**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,
                  2007
 **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)**
              **(IRS
                  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 registered**Common
                  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.    Yes****** ̈**    No  x
  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 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 Transition Report on Form 10-K
        or
        any amendment to this Form 10-K.    x
   Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
                  accelerated filer   ̈
              Accelerated
                  filer  x
              Non-accelerated
                  filer   ̈
 
 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, 2007, the last business day of the registrant’s most recently completed
        second fiscal quarter: $327,939,833.
  As
        of October 31, 2007, there were 33,289,780 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 2008 Annual Stockholder’s
        meeting.
  Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **ANNUAL
        REPORT ON FORM 10-K**
  **INDEX**
 
 **PART
                  1**Item
                  1
              BUSINESS
              3Item
                  1A.
              RISK
                  FACTORS
              12Item
                  1B.
              UNRESOLVED
                  STAFF COMMENTS
              21Item
                  2.
              PROPERTIES
              21Item
                  3.
              LEGAL
                  PROCEEDINGS
              21Item
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              22**PART II**Item
                  5.
              MARKET
                  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                  MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
              23Item
                  6.
              SELECTED
                  CONSOLIDATED FINANCIAL DATA
              25Item
                  7.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
              26Item
                  7A.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              48Item
                  8.
              CONSOLIDATED
                  FINANCIAL STATEMENTS AND SUPPLEMENTARY
                  DATA
              49Item
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE
              82Item
                  9A.
              CONTROLS
                  AND PROCEDURES
              82Item
                  9B.
              OTHER
                  INFORMATION
              84**PART III**Item
                  10.
              DIRECTORS,
                  EXECUTIVE OFFICERS AND COPORATE
                  GOVERNANCE
              84Item
                  11.
              EXECUTIVE
                  COMPENSATION
              84Item
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              84Item
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                  DIRECTOR INDEPENDENCE
              84Item
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              84**PART IV**Item
                  15.
              EXHIBITS
                  AND FINANCIAL STATEMENT
                  SCHEDULES
              85SIGNATURES
              
              92
 
  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 that
        improve the “customer experience” in front-office processes for leading global
        companies primarily in the banking, insurance, healthcare, and
        telecommunications markets. Chordiant provides companies in these markets with
        innovative solutions that 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 reducing operational costs, and increasing employee productivity.
        These improvements are realized by automating key business processes and
        supporting organizational decision-making associated with the servicing,
        selling, marketing and fulfillment of customer requests across the enterprise.
        We offer solutions to our clients that include software applications, business
        processes, tools and services that will 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.
 
 On
        December 21, 2004, we acquired KiQ Limited, a privately held United Kingdom
        software company or KiQ, for an aggregate purchase price of approximately
        $20
        million, which was comprised of $9.7 million in cash, $9.4 million in our
        common
        stock and approximately $0.9 million in associated transaction costs. Through
        this transaction, we acquired a decision management system 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. Products and patented technology acquired by us in this transaction
        enable 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. With the addition of
        KiQ’s
        products and patented technology 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
  3
 Table
            of Contents
  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.
 
 **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 four target vertical markets of banking, insurance,
        healthcare, and telecommunications:
 
 ·
              **Call
                  Center and Customer Service Desktop (Call Center Advisor – Browser
                  Edition)**: This product is a browser-based guided desktop 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**:  We provide applications for driving 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**: An application which provides 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 products 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. This application is 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**:
                  A guided desktop product and supporting financial transaction components
                  for retail bank tellers/cashiers or other cash-based desktop applications.
                  This product 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) in
                  providing company-wide case management, customer history, and work
                  management between front office and back office
                  operations.
 
 ·
              **Lending:**Solutions and services which 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**:
                  Solutions and services which provide a common process-driven insurance
                  infrastructure and services across an organization to increase
                  efficiency
                  of case management, claims processing, quoting, 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 first generally
                  available release, consisting of core collections functions, was
                  shipped
                  in the third fiscal quarter of 2007. The product is designed to
                  make
                  extensive use of Chordiant’s Decision Management (CDM) technology to
                  deliver real-time decisioning.
  4
 Table
            of Contents
  **Technology**
 
 Chordiant
        applications share a common technology platform and set of development and
        configuration tools through our Cx Enterprise Foundation. Chordiant technology
        is built to scale to tens of thousands of users and integrate seamlessly
        into
        our customer’s IT infrastructure. Chordiant technology is generally built based
        on standards as defined in Java 2 Enterprise Edition (J2EE). Chordiant
        technology works alongside third party J2EE Application Servers, such as
        those
        from International Business Machines Corporation (IBM) and BEA Systems
        Inc.
 
 Chordiant
        technology is based on 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 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.
 
 ·
              **Cx
                  Enterprise Foundation: 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 allows 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.
 
 •
              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.
  5
 Table
            of Contents
  **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 accounts through helping
        them improve the quality of the customer experience they deliver in the banking,
        insurance, healthcare, and telecommunications 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
        will 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., 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 these new
        applications and expand their investment in Chordiant products. For the year
        ended September 30, 2007, Citicorp Credit Services Inc. and IBM accounted
        for
        23% and 16% of our total revenues, respectively.
 
 **Technology**
 
 Chordiant’s
        solutions and core technology are implemented using industry standard software
        that includes J2EE, XML, and Web Services. This industry standard set of
        development specifications leverages the strengths of the Java programming
        language to enable software applications that are easier to develop, configure
        and integrate with legacy and third party information technology
        systems.
  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, BEA Systems, Sun Microsystems, and certain other non-public
        entities. Our enterprise platform solutions support industry standard J2EE
        application servers including IBM WebSphere and BEA WebLogic. Our server
        software runs on UNIX server platforms from Sun Microsystems, IBM and
        Linux.
  6
 Table
            of Contents
  **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, Tata Consulting, Cap Gemini,
        BearingPoint, and Accenture, systems integrators and 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.
  The
        sales process generally ranges from six 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 in various additional locations
        in
        North America and Europe.
 
 **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, business
        engineering, project guidance 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,
        supported by our consultants, 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
        2007,
        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 customized training courses for a fee and, also, through classroom
        and
        lab instructions. In addition, we provide certification programs for our
        partners and customers.
  7
 Table
            of Contents
  
 *Customer
        Support*
  We
        provide our customers with unspecified 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: Accenture, IBM Global Services,
        Ness
        Technologies, Tata Consultancy Services, Patni Telecom Solutions (UK), LTD,
        and
        Infogain Corporation. We plan to expand these 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, BEA Systems, 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 $27.5 million,
        $25.9 million and $20.3 million for the years ended September 30, 2007,
        2006, and 2005, respectively.
 
 **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
  8
 Table
            of Contents
  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
        cost of internal development and total cost-of-ownership have risen to become
        a
        primary concern of the business and management. 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 2007
        may indicate that we will face new competitors in the future. Within the
        year Oracle announced the acquisitions of Agile Software, an enterprise
        solutions software maker and Hyperion Software, a business performance software
        maker. Also in 2007, IBM acquired Palisades, a provider of lending software
        to
        companies in the mortgage industry and SAP has made an offer to purchase
        Business Objects. In 2006, IBM acquired Webify, a provider of middleware
        to
        companies primarily in the insurance industry. In January 2006, Oracle acquired
        Siebel Systems, Inc., a maker of customer relationship management software
        products and acquired Portal Software, a provider of billing and revenue
        management solutions for the communications and media industry. Siebel Systems,
        Inc. was a competitor of ours. In September 2005, IBM had acquired DWL, a
        provider of middleware to companies in the banking, insurance, retail and
        telecommunications industries. In 2005, Oracle acquired I-flex Solutions,
        Ltd.,
        a banking software maker headquartered in Mumbai, India. While we do not
        believe
        that Agile Software, Hyperion Software, Palisades, Webify, Portal Software,
        DWL,
        or I-flex Solutions have been significant competitors of Chordiant in the
        past,
        the acquisition of these companies by Oracle and IBM may indicate that we
        will
        face increased competition from significantly larger and more established
        entities in the future.
  9
 Table
            of Contents
  
 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.
 
 For
        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 covers the
        Decision Management Suite.
 
 **Employees**
  As
        of September 30, 2007, we employed 285 full time employees. Of that total,
        85
        were primarily engaged in product development, engineering or systems
        engineering, 85 were engaged in sales and marketing, 58 were engaged in
        professional services and 57 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
 Table
            of Contents
  **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 slow down 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 make our products less competitive in international markets
        and
        could adversely affect our operating results and cash flows.”
 
 **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 world-wide 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, 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.
  11
 Table
            of Contents
  **ITEM 1A.**
              **RISK
                  FACTORS**
 
 **The
        matters relating to the Audit Committee of the Board’s review of our historical
        stock option granting practices and the restatement of our consolidated
        financial statements have required us to incur substantial expenses, have
        resulted in litigation, and may result in additional
        litigation.**
 
 On
          July 24, 2006, the Company announced that the Audit Committee of the Company’s
          Board of Directors, with the assistance of independent legal counsel, was
          conducting a review of our stock option practices covering the time from
          the
          Company’s initial public offering in 2000 through June 2006. As described in
          Note 3 “Restatement of Previously Issued Consolidated Financial Statements” in
          Notes to Consolidated Financial Statements in the 2006 Form 10-K, 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 has recorded additional non-cash stock-based
          compensation expense, and related tax effects, related to certain stock
          option
          grants, and the Company has restated certain previously filed financial
          statements included in the 2006 Annual Report on Form 10-K.
 
 This
          review of our historical stock option granting practices has required us
          to
          incur substantial expenses for legal, accounting, tax and other professional
          services, has diverted our management’s attention from our business, and any
          litigation or future government enforcement actions could in the future
          adversely affect our business, financial condition, results of operations
          and
          cash flows.
 
 Our
          historical stock option granting practices and the restatement of our prior
          financial statements have exposed us to greater risks associated with litigation
          proceedings. Several derivative complaints have been filed pertaining to
          allegations relating to stock option grants. We cannot assure you that
          these or
          future similar complaints or any future litigation or regulatory action
          will
          result in the same conclusions reached by the Audit Committee. The conduct
          and
          resolution of these matters will be time consuming, expensive and distracting
          from the conduct of our business.
 
 We
          contacted the SEC regarding the Audit Committee’s review and, in July 2006, the
          SEC commenced an investigation into our historical stock option grant practices.
          In November 2006, a representative of the Audit Committee and its informal
          advisors met with the enforcement staff of the SEC and provided them with
          a
          report of the Audit Committee’s investigation and findings. In January 2007, the
          enforcement staff of the SEC notified the Company that its investigation
          had
          been terminated and no enforcement action had been recommended to the
          Commission.
 
 The
          findings of the Audit Committee’s review are more fully described in Note 3 to
          the Consolidated Financial Statements and in Item 9A of the Annual Report
          on
          Form 10-K for the year ended September 30, 2006.
 **Prior
        to 2007, we were not profitable and we may incur losses in the future, which
        may
        raise vendor viability concerns thereby making it more difficult to close
        license transactions with new and existing customers.**
  While
        the Company was profitable in the amount of $6.0 million for the year ended
        September 30, 2007, we incurred losses of $16.0 million and $19.9 million
        for
        the years ended September 30, 2006 and 2005, respectively. As of September
        30,
        2007, we had an accumulated deficit of $226.9 million. We may incur losses
        in
        future periods and cannot be certain that we can generate sufficient revenues
        to
        maintain profitability. Continued losses 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 viability concerns, our revenues will decline, which
        could
        further adversely affect our operating results.
 
 **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 revenues from a limited
        number of customers. The loss of a major customer could cause a decrease
        in
        revenues and net income. For the year ended September 30, 2007, Citicorp
        Credit
        Services, Inc. and International Business Machines (IBM) 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 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 new significant customers or additional orders
        from existing customers to materially affect our operating results.
   12
 Table
            of Contents
  **If
        we fail to adequately address the difficulties of managing our international
        operations, our revenues and operating expenses will be adversely
        affected.**
  For
        the year ended September 30, 2007, international revenues were $58.8 million
        or
        approximately 47% of our total revenues. While North American revenues have
        increased recently as a percentage of our overall 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;
                  and
 
 •
              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.
 
 Any
        of these factors could have a significant impact on our ability to license
        products on a competitive and timely basis and could adversely affect our
        operating expenses and net income. Additionally, we closed our only French
        office in fiscal year 2007. The absence of a business office in France may
        harm
        our ability to attract and retain customers in that country.
 
 **Our
        known backlog of business may not result in revenue.**
  An
        increasingly material portion of our revenues has been derived from large
        orders, as major customers deployed our products. 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.
  **Fluctuations
        in the value of the U.S. Dollar relative to foreign currencies could adversely
        affect our operating results and cash flows.**
 
 A
        significant portion of our sales and operating expenses result from transactions
        outside of the United States, often in foreign currencies. These currencies
        include the United Kingdom Pound Sterling, the Euro and the Canadian
        Dollar. Our international sales comprised 47% of our total sales for the
        year
        ended September 30, 2007. Our international sales comprised 38% of our total
        sales for the year ended September 30, 2006. Our future operating results
        will
        continue to be subject to fluctuations in foreign currency rates, especially
        if
        international sales grow as a percentage of our total sales, and we may be
        adversely impacted by fluctuations in foreign currency rates in the future.
        For
        the year ended September 30, 2007, we had an unrealized foreign currency
        transaction gain of approximately $0.6 million. See Item 7A for further
        discussion about foreign currency risk.
   13
 Table
            of Contents
  **Geopolitical
        concerns could make the closing of license transactions with new and existing
        customers difficult.**
  Our
        revenues may decrease in fiscal year 2008 or beyond if we are unable to enter
        into new large-scale license transactions with new and existing customers.
        The
        current state of world affairs and geopolitical concerns 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
        worldwide will have some economic and political stability. 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 post customer support
        revenues, on which we also depend.
  **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.
  •
              *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.
 
 In
        addition, recent continuing consolidation in the software industry during
        2007
        may indicate that we will face new competitors in the future. Within the
        year
        Oracle announced the acquisitions of Agile Software, an enterprise solutions
        software maker and Hyperion Software, a business performance software maker.
        Also in 2007, IBM acquired Palisades, a provider of lending software to
        companies in the mortgage industry and SAP has made an offer to purchase
        Business Objects. In 2006, IBM acquired Webify, a provider of middleware
        to
        companies primarily in the insurance industry. In January 2006, Oracle acquired
        Siebel Systems, Inc., a maker of customer relationship management software
        products and acquired Portal Software, a provider of billing and revenue
        management solutions for the communications and media industry. Siebel Systems,
        Inc. was a competitor of ours. In September 2005, IBM had acquired DWL, a
        provider of middleware to companies in the banking, insurance, retail and
        telecommunications industries. In 2005, Oracle acquired I-flex Solutions,
        Ltd.,
        a banking software maker headquartered in Mumbai, India. While we do not
        believe
        that Agile Software, Hyperion Software, Palisades, Webify, Portal Software,
        DWL,
        or I-flex Solutions have been significant competitors of Chordiant in the
        past,
        the acquisition of these companies by Oracle and IBM may indicate that we
        will
        face increased competition from significantly larger and more established
        entities in the future.
 
 Many
        of our competitors have greater resources and broader customer relationships
        than we do. In addition, many of these competitors have extensive knowledge
        of
        our industry. Current and potential competitors have established, or may
        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.
  **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
        include:
 
 •
              Size
                  and timing of individual
                  license transactions;
 
 •
              Delay
                  or deferral of customer
                  implementations of our products and subsequent impact on
                  revenues;
  •
              Lengthening
                  of our sales
                  cycle;
   14
 Table
            of Contents
  
 •
              Potentialdeterioration
                  and changes in
                  domestic and foreign markets and
                  economies;
  •
              Success
                  in expanding our global
                  services organization, direct sales force and indirect distribution
                  channels;
  •
              Timing
                  of new product
                  introductions and product
                  enhancements;
  •
              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.
 
 **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.**
 
 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 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. 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 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, our existing business alliance partners, IBM, and Accenture.
        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
        either
        IBM or Accenture 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 and Accenture and, as a result, these systems integrators
        may be more likely to recommend competitors’ products and services. In addition,
        in September 2005, IBM had acquired DWL, a provider of middleware to companies
        in the banking, insurance, retail and telecommunications industries. In 2006,
        IBM acquired Webify, a
  15
 Table
            of Contents
  provider
        of middleware to companies primarily in the insurance industry. In 2007,
        IBM acquired Palisades, a provider of lending software to companies in the
        mortgage industry and SAP has made an offer to purchase Business Objects.
        While
        we do not believe that either DWL, Webify, or Palisades had been a direct
        competitor of Chordiant in the past, IBM’s acquisition of DWL, Webify, and
        Palisades may indicate that IBM will become a competitor of ours in the future.
        While the Company currently has a 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 take over
        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.
  **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
        approximately three to twenty-four 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 and is commonly
        associated with substantial implementation efforts 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 the timing of revenue could be impacted. 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.
  **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 has recorded 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 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
        have contributed to increased expenses and efforts required for our financial
        reporting.
 
 If
        we are not successful in implementing 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.
 
  16
 Table
            of Contents
  **If
        we are not able to successfully manage our partner operations in India, our
        operations and financial results may be adversely
        affected.**
  In
        fiscal year 2003, we entered into an agreement with Ness Technologies Inc.,
        Ness
        USA Inc. (formerly 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 test and certain sustaining
        engineering functions. As of September 30, 2007, we use the services of
        approximately 146 consultants through Ness. In addition, as a result of the
        reduction in our workforce that took place in July 2005, and the reduction
        in
        our workforce that took place in October 2006, by approximately 10% in each
        instance, we are now more dependent on Ness. The expansion of 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 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.
  **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 the timing of revenue could be impacted.
        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.
  **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 and marketing and professional services
        personnel. In particular in prior years, we have had significant turnover
        of our
        executives as well 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 one 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. We have been targeted
        by recruitment agencies seeking to hire our key management, finance,
        engineering, sales and marketing and professional services personnel. In
        addition, in July 2005 and again in October of 2006, we reduced the size
        of our
        workforce by approximately 10% in each instance, which may have a negative
        effect on our ability to attract and retain qualified personnel.
 
 **To
        date, our sales have been concentrated in the banking, insurance, healthcare,
        and telecommunications markets, and if we are unable to continue sales in
        these
        markets or successfully penetrate new markets, or if these industries reduce
        their spending in reaction to the difficulties in the subprime lending market,
        our revenues may decline.**
  Sales
        of our products and services in five large markets—banking, insurance,
        healthcare, telecommunications and retail markets accounted for approximately
        99% and 96 % of our total revenues for the year ended September 30, 2007
        and 2006, respectively. We expect that revenues from these five markets will
        continue to account for a substantial portion of our total revenues for the
        foreseeable future. If we are unable to successfully increase penetration
        of our
        existing markets or achieve sales
  17
 Table
            of Contents
  in
        additional markets, or if the overall economic climate of our target markets
        deteriorates, our revenues may decline. Some of our current or prospective
        customers, especially those in the banking and insurance industries are in
        businesses that have or could have exposure, directly or indirectly, to the
        residential mortgage sector or homebuilder sector which has recently been
        facing
        financial difficulties.  If this causes our current or prospective
        customers to reduce their spending on technology, then this could have an
        adverse impact on our sales and revenues
 
 **Low
        gross margin in services revenues could adversely impact our overall gross
        margin and operating results.**
  Our
        services revenues have had lower gross margins than our license revenues.
        Service revenues comprised 57% and 58% of our total revenues for the year
        ended
        September 30, 2007 and 2006, respectively. Gross margin on service revenues
        was
        57% and 46% for the year ended September 30, 2007 and 2006, respectively.
        License revenues comprised 43% and 42% of our total revenues for the years
        ended
        September 30, 2007 and 2006, respectively. Gross margins on license revenues
        were 97% and 96% for the years ended September 30, 2007 and 2006,
        respectively.
  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. An increase to services
        revenues would require us to expand our services organization, 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. Such an expansion could further reduce gross
        margins
        in our services revenues.
  **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 adversely impact the development and sales of our products
        which would directly impact our operating results.**
  In
        July 2005 and again in October of 2006, we reduced the size of our workforce
        by
        approximately 10% 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, adversely 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 and 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.**
  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 features and
        functionality in a timely manner, demand for our products may decline and
        we may
        not be able to recover our R&D expenditures from such products. We have in
        the past experienced delays in the planned release dates of 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. 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
  18
 Table
            of Contents
  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 such as:
 
 •
              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 initial 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.**
 
 We
        recently 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.**
  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. Growth through
        mergers and acquisitions has several identifiable risks, including difficulties
        associated with successfully integrating distinct businesses into new
        organizations, the substantial management time devoted to integrating personnel,
        technology and entire companies, the possibility that we might not be successful
        in retaining the employees, undisclosed liabilities, the failure to realize
        anticipated benefits (such as cost savings and synergies) and issues related
        to
        integrating acquired technology, merged/acquired companies or content into
        our
        products (such as unanticipated expenses). 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, cash balances, and financial condition.
  **If
        we become subject to intellectual property infringement claims, including
        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. 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 were 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
  19
 Table
            of Contents
  defend
        such a suit. We have received a letter from one such patent holding company
        alleging that our products may infringe one or more of their
        patents.  If any of our products were found to infringe such patent,
        the patent 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 extremely costly. A patent infringement claim could have a material
        adverse effect on our business, operating results and financial
        condition.
  **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 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.
  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.
  **Changes
        in our revenue recognition model could result in short term declines to
        revenue.**
  Historically,
        a high percentage of license revenues have been accounted for 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 identify material weaknesses relating to internal control over financial
        reporting in the future, which may result in 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
        connection with the Company’s compliance with Section 404 under SOX for the
        fiscal years ended September 30, 2006 and 2005, we identified certain
        material weaknesses. In future periods, we will continue to document our
        internal controls to allow management to report on, and our independent
        registered public accounting firm to attest to, our internal control, over
        financial reporting as required by Section 404 of SOX, within the time
        frame required by Section 404. In the future, we may 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.
  20
 Table
            of Contents
  
 **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 2008.
        We
        also lease office space in Mahwah, New Jersey and 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**
 
 Beginning
        in July 2001, the Company and certain of our 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 our 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 our registration statement
        and
        prospectus failed to disclose material facts regarding the compensation to
        be
        received by, and the stock allocation practices of, our 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 Lawsuits
        pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing
        en banc and resolution of the class certification issue. On April 6, 2007,
        the
        Second Circuit denied plaintiffs’ rehearing petition, holding that the actions
        could not be maintained as pled but clarifying that the plaintiffs may seek
        to
        certify a more limited class in the District Court. Accordingly, the settlement
        as originally negotiated will not be finally approved. Plaintiffs had until
        July
        31, 2007 in which to file amended complaints against all Issuers, including
        Chordiant.
 
 Plaintiffs
        filed amended complaints in
        the six focus cases on or about August 14, 2007.  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.  On or about November 13, 2007, Issuers
        in the focus cases filed a motion to dismiss the claims alleged
        against them in the amended complaints.  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.****
  21
 Table
            of Contents
  
 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. The individual defendants filed motions to dismiss
        as
        well. The parties have agreed that the plaintiffs' opposition to the motions
        to
        dismiss would not be due until October 25, 2007, in order to permit
        the parties an opportunity to explore a resolution of this dispute. The hearing
        on the motion to dismiss is set for November 26, 2007.  The Plaintiffs
        have recently informed Chordiant that they intend to file an amended derivative
        complaint.  This will render the currently filed motion to dismiss moot and
        a new motion to dismiss will have to be filed in response to the amended
        pleading. The parties have stipulated to a schedule
        for filing the amended complaint and for briefing motions to dismiss,
        but the court has not yet entered this stipulation as an
        order.
 
 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
        our
        management’s attention or cause product delays. If any of our products were
        found to infringe such patents, the patent holder could seek an injunction
        to
        enjoin our use of the infringing product. If the Company was required to
        settle
        such a claim, it could have a material impact on our business, results of
        operations, financial condition or cash flows.
  The
        Company 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.
  22
 Table
            of Contents
  **PART
        II**
  **ITEM 5.**
              **MARKET
                  FOR REGISTRANT’S COMMON
                  EQUITY,RELATED
                  STOCKHOLDER
                  MATTERSAND ISSUER
                  PURCHASES OF EQUITY
                  SECURITIES**
 
 Our
        common stock is traded on the Nasdaq Global Market under the symbol “CHRD.” The
        following table shows, for the periods indicated, the high and low per share
        sales prices of our common stock, as reported by the NASDAQ Global Market.
        The
        prices appearing in the tables below reflect over-the-counter market quotations,
        which reflect inter-dealer prices, without retail mark-up, markdown or
        commission and may not necessarily represent actual transactions. The high
        and
        low per share prices reflects the 1 for 2.5 reverse stock split on February
        20,
        2007.
  **High**
              
              **Low**Year
                  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
              
              $
              12.94Year
                  Ended September 30, 2006First
                  Quarter (October 1 - December 31)
              $
              7.50
              
              $
              6.22Second
                  Quarter (January 1 - March 31)
              $
              8.82
              
              $
              6.40Third
                  Quarter (April 1 - June 30)
              $
              9.00
              
              $
              7.15Fourth
                  Quarter (July 1 - September 30)
              $
              8.00
              
              $
              5.72
 
 As
        of October 31, 2007, there were approximately 194 holders of record of our
        common stock who together held approximately 204,362 shares of our common
        stock.
        The remainder of our outstanding shares is 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. We have been advised that certain of our directors, officers
        and key
        employees have entered into trading plans for selling shares in our securities.
        As of September 30, 2007, the directors and executive officers who have
        entered into trading plans include Derek Witte, Frank Florence, and James
        D. St.
        Jean. 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.
  **Recent
        Sales of Unregistered Securities**
 
 None.
  23
 Table
            of Contents
  **PERFORMANCE
        MEASUREMENT COMPARISON**
 
 The
        following graph shows the five-year cumulative total stockholder return of
        an
        investment of $100 in cash on September 30, 2002 for:
 
 (i)
              
              Our
                  common stock;(ii)
              
              The
                  Nasdaq Stock Market (U.S.) 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.
 
 
  24
 Table
            of Contents
  
 **ITEM 6.**
              **SELECTED
                  CONSOLIDATED FINANCIAL
                  DATA**
 
 We
        derived the selected financial data as of September 30, 2007 and 2006 and
        for
        the years ended September 30, 2007, 2006, and 2005 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, 2005 and for the nine-months
        ended September 30, 2004 from our 2006 Consolidated Financial Statements
        in the
        2006 Annual Report on Form 10-K. The consolidated statements of operations
        data
        for the year ended December 31, 2003 and the consolidated balance sheets
        as of
        September 30, 2004 and December 31, 2003 have been restated to conform to
        the
        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. The financial data below reflects the 1 for 2.5 reverse
        stock
        split on February 20, 2007.
 
 **Years
                  Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,**
              
              
              
              **Year
                  Ended December 31,****2007**
              
              
              
              **2006**
              
              
              
              **2005**
              
              
              
              **2004**
              
              
              
              **2003****(unaudited)****(amounts
                  in thousands, except per share data)****Consolidated
                  Statements of Operations Data:**Revenues
              $
              124,547
              
              
              $
              97,536
              
              
              $
              83,725
              
              
              $
              61,023
              
              
              $
              68,266Net
                  income (loss)
              
              6,028
              
              
              
              (16,001
              )
              
              
              (19,865
              )
              
              
              (1,371
              )
              
              
              (17,932
              )Net
                  income (loss) per share—basic
              
              0.19
              
              
              
              (0.51
              )
              
              
              (0.67
              )
              
              
              (0.05
              )
              
              
              (0.76
              )Net
                  income (loss) per share—diluted
              $
              0.18
              
              
              $
              (0.51
              )
              
              $
              (0.67
              )
              
              $
              (0.05
              )
              
              $
              (0.76
              )Weighted
                  average shares used in computing net income (loss) per
                  share—basic
              
              32,425
              
              
              
              31,073
              
              
              
              29,780
              
              
              
              27,904
              
              
              
              23,741Weighted
                  average shares used in computing net income (loss) per
                  share—diluted
              
              33,261
              
              
              
              31,073
              
              
              
              29,780
              
              
              
              27,904
              
              
              
              23,741**As
                  of September 30,**
              
              
              **As
                  of**
                **December
                  31,****2007**
              
              
              
              **2006**
              
              
              
              **2005**
              
              
              
              **2004**
              
              
              
              **2003****(unaudited)**
              
              
              
              **(unaudited)****(amounts
                  in thousands)****Consolidated
                  Balance Sheets Data:**Cash,
                  cash equivalents, and marketable securities
              $
              90,146
              
              
              $
              45,278
              
              
              $
              38,546
              
              
              $
              59,748
              
              
              $
              36,399Working
                  capital
              
              56,447
              
              
              
              22,323
              
              
              
              23,733
              
              
              
              46,296
              
              
              
              19,480Total
                  assets
              
              164,815
              
              
              
              111,503
              
              
              
              107,250
              
              
              
              115,340
              
              
              
              83,811Current
                  and long term portion of capital lease obligations
              
              —
              
              
              
              95
              
              
              
              309
              
              
              
              508
              
              
              
              —Short-term
                  and long-term deferred revenue
              
              67,982
              
              
              
              29,505
              
              
              
              26,197
              
              
              
              20,581
              
              
              
              18,396Stockholders’
                  equity
              $
              73,361
              
              
              $
              57,225
              
              
              $
              65,157
              
              
              $
              75,912
              
              
              $
              48,350
 
 No
          dividends have been paid or declared since our inception. Effective January
          1,
          2002, the Company adopted the provisions of Statement of Financial Accounting
          Standards, or SFAS, No. 142, or SFAS 142, “Goodwill and Other
          Intangible Assets,” and ceased amortizing goodwill balances. 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.
 25
 Table
            of Contents
  **ITEM7.**
              **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 1 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.*
  **Reverse
        Stock Split**
 
 On
        December 13, 2006, Chordiant’s Board of Directors approved a reverse two and a
        half to one stock split. On February 15, 2007 at a special meeting, stockholders
        approved the reverse stock split such that each outstanding two and one half
        (2.5) shares of common stock were combined into and became one (1) share
        of
        common stock. The reverse stock split was effective February 20, 2007. All
        share
        and per share amounts in this form 10-K has been retroactively adjusted to
        reflect the reverse stock split for all periods presented.
 
 **Executive
        Overview**
  As
        an enterprise software vendor, we generate substantially all of our revenues
        from the banking, insurance, healthcare, telecommunications, and retail
        industries. 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.
  In
        fiscal year 2007, we recorded revenue of $124.5 million. In fiscal year 2007,
        we
        generated $6.0 million of net income and ended the fiscal year with over
        $90.1
        million in cash, cash equivalents and marketable securities as compared to
        $45.3
        million for the year ended September 30, 2006.
 
 Total
        revenue for the year ended September 30, 2007 increased 28% to $124.5 million
        from $97.5 million of the prior year. The growth in revenue was evenly
        distributed between license and service revenue, each increasing by $13.5
        million. The increase in license revenue was primarily driven by an increase
        in
        the transaction size of license transactions in excess of $1 million as compared
        to the prior year. The increase in service revenue was primarily composed
        of an increase in consulting revenue of $5.2 million, an increase in
        support and maintenance revenue of $8.9 million and an increase of $0.5 million
        in expense reimbursement revenue offset by a decrease in training revenue
        of
        $1.0 million.
 
 In
        the past an increase in license revenue has resulted in a related increase
        in
        consulting revenue as our customers request us to assist with their
        implementation efforts. The increase in support and maintenance revenue is
        expected to continue if we are able to add new licenses to our existing base
        of
        licenses at a rate greater than customers opting not to renew their annual
        support and maintenance contracts.
 
 **Software
        Industry Consolidation and Possible Increased Competition**
 
 The
        software industry in general is continuing to undergo a period of consolidation,
        and there has been recent consolidation in sectors of the software industry
        in
        which we operate. Within the year Oracle announced the acquisitions of Agile
        Software, an enterprise solutions software maker and Hyperion Software, a
        business performance software maker. Also in 2007, IBM acquired Palisades,
        a
        provider of lending software to companies in the mortgage industry and SAP
        has
        made an offer to purchase Business Objects. In 2006, IBM acquired Webify,
        a
        provider of middleware to companies primarily in the insurance industry.
        In
        January 2006, Oracle acquired Siebel Systems, Inc., a maker of customer
        relationship management software products and acquired Portal Software, a
        provider of billing and revenue management solutions for the communications
        and
        media industry. Siebel Systems, Inc. was a competitor of ours. In September
        2005, IBM had acquired DWL, a provider of middleware to companies in the
        banking, insurance, retail and telecommunications industries. In 2005, Oracle
        acquired I-flex Solutions, Ltd., a banking software maker headquartered in
        Mumbai, India. While we do not believe that Agile Software, Hyperion Software,
        Palisades, Webify, Portal Software, DWL, or I-flex Solutions have been
        significant competitors of Chordiant in the past, the acquisition of these
        companies by Oracle and IBM may indicate that we will face increased competition
        from larger and more established entities in the future.
  26
 Table
            of Contents
  
 **Financial
        Trends**
 
 *Backlog*.
        An increasingly material portion of our revenues have 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, 2007 and 2006, we
        had approximately $75.4 million and $36.0 million in backlog, respectively,
        which we define as contractual commitments by our customers through purchase
        orders or contracts. This increase in backlog is partially reflected in the
        growth of deferred revenue recorded on our balance sheet. For the period
        ended
        September 30, 2006 to September 30, 2007 deferred revenue increased $38.4
        million due to an increase of $20.6 million in short-term deferred revenue
        and a
        $17.8 million increase in long-term deferred revenue. The increase in long-term
        deferred revenue was primarily driven by entering into multi-year support
        and
        maintenance contracts with our customers. Backlog is comprised of:
  •
              software
                  license ordersforwhichthe
                  delivered productshave 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;
 
 •
              deferred
                  revenue from customer
                  support contracts;
  •
              consulting
                  service orders
                  representing the unbilled remaining balances of consulting contracts
                  not
                  yet completed or delivered, plus deferred consulting revenuewhere we
                  have not otherwise met
                  all of the required criteria for revenue
                  recognition.
  Backlog
        is not necessarily indicative of revenues to be recognized in a specified
        future
        period. There are many factors that would 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 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. These orders will 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
        (SOP 81-1) to a more traditional revenue model whereby revenues are
        recorded upon delivery.
 
 *Service**R**evenues.*Service revenues as a percentage of total revenues were
        57%, 58%, and 62% for the years ended September 30, 2007, 2006, and 2005,
        respectively. We expect that service revenues will represent between 50%
        and 60%
        of our total revenues in the foreseeable future.
 
 *Revenues
        from**I**nternational**C**ustomers versus**North America**.* For all
        periods presented, revenues were
        principally derived from customer accounts in North America and Europe. For
        the
        years ended September 30, 2007, 2006, and 2005, international revenues were
        $58.8 million, $37.5 million, and $42.0 million or approximately 47%, 38%,
        and 50% 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 prior fiscal year 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 over
        the
        past several quarters. 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. International revenues were negatively impacted for the year ended
        September 30, 2006, as compared to the year ended September 30, 2005, as
        both
        the British Pound and the Euro decreased in average value by less than 1%
        and
        approximately 3%, respectively, as compared to the U.S. Dollar.
  For
        the years ended September 30, 2007, 2006, and 2005, North America revenues
        were
        $65.7 million, $60.0 million, and $41.7 million or approximately 53%, 62%,
        and
        50% of our total revenues, respectively. As the U.S. economy has
        remained
  27
 Table
            of Contents
  strong,
        we have seen an increase in North America revenues. Large customers have
        become
        more willing to invest in new enterprise infrastructure projects. We believe
        North America revenues will continue to represent 50% to 60% of our total
        revenues in the future.
  *Gross
        margins.* Management focuses on license and service gross margin in
        evaluating our financial condition and operating performance. Gross margins
        on
        license revenues were 97%, 96%, and 97% for the years ended September 30,
        2007,
        2006, and 2005, respectively. The changes in gross margins are primarily
        related
        to the amortization expense associated with capitalized software development
        costs pertaining to a banking product. 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%, 46%, and 42% for the years ended September
        30, 2007, 2006, and 2005, 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 55% and 60% in the foreseeable
        future. Margins can be negatively impacted during, and immediately following,
        periods in which professional service department headcounts increase, as
        resources are not immediately billable.
 
 *Acquisition
        of KiQ Limited.* On December 21, 2004, we acquired KiQ Limited, a
        privately-held United Kingdom software company with branch offices in the
        Netherlands, or KiQ, specializing in the development and sales of decision
        management systems. The year ended September 30, 2005 includes the revenue
        and expense of KiQ from the acquisition date, December 21, 2004, through
        the end
        of the fiscal year, September 30, 2005. The years ended September 30, 2007
        and
        2006 include the revenues and expenses of KiQ for the entire fiscal
        year.
 
 *Costs**R**elated to**C**ompliance with the Sarbanes-Oxley Act of
        2002.*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 years ended September 30, 2007, 2006, and 2005, these costs
        were $1.0 million, $1.8 million, and $4.5 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 2008 is uncertain as compared
        to the
        costs incurred for the year ended September 30, 2007.
 
 *Costs**R**elated to**S**tock**O**ption**I**nvestigation.*Significant
        outside professional services
        are included in general and administrative costs 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
        fiscal 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 (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, differ
        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 future
        cash payment equal to the price differential of the Amended Options. These
        payments will be treated as bonus payments. These cash payments will be
        approximately $0.3 million and will be paid out in January 2008. The cost
        of
        these bonus payments were fully accrued as of September 30, 2007.
 
 *Reduction
        in**W**orkforce.*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.
  28
 Table
            of Contents
  
 The
        restructuring plan 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 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 $1.8 million for severance costs and $4.4 million
        for
        exiting excess facilities of which $1.0 million of the excess facility expense
        is associated with non-cash expenses for the write-off of leasehold improvements
        and the reversal of a favorable purchase price adjustment related to the
        France
        office lease. We anticipated that $5.1 million of the expense would result
        in
        cash expenditures. As of September 30, 2007, we have paid $2.7 million in
        cash
        payments and expect to pay the remaining $2.5 million during the first six
        months of fiscal year 2008. In November 2007, we expect to negotiate a break
        clause in the lease allowing for an early termination of the United Kingdom
        facility which will release us of any future rent liabilities subsequent
        to
        January 2008. As of September 30, 2007, we expect the current accrued
        restructuring balance to be sufficient in amount to cover all future rental
        and
        lease termination payments; therefore, we do not anticipate any incremental
        restructuring expenses to terminate this lease early. All obligations related
        to
        severance and benefits have been paid as of September 30, 2007.
 
 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 $1.0 million in the fourth quarter ended September 30, 2005
        for severance benefits. As of September 30, 2007, $0.1 million of the cash
        charges remains outstanding.
 
 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 year ended September
        30, 2007.
  *Past**R**esults**m**ay not be**I**ndicative of**F**uture**P**erformance.*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 accounting principles generally accepted 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.
  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;
  29
 Table
            of Contents
  
 •
              Valuation
                  of long-lived and
                  intangible assets and
                  goodwill;
  •
              Restructuringexpenses;
                  and
  •
              Determining
                  functional currencies
                  for the purposes of consolidating our international
                  operations.
  *Revenue**R**ecognition.*We derive revenues from licenses of our
        software and related services, which include assistance in implementation,
        customization and integration, post-contract customer support, 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 quarter 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 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
        post-contract customer support 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 post-contract customer support
        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 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.
 
 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.
  30
 Table
            of Contents
  
 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.
 
 We
        recognize revenue for post-contract customer support ratably over the support
        period which 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. If a transaction
        includes extended payment terms, we recognized revenue as the payments become
        due and payable.
 
 *Allowance
        for**D**oubtful**A**ccounts.*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 $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.
        Our
        gross accounts receivable balance was $19.1 million with an allowance for
        doubtful accounts of $0.1 million as of September 30, 2006. 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.
        To
        date, bad debts have not been material and have been within management’s
        expectations.
 
 *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 2007 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, 2007 variables, it is
        estimated that a change of 10% in either the volatility, expected life or
        interest rate assumption would result in a corresponding 7%, 5% or 1% change
        in
        the estimated value of the option being valued using the Black-Scholes
        model.
 
 *Accounting
        for**I**ncome**T**axes.* 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
  31
 Table
            of Contents
  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 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.
 
 We
        have recorded a valuation allowance equal to 100% of the deferred tax assets
        as
        of September 30, 2007, due to uncertainties related to our ability to utilize
        our net deferred tax assets, primarily consisting of certain net operating
        losses carried forward and research and development tax credits. Deferred
        tax
        assets have been fully reserved for in all periods presented. We were profitable
        for the quarters ended March 31, 2007, June 30, 2007, and September 30, 2007
        and
        if we continue to be profitable in the near term, we will need to re-evaluate
        the 100% valuation allowance.
  *Valuation
        of**L**ong-lived and**I**ntangible**A**ssets and**G**oodwill.*
        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.
  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.
  We
        determined that we have one reporting unit. We completed a goodwill impairment
        review for the period including September 30, 2007 and 2006 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, 2007 and 2006 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.
  32
 Table
            of Contents
  
 *Restructuring**Expenses**.* In the past five years, we have
        implemented 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.
 
 *Determining**F**unctional**C**urrencies for the**P**urpose of**C**onsolidation.***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
        balance sheet for all periods presented.
  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, 2007, approximately $48.4 million of our cash and cash equivalents were
        held
        by our subsidiaries outside of the United States.
 
 **Recent
        Accounting Pronouncements**
 
 In
        February 2007, the Financial Accounting Standards Board, or FASB, issued
        SFAS
        No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”,
        or SFAS 159. SFAS 159 permits entities to choose to measure many financial
        instruments and certain other items at fair value. SFAS 159 is effective
        for
        fiscal years beginning after November 15, 2007. The Company has evaluated the
        new pronouncement and has determined that it will not have a significant
        impact
        on the determination or reporting of our financial results.
 
 In
        December 2006, the FASB issued Staff Position, or FSP, EITF 00-19-2, “Accounting
        for Registration Payment Arrangements.”  This FSP specifies that the
        contingent obligation to make future payments or otherwise transfer
        consideration under a registration payment arrangement, whether issued as
        a
        separate agreement or included as a provision of a financial instrument or
        other
        agreement, should be separately recognized and measured in accordance with
        FASB
        Statement No. 5, “Accounting for Contingencies.” The guidance is effective for
        fiscal years beginning after December 15, 2006. The Company has evaluated
        the
        new pronouncement and has determined that it will not have a significant
        impact
        on the determination or reporting of our financial results.
  33
 Table
            of Contents
  
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
        the Effects of Prior Year Misstatements When Quantifying Misstatements in
        Current Year Financial Statements”, or SAB 108.  SAB 108 provides
        guidance on how the effects of the carryover or reversal of prior year
        misstatements should be considered in quantifying a current year
        misstatement.  The guidance is applicable for fiscal years ending
        after November 15, 2006. The Company has evaluated the new statement and
        has
        determined that it will not have a significant impact on the determination
        or
        reporting of our financial results.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”, or SFAS
        157. SFAS 157 defines fair value, establishes a framework for measuring fair
        value, and also expands disclosures about fair value
        measurements.  The SFAS 157 is effective for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. The
        Company has evaluated the new pronouncement and has determined that it will
        not
        have a significant impact on the determination or reporting of our financial
        results.
 
 In
          July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
          Uncertainty in Income Taxes”, an interpretation of SFAS No. 109,
“Accounting for Income Taxes” or FIN 48. FIN 48 requires that a position
          taken or expected to be taken in a tax return be recognized in the financial
          statements when it is more likely than not (i.e. a likelihood of more than
          fifty
          percent) that the position would be sustained upon examination by tax
          authorities. A recognized tax position is then measured at the largest
          amount of
          benefit that is greater than fifty percent likely of being realized upon
          ultimate settlement. Upon adoption, the cumulative effect of applying the
          recognition and measurement provisions of FIN 48, if any, shall be
          reflected as an adjustment to the opening balance of retained
          earnings.
 
  FIN 48
          also requires expanded disclosures including identification of tax positions
          for
          which it is reasonably possible that the total amount of unrecognized tax
          benefits will significantly change in the next twelve months, a description
          of
          tax years that remain subject to examination by major tax jurisdictions,
          a
          tabular reconciliation of the total amount of unrecognized tax benefits
          at the
          beginning and end of each annual reporting period, the total amount of
          unrecognized tax benefits that, if recognized, would affect the effective
          tax
          rate and the total amounts of interest and penalties recognized in the
          statements of operations and financial position. FIN 48 is effective for
          fiscal years beginning after December 15, 2006, and the Company expects to
          adopt this standard in the fiscal year commencing on October 1, 2007. The
          Company has not yet determined the impact of the recognition and measurement
          requirements of FIN 48 on our existing tax positions.
 
 In
          May 2007, the FASB issued FSP FIN 48-1, “Definition of Settlement in FASB
          Interpretation No. 48”, which provides guidance on how a company should
          determine whether a tax position is effectively settled for the purpose
          of
          recognizing previously unrecognized tax benefits.
 
  34
 Table
            of Contents
  **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,****2007**
              
              **2006**
              
              **2005****Statements
                  of Operations Data:**Revenues:License
              
              $
              54,052
              
              
              43
              %
              
              $
              40,514
              
              
              42
              %
              
              $
              31,678
              
              
              38
              %Service
              
              
              70,495
              
              
              57
              
              
              
              57,022
              
              
              58
              
              
              
              52,047
              
              
              62Total
                  revenues
              
              
              124,547
              
              
              100
              
              
              
              97,536
              
              
              100
              
              
              
              83,725
              
              
              100Cost
                  of revenues:License
              
              
              1,813
              
              
              2
              
              
              
              1,690
              
              
              2
              
              
              
              1,079
              
              
              1Service
              
              
              30,329
              
              
              24
              
              
              
              30,566
              
              
              31
              
              
              
              30,155
              
              
              36Amortization
                  of intangible assets
              
              
              1,211
              
              
              1
              
              
              
              1,211
              
              
              1
              
              
              
              1,068
              
              
              2Total
                  cost of revenues
              
              
              33,353
              
              
              27
              
              
              
              33,467
              
              
              34
              
              
              
              32,302
              
              
              39Gross
                  profit
              
              
              91,194
              
              
              73
              
              
              
              64,069
              
              
              66
              
              
              
              51,423
              
              
              61Operating
                  expenses:Sales
                  and marketing
              
              
              32,597
              
              
              26
              
              
              
              33,616
              
              
              34
              
              
              
              29,561
              
              
              36Research
                  and development
              
              
              27,546
              
              
              22
              
              
              
              25,858
              
              
              27
              
              
              
              20,272
              
              
              24General
                  and administrative
              
              
              19,898
              
              
              16
              
              
              
              20,445
              
              
              21
              
              
              
              18,549
              
              
              22Amortization
                  of intangible assets
              
              
              —
              
              
              —
              
              
              
              —
              
              
              —
              
              
              
              117
              
              
              —Restructuring
                  expense
              
              
              6,543
              
              
              6
              
              
              
              —
              
              
              —
              
              
              
              1,052
              
              
              1Purchased
                  in-process research and development
              
              
              —
              
              
              —
              
              
              
              —
              
              
              —
              
              
              
              1,940
              
              
              2Total
                  operating expenses
              
              
              86,584
              
              
              70
              
              
              
              79,919
              
              
              82
              
              
              
              71,491
              
              
              85Income
                  (loss) from operations
              
              
              4,610
              
              
              3
              
              
              
              (15,850
              )
              
              (16
              )
              
              
              (20,068
              )
              
              (24
              )Interest
                  income, net
              
              
              2,198
              
              
              2
              
              
              
              1,120
              
              
              1
              
              
              
              755
              
              
              1Other
                  income (expense), net
              
              
              822
              
              
              1
              
              
              
              (627
              )
              
              —
              
              
              
              (103
              )
              
              —Income
                  (loss) before income taxes
              
              
              7,630
              
              
              6
              
              
              
              (15,357
              )
              
              (15
              )
              
              
              (19,416
              )
              
              (23
              )Provision
                  for income taxes
              
              
              1,602
              
              
              1
              
              
              
              644
              
              
              1
              
              
              
              449
              
              
              1Net
                  income (loss)
              
              $
              6,028
              
              
              5
              %
              
              $
              (16,001
              )
              
              (16
              )%
              
              $
              (19,865
              )
              
              (24
              )%
 
 **Comparison
        of the Year Ended September 30, 2007 to the Year Ended September 30,
        2006**
 
 *Revenues*
 
 *License**R**evenue.*****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
              %
  35
 Table
            of Contents
  
 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 the
        next
        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
        is
        being 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 has 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.
 
 *Service**R**evenue*. Service revenue is primarily composed of
        consulting implementation and integration, consulting customization, training,
        post-contract customer support services, or 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
                  license 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 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 will use some
        form of our consulting services in connection with their project.
  *Cost
        of Revenues*
  *License*.
        Cost of license revenues 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. The capitalized
        software development costs pertain to a banking product that was completed
        and
        available for general release in August 2005 and the third party costs
        associated with the porting of a product to a new platform. The porting project
        was completed in August 2007 and the aggregate costs capitalized were $0.5
        million. Amortization expense for the banking product and porting project
        for
        the year ended September 30, 2007 were $0.9 million and less than $0.1 million,
        respectively. Amortization costs for the banking product are expected
        through 2008 and amortization costs of the porting project are expected through
        2010. 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.
  *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):
  36
 Table
            of Contents
  
 **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
        of**I**ntangible**A**ssets
        (**i**ncluded in**C**ost of**R**evenues).*Amortization
        of intangible assets cost
        consists primarily 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 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 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):
 
 **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
  37
 Table
            of Contents
  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
        and**A**dministrative.*General and administrative expenses
        is composed primarily of costs associated with our executive and administrative
        personnel (e.g. the CEO, legal, human resources and finance personnel). These
        costs consist primarily of employee salaries, bonuses, stock compensation
        expense, benefits, facilities, professional fees, including costs for
        Sarbanes-Oxley Act of 2002 (SOX) consultants and the recently 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.
 
 *Restructuring
        Expense.*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. 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 $1.8 million for severance costs and $4.4
        million for exiting excess facilities of which $1.0 million of the excess
        facility expense is associated with non-cash charges for the write-off of
        leasehold improvements and the reversal of a favorable purchase price adjustment
        related to the France office lease. We anticipated that $5.1 million of the
        expense would result in cash expenditures. As of September 30, 2007, we have
        paid $2.7 million in cash payments and expect to pay the remaining $2.5 million
        during the first six months of fiscal year 2008.
 
 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 2007, we completed
        a
        new sublease for this facility with a new sub-tenant 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
        an additional $0.4 million in restructuring expenses for the year ended
        September 30, 2007.
 
 *Stock-based**C**ompensation (**i**ncluded**i**n
        individual**O**perating**E**xpense and**C**ost of**R**evenue**C**ategories).*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):
 
 **Years
                  Ended September 30,****2007**
              
              
              
              **2006**Stock-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 related to 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.
  38
 Table
            of Contents
  
 *Interest**I**ncome,**N**et.*****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 (E**xpense**)**,**N**et.*****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.
  *Provision
        for**I**ncome**T**axes.* Our provision
        for income taxes is $1.6 million and $0.6 million for the years ended
        September 30, 2007 and 2006, respectively. The $1.0 million increase in
        income taxes is 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 primarily consist of net operating loss carryforwards,
        nondeductible allowances and research and development tax credits. We have
        recorded a valuation allowance for the full amount of our net deferred tax
        assets, as the future realization of the tax benefit is not considered by
        management to be more-likely-than-not.
 
 **Comparison
        of the Year Ended September 30, 2006 to the Year Ended September 30,
        2005**
 
 *Revenues*
 
 *License
        Revenue.*****The increase or decrease of license
        revenue occurring within the three different product emphases 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, 2006 and 2005 (in thousands, except percentages):
  39
 Table
            of Contents
  
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%****License
                  Revenue:**Enterprise
                  solutions
              $
              30,351
              
              
              $
              24,587
              
              
              $
              5,764
              
              
              
              23
              %Marketing
                  solutions
              
              6,396
              
              
              
              2,450
              
              
              
              3,946
              
              
              
              161Decision
                  management solutions
              
              3,767
              
              
              
              4,641
              
              
              
              (874
              )
              
              
              (19
              )Total
                  license revenue
              $
              40,514
              
              
              $
              31,678
              
              
              $
              8,836
              
              
              
              28
              %
 
 Total
        license revenue increased $8.8 million, or 28%, to $40.5 million for the
        year
        ended September 30, 2006 compared to $31.7 million for the year ended September
        30, 2005. License revenues for enterprise solutions increased $5.8 million,
        or
        23%, to $30.4 million for the year ended September 30, 2006 compared to
        $24.6 million for the year ended September 30, 2005. This increase was
        primarily due to an increase in value of the average customer transaction.
        License revenues for marketing solutions increased $3.9 million, or 161%,
        to
        $6.4 million for the year ended September 30, 2006 compared to $2.5 million
        for the year ended September 30, 2005. License revenues for decision
        management solutions relate to the products acquired in the KiQ transaction.
        License revenues for decision management solutions decreased $0.8 million,
        or
        19% to 3.8 million for the year ended September 30, 2006 compared to $4.6
        million for year ended September 30, 2005.
  *Service
        Revenue*.  Service revenue is primarily composed of consulting
        implementation and integration, consulting customization, training,
        post-contract customer support services, 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, 2006 and 2005 (in thousands,
        except percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%****Service
                  Revenue:**Enterprise
                  solutions
              $
              39,911
              
              
              $
              40,441
              
              
              $
              (530
              )
              
              
              (1
              )%Marketing
                  solutions
              
              12,996
              
              
              
              9,680
              
              
              
              3,316
              
              
              
              34Decision
                  management solutions
              
              4,115
              
              
              
              1,926
              
              
              
              2,189
              
              
              
              114Total
                  license revenue
              $
              57,022
              
              
              $
              52,047
              
              
              $
              4,975
              
              
              
              10
              %
 
 Total
        service revenue, which includes reimbursement of out-of-pocket expenses,
        increased $5.0 million, or 10%, to $57.0 million for the year ended
        September 30, 2006 compared to $52.0 million for the year ended
        September 30, 2005. This increase is primarily related to a $2.3 million
        increase in support and maintenance revenue, a $2.1 million increase in training
        revenue and a $0.5 million increase in consulting revenue.  Service
        revenue associated with enterprise solution products decreased
        $0.5 million, or 1%, to $39.9 million for the year ended September 30,
        2006 compared to $40.4 million for the year ended September 30, 2005.
        Service revenues associated with marketing solution products increased $3.3
        million, or 34%, to $13.0 million for the year ended September 30, 2006
        compared to $9.7 million for the year ended September 30, 2005. Service
        revenues associated with decision management solution products relate to
        the
        products acquired in the KiQ transaction. Service revenues associated with
        decision management increased $2.2 million or 114% to $4.1 million for the
        year
        ended September 30, 2006 compared to $1.9 million for the year ended
        September 30, 2005.
  Reimbursement
        of out-of-pocket expenses (which are included in total service revenues)
        decreased $0.2 million, or 4%, to $3.3 million for the year ended
        September 30, 2006 compared to $3.5 million for the year ended
        September 30, 2005.
  *Cost
        of Revenues*
  *License*.
        Cost of license revenues 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. The capitalized
        software development costs pertain to a banking product that was completed
        and
        available for general release in August 2005. Annual amortization expense
        associated with this product is $0.9 million. Amortization of these costs
        is
        expected through 2008. The following table sets forth our cost of license
        revenues for the years ended September 30, 2006 and 2005 (in thousands, except
        percentages):
  40
 Table
            of Contents
  
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Cost
                  of license revenue
              $
              1,690
              
              
              $
              1,079
              
              
              $
              611
              
              
              
              57
              %Percentage
                  of total revenue
              
              2
              %
              
              
              1
              %
 
 Cost
        of license revenues increased $0.6 million, or 57%, to $1.7 million for the year
        ended September 30, 2006 compared to $1.1 million for the year ended
        September 30, 2005. This increase is primarily related to the fiscal year
        2006 including a full year of amortization related to the banking product
        versus
        the prior year which included only 1.5 months of amortization. These costs
        resulted in license gross margins of approximately 96% and 97% for the years
        ended September 30, 2006 and 2005, respectively.
  *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, 2006 and 2005 (in thousands, except
        percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Cost
                  of service revenue
              $
              30,566
              
              
              $
              30,155
              
              
              $
              411
              
              
              
              1
              %Percentage
                  of total revenue
              
              31
              %
              
              
              36
              %
 
 Cost
        of service revenues increased $0.4 million, or 1%, to $30.6 million for the
        year
        ended September 30, 2006 compared to $30.2 million for the year ended
        September 30, 2005. This increase in costs is primarily due to increases in
        personnel related costs of $0.7 million related to an increase in headcount,
        facility and information technology costs of $0.6 million, third party support
        and maintenance costs of $0.3 million offset by a decrease in third party
        consulting costs of $1.5 million. These costs resulted in service gross margins
        of approximately 46% and 42% for the years ended September 30, 2006 and
        2005, respectively.
  *Amortization
        of**I**ntangible**A**ssets (included in**C**ost of**R**evenues).*Amortization
        of
        intangible assets cost consists primarily 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 months ended September 30,
        2006
        and 2005 (in thousands, except percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Amortization
                  of intangible assets
              $
              1,211
              
              
              $
              1,068
              
              
              $
              143
              
              
              
              13
              %Percentage
                  of total revenue
              
              1
              %
              
              
              2
              %
 
 Amortization
        of intangible assets was $1.2 million for the year ended September 30,
        2006 compared to $1.1 million for the year ended September 30, 2005. The
        amortization expense in the year ended September 30, 2006 is solely related
        to $6.1 million of intangible assets associated with the acquisition of KiQ
        in
        December 2004. The amortization for 2005 includes a partial year of KiQ related
        amortization. We expect to continue to amortize these assets through December
        2009.
 
 *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 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, 2006 and 2005 (in thousands, except
        percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Sales
                  and marketing costs
              $
              33,616
              
              
              $
              29,561
              
              
              $
              4,055
              
              
              
              14
              %Percentage
                  of total revenue
              
              34
              %
              
              
              36
              %
 
 Sales
        and marketing expenses increased $4.0 million, or 14%, to $33.6 million for
        the
        year ended September 30, 2006 compared to $29.6 million for the year ended
        September 30, 2005. The $4.0 million increase in these expenses was
        mainly attributable to an increase of $2.7 million in personnel related
        expenses, $1.0 million in sales events, and $0.3 million increase in legal
        contract and personnel costs.
  41
 Table
            of Contents
  
 *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 years ended September
        30,
        2006 and 2005 (in thousands, except percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Research
                  and development costs
              $
              25,858
              
              
              $
              20,272
              
              
              $
              5,586
              
              
              
              28
              %Percentage
                  of total revenue
              
              27
              %
              
              
              24
              %
 
 Research
        and development expenses increased $5.6 million, or 27%, to $25.9 million
        for
        the year ended September 30, 2006 compared to $20.3 million for the year
        ended September 30, 2005. This increase was driven by two large
        co-development projects; one in North America and one in the United Kingdom.
        The
        United Kingdom project was completed in September 2006 and the North America
        project was completed in the second half of 2007. This $5.6 million increase
        in
        costs was primarily composed of $6.6 million in consulting expenses related
        to
        our outsourcing of technical support and certain sustaining engineering
        functions and $0.4 million in travel costs which were offset by decreases
        of
        $1.1 million in personnel costs and $0.3 million in information technology
        costs.
  *General
        and**A**dministrative.*General and administrative expenses
        is composed primarily of costs associated with our executive and administrative
        personnel (e.g. the CEO, human resources, legal and finance personnel). These
        costs consist primarily of employee salaries, bonuses, stock compensation
        expense, benefits, facilities, consulting costs, including costs for
        Sarbanes-Oxley Act of 2002 (SOX) consultants and the recently 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, 2006
        and
        2005 (in thousands, except percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**General
                  and administrative costs
              $
              20,445
              
              
              $
              18,549
              
              
              $
              1,896
              
              
              
              10
              %Percentage
                  of total revenue
              
              21
              %
              
              
              22
              %
 
 General
        and administrative expenses increased $1.9 million, or 10%, to $20.4 million
        for
        the year ended September 30, 2006 compared to $18.5 million for the year
        ended September 30, 2005. The increase in costs is primarily due to
        increases of $3.4 million for personnel costs, $0.7 million for severance
        costs
        associated with two senior executives, offset by a reduction of $2.3 million
        in
        professional services for consultants. The increase in personnel costs and
        decrease in professional services was driven by the replacement of accounting
        consultants with permanent employees. The decrease in professional services
        was
        also due to a decrease in SOX consulting fees of $2.7 million which was offset
        by stock option review professional fees of $1.2 million during the year.
        We did
        not experience the same level of decrease in SOX costs in 2007 that we did
        in
        2006. The costs associated with the stock option review continued in the
        first
        half of 2007.
  *Amortization
        of**I**ntangible**A**ssets (included in**O**perating**E**xpenses).*There
        was no
        amortization of intangible assets included in operating costs for 2006. All
        intangible assets attributable to operating expenses were fully amortized
        in
        2005. Amortization of intangible assets included in operating expenses was
        $0.1
        million for the year ended September 30, 2005. These intangible assets were
        the result of the Prime Response acquisition in March 2001.
  *Purchased
        in-process**R**esearch and**D**evelopment.*In-process research and development
        expense represents acquired technology
        that, on the date of acquisition, had not achieved technological feasibility
        and
        did not have an alternative future use, based on the state of development.
        Because the product under development may not achieve commercial viability,
        the
        amount of acquired in-process research and development was immediately expensed.
        The nature of the efforts required to develop the purchased in-process research
        and development into a commercially viable product principally relate to
        the
        completion of all planning, designing, prototyping, verification and testing
        activities that are necessary to establish that the product can be produced
        to
        meet its designed specifications, including functions, features and technical
        performance requirements. There was no purchased in-process research and
        development expense for the year ended September 30, 2006. For the year
        ended September 30, 2005, we recorded an expense of $1.9 million related to
        acquired in-process technology attributable to the acquisition of
        KiQ.
 
 *Restructuring**E**xpenses.*In July 2005, we announced a reduction in
        workforce and incurred a one-time cash expense of approximately $1.1 million
        in
        the year ended September 30, 2005. Please refer to Note 6 to the
        Consolidated Financial Statements for further discussion.
  42
 Table
            of Contents
  
 *Stock-based**C**ompensation (included in**I**ndividual**O**perating**E**xpense
        and**C**ost
        of**R**evenue**C**ategories).*The following
        table sets forth our stock-based compensation expense in terms of absolute
        dollars and functional breakdown for the years ended September 30, 2006 and
        2005
        (in thousands):
 
 **Years
                  Ended September 30,****2006**
                **(under
                  SFAS 123®)**
              
              
              
              **2005**
                **(under
                  SFAS 123/APB 25)**Stock-based
                  compensation expense:Cost
                  of revenues
              $
              248
              
              
              $
              690Sales
                  and marketing
              
              2,327
              
              
              
              986Research
                  and
                  development
              
              332
              
              
              
              843General
                  and
                  administrative
              
              1,788
              
              
              
              512Total
                  stock-based compensation
                  expense
              $
              4,695
              
              
              $
              3,031
 
 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
        is
        a combination of $2.7 million related to stock options and $2.0 million
        associated with restricted stock awards. Included in the restricted stock
        award
        compensation expense of $2.0 million is $1.2 million associated with the
        amortization of restricted stock awards attributable to the KiQ acquisition
        in
        December 2004.  Amortization of deferred stock-based compensation
        attributable to the acquisition of KiQ was expensed through June
        2007.
 
 For
        the year ended September 30, 2005, the aggregate stock-based compensation
        cost
        included in cost of revenues and in operating expenses was $3.0 million which
        was a combination of a $0.4 million benefit related to stock options and
        $3.4
        million expense associated with restricted stock awards. Included in the
        restricted stock award compensation expense of $3.4 million is $2.7 million
        associated with the amortization of restricted stock awards attributable
        to the
        KIQ acquisition.
  *Interest**I**ncome,**N**et.*Interest income, net,
        consists primarily of interest income generated from our cash and cash
        equivalents, offset by interest expense incurred in connection with our capital
        leases and letters of credit. The following table sets forth our interest
        income, net, in terms of absolute dollars for the years ended September 30,
        2006
        and 2005 (in thousands, except percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Interest
                  income, net
              $
              1,120
              
              
              $
              755
              
              
              $
              365
              
              
              
              48
              %Percentage
                  of total revenue
              
              1
              %
              
              
              1
              %
 
 Interest
        income, net, increased to approximately $1.1 million for the year ended
        September 30, 2006 from $0.8 million for the year ended September 30,
        2005. 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 2006 versus 2005.
 
 *Other**Income****(E**xpense**)**,**N**et.*****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 denominated subsidiaries. The following table sets forth our
        other
        income (expense), net in terms of absolute dollars for the years ended September
        30, 2006 and 2005 (in thousands, except percentages):
 
 **Years
                  Ended September 30,****2006**
              
              
              
              **2005**
              
              
              
              **Change**
              
              
              
              **%**Other
                  income (expense), net
              $
              (627
              )
              
              $
              (103
              )
              
              $
              (524
              )
              
              
              (509
              )%Percentage
                  of total revenue
              
              —
              %
              
              
              —
              %
 
 Other
        expense was $0.6 million for the year ended September 30, 2006 as compared
        to $0.1 million for the same period in the prior year. The change is primarily
        attributable to currency exchange gains and losses recognized during the
        years
        ended September 30, 2006 and 2005. These gains and losses are primarily
        associated with our U.S. Dollar account balances held in Europe and the U.S.
        Dollar’s fluctuations in value against the Euro and U.K. Pound
        Sterling.
   43
 Table
            of Contents
  
 *Provision
        for**I**ncome**T**axes.*Our provisions for
        income taxes were $0.6 million and $0.4 million for the years ended
        September 30, 2006 and 2005, respectively. The provisions were attributable
        to taxes on earnings from our foreign subsidiaries and certain state income
        taxes.
  Our
        deferred tax assets primarily consist of net operating loss carryforwards,
        nondeductible allowances and research and development tax credits. We have
        recorded a valuation allowance for the full amount of our net deferred tax
        assets, as the future realization of the tax benefit is not considered by
        management to be more-likely-than-not.
 
 **Liquidity
        and Capital Resources**
 
 Prior
        to the year ended September 30, 2007, we have not been profitable and we
        have
        financed any shortfall from our operating activities through the issuance
        of our
        common stock. Currently, in addition to generating profit for the year, we
        have
        generated $38.9 million cash from operations for the year ended September
        30,
        2007. It is anticipated that we will continue to generate cash from operations
        or financing activities in excess of the cash requirements in the near
        term.
 
 Our
        cash, cash equivalents, restricted cash are principally held in operating
        accounts, money market accounts, commercial paper and certificates of deposit
        and our marketable securities are invested in corporate bonds and commercial
        paper. The balances of these accounts totaled $90.5 million and $45.8 million
        at
        September 30, 2007 and 2006, respectively, an increase of $44.7 million,
        or
        98%.
 
 Operating
                  Activities
 
 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.
 
 Cash
        used in operating activities was $9.0 million during the year ended
        September 30, 2005, which consisted primarily of our net loss of $19.9
        million adjusted for non-cash items (primarily the write off of in-process
        research and development costs associated with the KiQ acquisition,
        depreciation, amortization, non-cash stock-based compensation expense and
        other
        non-cash charges) aggregating approximately $7.9 million and the net cash
        inflow
        effect from changes in assets and liabilities of approximately $3.1 million.
        This net cash inflow was primarily caused by an increase in revenue and the
        collection of accounts receivable, offset by the payment of accounts payable
        and
        accrued expenses, and additions to prepaid expenses and other assets. The
        increase in deferred revenue is primarily attributable to two significant
        license agreements signed in the three month period ended June 30, 2005.
        These agreements were accounted for under the percentage of completion method
        of
        accounting.
 
 Investing
                  Activities
 
 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.
  44
 Table
            of Contents
  
 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.
 
 Cash
        used in investing activities during the year ended September 30, 2005 was
        $8.8 million. This use of cash primarily related to the $9.8 million in
        funds used to acquire KiQ, $2.2 million in funds used to complete
        development of an acquired banking product offset by the $4.0 million in net
        proceeds from the sale of marketable securities. Property and equipment
        purchases also consumed $0.7 million of cash during the period.
 
 Financing
                  Activities
 
 Financing
        activities were a source of cash in the amounts of $6.2 million, $2.0 million,
        and $1.0 million for the year ended September 30, 2007, 2006 and 2005,
        respectively.
 
 For
        the year ended September 30, 2007, 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.
 
 For
        the year ended September 30, 2006, the amount relates to $2.2 million in
        proceeds from stock option exercises, offset by payments of $0.2 million
        on
        capital lease obligations.
 
 For
        the year ended September 30, 2005, the amount relates to $1.2 million in
        proceeds from stock option exercises, offset by payments of $0.2 million
        on
        capital lease obligations. During the year ended September 30, 2005, we
        suspended our Employee Stock Purchase Plan, or ESPP. Historically, proceeds
        to
        us from the ESPP have been significant. The ESPP is not expected to be
        reinstated and, accordingly, we do not anticipate that we will receive proceeds
        from the ESPP in the near term.
 
 **Revolving
        Line of Credit**
 
  The
        Company’s revolving line of credit with Comerica Bank was amended and restated
        on March 8, 2006 and was extended to March 7, 2008. The terms of the agreement
        include a $5.0 million line of credit and require us 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. Due to the Company’s failing to
        timely file its periodic reports on Form 10-K for the year ended September
        30,
        2006 and on Form 10-Q for the quarter ended June 30, 2006, the line of credit
        agreement was amended in August 2006, November 2006, and December 2006 to
        extend
        the deadline related to the filing of its periodic reports to February 20,
        2007.
        As of February 14, 2007, the Company became current with its SEC regulatory
        filings and has remained current for filings thereafter.
 
 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, 2007, we had utilized $0.3 million of the standby commercial letters
        of
        credit limit of which $0.3 million serves as collateral for computer equipment
        leases for Ness (see Note 9 to the Consolidated Financial Statements). 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,
        2007, we had not entered into any foreign exchange forward contracts. Pursuant
        to the amendment in March 2006, we are required to secure the standby commercial
        letters of credit and foreign exchange forward contracts through March 7,
        2008.
        If these have not been secured to Comerica Bank’s satisfaction, our 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,
        2007, there was no outstanding balance on the revolving line of credit. Advances
        are available on a non-formula basis up to $5.0 million.
  45
 Table
            of Contents
  
 **Contractual
        Obligations**
 
 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 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 the Company,
        subject to the payment of a termination fee. In 2004, 2005, 2006 and
        2007 we 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. The remaining minimum purchase commitment under these
        agreements, if Chordiant was to cancel the contracts, was approximately $0.7
        million at September 30, 2007. 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 $0.3 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.
 
 During
        the three months ended March 31, 2007, the Company paid the final payments
        on
        its remaining capital lease obligations. Operating lease payments in the
        table below include approximately $4.9 million for two facility operating
        lease
        commitments that are included in restructuring expenses. One of the leases
        is
        located in Boston, Massachusetts and the other is located in the United Kingdom.
        As of September 30, 2007, the Company has $0.9 million in sublease income
        contractually committed for future periods relating to the Boston,
        Massachusetts facility classified as an operating lease. See Note 6 to the
        Consolidated Financial Statements for further discussion.
 
 In
        November 2007, we expect to negotiate a break clause in the in the United
        Kingdom facility lease allowing for an early termination of the respective
        facility which will release the Company of any future rent liabilities
        subsequent to January 2008. The scheduled lease payments shown in the table
        below reflect a payment of $2.5 million in fiscal year 2008 associated with
        the
        anticipated early termination of the United Kingdom lease.
 
 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, 2007, the Company estimated that gross expected
        cash flows of 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, 2007(in thousands):
 
 **Payments
                  due by period****Total**
              
              
              
              **Less
                  than**
                **1
                  Year**
              
              
              
              **1-3**
                **Years**
              
              
              
              **3-5**
                **Years**
              
              
              
              **More
                  than**
                **5
                  years**Operating
                  lease obligations
              
              13,580
              
              
              
              5,772
              
              
              
              4,779
              
              
              
              2,472
              
              
              
              557Asset
                  retirement obligations
              
              346
              
              
              
              —
              
              
              
              —
              
              
              
              346
              
              
              
              —Total
              
              13,926
              
              
              
              5,772
              
              
              
              4,779
              
              
              
              2,818
              
              
              
              557
 
 We
        believe that the effects of our strategic actions implemented to improve
        revenue
        as well as to control costs 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,
        a
        decline 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. 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.
  46
 Table
            of Contents
  
 **Indemnification**
 
 As
        permitted under Delaware law, we have agreements whereby we have indemnified
        our
        officers, directors and certain employees for certain events or occurrences
        while the employee, officer or director is, or was serving, at our 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 we could be
        required to make under these indemnification agreements is unlimited; however,
        we have a Director****and Officer insurance policy that
        limits our exposure and may enable us 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 lawsuits described in Note 10 to the Consolidated
        Financial Statements. As a result of our insurance policy coverage, we believe
        the estimated fair value of these indemnification agreements is minimal.
        Accordingly, we have no liabilities recorded for these agreements as of
        September 30, 2007.
 
 We
        have entered into standard indemnification agreements in our ordinary course
        of
        business. Pursuant to these agreements, we agreed to indemnify, defend, hold
        harmless, and to reimburse the indemnified party for losses suffered or incurred
        by the indemnified party, generally our business partners or customers, in
        connection with any patent, copyright or other intellectual property
        infringement claim by any third party with respect to our products. The term
        of
        these indemnification agreements is generally perpetual after execution of
        the
        agreement. The maximum potential amount of future payments we could be required
        to make under these indemnification agreements is unlimited. We have not
        incurred significant costs to defend lawsuits or settle claims related to
        these
        indemnification agreements. We believe the estimated fair value of these
        agreements is minimal.  Accordingly, we have no liabilities recorded
        for these agreements as of September 30, 2007.
 
 We
        have entered into arrangements with our business partners, whereby the business
        partners agree to provide services as subcontractors for its implementations.
        We
        may, at its discretion and in the ordinary course of business, subcontract
        the
        performance of any of our services. Accordingly, we have entered into standard
        indemnification agreements with our customers, whereby we indemnify them
        for
        other acts, such as personal property damage by our subcontractors. The maximum
        potential amount of future payments we could be required to make under these
        indemnification agreements is unlimited; however, we have general and umbrella
        insurance policies that may enable us to recover a portion of any amounts
        paid.
        We have not incurred significant costs to defend lawsuits or settle claims
        related to these indemnification agreements. As a result, we believe the
        estimated fair value of these agreements is minimal. Accordingly, we have
        no
        liabilities recorded for these agreements as of September 30, 2007.
 
 When,
        as part of an acquisition, we acquire all of the stock or all of the assets
        and
        liabilities of a company, we 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, we could be required to make
        for
        such obligations is undeterminable at this time. Accordingly, we have no
        amounts
        recorded for these contingent liabilities as of September 30, 2007.
 
 We
        warrant that our software products will perform in all material respects
        in
        accordance with our 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, we warrant that our maintenance and
        consulting services will be performed consistent with generally accepted
        industry standards. If necessary, we would provide for the estimated cost
        of
        product and service warranties based on specific warranty claims and claim
        history, however, we have not incurred significant expense under our product
        or
        services warranties to date. As a result, we believe the estimated fair value
        on
        these warranties is minimal. Accordingly, we have no amounts recorded for
        these
        contingent liabilities as of September 30, 2007.
 
 **Off
        Balance Sheet Arrangements**
 
 None.
 
 
  47
 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 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
                  Rates**Restricted
                  cash 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
              %
 
 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, 2006 (in thousands):
 
 **September
                  30, 2006**
              
              
              **Fair
                  Value**
              
              **Average**
                **Interest
                  Rates**Restricted
                  cash in short-term investments
              $
              519
              
              $
              519
              
              1.9
              %Total
                  restricted cash in short-term investments
              $
              519
              
              $
              519
 
 *Interest
        Rate Risk*. Our exposure to market rate risk for changes in interest rates
        relates primarily to money market accounts, commercial paper, short-term
        certificates of deposit and marketable securities. We invest our excess
        cash in money market accounts, commercial paper, certificates-of-deposit,
        and
        marketable securities 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.
 
 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, 2007, interest income would decline by $0.1 million. Assuming
        consistent investment levels as of September 30, 2006, interest income would
        have declined by less than $0.1 million.
 
 *Foreign
        Currency Risk*. International revenues accounted for approximately 47% of
        total revenues for the year ended September 30, 2007, compared to 38% of
        total revenues for the year ended September 30, 2006.  International
        revenues increased $21.3 million or 57% compared to the prior
        year.  The growth in our international operations has 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
        2007,
        our international revenues for 2007 would have been lower than we reported
        by
        approximately $0.1 million and our international income from operations
        would have not been materially different. Using the average foreign currency
        exchange rates from 2006, our international revenues for 2007 would have
        been
        lower than we reported by approximately $4.9 million and our international
        income from operations would have been lower than we reported by
        $0.8 million.
 
 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 fiscal years ended September 30, 2007,
        2006
        and 2005, we recorded net foreign currency transaction gains and (losses),
        realized and unrealized, of approximately $0.6 million, ($0.5 million), and
        $0.1
        million, respectively, which were recorded in Other income (expense), net,
        in
        the Consolidated Statements of Operations.
  48
 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, 2007, 2006 and 2005.**
  **Consolidated
                  Financial Statements:**Report
                  of
                  Independent Registered Public Accounting Firm
              50Consolidated
                  Balance Sheets as of September 30, 2007 and
                  2006
              51Consolidated
                  Statements of Operations for the years ended September 30, 2007,
                  2006, and 2005
              52Consolidated
                  Statements of Stockholders’ Equityand Comprehensive
                  Income (Loss)for the
                  years ended
                  September 30, 2007, 2006, and 2005
              53Consolidated
                  Statements of Cash Flows for the years ended September 30, 2007,
                  2006, and 2005
              54Notes
                  to
                  Consolidated Financial Statements
              55**Financial
                  Statement Schedule:**Schedule
                  II—Valuation and Qualifying Accounts for the years ended
                  September 30, 2007, 2006, and 2005
              85
 
 All
        other schedules are omitted because they are not applicable or the required
        information is shown in the Consolidated Financial Statements or Notes
        thereto.
  49
 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, 2007 and 2006, 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, 2007.  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, 2007 and 2006, and the results of its operations and
        its
        cash flows for each of the three years in the period ended September 30,
        2007**,** in conformity with accounting principles generally
        accepted in the United States of America.
  Also,
        in our opinion, the financial statement schedule 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,
        2007, based on criteria established in *Internal Control – Integrated
        Framework*issued by the Committee of Sponsoring Organizations of the
        Treadway Commission (COSO) and our report dated November 15, 2007 expressed
        an
        unqualified opinion thereon.
 
 
 /s/
        BDO Seidman, LLP
 
 San
        Jose, California
 November
        15, 2007
  50
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 **(in
        thousands, except per share data)**
  **September
                  30,****2007**
              
              **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              77,987
              
              
              $
              45,278Marketable
                  securities
              
              
              12,159
              
              
              
              —Restricted
                  cash
              
              
              46
              
              
              
              185Accounts
                  receivable, net, including nil and $142 due from related parties
                  at
                  September 30, 2007 and 2006, respectively
              
              
              27,381
              
              
              
              19,025Prepaid
                  expenses and other current assets
              
              
              5,306
              
              
              
              5,210Total
                  current assets
              
              
              122,879
              
              
              
              69,698Restricted
                  cash
              
              
              265
              
              
              
              334Property
                  and equipment, net
              
              
              3,638
              
              
              
              2,630Goodwill
              
              
              32,044
              
              
              
              32,044Intangible
                  assets, net
              
              
              2,725
              
              
              
              3,937Other
                  assets
              
              
              3,264
              
              
              
              2,860Total
                  assets
              
              $
              164,815
              
              
              $
              111,503**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable, including nil and $132 due to related parties at September
                  30, 2007 and 2006, respectively
              
              $
              8,080
              
              
              $
              7,665Accrued
                  expenses
              
              
              13,804
              
              
              
              15,706Deferred
                  revenue, including related party balances of $116 and $112 at
                  September 30, 2007 and 2006, respectively
              
              
              44,548
              
              
              
              23,909Current
                  portion of capital lease obligations
              
              
              —
              
              
              
              95Total
                  current liabilities
              
              
              66,432
              
              
              
              47,375Deferred
                  revenue—long-term
              
              
              23,434
              
              
              
              5,596Restructuring
                  costs, net of current portion
              
              
              942
              
              
              
              1,239Other
                  long-term liabilities
              
              
              646
              
              
              
              68Total
                  liabilities
              
              
              91,454
              
              
              
              54,278Commitments
                  and contingencies (Notes 6, 8, 9, and 10)Stockholders’
                  equity:Preferred
                  stock, $0.001 par value; 51,000 shares authorized; none issued
                  and
                  outstanding at September 30, 2007 and 2006
              
              
              —
              
              
              
              —Common
                  stock, $0.001 par value; 120,000 shares authorized; 33,221 and
                  32,030
                  shares issued and outstanding at September 30, 2007 and 2006,
                  respectively
              
              
              33
              
              
              
              32Additional
                  paid-in capital
              
              
              295,650
              
              
              
              286,440Accumulated
                  deficit
              
              
              (226,915
              )
              
              
              (232,943
              )Accumulated
                  other comprehensive income
              
              
              4,593
              
              
              
              3,696Total
                  stockholders’ equity
              
              
              73,361
              
              
              
              57,225Total
                  liabilities and stockholders’ equity
              
              $
              164,815
              
              
              $
              111,503
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  51
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(in
        thousands, except per share data)**
 **Years
                    Ended September 30,****2007**
                
                **2006**
                
                **2005**Revenues:License,
                    including related party items aggregating nil, nil, and $5,612,
                    for years
                    ended September 30, 2007, 2006, and 2005,
                    respectively
                
                $
                54,052
                
                
                $
                40,514
                
                
                $
                31,678Service,
                    including related party items aggregating $252, $663, and $2,443,
                    for
                    years ended September 30, 2007, 2006, and 2005,
                    respectively
                
                
                70,495
                
                
                
                57,022
                
                
                
                52,047Total
                    revenues
                
                
                124,547
                
                
                
                97,536
                
                
                
                83,725Cost
                    of revenues:License
                
                
                1,813
                
                
                
                1,690
                
                
                
                1,079Service,
                    including related party items aggregating $72, $669, and nil,
                    for the
                    years ended September 30, 2007, 2006, and 2005,
                    respectively
                
                
                30,329
                
                
                
                30,566
                
                
                
                30,155Amortization
                    of intangible assets
                
                
                1,211
                
                
                
                1,211
                
                
                
                1,068Total
                    cost of revenues
                
                
                33,353
                
                
                
                33,467
                
                
                
                32,302Gross
                    profit
                
                
                91,194
                
                
                
                64,069
                
                
                
                51,423Operating
                    expenses:Sales
                    and marketing
                
                
                32,597
                
                
                
                33,616
                
                
                
                29,561Research
                    and development
                
                
                27,546
                
                
                
                25,858
                
                
                
                20,272General
                    and administrative
                
                
                19,898
                
                
                
                20,445
                
                
                
                18,549Amortization
                    of intangible assets
                
                
                —
                
                
                
                —
                
                
                
                117Restructuring
                    expense
                
                
                6,543
                
                
                
                —
                
                
                
                1,052Purchased
                    in-process research and development
                
                
                —
                
                
                
                —
                
                
                
                1,940Total
                    operating expenses
                
                
                86,584
                
                
                
                79,919
                
                
                
                71,491Income
                    (loss) from operations
                
                
                4,610
                
                
                
                (15,850
                )
                
                
                (20,068
                )Interest
                    income, net
                
                
                2,198
                
                
                
                1,120
                
                
                
                755Other
                    income (expense), net
                
                
                822
                
                
                
                (627
                )
                
                
                (103
                )Income
                    (loss) before income taxes
                
                
                7,630
                
                
                
                (15,357
                )
                
                
                (19,416
                )Provision
                    for income taxes
                
                
                1,602
                
                
                
                644
                
                
                
                449Net
                    income (loss)
                
                $
                6,028
                
                
                $
                (16,001
                )
                
                $
                (19,865
                )Net
                    income (loss) per share:Basic
                
                $
                0.19
                
                
                $
                (0.51
                )
                
                $
                (0.67
                )Diluted
                
                $
                0.18
                
                
                $
                (0.51
                )
                
                $
                (0.67
                )Weighted
                    average shares used in computing net income (loss) per
                    share:Basic
                
                
                32,425
                
                
                
                31,073
                
                
                
                29,780Diluted
                
                
                33,261
                
                
                
                31,073
                
                
                
                29,780
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
  52
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
        (LOSS)**
 **(in
        thousands)**
 
 **Common
                  Stock**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Deferred**
                **Stock-Based**
                **Compensation**
              
              **Accumulated**
                **Deficit**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Income
                  (Loss)**
              
              **Total**
                **Stockholders’**
                **Equity****Shares**
              
              **Amount****Balance
                  at September 30, 2004**
              
              
              **29,014**
              
              
              **$**
              **29**
              
              
              **$**
              **270,571**
              
              
              **$**
              **(700**
              **)**
              
              **$**
              **(197,077**
              **)**
              
              **$**
              **3,089**
              
              
              **$**
              **75,912**Net
                  loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (19,865
              )
              
              
              —
              
              
              
              (19,865
              )Foreign
                  currency translation loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (605
              )
              
              
              (605
              )Comprehensive
                  loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (20,470
              )Exercise
                  of stock options
              
              
              498
              
              
              
              —
              
              
              
              1,512
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,512Stock-based
                  compensation-stock options related to acquisitions
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,729
              
              
              
              —
              
              
              
              —
              
              
              
              2,729Stock-based
                  compensation-stock options
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (348
              )
              
              
              —
              
              
              
              —
              
              
              
              (348
              )Stock-based
                  compensation-restricted stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              650
              
              
              
              —
              
              
              
              —
              
              
              
              650Cancellation
                  of restricted stock
              
              
              (38
              )
              
              
              —
              
              
              
              (221
              )
              
              
              221
              
              
              
              —
              
              
              
              —
              
              
              
              —Unearned
                  compensation on variable options
              
              
              —
              
              
              
              —
              
              
              
              (411
              )
              
              
              411
              
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
                  of restricted stock
              
              
              180
              
              
              
              —
              
              
              
              952
              
              
              
              (952
              )
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
                  of common stock, net of offering costs, and restricted stock related
                  to
                  acquisitions
              
              
              1,741
              
              
              
              2
              
              
              
              9,305
              
              
              
              (4,123
              )
              
              
              —
              
              
              
              —
              
              
              
              5,184Warrants
                  issued to customer
              
              
              —
              
              
              
              —
              
              
              
              (12
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (12
              )**Balance
                  at September 30, 2005**
              
              
              **31,395**
              
              
              
              **31**
              
              
              
              **281,696**
              
              
              
              **(2,112**
              **)**
              
              
              **(216,942**
              **)**
              
              
              **2,484**
              
              
              
              **65,157**Net
                  loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (16,001
              )
              
              
              —
              
              
              
              (16,001
              )Foreign
                  currency translation gain
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,212
              
              
              
              1,212Comprehensive
                  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**
              
              
              
              **57,225**Net
                  income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              6,028
              
              
              
              —
              
              
              
              6,028Unrealized
                  gain/loss on marketable securities, net
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2
              )
              
              
              (2
              )Foreign
                  currency translation gain
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              899
              
              
              
              899Comprehensive
                  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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              77**Balance
                  at September 30, 2007**
              
              
              **33,221**
              
              
              **$**
              **33**
              
              
              **$**
              **295,650**
              
              
              **$**
              **—**
              
              
              **$**
              **(226,915**
              **)**
              
              **$**
              **4,593**
              
              
              **$**
              **73,361**
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  53
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
  **Years
                  Ended September 30,****2007**
              
              
              **2006**
              
              
              **2005**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              6,028
              
              
              $
              (16,001
              )
              
              $
              (19,865
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Depreciation
                  and amortization
              
              
              1,611
              
              
              
              1,238
              
              
              
              1,382Purchased
                  in-process research and development
              
              
              —
              
              
              
              —
              
              
              
              1,940Amortization
                  of intangibles and capitalized software
              
              
              2,133
              
              
              
              2,111
              
              
              
              1,335Non-cash
                  stock-based compensation expense
              
              
              3,020
              
              
              
              4,695
              
              
              
              3,031Excess
                  tax benefits from stock-based compensation
              
              
              (77
              )
              
              
              —
              
              
              
              —Provision
                  (reversal) for doubtful accounts
              
              
              82
              
              
              
              (9
              )
              
              
              103Warrants
                  issued to customers
              
              
              —
              
              
              
              —
              
              
              
              (12
              )Loss
                  on disposal of assets
              
              
              673
              
              
              
              40
              
              
              
              27Accretion
                  of discounts on investments
              
              
              (131
              )
              
              
              —
              
              
              
              —Other
                  non-cash charges
              
              
              445
              
              
              
              140
              
              
              
              29Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (11,825
              )
              
              
              292
              
              
              
              1,479Prepaid
                  expenses and other current assets
              
              
              (59
              )
              
              
              (1,028
              )
              
              
              (988
              )Other
                  assets
              
              
              2,585
              
              
              
              (136
              )
              
              
              250Accounts
                  payable
              
              
              238
              
              
              
              3,004
              
              
              
              (3,893
              )Accrued
                  expenses, other long term liabilities and restructuring
              
              
              (2,383
              )
              
              
              6,106
              
              
              
              743Deferred
                  revenue
              
              
              36,573
              
              
              
              2,793
              
              
              
              5,489Net
                  cash provided by (used in) operating activities
              
              
              38,913
              
              
              
              3,245
              
              
              
              (8,950
              )Cash
                  flows from investing activities:Property
                  and equipment purchases
              
              
              (2,809
              )
              
              
              (1,694
              )
              
              
              (726
              )Capitalized
                  product development costs
              
              
              (257
              )
              
              
              (250
              )
              
              
              (2,226
              )Proceeds
                  from disposal of property and equipment
              
              
              —
              
              
              
              11
              
              
              
              —Cash
                  used for acquisitions, net
              
              
              —
              
              
              
              —
              
              
              
              (9,800
              )Proceeds
                  from release of restricted cash
              
              
              215
              
              
              
              1,893
              
              
              
              (12
              )Purchases
                  of marketable securities and short term investments
              
              
              (18,028
              )
              
              
              —
              
              
              
              (100
              )Proceeds
                  from maturities of short term investments
              
              
              6,000
              
              
              
              —
              
              
              
              4,100Net
                  cash used in investing activities
              
              
              (14,879
              )
              
              
              (40
              )
              
              
              (8,764
              )Cash
                  flows from financing activities:Proceeds
                  from exercise of stock options
              
              
              6,191
              
              
              
              2,250
              
              
              
              1,210Payment
                  on capital leases
              
              
              (96
              )
              
              
              (213
              )
              
              
              (199
              )Excess
                  tax benefits from stock-based compensation
              
              
              77
              
              
              
              —
              
              
              
              —Net
                  cash provided by financing activities
              
              
              6,172
              
              
              
              2,037
              
              
              
              1,011Effect
                  of exchange rate changes
              
              
              2,503
              
              
              
              1,490
              
              
              
              (499
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              32,709
              
              
              
              6,732
              
              
              
              (17,202
              )Cash
                  and cash equivalents at beginning of the year
              
              
              45,278
              
              
              
              38,546
              
              
              
              55,748Cash
                  and cash equivalents at end of the year
              
              $
              77,987
              
              
              $
              45,278
              
              
              $
              38,546Supplemental
                  cash flow information:Cash
                  paid for interest
              
              $
              3
              
              
              $
              17
              
              
              $
              29Cash
                  paid for taxes
              
              $
              1,669
              
              
              $
              360
              
              
              $
              478Supplemental
                  non-cash investing and financing activities:Receivable
                  related to issuance of stock options
              
              $
              —
              
              
              $
              77
              
              
              $
              302Fair
                  value of assets acquired in acquisition, excluding acquired intangible
                  assets
              
              $
              —
              
              
              $
              —
              
              
              $
              1,134Liabilities
                  assumed in acquisitions
              
              $
              —
              
              
              $
              —
              
              
              $
              477Issuance
                  of common stock in connection with acquisition
              
              $
              —
              
              
              $
              —
              
              
              $
              9,307Cashless
                  exercise of stock warrants
              
              $
              —
              
              
              $
              450
              
              
              $
              —
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  54
 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 banking, insurance,
        healthcare, telecommunications, 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**
  **Basis
        of Presentation - Reverse Stock Split**
 
 On
        December 13, 2006, Chordiant’s Board of Directors approved a reverse two and a
        half to one stock split. On February 15, 2007 at a special meeting, stockholders
        approved the reverse stock split such that each outstanding two and one half
        (2.5) shares of common stock were combined into and became one (1) share
        of
        common stock. The reverse stock split was effective February 20, 2007. All
        share
        and per share amounts in these Consolidated Financial Statements and related
        notes have been retroactively adjusted to reflect the reverse stock split
        for
        all periods presented.
 
 **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 accounting
        principles generally accepted 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 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.
  55
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued**)
 
 **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 are subject to minimal credit and market
        risks.
 
 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, 2007 and 2006, there
        were $12.2 million and zero, respectively marketable securities held by the
        Company, respectively.
  **Restricted
        cash**
 
 At
        September 30, 2007 and 2006, interest bearing certificates of deposit were
        classified as restricted cash. These deposits serve as collateral for letters
        of
        credit securing certain lease obligations and post-contract customer support
        obligations. During the years ended September 30, 2007 and 2006, $0.2 million
        and $0.3 million, respectively of restricted cash for letters of credit related
        to lease obligations was released in accordance with the requirements of
        the
        lease agreement.
 
 **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, 2007, 2006 and 2005, 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, 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 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”
(collectively “SOP 97-2”).
 
 For
        arrangements with multiple elements, the Company recognizes revenue for services
        and post-contract customer support based upon the fair value Vendor Specific
        Objective Evidence (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
        post-contract customer support 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.
  56
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued**)
 
 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
        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
        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”.
 
 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.
 
 Revenue
        for post-contract customer support is recognized ratably over the support
        period
        which 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.
 
 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. If a transaction
        includes extended payment terms, the revenue is recognized as the payments
        become due and payable.
  57
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued**)
 
 **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 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, 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, 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, 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.
 
 Upon
        adoption of SFAS 123(R), the Company has continued to utilize the Black-Scholes
        option-pricing model, or Black-Scholes model. For additional information,
        see
        Note 12. 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. Stock-based compensation expense recognized under SFAS 123(R)
        for
        the year ended 2007 was $3.0 million, which consisted of stock-based
        compensation expense of $2.8 million related to employee stock options and
        $0.2
        million related to restricted stock awards, respectively.
 
 There
        was no stock-based compensation expense related to the ESPP recognized during
        the years ended September 30, 2007, 2006 and 2005. See Note 12 for additional
        information.
 
  58
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued**)
 
 **Concentrations
        of credit risk**
 
 Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist of cash, cash equivalents, restricted cash, marketable securities
        and accounts receivable. To date, the Company has invested excess funds in
        money
        market accounts, commercial paper, corporate bonds, certificates-of-deposit,
        and
        marketable securities with maturities of less than one year. The Company
        has
        cash and cash equivalents and marketable securities with various high quality
        institutions domestically and internationally. The Company’s marketable
        securities are composed of investment instruments that are highly
        rated.
 
 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.
        To date, bad debts have not been material and have been within management
        expectations. The following table summarizes the revenues from customers
        that
        accounted for 10% or more of total revenues:
 
 **Year
                  Ended****September 30,****2007**
              
              **2006**
              
              **2005**Citicorp
                  Credit Services, Inc.
              23
              %
              
              12
              %
              
              *IBM
              16
              %
              
              *
              
              
              *Capital
                  Once Services, Inc.
              *
              
              
              *
              
              
              18
              %
 *      Represents
        less than 10% of total revenues.
 
 At
        September 30, 2007, Wellpoint, Inc., IBM and Citicorp Credit Services,
        Inc. accounted for approximately 28%, 17% and 15% of our accounts
        receivable, respectively. At September 30, 2006, IBM and Cash America
        International, Inc. accounted for approximately 26% and 14% of our accounts
        receivable, respectively.
 
 **Research
        and Development**
 
 Costs
        incurred in the research and development of new products and enhancements
        to
        existing products are charged to expense as incurred until the technological
        feasibility of the product or enhancement has been established. Technological
        feasibility of the product is determined after the completion of a detailed
        program design and a determination has been made that any uncertainties related
        to high-risk development issues have been resolved. If the process of developing
        the product does not include a detail program design, technological feasibility
        is determined only after completion of a working model. After establishing
        technological feasibility, additional development costs incurred through
        the
        date the product is available for general release to customers is capitalized
        and amortized over the estimated product life.
 
 When
        technological feasibility is established through the completion of a working
        model the period of time between achieving technological feasibility and
        the
        general release of new product is generally short and software development
        costs
        qualifying for capitalization have historically been insignificant.
 
 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 have been capitalized and included in Other Assets as of September
        30,
        2007. This product was completed 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 year ended
        September 30, 2007 amortization expense related to this product was less
        than
        $0.1 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
        have
        been 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 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, 2007 and 2006, amortization
        expense related to this product was $0.9 million and $0.9 million,
        respectively.
  59
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 **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 $1.5
        million, $1.2 million and $1.4 million for the years ended September 30,
        2007, 2006, and 2005, 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**
 
 Goodwill
        represents the excess of the purchase price in a business combination over
        the
        fair value of net tangible and intangible assets acquired.  Goodwill
        amounts are not amortized, but rather are tested for impairment at least
        annually. 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). 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 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, 2007,
        2006,
        and 2005.
 
 **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 $1.8 million, $1.5
        million, and $1.5 million for the years ended September 30, 2007, 2006, and
        2005, 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, 2007, 2006, and 2005 totaled approximately
        $0.5 million, $0.2 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).
  60
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 **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.
 
 **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 years ended September 30, 2006 and 2005.
 
 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):
 
 **Year****s****ended********September 30,****2007**
              
              
              **2006**
              
              
              **2005**Net
                  income (loss) available to common stockholders
              
              $
              6,028
              
              
              $
              (16,001
              )
              
              $
              (19,865
              )Denominator:Weighted
                  average common stock outstanding
              
              
              32,650
              
              
              
              31,476
              
              
              
              30,548Common
                  stock subject to repurchase
              
              
              (225
              )
              
              
              (403
              )
              
              
              (768
              )Denominator
                  for basic calculations
              
              
              32,425
              
              
              
              31,073
              
              
              
              29,780Effect
                  of dilutive potential common shares
              
              
              836
              
              
              
              —
              **(1)**
              
              
              —
              **(1)**Denominator
                  for diluted calculations
              
              
              33,261
              
              
              
              31,073
              
              
              
              29,780Net
                  income (loss) per share—basic
              
              $
              0.19
              
              
              $
              (0.51
              )
              
              $
              (0.67
              )Net
                  income (loss) per share—diluted
              
              $
              0.18
              
              
              $
              (0.51
              )
              
              $
              (0.67
              )
 
 **(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,****2006**
              
              
              
              **2005**Warrants
                  outstanding
              
              345
              
              
              
              665Employee
                  stock options
              
              4,105
              
              
              
              3,385Restricted
                  stock
              
              403
              
              
              
              7684,853
              
              
              
              4,818
  61
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 **NOTE
        3— BALANCE SHEET COMPONENTS**
 
 **Accounts
        receivable**
 
 Accounts
        receivable, net, consists of the following (in thousands):
 
 **September 30,****2007**
              
              
              
              **2006**Accounts
                  receivable, net:Accounts
                  receivable
              $
              27,546
              
              
              $
              19,108Less:
                  allowance for doubtful accounts
              
              (165
              )
              
              
              (83
              )$
              27,381
              
              
              $
              19,025
 
 **Prepaid
        expenses and other current assets**
 
 Prepaid
        expense and other current assets consist of the following (in
        thousands):
 
 **September 30,****2007**
              
              
              
              **2006**Prepaid
                  expense and other current assets:Prepaid
                  commissions and royalties
              $
              3,104
              
              
              $
              3,265Other
                  prepaid expenses and current assets
              
              2,202
              
              
              
              1,945$
              5,306
              
              
              $
              5,210
 
 **Property
        and equipment**
 
 Property
        and equipment, net, consists of the following (in thousands):
 
 **September 30,****2007**
              
              
              
              **2006**Property
                  and equipment, net:Computer
                  hardware (useful lives of 3 years)
              $
              4,167
              
              
              $
              3,313Purchased
                  internal-use software (useful lives of 3 years)
              
              2,685
              
              
              
              2,254Furniture
                  and equipment (useful lives of 3 to 7 years)
              
              739
              
              
              
              1,043Computer
                  equipment and software under capital leases (useful lives of 3
                  years)
              
              —
              
              
              
              549Leasehold
                  improvements (shorter of 7 years or the term of the lease)
              
              2,883
              
              
              
              2,72910,474
              
              
              
              9,888Accumulated
                  depreciation and amortization
              
              (6,836
              )
              
              
              (7,258
              )$
              3,638
              
              
              $
              2,630
 
  62
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 **Intangible
        assets**
 
 Intangible
        assets, net, consist of the following (in thousands):
  **September
                  30, 2007**
              
              **September 30,
                  2006****Gross**
                **Carrying**
                **Amount**
              
              
              
              **Accumulated**
                **Amortization**
              
              
              
              **Net**
                **Carrying**
                **Amount**
              
              
              
              **Gross**
                **Carrying**
                **Amount**
              
              
              
              **Accumulated**
                **Amortization**
              
              
              
              **Net**
                **Carrying**
                **Amount**Intangible
                  assets, net:Developed
                  technologies
              
              $
              6,904
              
              
              $
              (4,869
              )
              
              $
              2,035
              
              
              $
              6,904
              
              
              $
              (3,972
              )
              
              $
              2,932Customer
                  list and trade-names
              
              
              2,731
              
              
              
              (2,041
              )
              
              
              690
              
              
              
              2,731
              
              
              
              (1,726
              )
              
              
              1,005$
              9,635
              
              
              $
              (6,910
              )
              
              $
              2,725
              
              
              $
              9,635
              
              
              $
              (5,698
              )
              
              $
              3,937
 
 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 their estimated useful lives which are as follows:
        Developed technologies—one and one half to five years; trade-names—three to five
        years; 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, 2007, 2006, and 2005, respectively. The Company
        expects amortization expense on acquired intangible assets to be $1.2 million
        in
        fiscal 2008, $1.2 million in fiscal 2009, and $0.3 million in fiscal
        2010.
 
 **Other
        assets**
 
 Other
        assets consist of the following (in thousands):
 
 **September 30,****2007**
              
              
              
              **2006**Other
                  assets:Long-term
                  accounts receivable
              $
              984
              
              
              $
              —Other
                  assets
              
              2,280
              
              
              
              2,860$
              3,264
              
              
              $
              2,860
 
 The
        long-term accounts receivable balance represents 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, 2007, an allowance has not been provided
        for
        this receivable based on the Company’s assessment of the underlying customer’s
        credit worthiness.
 
 **Accrued
        expenses**
  Accrued
        expenses consist of the following (in thousands):
  **September 30,****2007**
              
              
              
              **2006**Accrued
                  expenses:Accrued
                  payroll, payroll taxes and related expenses
              $
              6,781
              
              
              $
              7,627Accrued
                  restructuring expenses, current portion (Note 6)
              
              3,044
              
              
              
              655Accrued
                  third party consulting fees
              
              1,264
              
              
              
              1,491Accrued
                  income, sales and other taxes
              
              1,143
              
              
              
              2,545Accrued
                  professional fees
              
              337
              
              
              
              1,630Other
                  accrued liabilities
              
              1,235
              
              
              
              1,758$
              13,804
              
              
              $
              15,706
 
  63
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 **NOTE
        4—MARKETABLE SECURITIES**
 
 The
        Company has the following marketable securities (in
        thousands):
 
 **September
                  30, 2007****Amortized**
                **cost**
              
              
              
              **Gross**
                **Unrealized**
                **Gain**
              
              
              
              **Gross**
                **Unrealized**
                **Loss**
              
              
              
              **Fair**
                **Value**Marketable
                  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, 2006. As of September
        30, 2007, all marketable securities have maturity dates less than one year.
        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
        February 2007, the FASB, issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities”, or SFAS 159. SFAS 159 permits
        entities to choose to measure many financial instruments and certain other
        items
        at fair value. SFAS 159 is effective for fiscal years beginning after November
        15, 2007. The Company has evaluated the new pronouncement and has determined
        that it will not have a significant impact on the determination or reporting
        of
        our financial results.
 
 In
        December 2006, the FASB issued FSP EITF 00-19-2, “Accounting for Registration
        Payment Arrangements.” This FSP specifies that the contingent obligation to make
        future payments or otherwise transfer consideration under a registration
        payment
        arrangement, whether issued as a separate agreement or included as a provision
        of a financial instrument or other agreement, should be separately recognized
        and measured in accordance with FASB Statement No. 5, “Accounting for
        Contingencies.” The guidance is effective for fiscal years beginning after
        December 15, 2006. The Company has evaluated the new pronouncement and has
        determined that it will not have a significant impact on the determination
        or
        reporting of our financial results.
 
 In
        September 2006, the SEC issued SAB 108, “Considering the Effects of Prior Year
        Misstatements When Quantifying Misstatements in Current Year Financial
        Statements”. SAB 108 provides guidance on how the effects of the carryover or
        reversal of prior year misstatements should be considered in quantifying
        a
        current year misstatement.  The guidance is applicable for fiscal
        years ending after November 15, 2006. The Company has evaluated the new
        statement and has determined that it will not have a significant impact on
        the
        determination or reporting of our financial results.
 
 In
        September 2006, the FASB issued SFAS 157, “Fair Value Measurement”. SFAS 157
        defines fair value, establishes a framework for measuring fair value, and
        also
        expands disclosures about fair value measurements. SFAS 157 is effective
        for
        fiscal years beginning after November 15, 2007, and interim periods within
        those
        fiscal years. The Company has evaluated the new pronouncement and has determined
        that it will not have a significant impact on the determination or reporting
        of
        our financial results.
 
 In
          July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”,
          an interpretation of SFAS No. 109, “Accounting for Income Taxes”.
          FIN 48 requires that a position taken or expected to be taken in a tax
          return be recognized in the financial statements when it is more likely
          than not
          (i.e. a likelihood of more than fifty percent) that the position would
          be
          sustained upon examination by tax authorities. A recognized tax position
          is then
          measured at the largest amount of benefit that is greater than fifty percent
          likely of being realized upon ultimate settlement. Upon adoption, the cumulative
          effect of applying the recognition and measurement provisions of FIN 48, if
          any, shall be reflected as an adjustment to the opening balance of retained
          earnings.
 
  FIN 48
          also requires expanded disclosures including identification of tax positions
          for
          which it is reasonably possible that the total amount of unrecognized tax
          benefits will significantly change in the next twelve months, a description
          of
          tax years that remain subject to examination by major tax jurisdictions,
          a
          tabular reconciliation of the total amount of unrecognized tax
          benefits
  64
 Table
            of Contents
  **CHORDIANT
          SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 at
          the beginning and end of each annual reporting period, the total amount
          of
          unrecognized tax benefits that, if recognized, would affect the effective
          tax
          rate and the total amounts of interest and penalties recognized in the
          statements of operations and financial position. FIN 48 is effective for
          fiscal years beginning after December 15, 2006, and the Company expects to
          adopt this standard in the fiscal year commencing on October 1, 2007. The
          Company has not yet determined the impact of the recognition and measurement
          requirements of FIN 48 on our existing tax positions.
 
 In
        May
        2007,the FASB issued FSP FIN 48-1, “Definition of Settlement in FASB
        Interpretation No. 48”, which provides guidance on how a company should
        determine whether a tax position is effectively settled for the purpose of
        recognizing previously unrecognized tax benefits.
 
 **NOTE
        6—RESTRUCTURING**
 
 **Restructuring
        Costs**
  Through
        September 30, 2007, 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, or SFAS 146, “Accounting for Costs
        Associated with Exit or Disposal Activities” 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, 2007, the total restructuring accrual consisted of the
        following (in thousands):
 
 **Current**
              
              
              
              **Non-Current**
              
              
              
              **Total**Severance
                  and termination benefits
              $
              100
              
              
              $
              —
              
              
              $
              100Excess
                  facilities
              
              2,944
              
              
              
              942
              
              
              
              3,886Total
              $
              3,044
              
              
              $
              942
              
              
              $
              3,986
 
 As
        of September 30, 2007 and 2006, $3.0 million and $0.7 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, 2008.
 
  65
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 The
        excess facilities reserve relates to two facilities: one located in the United
        Kingdom and one in Boston, Massachusetts. The 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
                  Future**
                **Minimum
                  Lease**
                **Payments**2008
              
              
              
              
              $
              2,9442009
              
              
              
              
              
              4152010
              
              
              
              
              
              4072011
              
              
              
              
              
              120Total
              
              
              
              
              $
              3,886
 
 Included
        in the future minimum lease payments schedule above is an offset of $0.9
        million
        of contractually committed sublease rental income for the Boston facility.
        In
        November 2007, the Company expects to negotiate a break clause in the
        United Kingdom lease allowing for an early termination of the respective
        facility which will release the Company of any future rent liabilities
        subsequent to January 2008. The scheduled lease payments shown in the table
        above reflect an expected payment of $2.5 million in fiscal year 2008 associated
        with the early termination of the United Kingdom lease.
 
 **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. In connection with this action, 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. The Company was able to terminate the France
        facility lease during the year and as of the date of this Annual Report,
        expects
        to negotiate an early termination option for the United Kingdom lease that
        will
        terminate the lease by January 2008. Management believes the current restructure
        reserve amount is sufficient to meet all payments required as a result of
        the
        anticipated early termination.
 
 The
        following table summarizes the activity related to the fiscal year 2007
        restructuring (in thousands):
 
 **Severance**
                **and
                  Benefits**
              
              
              
              **Excess**
                **Facilities**
              
              
              
              **Total**Total
                  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
              
              
              $
              2,526
 
 **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 as 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, and affected employees were notified in
        July 2005. In connection with this action, the Company incurred a one-time
        restructuring expense of $1.1 million in the fourth quarter ended
        September 30, 2005 for severance and termination benefits.
 
  66
 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**
                  **Benefits**Reserve
                    balance at September 30, 2005
                $
                469Non-Cash
                
                1Cash
                    paid
                
                (438
                )Reserve
                    balance at September 30, 2006
                
                32Provision
                    adjustment
                
                60Non-Cash
                
                8Cash
                    paid
                
                —Reserve
                    balance at September 30, 2007
                $
                100
 **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
        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 is 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**
                **Facilities**Reserve
                  balance at
                  September 30, 2005
              $
              2,497Non-cash
              
              (298
              )Cash
                  paid
              
              (337
              )Reserve
                  balance at
                  September 30, 2006
              
              1,862Provision
                  adjustment
              
              353Non-cash
              
              1Cash
                  paid
              
              (856
              )Reserve
                  balance at September 30, 2007
              $
              1,360
  67
 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 director of the Company, is the President and Chief Executive
        Officer of Covad Communications Group, Inc., or Covad, a customer of
        ours.
 
 In
        January 2005, David A. Weymouth became a 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.
 
 The
        following presents the related
        party transactions balances(in thousands):
  **Revenue**
              
              **Cost
                  of Revenues**
              
              **Payments****Year
                  Ended September 30,****2007**
              
              
              **2006**
              
              
              **2005**
              
              
              **2007**
              
              
              **2006**
              
              
              **2005**
              
              
              **2007**
              
              
              **2006**
              
              
              **2005**Infogain
              $
              —
              
              $
              426
              
              $
              —
              
              $
              72
              
              $
              669
              
              $
              —
              
              $
              204
              
              $
              952
              
              $
              —Covad
              
              252
              
              
              237
              
              
              1,102
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Barclay’s
                  Group
              
              —
              
              
              
              
              
              6,953
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Deloitte
                  & Touche LLP
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              98
              
              
              547$
              252
              
              $
              663
              
              $
              8,055
              
              $
              72
              
              $
              669
              
              $
              —
              
              $
              204
              
              $
              1,050
              
              $
              547
  **Accounts Receivable**
                
                **Accounts
                    Payable**
                
                **Deferred
                    Revenue****As
                    of September 30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Infogain
                $
                —
                
                $
                2
                
                $
                —
                
                $
                132
                
                $
                —
                
                $
                —Covad
                
                —
                
                
                140
                
                
                —
                
                
                —
                
                
                116
                
                
                112$
                —
                
                $
                142
                
                $
                —
                
                $
                132
                
                $
                116
                
                $
                112
 **NOTE
          8—BORROWINGS**
 
 **Revolving
        Line of Credit**
 
  The
        Company’s revolving line of credit with Comerica Bank was amended and restated
        on March 8, 2006 and was extended to March 7, 2008. The terms of the agreement
        include a $5.0 million line of credit and require 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. Due to the Company’s failing to
        timely file its periodic reports on Form 10-K for the year ended September
        30,
        2006 and on Form 10-Q for the quarter ended June 30, 2006, the line of credit
        agreement was amended in August 2006, November 2006, and December 2006 to
        extend
        the deadline related to the filing of its periodic reports to February 20,
        2007.
        As of February 14, 2007, the Company became current with its SEC regulatory
        filings and has remained current for filings thereafter.
 
 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, 2007, the Company had utilized $0.3 million of the standby commercial
        letters of credit limit of which $0.3 million serves as collateral for computer
        equipment leases for Ness (see Note 9). 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, 2007, the Company
        had
        not entered into any foreign exchange forward contracts. Pursuant to the
        amendment in March 2006, the Company is required to secure the standby
        commercial letters of credit and foreign exchange forward contracts through
        March 7, 2008. 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.
 
  68
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
  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,
          2007, there was no outstanding balance on the revolving line of credit.
          Advances
          are available on a non-formula basis up to $5.0 million.
 **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 term.
 
 Future
        minimum lease payments as of September 30, 2007 are as follows (in
        thousands):
 
 **Operating**
                **Leases**
              
              
              
              **Operating**
                **Sublease**
                **Income**
              
              
              
              **Net**
                **Operating**
                **Leases**Fiscal
                  year ended September 30:2008
              $
              5,772
              
              
              $
              (277
              )
              
              $
              5,4952009
              
              2,503
              
              
              
              (283
              )
              
              
              2,2202010
              
              2,276
              
              
              
              (294
              )
              
              
              1,9822011
              
              1,672
              
              
              
              (85
              )
              
              
              1,5872012
              
              800
              
              
              
              —
              
              
              
              800Thereafter
              
              557
              
              
              
              —
              
              
              
              557Total
                  minimum payments
              $
              13,580
              
              
              $
              (939
              )
              
              $
              12,641
 
 During
        the three months ended March 31, 2007, the Company paid the final payments
        on
        its remaining capital lease obligations. Operating lease payments in the
        table above include approximately $4.9 million for two facility operating
        lease
        commitments that are included in restructuring expense. One of the leases
        is
        located in Boston, Massachusetts and the other is located in the United Kingdom.
        As of September 30, 2007, the Company has $0.9 million in sublease income
        contractually committed for future periods relating to the Boston,
        Massachusetts facility classified as an operating lease. See Note 6 for
        further discussion. The scheduled lease payments shown in the table above
        reflect a payment of $2.5 million in fiscal year 2008 associated with the
        early
        termination of the United Kingdom lease.
  Rent
        expense for the years ended September 30, 2007, 2006, and 2005 totaled $2.5
        million, $2.5 million, and $2.7 million, respectively. Certain operating
        leases
        included in the table above are part of our restructuring activities and
        lease
        payments on such leases are expensed against the restructuring
        accrual.
 
 *Asset
        Retirement Obligations*
 
 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, 2007, the Company estimated that gross expected
        cash flows of approximately $0.3 million will be required to fulfill these
        obligations.
 
 Asset
        retirement obligations payments as of September 30, 2007 are as follows (in
        thousands):
 
 **Payments**Fiscal
                  year ended September 30:2008
              
              
              
              
              $
              —2009
              
              
              
              
              
              —2010
              
              
              
              
              
              —2011
              
              
              
              
              
              1442012
              
              
              
              
              
              202Total
              
              
              
              
              $
              346
 
  69
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 *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 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. In 2004, 2005, 2006 and 2007 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. The
        remaining minimum purchase commitment under these agreements, if Chordiant
        was
        to cancel the contracts, was approximately $0.7 million at September 30,
        2007.
        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 $0.3 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
        Director****and 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 lawsuits 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,
        2007.
 
 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, 2007.
 
 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,
        2007.
 
 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, 2007.
  70
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 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,
        2007.
 
 **NOTE
        10—LITIGATION**
 
 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 Lawsuits
        pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing
        en banc and resolution of the class certification issue. On April 6, 2007,
        the
        Second Circuit denied plaintiffs’ rehearing petition, holding that the actions
        could not be maintained as pled but clarifying that the plaintiffs may seek
        to
        certify a more limited class in the District Court. Accordingly, the settlement
        as originally negotiated will not be finally approved. Plaintiffs had until
        July
        31, 2007 in which to file amended complaints against all Issuers, including
        Chordiant.
 
 Plaintiffs
        filed amended complaints in
        the six focus cases on or about August 14, 2007.  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.  On or about November 13, 2007, Issuers
        in the focus cases filed a motion to dismiss the claims alleged
        against them in the amended complaints.  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.****
  71
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 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. The individual defendants filed motions to dismiss
        as
        well. The parties have agreed that the plaintiffs' opposition to the motions
        to
        dismiss would not be due until October 25, 2007, in order to permit
        the parties an opportunity to explore a resolution of this dispute. The hearing
        on the motion to dismiss is set for November 26, 2007.  The Plaintiffs
        have recently informed Chordiant that they intend to file an amended derivative
        complaint.  This will render the currently filed motion to dismiss moot and
        a new motion to dismiss will have to be filed in response to the amended
        pleading. The parties have stipulated to a schedule
        for filing the amended complaint and for briefing motions to dismiss,
        but the court has not yet entered this stipulation as an
        order.
 
 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. If the Company was required to settle
        such a claim, it could have a material impact on our business, results of
        operations, financial condition or cash flows.
  The
        Company 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,****2007**
              
              
              
              **2006**
              
              
              
              **2005**United
                  States
              $
              (2,363
              )
              
              $
              (16,759
              )
              
              $
              (19,766
              )Foreign
              
              9,993
              
              
              
              1,402
              
              
              
              350$
              7,630
              
              
              $
              (15,357
              )
              
              $
              (19,416
              )
 
  72
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 Income
        tax expense (benefit) was comprised of the following (in
        thousands):
 
 **Years
                  ended September 30,****2007**
              
              
              
              **2006**
              
              
              
              **2005**CurrentUnited
                  States
              $
              150
              
              
              $
              —
              
              
              $
              —International
              
              1,431
              
              
              
              377
              
              
              
              234State
              
              21
              
              
              
              267
              
              
              
              2151,602
              
              
              
              644
              
              
              
              449DeferredUnited
                  States
              
              —
              
              
              
              —
              
              
              
              —International
              
              —
              
              
              
              —
              
              
              
              —State
              
              —
              
              
              
              —
              
              
              
              ——
              
              
              
              —
              
              
              
              —$
              1,602
              
              
              $
              644
              
              
              $
              449
 
 The
        increase in the provision for the year ended September 30, 2007 when compared
        to
        the year ended September 30, 2006 is due primarily to $0.8 million of
        foreign withholding taxes paid during the year and an increase in United
        States alternative minimum tax.  The increase in the provision for the
        year ended September 30, 2006 when compared to the year ended September 30,
        2005 is due to a combination of increases in both state tax expense and foreign
        income tax expense.
 
 Deferred
        tax assets consist of the following (in thousands):
 
 **September 30,****2007**
              
              
              
              **2006**Net
                  operating loss carryforwards
              $
              64,239
              
              
              $
              67,691Accrued
                  expenses and provisions
              
              1,486
              
              
              
              3,731Tax
                  credit carryforwards
              
              5,566
              
              
              
              5,422Deferred
                  revenue
              
              13,997
              
              
              
              9,302Stock-based
                  compensation
              
              1,087
              
              
              
              544Depreciation
                  and amortization
              
              2,524
              
              
              
              2,227Gross
                  deferred tax assets
              
              88,899
              
              
              
              88,917Deferred
                  tax valuation allowance
              
              (88,899
              )
              
              
              (88,917
              )Net
                  deferred tax assets
              $
              —
              
              
              $
              —
 
 The
        valuation allowance did not change substantially for the year ended September
        30, 2007 and increased by $5.6 million for the year ended September 30,
        2006.
 
 We
        provide a valuation allowance for deferred tax assets when it is more likely
        than not that the net deferred tax assets will not be realized. Based on
        a
        number of factors, including the lack of a history of profits, future projected
        taxable income and the fact that the market in which we compete is intensely
        competitive and characterized by rapidly changing technology, we believe
        that
        there is sufficient uncertainty regarding the realization of deferred tax
        assets
        such that a full valuation allowance has been provided. At September 30,
        2007, we had approximately $147.3 million and $18.9 million of net operating
        loss carryforwards for federal and state purposes, respectively, and net
        operating loss carryforwards of approximately $35.4 million in the United
        Kingdom. Approximately $36.4 million of the federal net operating loss
        carryforwards, representing net operating loss carryforwards acquired through
        our acquisition of Prime Response, are subject to change in control limitations,
        and, if utilized beyond such limitations will reduce goodwill and intangibles
        recorded at the date of acquisition before reducing the tax provision.
        Approximately $3.5 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 begin to expire in 2010 and 2008, respectively. At
        September 30, 2007, there are approximately $3.3 million of federal
        research and development credits and alternative minimum tax credits that
        begin
        to expire in 2010. At September 30, 2007, there were also California state
        credits of approximately $3.5 million that do not expire.
  73
 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.
  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,****2007**
              
              
              
              **2006**
              
              
              
              **2005**Income
                  (loss) before income taxes
              $
              7,630
              
              
              $
              (15,357
              )
              
              $
              (19,416
              )Federal
                  tax at 35 % statutory rate
              $
              2,670
              
              
              $
              (5,375
              )
              
              $
              (6,796
              )State
                  taxes, net of federal tax benefit
              
              14
              
              
              
              267
              
              
              
              215Stock-based
                  compensation
              
              531
              
              
              
              1,643
              
              
              
              1,062In
                  process R&D
              
              —
              
              
              
              —
              
              
              
              679Federal
                  alternative minimum tax
              
              150
              
              
              
              —
              
              
              
              —Foreign
                  tax at other than US rates
              
              (2,067
              )
              
              
              377
              
              
              
              234Other
                  items
              
              322
              
              
              
              —
              
              
              
              —Valuation
                  allowance
              
              (18
              )
              
              
              3,732
              
              
              
              5,055Provision
                  for income taxes
              $
              1,602
              
              
              $
              644
              
              
              $
              449
 
 **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 restricted stock to Samuel Spadafora, the Chairman of the Board at
        that time. In November 2006, Mr. Spadafora 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 Mr. Spadafora’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 restricted stock to Robert Mullen, President of Worldwide Field Operations
        at that time, to occur on August 2005, April 2006 and April 2007. In August
        2006,****Mr. Mullen 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 Mr. Mullen’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 50,000 shares of our restricted stock to Stephen
        Kelly, our Chief Executive Officer at that time, and 50,000 shares to Robert
        Mullen. These shares vested on April 1, 2006.
 
 There
        were no repurchases of the Company’s common stock during the years ended
        September 30, 2007, 2006, and 2005. Cancellations of issued but unvested
        shares
        of restricted stock were approximately 136,775, 8,000, and 38,400 shares
        during
        the years ended September 30, 2007, 2006, and 2005, respectively.
 
 **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, restricted stock awards, 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
  74
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 exercised
        beyond ten years from that
        date. However, during the stock option review(see Note 3in 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 onFormSCTO-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 bythe Companyat the initial exercise price.
        Beginning September27,
        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 approximately0.5million 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 increases
        the number of shares available for issuance by2.2million shares of common stock from an
        aggregate total of approximately0.5million shares available under the
        1999 Plan as of September 27, 2005, resulting in an aggregate of
        approximately2.7million shares available for future
        grant and issuance under the 2005 Plan.In January 2007, the
        Board amended the2005 plan
        to increase the number of shares
        reserved for future issuance by1.6million shares. This amendmentwas approvedbythe stockholders at the 2007 annual
        meeting of stockholders’held onApril24,2007.As
        of September 30, 2007,
        there were approximately2.8million shares reserved for future
        issuance and approximately2.6million options that were outstanding
        under the 2005 Plan.
  **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. The 2000 Plan was in effect as of June 30, 2003.
        In
        April 2002 and October 2002, the Board approved increases to the number of
        shares reserved under the 2000 Plan from 0.4 million shares to 1.0 million
        shares and then 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, 2007, there were approximately 0.4
        million shares outstanding under the 2000 Plan.
 
 **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. No additional
        stock options will be granted under the 1999 Plan subsequent to September
        27,
        2005. 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.
  75
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 **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 initial
        public
        offering. The 1999 Director Plan provides for the automatic grant of anonstatutory
        option to purchase 10,000 shares of common stock to each new non-employee
        director on the date that such person becomes a director, vesting over a
        period
        of three years in equal monthly installments with 1/3% of the shares vesting
        after one year, and the remainder vesting in equal monthly installments over
        the
        remaining two years. Each current and future non-employee director will
        automatically be granted an additional nonstatutory option to purchase 3,000
        shares on the day after each of our annual meetings of the stockholders,
        vesting
        in equal monthly installments over one year. Each director who is a member
        of a
        board committee will automatically be granted an additional nonstatutory
        option
        to purchase 2,000 shares, for each committee they serve on, on the day after
        each annual meeting of the stockholders, vesting in equal monthly installments
        over one year. The amount reserved under the 1999 Director Plan automatically
        increases 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 1999 Director Plan during the prior year. This
        automatic increase is subject to reduction by the Board of Directors. Under
        the
        terms of the 1999 Director Plan, option prices may 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. In January 2007, the Board amended and restated
        the 1999 Director Plan to decrease the number of shares reserved for future
        issuance to 0.3 million shares and to eliminate the automatic increase
        provision. This amendment was approved by the stockholders at the 2007 annual
        meeting of stockholders’ held on April 24, 2007. As of September 30, 2007,
        approximately 0.3 million shares of common stock have been reserved for issuance
        and 0.2 million are outstanding under the 1999 Director Plan.
 
 **Stock
        Option Activity**
  The
        following table summarizes stock option and restricted stock activity under
        the
        Company’s stock option plans (in thousands, except per share
        data):
 
 **Options
                  Outstanding****Shares Available**
                **for Grant**
              
              
              **Shares**
              
              
              **Weighted Average**
                **Exercise
                  Price**Balance
                  at September 30, 2004
              1,348
              
              
              3,802
              
              
              $
              6.13Authorized
              2,264
              
              
              —
              
              
              
              —Options
                  granted
              (834
              )
              
              834
              
              
              
              5.20Restricted
                  stock granted
              (180
              )
              
              —
              
              
              
              —Options
                  exercised
              —
              
              
              (498
              )
              
              
              3.03Cancellation
                  of unvested restricted stock
              38
              
              
              —
              
              
              
              —Options
                  cancelled/forfeited
              742
              
              
              (742
              )
              
              
              9.00Options
                  cancelled from expired plans
              (130
              )
              
              (11
              )
              
              
              —Balance
                  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
              
              
              
              9.11Restricted
                  stock granted
              —
              
              
              —
              
              
              
              —Options
                  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
              
              
              $
              7.96
  76
 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, 2007 (in thousands, except exercise prices and
        contractual life data):
 
 **Options
                  Outstanding and Exercisable**
              
              **Options
                  Vested****Range
                  of**
                **Exercise
                  Prices**
              
              **Number**
                **Outstanding**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life
                  (Years)**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Aggregate**
                **Intrinsic**
                **Value**
                **Closing**
                **Price
                  at**
                **09/30/2007**
                **of
                  $13.86**
              
              **Number**
                **Exercisable**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Aggregate**
                **Intrinsic**
                **Value**
                **Closing**
                **Price
                  at**
                **09/30/07**
                **of
                  $13.86**$0.35
                  – 4.10
              
              
              365
              
              
              5.96
              
              $
              3.16
              
              $
              3,902
              
              
              314
              
              $
              3.01
              
              $
              3,4034.18
                  – 6.70
              
              
              413
              
              
              6.97
              
              
              5.83
              
              
              3,316
              
              
              305
              
              
              5.68
              
              
              2,4956.75
                  – 7.75
              
              
              415
              
              
              7.67
              
              
              7.40
              
              
              2,683
              
              
              196
              
              
              7.32
              
              
              1,2827.80
                  – 8.15
              
              
              442
              
              
              8.19
              
              
              7.98
              
              
              2,597
              
              
              183
              
              
              7.99
              
              
              1,0778.25
                  – 8.25
              
              
              829
              
              
              9.37
              
              
              8.25
              
              
              4,651
              
              
              147
              
              
              8.25
              
              
              8238.28
                  – 10.75
              
              
              350
              
              
              7.83
              
              
              9.22
              
              
              1,625
              
              
              152
              
              
              9.60
              
              
              64810.80
                  – 45.00
              
              
              364
              
              
              7.70
              
              
              13.90
              
              
              346
              
              
              184
              
              
              13.63
              
              
              285$0.35
                  – 45.00
              
              
              3,178
              
              
              7.92
              
              $
              7.96
              
              $
              19,120
              
              
              1,481
              
              $
              7.26
              
              $
              10,013
 
 The
        aggregate intrinsic value in the preceding table represents the total intrinsic
        value, based on the Company’s closing stock price of $13.86 as of September 30,
        2007, which would have been received by the option holders had all option
        holders exercised their options as of that date. The total number of
        in-the-money options vested and exercisable as of September 30, 2007 was
        approximately 1.4 million. As of September 30, 2007, approximately 1.5 million
        outstanding options were vested and exercisable, and the weighted average
        exercise price was $7.26. The total intrinsic value of options exercised
        during
        the year ended September 30, 2007 was $8.5 million. The fair value of options
        vested was $3.3 million for the year ended September 30, 2007. As of September
        30, 2007, total unrecognized compensation costs related to non-vested stock
        options was $5.2 million, which is expected to be recognized as expense over
        a
        weighted-average period of approximately 2.7 years.
 
 The
        total intrinsic value of options exercised during the year ended September
        30,
        2006 was $1.8 million. The fair value of options vested was $5.0 million
        for the
        year ended September 30, 2006. As of September 30, 2006, total unrecognized
        compensation costs related to non-vested stock options was $4.2 million,
        which was expected to be recognized as expense over a weighted-average
        period of approximately 1.4 years.
 
 The
        Company had zero unvested restricted stock awards as of September 30,
        2007. Approximately 0.3 million shares of restricted stock vested during
        the year ended September 30, 2007. There were no shares of restricted stock
        awarded during the year ended September 30, 2007.
  We
          had 1.0 million unvested restricted stock awards as of September 30, 2006.
          The
          total fair value of the unvested restricted stock awards at grant date
          was $2.4
          million. The aggregate intrinsic value of the unvested restricted stock
          awards
          at September 30, 2006 was $3.1 million. During the year ended September
          30,
          2006, approximately 1.2 million shares vested related to restricted stock
          awards. There were approximately 0.3 million shares of restricted stock
          awarded
          during the year ended September 30, 2006. The weighted average fair value
          at
          grant date of the unvested restricted stock awards was $2.39 as of September
          30,
          2006. As of September 30, 2006, total unrecognized compensation costs related
          to
          unvested restricted stock awards was $0.9 million which was expected to
          be
          recognized as expense over a weighted average period of approximately one
          year.
 The
        Company settles stock option exercises and restricted stock awards 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, restricted stock awards 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 and restricted stock
        awards for years ended September 30, 2007, 2006, and 2005 which was allocated
        as
        follows (in thousands):
  77
 Table
            of Contents
  
 **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
  **Years
                    Ended September 30,****2007**
                  **(under SFAS**
                  **123(R))**
                
                
                
                **2006**
                  **(under SFAS**
                  **123(R))**
                
                
                
                **2005**
                  **(under SFAS**
                  **123 /**
                  **APB
                    25)**Stock-based
                    compensation expense:Cost
                    of revenues
                $
                313
                
                
                $
                248
                
                
                $
                690Sales
                    and marketing
                
                744
                
                
                
                2,327
                
                
                
                986Research
                    and development
                
                546
                
                
                
                332
                
                
                
                843General
                    and administrative
                
                1,417
                
                
                
                1,788
                
                
                
                512Total
                    stock-based compensation expense
                $
                3,020
                
                
                $
                4,695
                
                
                $
                3,031
  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 restricted stock awards 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 restricted stock awards of $2.0 million.
 
 The
        table below reflects net loss and basic and diluted net loss per share as
        if the
        fair value recognition provision of SFAS 123 had been applied for the year
        ended September 30, 2005 (in thousands except per-share
        amounts):
 
 **Year
                  Ended**
                **September
                  30,**
                **2005**Net
                  loss
              
              $
              (19,865
              )Add:
                  Stock-based compensation included in reported net loss
              
              
              3,031Less:
                  Stock-based compensation expense determined under fair value
                  method
              
              
              (5,988
              )Net
                  loss—pro forma
              
              $
              (22,822
              )Basic
                  and diluted net loss per share—as reported
              
              $
              (0.67
              )Basic
                  and diluted net loss per share—pro forma
              
              $
              (0.77
              )Weighted
                  average shares
              
              
              29,780
 
 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 disclosures in accordance with SFAS 123. The
        weighted-average estimated fair value of stock options granted for the year
        ended September 30, 2007, 2006, and 2005 was $4.41, $4.98, and 2.98 per share,
        respectively, using the Black-Scholes model with the following weighted-average
        assumptions:
 
 **2007**
              
              **2006**
              
              **2005**Expected
                  lives in years
              
              3.5
              
              
              
              3.9
              
              
              
              2.6Risk
                  free interest rates
              
              4.7
              %
              
              
              4.8
              %
              
              
              3.3
              %Volatility
              
              63
              %
              
              
              88
              %
              
              
              98
              %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, 2007 variables,
        it is
        estimated that a change of 10% in either the volatility, expected life or
        interest rate assumption would result in a corresponding 7%, 5% or 1% change
        in
        the estimated value of the option being valued using the Black-Scholes
        model.
 
 78
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
 
 As
          stock-based compensation expense recognized in the Consolidated Statement
          of
          Operations for the years ended September 30, 2007, 2006, and 2005 is based
          on
          awards ultimately expected to vest. Fiscal years 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, 2007 was based on historical forfeiture
          experience.
 During
        the quarter ended June 30, 2007, the Company completed its 409A 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.
 
 **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 restricted stock awards. Although the fair value of employee
        stock options and restricted stock awards 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. The Plan allows the Company to match
        up to
        50% the employee contributions. For each of the years ended September 30,
        2007,
        2006, 2005, 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 $0.4
        million, $0.4 million, and $0.4 million for the years ended September 30,
        2007, 2006, and 2005, respectively.
 
 **Defined
        Contribution Plan**
  The
        Company also sponsors a defined contribution pension plan for the employees
        of
        Canada, United Kingdom, Netherlands, and Germany. The Company’s
        contributions to the pension plan totaled approximately $0.4 million, $0.5
        million, and $0.7 million for the years ended September 30, 2007, 2006, and
        2005, 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.
        Eligible employees may have up to 15% of their earnings withheld to be used
        to
        purchase shares of the Company’s common stock at 85% of the lower of the fair
        market value of the common stock on the commencement date of each nine-month
        offering period or the specified purchase date. The amount 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
        2007,
        2006 and 2005, 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.
 
 79
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
  **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, 2007, there were no remaining warrants
          outstanding.
 **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,****2007**
              
              
              
              **2006**
              
              
              
              **2005****License
                  revenue**Enterprisesolutions
              $
              37,648
              
              
              $
              30,351
              
              
              $
              24,587Marketing
                  solutions
              
              6,013
              
              
              
              6,396
              
              
              
              2,450Decision
                  management
                  solutions
              
              10,391
              
              
              
              3,767
              
              
              
              4,641Total
              $
              54,052
              
              
              $
              40,514
              
              
              $
              31,678
 
 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,****2007**
              
              
              
              **2006**
              
              
              
              **2005****Service
                  revenue**Enterprisesolutions
              $
              51,584
              
              
              $
              39,911
              
              
              $
              40,441Marketing
                  solutions
              
              12,369
              
              
              
              12,996
              
              
              
              9,680Decision
                  management
                  solutions
              
              6,542
              
              
              
              4,115
              
              
              
              1,926Total
              $
              70,495
              
              
              $
              57,022
              
              
              $
              52,047
 
 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,****2007**
              
              
              
              **2006**
              
              
              
              **2005**North
                  America
              $
              65,701
              
              
              $
              60,008
              
              
              $
              41,697Europe
              
              58,846
              
              
              
              37,528
              
              
              
              41,939Rest
                  of World
              
              —
              
              
              
              —
              
              
              
              89Total
              $
              124,547
              
              
              $
              97,536
              
              
              $
              83,725
 
 Included
        in foreign revenue results for Europe is revenue from the United Kingdom
        of
        $28.3 million, $16.1 million, and $22.5 million for the years ended September
        30, 2007, 2006 and 2005, respectively.
  80
 Table
            of Contents
  **CHORDIANT
        SOFTWARE, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)**
  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,****2007**
                
                
                
                **2006**North
                    America
                $
                2,346
                
                
                $
                1,844Europe
                
                1,292
                
                
                
                786Total
                $
                3,638
                
                
                $
                2,630
 **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,
        2007
        and 2006:
 
 **Year
        ended September 30, 2007:**
 
 **Quarters
                  -Ended****September30,**
                **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
 
 **Year
        ended September 30, 2006:**
 
 **Quarters
                  -Ended****September 30,**
                **2006**
              
              **June 30,**
                **2006**
              
              **March 31,**
                **2006**
              
              **December 31,**
                **2005**(in
                  thousands, except per share data)Revenues
              $
              21,679
              
              
              $
              27,026
              
              
              $
              26,273
              
              
              $
              22,558Gross
                  profit
              $
              13,697
              
              
              $
              17,360
              
              
              $
              17,585
              
              
              $
              15,427Net
                  loss
              $
              (8,364
              )
              
              $
              (3,682
              )
              
              $
              (2,202
              )
              
              $
              (1,753
              )Net
                  loss per share—basic and diluted
              $
              (0.27
              )
              
              $
              (0.12
              )
              
              $
              (0.07
              )
              
              $
              (0.06
              )Weighted
                  average shares used in computing basic and diluted net loss per
                  share
              
              31,468
              
              
              
              31,214
              
              
              
              30,891
              
              
              
              30,730
 
 **NOTE
        16—SUBSEQUENT EVENTS**
 
 **Equity
        Compensation**
 
 In
        2007, the Company’s Board of Directors approved the grant to employees of
        738,700 shares of Stock Options and 199,500 shares of Restricted Stock
        Units.
  81
 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, 2007, 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.
 
 ***Changes
        Internal Control over Financial Reporting***
 
 There
        were no changes in our internal controls over financial reporting during
        the
        quarter ended September 30, 2007 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, 2007 based on
        the guidelines established in *Internal Control—Integrated Framework*issued 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.
 
 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, 2007.
 
 BDO
        Seidman, LLP, our independent registered public accounting firm, audited
        management’s assessment and independently assessed the effectiveness of our
        internal control over financial reporting as of September 30, 2007. BDO
        Seidman, LLP has issued an attestation report on management’s assessment, which
        is included in Item 9A of this Form 10-K.
  82
 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, 2007, 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, 2007,
        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, 2007 and 2006, 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, 2007 and our report dated November 15, 2007 expressed an
        unqualified opinion thereon.
   /s/
        BDO Seidman, LLP
  San
        Jose, California
 November
        15, 2007
  83
 Table
            of Contents
  **ITEM 9B.**
              **OTHER
                  INFORMATION**
 
 None.
 
 **PART
        III**
 
 Certain
        information required by Part III is omitted from this Annual Report on Form
        10-K
        because the registrant will file with the U.S. Securities and Exchange
        Commission a proxy statement pursuant to Regulation 14A in connection with
        the
        solicitation of proxies for the registrant’s Annual Meeting of Stockholders
        expected to be held not later 120 days after the end of the fiscal year covered
        by this Annual Report on Form 10-K, and certain information included therein
        as
        incorporated by reference.
 
 **ITEM 10.**
              **DIRECTORS,
                  EXECUTIVE OFFICERS AND CORPORATE
                  GOVERNANCE**
 
 The
        information required by this Item is incorporated herein by reference from
        the
        section entitled “Election of Directors” to be contained in our Proxy
        Statement.
 
 **ITEM 11.**
              **EXECUTIVE
                  COMPENSATION**
 
 The
        information required by this Item is incorporated herein by reference from
        the
        section entitled “Executive Compensation” 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 herein by reference from
        the
        information from the section entitled “Securities Authorized for Issuance under
        Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners
        and Management” 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 herein by reference from
        the
        section entitled “Transactions with Related Persons” to be contained in our
        Proxy Statement.
 
 **ITEM 14.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND
                  SERVICES**
 
 The
        information required by this Item is incorporated herein by reference from
        the
        section entitled “Ratification of Selection of Independent Auditors” to be
        contained in our Proxy Statement.
  84
 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 page 49 of 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
        page****55****of this report are included in
        Item 8 above**.
  2.
              Financial
                  Statement
                  Schedule
  Schedule
        II—Valuation and Qualifying Accounts for the years ended September 30,
        2007, 2006, and 2005 are as follows (in thousands):
  
 **Balance at**
                **Beginning**
                **of
                  Period**
              
              **Charged to**
                **Expenses**
              
              
              **Deductions**
              
              
              **Balance at**
                **End of Period**Allowance
                  for doubtful accounts2007
              
              $
              83
              
              $
              82
              
              
              $
              —
              
              
              $
              1652006
              
              $
              214
              
              $
              (9
              )
              
              $
              (122
              )
              
              $
              832005
              
              $
              111
              
              $
              103
              
              
              $
              —
              
              
              $
              214Deferred
                  tax asset valuation allowance2007
              
              $
              88,917
              
              $
              —
              
              
              $
              (18
              )
              
              $
              88,8992006
              
              $
              83,350
              
              $
              5,567
              
              
              $
              —
              
              
              $
              88,9172005
              
              $
              63,615
              
              $
              19,735
              
              
              $
              —
              
              
              $
              83,350
  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 Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**2.1
              
              Stock
                  Purchase Agreement, dated July 19, 2000, between Chordiant Software,
                  Inc.,
                  White Spider Software, Inc. and the Sellers of capital stock of
                  White
                  Spider Software, Inc..
              
              8-K
              
              8/3/20002.2
              
              Agreement
                  and Plan of Merger and Reorganization, dated as of January 8, 2001,
                  by and
                  among Chordiant Software, Inc., Puccini Acquisition Corp. and Prime
                  Response, Inc..
              
              Form
                  S-4
                (No.
                  333-54856)
              
              2/26/20012.3
              
              Agreement
                  and Plan of Merger and Reorganization, dated as of March 28, 2002,
                  by and
                  among Chordiant Software, Inc., OnDemand Acquisition Corp. and
                  OnDemand,
                  Inc..
              
              8-K
              
              4/12/20022.4
              
              Share
                  Purchase Agreement, dated December 8, 2004, between Chordiant Software
                  International, Inc. and the persons named therein (1).
              
              8-K
              
              12/27/20042.5
              
              Deed
                  of Trust, dated December 8, 2004, between Chordiant Software
                  International, Inc. and KiQ Limited.
              
              Form
                  8-K
              
              12/27/2004
  85
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**3.1
              
              Amended
                  and Restated Certificate of Incorporation of Chordiant Software,
                  Inc..
              
              Form
                  S-1
                (No.
                  333-92187)
              
              2/6/19993.2
              
              Amended
                  and Restated Bylaws of Chordiant Software, Inc..
              
              Form 8-K
              
              2/2/20064.1
              
              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
              
              Warrant,
                  dated February 28, 1999, issued to GAP Coinvestment Partners II,
                  L.P..
              
              Form
                  S-1
                (No.
                  333-92461)
              
              12/10/19994.5
              
              Warrant,
                  dated December 9, 1999, issued to General Atlantic Partners 52,
                  L.P..
              
              Form
                  S-1 (No. 333-92461)
              
              12/10/19994.6
              
              Warrant,
                  dated December 9, 1999, issued to Accenture (Formerly known as
                  Andersen
                  Consulting), L.P..
              
              Form
                  S-1 (No. 333-92461)
              
              12/10/19994.7
              
              Warrant,
                  dated December 9, 1999, issued to Accenture (Formerly known as
                  Andersen
                  Consulting), L.P..
              
              Form
                  S-1
                (No.
                  333-92461)
              
              12/10/19994.8
              
              Warrant,
                  dated December 9, 1999, issued to Accenture (Formerly known as
                  Andersen
                  Consulting), L.P..
              
              S-1
                (No.
                  333-92461)
              
              12/10/19994.9
              
              Warrant,
                  dated September 4, 2001, issued to Accenture plc.
              
              Form 10-K/T
              
              3/29/200510.1*
              
              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*
              
              Employment
                  Letter Agreement of Samuel T. Spadafora dated April 24, 1998, by
                  Chordiant
                  Software, Inc. and agreed to and accepted by Samuel T.
                  Spadafora.
              
              Form
                  S-1
                (No.
                  333-92187)
              
              1/19/200010.7
              
              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)
              
              1/19/2000
  86
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.8
              
              Amended
                  and Restated Loan and Security Agreement dated August 31, 2000,
                  by and
                  between Chordiant Software, Inc. and Imperial Bank.
              
              Form
                  10-Q
              
              5/15/200210.9
              
              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
              
              5/15/200210.10*
              
              Change
                  of Control Agreement, dated April 27, 2001, by and between Chordiant
                  Software, Inc. and Stephen P. Kelly.
              
              Form
                  10-Q
              
              5/15/200210.11*
              
              Change
                  of Control Agreement, dated September 10, 2001, by and between
                  Chordiant
                  Software, Inc. and Samuel T. Spadafora.
              
              Form
                  10-Q
              
              5/15/200210.12*
              
              Separation
                  Agreement, dated October 20, 2003, by and between Chordiant Software,
                  Inc.
                  and Steve G. Vogel.
              
              Form
                  10-K/A
              
              3/30/200410.13*
              
              Form
                  of Indemnification Agreement, by and between Chordiant Software,
                  Inc. and
                  certain officers and directors of Chordiant Software,
                  Inc..
              
              Form
                  10-Q
              
              5/15/200210.14*
              
              Employment
                  Letter, dated November 14, 2002, between Chordiant Software, Inc.
                  and
                  Stephen P. Kelly.
              
              Form
                  10-Q
              
              11/14/200210.15*
              
              Amendment
                  to Change of Control Agreement dated January 10, 2003, by and between
                  Chordiant Software, Inc. and Stephen P. Kelly.
              
              Form 10-K
              
              3/28/200310.16*
              
              Amendment
                  to Change of Control Agreement dated February 27, 2004, by and
                  between
                  Chordiant Software, Inc. and Samuel T. Spadafora.
              
              Form
                  10-K
              
              3/8/200410.17
              
              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
              
              8/14/200310.18
              
              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
              
              3/8/200410.19
              
              Purchase
                  Agreement by and between Chordiant and Acqua Wellington Opportunity
                  I
                  Limited, dated January 22, 2004.
              
              Form
                  S-3/A
              
              3/30/200410.20*
              
              Offer
                  letter dated November 16, 2004 to George A. de Urioste.
              
              Form
                  8-K
              
              2/2/200510.21*
              
              Change
                  of Control Agreement dated January 31, 2005 by and between Chordiant
                  Software, Inc. and George A. de Urioste.
              
              Form
                  10-K/T
              
              3/29/200510.22*
              
              Terms
                  of employment for Robert U. Mullen as of March 31, 2004.
              
              Form
                  10-K/T
              
              3/29/200510.23*
              
              Change
                  of Control Agreement dated April 24, 2003 by and between Chordiant
                  Software, Inc. and Robert U. Mullen.
              
              Form
                  10-K/T
              
              3/29/200510.24*
              
              Separation
                  Agreement, dated August 16, 2004, by and between Chordiant Software,
                  Inc.
                  and Michael J. Shannahan.
              
              Form
                  10-K/T
              
              3/29/2005
  87
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.25*
              
              Form
                  of Director Agreement by and between Chordiant Software, Inc. and
                  certain
                  officers and directors of Chordiant Software, Inc..
              
              Form
                  10-K/T
              
              3/29/200510.26*
              
              Compromise
                  Agreement by and between Chordiant Software International Limited
                  and
                  Allen Swann dated October 28th 2004.
              
              Form
                  10-K/T
              
              3/29/200510.27+
              
              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.
              
              
              
              
              
              X10.28*
              
              A
                  description of certain compensation arrangements between Chordiant
                  Software, Inc. and its executive officers.
              
              Form
                  8-K
              
              6/8/200510.29*
              
              Offer
                  Letter dated October 17, 2005 for Derek P. Witte.
              
              Form
                  8-K
              
              10/26/200510.30*
              
              Change
                  of Control Agreement dated October 20, 2005 by and between Chordiant
                  Software, Inc. and Derek P. Witte.
              
              Form
                  8-K
              
              10/26/200510.31*
              
              2005
                  Equity Incentive Plan, as amended.
              
              Schedule
                  14A
              
              3/15/200710.32*
              
              A
                  description of certain compensation arrangements between Chordiant
                  Software, Inc. its executive officers.
              
              Form
                  8-K
              
              2/2/200610.33*
              
              Offer
                  Letter dated January 31, 2006 for Steven R. Springsteel.
              
              Form
                  8-K
              
              2/2/200610.34*
              
              Form
                  of Stock Option Agreement for Steven R. Springsteel.
              
              Form
                  8-K
              
              2/2/200610.35*
              
              Amendment
                  dated August 29, 2005 to April 24, 1998 Letter Agreement by and
                  between
                  Chordiant Software, Inc. and Samuel Spadafora.
              
              Form
                  10-Q
              
              2/9/200610.36*
              
              Board
                  Member Agreement dated March 7, 2006 for Richard Stevens
              
              Form
                  8-K
              
              3/10/200610.37
              
              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
              
              5/4/200610.38*
              
              Separation
                  Agreement dated March 1, 2006, by and between Chordiant Software,
                  Inc. and
                  Stephen Kelly.
              
              Form
                  10-Q
              
              5/4/200610.39*
              
              Separation
                  Agreement dated March 8, 2006, by and between Chordiant Software,
                  Inc. and
                  George A. de Urioste.
              
              Form
                  10-Q
              
              5/4/200610.40*
              
              Separation
                  Agreement dated August 8, 2006, by and between Chordiant Software,
                  Inc.
                  and Robert Mullen.
              
              Form
                  8-K
              
              8/11/200610.41
              
              Addendum
                  A to Master Services Agreement dated September 11, 2006 by and
                  between
                  Chordiant Software, Inc. and Ness USA, Inc..
              
              Form
                  10-K
              
              2/9/200710.42+
              
              Order
                  Form Agreement dated September 28, 2006 by and between Chordiant
                  Software,
                  Inc. and International Business Machines Corporation.
              
              Form
                  10-K
              
              2/9/2007
  88
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.43+
              
              Software
                  License and Services Agreement dated September 28, 2006 by and
                  between
                  Chordiant Software, Inc. and Connecticut General Life Insurance
                  Company.
              
              
              
              
              
              X10.44
              
              Master
                  Agreement for Subcontracted Services dated June 14, 2002 by and
                  between
                  Chordiant Software, Inc. and International Business Machines
                  Corporation.
              
              Form
                  10-K
              
              2/9/200710.45
              
              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
              
              2/9/200710.46
              
              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
              
              2/9/200710.47+
              
              Statement
                  of Work dated September 28, 2006 by and between Chordiant Software,
                  Inc.
                  and International Business Machines Corporation.
              
              Form
                  10-K
              
              2/9/200710.48*
              
              Separation
                  Agreement dated November 30, 2006, by and between Chordiant Software,
                  Inc.
                  and Samuel Spadafora.
              
              Form
                  8-K
              
              11/30/200610.49+
              
              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
              
              2/9/200710.50
              
              Master
                  Professional Services Agreement dated May 7, 2006 by and between
                  Chordiant
                  Software, Inc. and Citicorp Credit Services, Inc. (USA).
              
              Form
                  10-K
              
              2/9/200710.51+
              
              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).
              
              
              
              
              
              X10.52
              
              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
              
              2/9/200710.53
              
              Order
                  Form Agreement dated December 19, 2006 by and between Chordiant
                  Software
                  International GmbH and IBM Deustchland GmbH.
              
              Form
                  10-K
              
              2/9/200710.54
              
              Software
                  License and Services Agreement dated December 19, 2006 by and between
                  Chordiant Software International GmbH and Deutsche Angestellten
                  Krankenkasse.
              
              Form
                  10-K
              
              2/9/200710.55*
              
              Change
                  of Control Agreement dated November 1, 2005 by and between Chordiant
                  Software, Inc. and Peter Norman.
              
              Form
                  10-Q
              
              4/30/200710.56*
              
              Change
                  of Control Agreement dated November 11, 2005 by and between Chordiant
                  Software, Inc. and James St. Jean.
              
              Form
                  10-Q
              
              4/30/200710.57*
              
              Change
                  of Control Agreement dated May 26, 2006 by and between Chordiant
                  Software,
                  Inc. and Frank Florence.
              
              Form
                  10-Q
              
              4/30/2007
  89
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.58*
              
              Change
                  of Control Agreement dated April 13, 2007 by and between Chordiant
                  Software, Inc. and PK Karnik.
              
              Form
                  10-Q
              
              4/30/200710.59+
              
              Master
                  Agreement dated June 28, 2007 by and between WellPoint, Inc. and
                  Chordiant
                  Software, Inc..
              
              Form
                  10-Q
              
              8/10/200710.60*+
              
              Fiscal
                  Year 2008 Executive Incentive Bonus Plan.
              
              
              
              
              
              X10.61*+
              
              Fiscal
                  Year 2008 General Counsel Incentive Bonus Plan.
              
              
              
              
              
              X10.62*+
              
              Fiscal
                  Year 2008 Compensation Plan for Worldwide Vice President, Professional
                  Services.
              
              
              
              
              
              X10.63*+
              
              Fiscal
                  Year 2008 Bonus Plan for Worldwide Vice President, Sales.
              
              
              
              
              
              X10.64*
              
              Fiscal
                  Year 2008 Compensation Plan for Worldwide Vice President,
                  Sales.
              
              
              
              
              
              X10.65*
              
              Offer
                  Letter dated October 31, 2007 for David Cunningham.
              
              
              
              
              
              X10.66*+
              
              2008-2009
                  Performance Share Unit Program.
              
              
              
              
              
              X10.67*
              
              Form
                  of 2008-2009 Performance Share Unit Program Award Grant
                  Notice.
              
              
              
              
              
              X10.68
              
              Addendum
                  A to the Master Services Agreement dated October 25, 2007 by and
                  between
                  Chordiant Software, Inc. and Ness USA, Inc.
              
              
              
              
              
              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..
              
              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(a) or Rule 15d-14(a) and Section 1350 of
                  Chapter
                  63 of Title 18 of the United States Code (18 U.S.C. 1350).
              
              
              
              
              
              X
 *
              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.
 
 (1)
              Chordiant
                  has omitted Schedules 2-4 and 709 to the Share Purchase Agreement
                  pursuant
                  to Item 601(b)(2) of Regulation S-K. A brief description of the
                  omitted schedules is contained in Exhibit 2.4. Chordiant hereby
                  undertakes
                  to provide the SEC with copies of the omitted schedules upon
                  request.
  90
 Table
            of Contents
  
 #
              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.
 
  91
 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 15, 2007.
 
 CHORDIANT
                  SOFTWARE, INCBy:
              /s/  STEVEN
                  R. SPRINGSTEEL**Steven
                  R. Springsteel**
                **Chairman,
                  President, and CEO**
 
 
 **KNOW
        ALL PERSONS BY THESE PRESENTS**, that each person whose signature appears
        below constitutes and appoints **STEVEN R. SPRINGSTEEL**and
**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
                  15, 2007Steven
                  R. Springsteel/s/
                  PETER S. NORMAN
              
              Chief
                  Financial Officer and Principal Accounting
              
              November
                  15, 2007Peter
                  S. Norman
              
              Officer/s/
                  RICHARD G. STEVENS
              
              Director
              
              November
                  15, 2007Richard
                  G. Stevens/s/
                  DAVID R. SPRINGETT
              
              Director
              
              November
                  15, 2007David
                  R. Springett/s/
                  WILLIAM J. RADUCHEL
              
              Director
              
              November
                  15, 2007William
                  J. Raduchel/s/
                  DAVID A. WEYMOUTH
              
              Director
              
              November
                  15, 2007David
                  A. Weymouth/s/
                  CHARLES E. HOFFMAN
              
              Director
              
              November
                  15, 2007Charles
                  E. Hoffman
   92
 Table
            of Contents
  EXHIBIT
        INDEX
 
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**2.1
              
              Stock
                  Purchase Agreement, dated July 19, 2000, between Chordiant Software,
                  Inc.,
                  White Spider Software, Inc. and the Sellers of capital stock of
                  White
                  Spider Software, Inc..
              
              8-K
              
              8/3/20002.2
              
              Agreement
                  and Plan of Merger and Reorganization, dated as of January 8, 2001,
                  by and
                  among Chordiant Software, Inc., Puccini Acquisition Corp. and Prime
                  Response, Inc..
              
              Form
                  S-4
                (No.
                  333-54856)
              
              2/26/20012.3
              
              Agreement
                  and Plan of Merger and Reorganization, dated as of March 28, 2002,
                  by and
                  among Chordiant Software, Inc., OnDemand Acquisition Corp. and
                  OnDemand,
                  Inc..
              
              8-K
              
              4/12/20022.4
              
              Share
                  Purchase Agreement, dated December 8, 2004, between Chordiant Software
                  International, Inc. and the persons named therein (1).
              
              8-K
              
              12/27/20042.5
              
              Deed
                  of Trust, dated December 8, 2004, between Chordiant Software
                  International, Inc. and KiQ Limited.
              
              Form
                  8-K
              
              12/27/20043.1
              
              Amended
                  and Restated Certificate of Incorporation of Chordiant Software,
                  Inc..
              
              Form
                  S-1
                (No.
                  333-92187)
              
              2/6/19993.2
              
              Amended
                  and Restated Bylaws of Chordiant Software, Inc..
              
              Form 8-K
              
              2/2/20064.1
              
              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
              
              Warrant,
                  dated February 28, 1999, issued to GAP Coinvestment Partners II,
                  L.P..
              
              Form
                  S-1
                (No.
                  333-92461)
              
              12/10/19994.5
              
              Warrant,
                  dated December 9, 1999, issued to General Atlantic Partners 52,
                  L.P..
              
              Form
                  S-1 (No. 333-92461)
              
              12/10/19994.6
              
              Warrant,
                  dated December 9, 1999, issued to Accenture (Formerly known as
                  Andersen
                  Consulting), L.P..
              
              Form
                  S-1 (No. 333-92461)
              
              12/10/19994.7
              
              Warrant,
                  dated December 9, 1999, issued to Accenture (Formerly known as
                  Andersen
                  Consulting), L.P..
              
              Form
                  S-1
                (No.
                  333-92461)
              
              12/10/19994.8
              
              Warrant,
                  dated December 9, 1999, issued to Accenture (Formerly known as
                  Andersen
                  Consulting), L.P..
              
              S-1
                (No.
                  333-92461)
              
              12/10/19994.9
              
              Warrant,
                  dated September 4, 2001, issued to Accenture plc.
              
              Form 10-K/T
              
              3/29/200510.1*
              
              1999
                  Equity Incentive Plan and Form of Stock Option Agreement.
              
              Form
                  S-1
                (No.
                  333-92187)
              
              12/6/1999
  93
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.2*
              
              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*
              
              Employment
                  Letter Agreement of Samuel T. Spadafora dated April 24, 1998, by
                  Chordiant
                  Software, Inc. and agreed to and accepted by Samuel T.
                  Spadafora.
              
              Form
                  S-1
                (No.
                  333-92187)
              
              1/19/200010.7
              
              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)
              
              1/19/200010.8
              
              Amended
                  and Restated Loan and Security Agreement dated August 31, 2000,
                  by and
                  between Chordiant Software, Inc. and Imperial Bank.
              
              Form
                  10-Q
              
              5/15/200210.9
              
              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
              
              5/15/200210.10*
              
              Change
                  of Control Agreement, dated April 27, 2001, by and between Chordiant
                  Software, Inc. and Stephen P. Kelly.
              
              Form
                  10-Q
              
              5/15/200210.11*
              
              Change
                  of Control Agreement, dated September 10, 2001, by and between
                  Chordiant
                  Software, Inc. and Samuel T. Spadafora.
              
              Form
                  10-Q
              
              5/15/200210.12*
              
              Separation
                  Agreement, dated October 20, 2003, by and between Chordiant Software,
                  Inc.
                  and Steve G. Vogel.
              
              Form
                  10-K/A
              
              3/30/200410.13*
              
              Form
                  of Indemnification Agreement, by and between Chordiant Software,
                  Inc. and
                  certain officers and directors of Chordiant Software,
                  Inc..
              
              Form
                  10-Q
              
              5/15/200210.14*
              
              Employment
                  Letter, dated November 14, 2002, between Chordiant Software, Inc.
                  and
                  Stephen P. Kelly.
              
              Form
                  10-Q
              
              11/14/200210.15*
              
              Amendment
                  to Change of Control Agreement dated January 10, 2003, by and between
                  Chordiant Software, Inc. and Stephen P. Kelly.
              
              Form 10-K
              
              3/28/200310.16*
              
              Amendment
                  to Change of Control Agreement dated February 27, 2004, by and
                  between
                  Chordiant Software, Inc. and Samuel T. Spadafora.
              
              Form
                  10-K
              
              3/8/200410.17
              
              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
              
              8/14/2003
  94
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.18
              
              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
              
              3/8/200410.19
              
              Purchase
                  Agreement by and between Chordiant and Acqua Wellington Opportunity
                  I
                  Limited, dated January 22, 2004.
              
              Form
                  S-3/A
              
              3/30/200410.20*
              
              Offer
                  letter dated November 16, 2004 to George A. de Urioste.
              
              Form
                  8-K
              
              2/2/200510.21*
              
              Change
                  of Control Agreement dated January 31, 2005 by and between Chordiant
                  Software, Inc. and George A. de Urioste.
              
              Form
                  10-K/T
              
              3/29/200510.22*
              
              Terms
                  of employment for Robert U. Mullen as of March 31, 2004.
              
              Form
                  10-K/T
              
              3/29/200510.23*
              
              Change
                  of Control Agreement dated April 24, 2003 by and between Chordiant
                  Software, Inc. and Robert U. Mullen.
              
              Form
                  10-K/T
              
              3/29/200510.24*
              
              Separation
                  Agreement, dated August 16, 2004, by and between Chordiant Software,
                  Inc.
                  and Michael J. Shannahan.
              
              Form
                  10-K/T
              
              3/29/200510.25*
              
              Form
                  of Director Agreement by and between Chordiant Software, Inc. and
                  certain
                  officers and directors of Chordiant Software, Inc..
              
              Form
                  10-K/T
              
              3/29/200510.26*
              
              Compromise
                  Agreement by and between Chordiant Software International Limited
                  and
                  Allen Swann dated October 28th 2004.
              
              Form
                  10-K/T
              
              3/29/200510.27+
              
              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.
              
              
              
              
              
              X10.28*
              
              A
                  description of certain compensation arrangements between Chordiant
                  Software, Inc. and its executive officers.
              
              Form
                  8-K
              
              6/8/200510.29*
              
              Offer
                  Letter dated October 17, 2005 for Derek P. Witte.
              
              Form
                  8-K
              
              10/26/200510.30*
              
              Change
                  of Control Agreement dated October 20, 2005 by and between Chordiant
                  Software, Inc. and Derek P. Witte.
              
              Form
                  8-K
              
              10/26/200510.31*
              
              2005
                  Equity Incentive Plan, as amended.
              
              Schedule
                  14A
              
              3/15/200710.32*
              
              A
                  description of certain compensation arrangements between Chordiant
                  Software, Inc. its executive officers.
              
              Form
                  8-K
              
              2/2/200610.33*
              
              Offer
                  Letter dated January 31, 2006 for Steven R. Springsteel.
              
              Form
                  8-K
              
              2/2/200610.34*
              
              Form
                  of Stock Option Agreement for Steven R. Springsteel.
              
              Form
                  8-K
              
              2/2/200610.35*
              
              Amendment
                  dated August 29, 2005 to April 24, 1998 Letter Agreement by and
                  between
                  Chordiant Software, Inc. and Samuel Spadafora.
              
              Form
                  10-Q
              
              2/9/200610.36*
              
              Board
                  Member Agreement dated March 7, 2006 for Richard Stevens
              
              Form
                  8-K
              
              3/10/2006
  95
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.37
              
              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
              
              5/4/200610.38*
              
              Separation
                  Agreement dated March 1, 2006, by and between Chordiant Software,
                  Inc. and
                  Stephen Kelly.
              
              Form
                  10-Q
              
              5/4/200610.39*
              
              Separation
                  Agreement dated March 8, 2006, by and between Chordiant Software,
                  Inc. and
                  George A. de Urioste.
              
              Form
                  10-Q
              
              5/4/200610.40*
              
              Separation
                  Agreement dated August 8, 2006, by and between Chordiant Software,
                  Inc.
                  and Robert Mullen.
              
              Form
                  8-K
              
              8/11/200610.41
              
              Addendum
                  A to Master Services Agreement dated September 11, 2006 by and
                  between
                  Chordiant Software, Inc. and Ness USA, Inc..
              
              Form
                  10-K
              
              2/9/200710.42+
              
              Order
                  Form Agreement dated September 28, 2006 by and between Chordiant
                  Software,
                  Inc. and International Business Machines Corporation.
              
              Form
                  10-K
              
              2/9/200710.43+
              
              Software
                  License and Services Agreement dated September 28, 2006 by and
                  between
                  Chordiant Software, Inc. and Connecticut General Life Insurance
                  Company.
              
              
              
              
              
              X10.44
              
              Master
                  Agreement for Subcontracted Services dated June 14, 2002 by and
                  between
                  Chordiant Software, Inc. and International Business Machines
                  Corporation.
              
              Form
                  10-K
              
              2/9/200710.45
              
              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
              
              2/9/200710.46
              
              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
              
              2/9/200710.47+
              
              Statement
                  of Work dated September 28, 2006 by and between Chordiant Software,
                  Inc.
                  and International Business Machines Corporation.
              
              Form
                  10-K
              
              2/9/200710.48*
              
              Separation
                  Agreement dated November 30, 2006, by and between Chordiant Software,
                  Inc.
                  and Samuel Spadafora.
              
              Form
                  8-K
              
              11/30/200610.49+
              
              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
              
              2/9/200710.50
              
              Master
                  Professional Services Agreement dated May 7, 2006 by and between
                  Chordiant
                  Software, Inc. and Citicorp Credit Services, Inc. (USA).
              
              Form
                  10-K
              
              2/9/2007
 
  96
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**10.51+
              
              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).
              
              
              
              
              
              X10.52
              
              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
              
              2/9/200710.53
              
              Order
                  Form Agreement dated December 19, 2006 by and between Chordiant
                  Software
                  International GmbH and IBM Deustchland GmbH.
              
              Form
                  10-K
              
              2/9/200710.54
              
              Software
                  License and Services Agreement dated December 19, 2006 by and between
                  Chordiant Software International GmbH and Deutsche Angestellten
                  Krankenkasse.
              
              Form
                  10-K
              
              2/9/200710.55*
              
              Change
                  of Control Agreement dated November 1, 2005 by and between Chordiant
                  Software, Inc. and Peter Norman.
              
              Form
                  10-Q
              
              4/30/200710.56*
              
              Change
                  of Control Agreement dated November 11, 2005 by and between Chordiant
                  Software, Inc. and James St. Jean.
              
              Form
                  10-Q
              
              4/30/200710.57*
              
              Change
                  of Control Agreement dated May 26, 2006 by and between Chordiant
                  Software,
                  Inc. and Frank Florence.
              
              Form
                  10-Q
              
              4/30/200710.58*
              
              Change
                  of Control Agreement dated April 13, 2007 by and between Chordiant
                  Software, Inc. and PK Karnik.
              
              Form
                  10-Q
              
              4/30/200710.59+
              
              Master
                  Agreement dated June 28, 2007 by and between WellPoint, Inc. and
                  Chordiant
                  Software, Inc..
              
              Form
                  10-Q
              
              8/10/200710.60*+
              
              Fiscal
                  Year 2008 Executive Incentive Bonus Plan.
              
              
              
              
              
              X10.61*+
              
              Fiscal
                  Year 2008 General Counsel Incentive Bonus Plan.
              
              
              
              
              
              X10.62*+
              
              Fiscal
                  Year 2008 Compensation Plan for Worldwide Vice President, Professional
                  Services.
              
              
              
              
              
              X10.63*+
              
              Fiscal
                  Year 2008 Bonus Plan for Worldwide Vice President, Sales.
              
              
              
              
              
              X10.64*
              
              Fiscal
                  Year 2008 Compensation Plan for Worldwide Vice President,
                  Sales.
              
              
              
              
              
              X10.65*
              
              Offer
                  Letter dated October 31, 2007 for David Cunningham.
              
              
              
              
              
              X10.66*+
              
              2008-2009
                  Performance Share Unit Program.
              
              
              
              
              
              X10.67*
              
              Form
                  of 2008-2009 Performance Share Unit Program Award Grant
                  Notice.
              
              
              
              
              
              X10.68
              
              Addendum
                  A to the Master Services Agreement dated October 25, 2007 by and
                  between
                  Chordiant Software, Inc. and Ness USA, Inc.
              
              
              
              
              
              X18.1
              
              Preferability
                  letter from BDO Seidman, LLP, Independent Registered Public Accounting
                  Firm.
              
              Form
                  10-K
              
              12/9/2005
  97
 Table
            of Contents
  
 **Incorporated
                  by Reference****Exhibit**
                **Number**
              
              **Description
                  of Document**
              
              **Form**
              
              **Date**
              
              **Filed
                  Herewith**21.1
              
              Subsidiaries
                  of Chordiant Software, Inc..
              
              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(a) or Rule 15d-14(a) and Section 1350 of
                  Chapter
                  63 of Title 18 of the United States Code (18 U.S.C. 1350).
              
              
              
              
              
              X
 *
              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.
 
 (1)
              Chordiant
                  has omitted Schedules 2-4 and 709 to the Share Purchase Agreement
                  pursuant
                  to Item 601(b)(2) of Regulation S-K. A brief description of the
                  omitted schedules is contained in Exhibit 2.4. Chordiant hereby
                  undertakes
                  to provide the SEC with copies of the omitted schedules upon
                  request.
 
 #
              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.
 
 
  98