inc., as Lessee.
              
              10-K
              
              3/8/200410.45
              
              Second
      Amendment to Cupertino City Center Net Office Lease dated March 10, 2006,
      by and between Cupertino City Center Buildings, as Lessor, and Chordiant
      Software, Inc., as Lessee
              
              
              
              
              
              X10.46
              
              Third
      Amendment to Cupertino City Center Net Office Lease dated July 11, 2008,
      by and between Cupertino City Center Buildings, as Lessor, and Chordiant
      Software, Inc., as Lessee.
              
              Form
      10-Q
              
              07/31/200810.47*
              
              Change
      of Control Agreement, dated September 10, 2001, by and between Chordiant
      Software, Inc. and Samuel T. Spadafora.
              
              Form
      10-Q
              
              5/15/200210.48*
              
              Amendment
      to Change of Control Agreement dated February 27, 2004, by and between
      Chordiant Software, Inc. and Samuel T. Spadafora.
              
              Form
      10-K
              
              3/8/200410.49*
              
              Separation
      Agreement dated November 30, 2006, by and between Chordiant Software, Inc.
      and Samuel Spadafora.
              
              Form
      8-K
              
              11/30/200610.51*
              
              Compromise
      Agreement by and between Chordiant Software International Limited and
      Allen Swann dated October 28th 2004.
              
              Form
      10-K/T
              
              3/29/200510.52*
              
              Board
      Member Agreement dated March 7, 2006 for Richard Stevens
              
              Form
      8-K
              
              3/10/200610.53
              
              Offer
      Letter dated July 19, 2004 for Peter Norman.
              
              
              
              
              
              X10.54*
              
              Change
      of Control Agreement dated November 1, 2005 by and between Chordiant
      Software, Inc. and Peter Norman.
              
              Form
      10-Q
              
              4/30/200710.55*
              
              Change
      of Control Agreement dated November 11, 2005 by and between Chordiant
      Software, Inc. and James St. Jean.
              
              Form
      10-Q
              
              4/30/200710.56
              
              Offer
      Letter dated April 19, 2006 for Frank J. Florence.
              
              
              
              
              
              X10.57*
              
              Change
      of Control Agreement dated May 22, 2006 by and between Chordiant Software,
      Inc. and Frank Florence.
              
              Form
      10-Q
              
              4/30/2007
  99
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.58
              
              Offer
      Letter dated July 14, 2006 for P.K. Karnik.
              
              
              
              
              
              X10.59*
              
              Change
      of Control Agreement dated April 13, 2007 by and between Chordiant
      Software, Inc. and PK Karnik.
              
              Form
      10-Q
              
              4/30/200710.60*
              
              Offer
      Letter dated October 17, 2005 for Derek P. Witte.
              
              Form
      8-K
              
              10/26/200510.61*
              
              Change
      of Control Agreement dated October 20, 2005 by and between Chordiant
      Software, Inc. and Derek P. Witte.
              
              Form
      8-K
              
              10/26/200510.62
              
              Separation
      Agreement dated May 1, 2008 by and between Chordiant Software Inc. and
      Derek P. Witte.
              
              Form
      10-Q
              
              07/31/200810.63*
              
              Offer
      Letter dated January 31, 2006 for Steven R. Springsteel.
              
              Form
      8-K
              
              2/2/200610.64*
              
              Form
      of Stock Option Agreement for Steven R. Springsteel.
              
              Form
      8-K
              
              2/2/200610.65*
              
              Offer
      Letter dated October 19, 2007 for David Cunningham.
              
              Form
      10-K
              
              11/15/200710.66
              
              Offer
      Letter dated February 3, 2008 for Charles Altomare.
              
              
              
              
              
              X10.67
              
              Offer
      Letter dated July 18, 2008 for David Zuckerman.
              
              
              
              
              
              X18.1
              
              Preferability
      letter from BDO Seidman, LLP, Independent Registered Public Accounting
      Firm.
              
              Form
      10-K
              
              12/9/200521.1
              
              Subsidiaries
      of Chordiant Software, Inc..
              
              Form
      10-Q
              
              5/16/200523.1
              
              Consent
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm.
              
              
              
              
              
              X24.1
              
              Power
      of Attorney (included on the signature pages hereto).
              
              
              
              
              
              X31.1
              
              Certification
      required by Rule 13a-14(a) or Rule 15d-14(a).
              
              
              
              
              
              X31.2
              
              Certification
      required by Rule 13a-14(a) or Rule 15d-14(a).
              
              
              
              
              
              X32.1#
              
              Certification
      required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
      63 of Title 18 of the United States Code (18 U.S.C. 1350).
 
  100
 Table of Contents
  
 (1)
              Chordiant
      has omitted Schedules 2-4 and 709 to the Share Purchase Agreement pursuant
      to Item 601(b)(2) of Regulation S-K. Chordiant hereby undertakes to
      provide the SEC with copies of the omitted schedules upon
      request.
 
 *
              Management
      contract or compensatory plan or
arrangement.
 
 †
              Confidential
      treatment has been requested with respect to certain portions of this
      exhibit. Omitted portions have been filed separately with the SEC as
      required by Rule 406 of Regulation
C.
 
 ††
              Confidential
      treatment granted. Omitted portions have been filed separately with the
      SEC as required by Rule 406 of Regulation
C.
 
 †††
              Confidential
      treatment extension requested. Omitted portions have been filed separately
      with the SEC as required by Rule 406 of Regulation
  C.
 
 #
              The
      certification attached as Exhibit 32.1 is not deemed filed with the
      Securities and Exchange Commission and is not incorporated by reference
      into any filing of Chordiant Software, Inc., whether made before or after
      the date of this Form 10-K irrespective of any general incorporation
      language contained in such filing.
 
 
 
  101
 Table of Contents
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report on Form 10-K to
be signed on our behalf by the undersigned, thereunto duly authorized, in the
City of Cupertino, State of California, on November 20, 2008.
 
 CHORDIANT
      SOFTWARE, INCBy:
              /s/  STEVEN
      R. SPRINGSTEELSteven
      R. Springsteel
                Chairman,
      President, and CEO
 
 
 KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints STEVEN R. SPRINGSTEELand PETER S.
NORMAN, and each or any one of them, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report on Form 10-K has been signed by the following persons on behalf of
the Registrant and of the capacities and on the dates indicated.
  Signature
              
              Title
              
              Date/s/
      STEVEN R. SPRINGSTEEL
              
              Chairman,
      President, and Chief Executive Officer
              
              November
      20, 2008Steven
      R. Springsteel/s/
      PETER S. NORMAN
              
              Chief
      Financial Officer and Principal Accounting
              
              November
      20, 2008Peter
      S. Norman
              
              Officer/s/
      RICHARD G. STEVENS
              
              Director
              
              November
      20, 2008Richard
      G. Stevens/s/
      DAVID R. SPRINGETT
              
              Director
              
              November
      20, 2008David
      R. Springett/s/
      WILLIAM J. RADUCHEL
              
              Director
              
              November
      20, 2008William
      J. Raduchel/s/
      ALLEN A.A. SWANN
              
              Director
              
              November
      20, 2008Allen
      A. A. Swann/s/
      CHARLES E. HOFFMAN
              
              Director
              
              November
      20, 2008Charles
      E. Hoffman/s/
      DANIEL A. GAUDREAU
              
              Director
              
              November
      20, 2008Daniel
      A. Gaudreau
  
  102
 Table of Contents
  EXHIBIT
INDEX
 
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed
      Herewith2.1
              
              Share
      Purchase Agreement, dated December 8, 2004, between Chordiant Software
      International, Inc. and the persons named therein (1).
              
              Form
      8-K
              
              12/27/20043.1
              
              Amended
      and Restated Certificate of Incorporation of Chordiant Software,
      Inc.
              
              
              
              
              
              X3.3
              
              Certificate
      of Designation of Series A. Junior Participating Preferred
      Stock
              
              Form
      8-K
              
              7/11/20084.1
              
              Specimen
      Common Stock Certificate.
              
              Form
      S-11 (No. 333-92187)
              
              2/7/20004.2
              
              Warrant
      agreement, dated August 12, 2002, by and between Chordiant Software, Inc.
      and International Business Machines Corporation (“IBM”).
              
              Form
      10-Q
              
              5/15/20034.3
              
              Registration
      Rights Agreement, dated January 22, 2004, by and between Chordiant
      Software, Inc., and Acqua Wellington Opportunity I
Limited.
              
              Form
      8-K
              
              1/26/20044.4
              
              Rights
      Agreement dated as of July 10, 2008, by and between Chordiant Software,
      Inc. and American Stock Transfer & Trust Company, LLC
              
              Form
      8-K
              
              7/11/20084.5
              
              Form
      of Rights Certificate
              
              Form
      8-K
              
              7/11/200810.1*
              
              1999
      Equity Incentive Plan and Form of Stock Option Agreement.
              
              Form
      S-1
                (No.
      333-92187)
              
              12/6/199910.2*
              
              1999
      Employee Stock Purchase Plan.
              
              Form
      S-1
                (No.
      333-92187)
              
              12/6/199910.3*
              
              Amended
      and Restated 1999 Non-Employee Directors' Plan as amended and
      restated.
              
              Schedule
      14A
              
              3/15/200710.4*
              
              Form
      of Stock Option Agreement of 1999 Non-Employee Directors'
      Plan.
              
              Form
      S-1 (No. 333-92187)
              
              1/19/200010.5*
              
              2000
      Nonstatutory Equity Incentive Plan.
              
              S-8
                (No.
      333-42844)
              
              8/2/200010.6*
              
              2005
      Equity Incentive Plan, as amended.
              
              Schedule
      14A
              
              3/15/200710.7*
              
              Form
      of Director Agreement by and between Chordiant Software, Inc. and certain
      officers and directors of Chordiant Software, Inc.
              
              Form
      10-K/T
              
              3/29/2005
  103
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.8*
              
              Form
      of Indemnification Agreement, by and between Chordiant Software, Inc. and
      certain officers and directors of Chordiant Software, Inc.
              
              Form
      10-Q
              
              5/15/200210.9*
              
              Form
      of 2008-2009 Performance Share Unit Program Award Grant
      Notice.
              
              Form
      10-K
              
              11/15/200710.10*††
              
              Fiscal
      Year 2008 Executive Incentive Bonus Plan.
              
              Form
      10-K
              
              11/15/200710.11*††
              
              Fiscal
      Year 2008 General Counsel Incentive Bonus Plan.
              
              Form
      10-K
              
              11/15/200710.12*††
              
              Fiscal
      Year 2008 Compensation Plan for Worldwide Vice President, Professional
      Services.
              
              Form
      10-K
              
              11/15/200710.13*††
              
              Fiscal
      Year 2008 Bonus Plan for Worldwide Vice President, Sales.
              
              Form
      10-K
              
              11/15/200710.14*
              
              Fiscal
      Year 2008 Compensation Plan for Worldwide Vice President,
      Sales.
              
              Form
      10-K
              
              11/15/200710.15*††
              
              2008-2009
      Performance Share Unit Program.
              
              Form
      10-K
              
              11/15/200710.16*
              
              A
      description of certain compensation arrangements between Chordiant
      Software, Inc. and its executive officers.
              
              Form
      8-K
              
              10/16/200710.17
              
              Amended
      and Restated Loan and Security Agreement dated August 31, 2000, by and
      between Chordiant Software, Inc. and Imperial Bank.
              
              Form
      10-Q
              
              5/15/200210.18
              
              First
      Amendment to Amended and Restated Loan and Security Agreement, dated
      October 19, 2001, by and between Chordiant Software, Inc. and Comerica
      Bank-California, successor in interest to Imperial Bank.
              
              Form
      10-Q
              
              5/15/200210.19
              
              Second
      Amendment to Amended and Restated Loan and Security Agreement by and
      between Chordiant Software, Inc. and Comerica Bank-California, successor
      in interest to Imperial Bank, dated March 28, 2003.
              
              Form
      10-Q
              
              8/14/200310.20
              
              Second
      Amended and Restated Loan and Security Agreement by and between Chordiant
      Software, Inc. and Comerica Bank-California, successor in interest to
      Imperial Bank, dated March 8, 2006.
              
              Form
      10-Q
              
              5/4/200610.21
              
              Modification
      to Second Amended and Restated Loan and Security Agreement dated June 30,
      2008, by and between Chordiant Software, Inc., and Comerica
      Bank-California.
              
              Form
      10-Q
              
              07/31/200810.22
              
              Master
      Agreement for Subcontracted Services dated June 14, 2002 by and between
      Chordiant Software, Inc. and International Business Machines
      Corporation.
              
              Form
      10-K
              
              2/9/2007
  104
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.23
              
              Amendment
      Number One dated May 31, 2005 to the Master Agreement for Subcontracted
      Services dated June 14, 2006 by and between Chordiant Software, Inc. and
      International Business Machines Corporation.
              
              Form
      10-K
              
              2/9/200710.24
              
              Amendment
      Number Two dated October 12, 2006 to the Master Agreement for
      Subcontracted Services dated June 14, 2006 by and between Chordiant
      Software, Inc. and International Business Machines
      Corporation.
              
              Form
      10-K
              
              2/9/200710.25††
              
              Statement
      of Work dated September 28, 2006 by and between Chordiant Software, Inc.
      and International Business Machines Corporation.
              
              Form
      10-K
              
              2/9/200710.26†
              
              Order
      Form Agreement dated September 28, 2006 by and between Chordiant Software,
      Inc. and International Business Machines Corporation.
              
              Form
      10-K
              
              2/9/200710.27††
              
              Software
      License and Services Agreement dated September 28, 2006 by and between
      Chordiant Software, Inc. and Connecticut General Life Insurance
      Company.
              
              Form
      10-K
              
              11/15/200710.28†
              
              Master
      Software License and Support Agreement dated March 21, 2006 by and between
      Chordiant Software, Inc. and Citicorp Credit Services, Inc.
      (USA).
              
              Form
      10-K
              
              2/9/200710.29
              
              Master
      Professional Services Agreement dated May 7, 2006 by and between Chordiant
      Software, Inc. and Citicorp Credit Services, Inc. (USA).
              
              Form
      10-K
              
              2/9/200710.30††
              
              License
      Schedule #5 dated December 8, 2006 to the Master Software License and
      Support Agreement dated March 21, 2006 by and between Chordiant Software
      and Citicorp Credit Services, Inc. (USA).
              
              Form
      10-K
              
              11/15/200710.31
              
              Amendment
      No. 1 to the Master Software License and Support Agreement dated March 21,
      2006 by and between Chordiant Software and Citicorp Credit Services, Inc.
      (USA).
              
              Form
      10-K
              
              2/9/200710.32
              
              Order
      Form Agreement dated December 19, 2006 by and between Chordiant Software
      International GmbH and IBM Deustchland GmbH.
              
              Form
      10-K
              
              2/9/200710.33
              
              Software
      License and Services Agreement dated December 19, 2006 by and between
      Chordiant Software International GmbH and Deutsche Angestellten
      Krankenkasse.
              
              Form
      10-K
              
              2/9/200710.34††
              
              Master
      Agreement dated June 28, 2007 by and between WellPoint, Inc. and Chordiant
      Software, Inc.
              
              Form
      10-Q
              
              8/10/200710.35†††
              
              Master
      Services Agreement By and Between Chordiant Software, Inc. and Ness
      Technologies, Inc., Ness Global Services, Inc. and Ness Technologies India
      Ltd., dated December 15, 2003, as amended.
              
              Form
      10-K
              
              11/15/2007
  105
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.36
              
              Addendum
      A to Master Services Agreement dated September 11, 2006 by and between
      Chordiant Software, Inc. and Ness USA, Inc.
              
              Form
      10-K
              
              2/9/200710.37
              
              Addendum
      A to the Master Services Agreement dated October 25, 2007 by and between
      Chordiant Software, Inc. and Ness USA, Inc.
              
              Form
      10-K
              
              11/15/200710.38
              
              Addendum
      A to Master Services Agreement dated August 15, 2008 by and between
      Chordiant Software, Inc. and Ness USA, Inc..
              
              Form
      8-K
              
              08/29/200810.39†
              
              Addendum
      B to Master Services Agreement dated March 28, 2006 by and among Chordiant
      Software, Inc., Ness USA, Inc., Ness Technologies, India Ltd. and Ness
      Technologies, Inc.
              
              
              
              
              
              X10.40
              
              Addendum
      A to Master Services Agreement dated September 12, 2005 by and among
      Chordiant Software, Inc., Ness Global Services, Inc., Ness Technologies
      India Ltd. and Ness Technologies, Inc.
              
              
              
              
              
              X10.41††
              
              Global
      Framework Agreement dated December 21, 2007 by and between Chordiant
      Software, Inc. and Vodafone Group Services Limited.
              
              Form
      10-Q
              
              02/07/200810.42
              
              Memorandum
      of Understanding re Compromise and Settlement, dated May 29,
      2008.
              
              Form
      8-K
              
              06/03/200810.43
              
              Cupertino
      City Center Net Office Lease, dated June 19, 1998, by and between
      Cupertino City Center Buildings, as Lessor, and Chordiant Software, Inc.,
      as Lessee.
              
              Form
      S-1
                (No.
      333-92187)
              
              1/19/200010.44
              
              First
      amendment to Cupertino City Center Net Office Lease, dated December 10,
      2003, by and between Cupertino City Center Buildings, as Lessor, and
      Chordiant Software, Inc., as Lessee.
              
              10-K
              
              3/8/200410.45
              
              Second
      Amendment to Cupertino City Center Net Office Lease dated March 10, 2006,
      by and between Cupertino City Center Buildings, as Lessor, and Chordiant
      Software, Inc., as Lessee
              
              
              
              
              
              X10.46
              
              Third
      Amendment to Cupertino City Center Net Office Lease dated July 11, 2008,
      by and between Cupertino City Center Buildings, as Lessor, and Chordiant
      Software, Inc., as Lessee.
              
              Form
      10-Q
              
              07/31/200810.47*
              
              Change
      of Control Agreement, dated September 10, 2001, by and between Chordiant
      Software, Inc. and Samuel T. Spadafora.
              
              Form
      10-Q
              
              5/15/200210.48*
              
              Amendment
      to Change of Control Agreement dated February 27, 2004, by and between
      Chordiant Software, Inc. and Samuel T. Spadafora.
              
              Form
      10-K
              
              3/8/200410.49*
              
              Separation
      Agreement dated November 30, 2006, by and between Chordiant Software, Inc.
      and Samuel Spadafora.
              
              Form
      8-K
              
              11/30/2006
  106
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith10.51*
              
              Compromise
      Agreement by and between Chordiant Software International Limited and
      Allen Swann dated October 28th 2004.
              
              Form
      10-K/T
              
              3/29/200510.52*
              
              Board
      Member Agreement dated March 7, 2006 for Richard Stevens
              
              Form
      8-K
              
              3/10/200610.53
              
              Offer
      Letter dated July 19, 2004 for Peter Norman.
              
              
              
              
              
              X10.54*
              
              Change
      of Control Agreement dated November 1, 2005 by and between Chordiant
      Software, Inc. and Peter Norman.
              
              Form
      10-Q
              
              4/30/200710.55*
              
              Change
      of Control Agreement dated November 11, 2005 by and between Chordiant
      Software, Inc. and James St. Jean.
              
              Form
      10-Q
              
              4/30/200710.56
              
              Offer
      Letter dated April 19, 2006 for Frank J. Florence.
              
              
              
              
              
              X10.57*
              
              Change
      of Control Agreement dated May 22, 2006 by and between Chordiant Software,
      Inc. and Frank Florence.
              
              Form
      10-Q
              
              4/30/200710.58
              
              Offer
      Letter dated July 14, 2006 for P.K. Karnik.
              
              
              
              
              
              X10.59*
              
              Change
      of Control Agreement dated April 13, 2007 by and between Chordiant
      Software, Inc. and PK Karnik.
              
              Form
      10-Q
              
              4/30/200710.60*
              
              Offer
      Letter dated October 17, 2005 for Derek P. Witte.
              
              Form
      8-K
              
              10/26/200510.61*
              
              Change
      of Control Agreement dated October 20, 2005 by and between Chordiant
      Software, Inc. and Derek P. Witte.
              
              Form
      8-K
              
              10/26/200510.62
              
              Separation
      Agreement dated May 1, 2008 by and between Chordiant Software Inc. and
      Derek P. Witte.
              
              Form
      10-Q
              
              07/31/200810.63*
              
              Offer
      Letter dated January 31, 2006 for Steven R. Springsteel.
              
              Form
      8-K
              
              2/2/200610.64*
              
              Form
      of Stock Option Agreement for Steven R. Springsteel.
              
              Form
      8-K
              
              2/2/200610.65*
              
              Offer
      Letter dated October 19, 2007 for David Cunningham.
              
              Form
      10-K
              
              11/15/200710.66
              
              Offer
      Letter dated February 3, 2008 for Charles Altomare.
              
              
              
              
              
              X10.67
              
              Offer
      Letter dated July 18, 2008 for David Zuckerman.
              
              
              
              
              
              X18.1
              
              Preferability
      letter from BDO Seidman, LLP, Independent Registered Public Accounting
      Firm.
              
              Form
      10-K
              
              12/9/200521.1
              
              Subsidiaries
      of Chordiant Software, Inc..
              
              Form
      10-Q
              
              5/16/200523.1
              
              Consent
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm.
              
              
              
              
              
              X24.1
              
              Power
      of Attorney (included on the signature pages hereto).
              
              
              
              
              
              X
  107
 Table of Contents
  
 Incorporated
      by ReferenceExhibit
                Number
              
              Description
      of Document
              
              Form
              
              Date
              
              Filed Herewith31.1
              
              Certification
      required by Rule 13a-14(a) or Rule 15d-14(a).
              
              
              
              
              
              X31.2
              
              Certification
      required by Rule 13a-14(a) or Rule 15d-14(a).
              
              
              
              
              
              X32.1#
              
              Certification
      required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
      63 of Title 18 of the United States Code (18 U.S.C. 1350).
 
 (1)
              Chordiant
      has omitted Schedules 2-4 and 709 to the Share Purchase Agreement pursuant
      to Item 601(b)(2) of Regulation S-K. Chordiant hereby undertakes to
      provide the SEC with copies of the omitted schedules upon
      request.
 
 *
              Management
      contract or compensatory plan or
arrangement.
 
 †
              Confidential
      treatment has been requested with respect to certain portions of this
      exhibit. Omitted portions have been filed separately with the SEC as
      required by Rule 406 of Regulation
C.
 
 ††
              Confidential
      treatment granted. Omitted portions have been filed separately with the
      SEC as required by Rule 406 of Regulation
C.
 
 †††
              Confidential
      treatment extension requested. Omitted portions have been filed separately
      with the SEC as required by Rule 406 of Regulation
  C.
 
 #
              The
      certification attached as Exhibit 32.1 is not deemed filed with the
      Securities and Exchange Commission and is not incorporated by reference
      into any filing of Chordiant Software, Inc., whether made before or after
      the date of this Form 10-K irrespective of any general incorporation
      language contained in such filing.
 
 
 
  108