UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

000-31321

(Commission File No.)

RIGHTNOW TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		81-0503640
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

40 Enterprise Boulevard

Bozeman, Montana 59718-9300

(Address of Principal Executive Offices) (Zip Code)

(406) 522-4200

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 31, 2005 was 31,549,088.

RightNow Technologies, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2005

INDEX

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RightNow Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands) (Unaudited)

	December 31, 2004			September 30, 2005
Assets
Cash and cash equivalents	$	18,944		$	39,594
Short-term investments	31,188			20,883
Accounts receivable	16,939			21,968
Term receivables, current	10,090			14,105
Allowance for doubtful accounts	(1,581		)	(1,960		)
Receivables, net	25,448			34,113
Prepaid expenses	1,255			1,771
Total current assets	76,835			96,361

Property and equipment, net	4,393			5,597
Term receivables, non-current	5,756			10,801
Intangible assets, net	1,113			1,631
Other	212			261
Total Assets	$	88,309		$	114,651

Liabilities and Stockholders’ Equity
Accounts payable	$	1,720		$	2,018
Commissions and bonuses payable	2,648			3,344
Other accrued liabilities	3,715			5,617
Current portion of long-term debt	—			29
Current portion of deferred revenue	36,020			45,694
Total current liabilities	44,103			56,702

Deferred revenue, net of current portion	13,105			18,058
Long-term debt, net of current portion	—			125

Stockholders’ equity:
Common stock	29			31
Warrants	291			107
Additional paid-in capital	72,367			76,339
Accumulated other comprehensive loss	(605		)	(433		)
Accumulated deficit	(40,981		)	(36,278		)
Total stockholders’ equity	31,101			39,766
Total Liabilities and Stockholders’ Equity	$	88,309		$	114,651

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts) (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2005			2004			2005
Revenue:
Software, hosting and support	$	12,976		$	18,005		$	35,405		$	48,743
Professional services	3,450			5,149			8,640			13,831
Total revenue	16,426			23,154			44,045			62,574

Cost of revenue:
Software, hosting and support	1,729			2,253			4,944			6,593
Professional services	1,979			3,026			4,862			8,601
Total cost of revenue	3,708			5,279			9,806			15,194

Gross profit	12,718			17,875			34,239			47,380

Operating expenses:
Sales and marketing	8,055			11,248			22,940			31,262
Research and development	2,028			2,937			5,640			7,524
General and administrative	1,164			1,627			3,333			4,623
Total operating expenses	11,247			15,812			31,913			43,409

Income from operations	1,471			2,063			2,326			3,971

Interest and other income (expense), net	30			440			(80		)	1,063

Income before income taxes	1,501			2,503			2,246			5,034
Provision for income taxes	(61		)	(160		)	(92		)	(331		)
Net income	$	1,440		$	2,343		$	2,154		$	4,703

Net income per share:
Basic	$	0.06		$	0.08		$	0.12		$	0.16
Diluted	$	0.05		$	0.07		$	0.08		$	0.14

Shares used in the computation:
Basic	23,734			30,802			17,963			30,287
Diluted	30,671			33,667			27,519			33,541

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2004			2005
Operating activities:
Net income	$	2,154		$	4,703
Non-cash adjustments:
Depreciation and amortization	2,081			2,462
Provisions for losses on accounts receivable	551			260
Deferred income taxes	—			218
Changes in operating accounts:
Receivables	(11,094		)	(14,340		)
Prepaid expenses	(1,141		)	(586		)
Accounts payable	367			405
Commissions and bonuses payable	598			732
Other accrued liabilities	1,183			2,023
Deferred revenue	9,217			15,283
Other	(498		)	(109		)
Cash provided by operating activities	3,418			11,051

Investing activities:
Net change in short-term investments	(25,943		)	10,303
Acquisition of property and equipment	(2,623		)	(3,272		)
Acquisition of intangible assets	(501		)	(1,035		)
Proceeds from sale of property and equipment	1			8
Cash provided by (used for) investing activities	(29,066		)	6,004

Financing activities:
Proceeds from long-term debt	1,675			162
Proceeds from issuance of common stock:
Initial public offering, less offering costs	40,687			—
Employee benefit plans	306			3,572
Repurchase of common stock	(2		)	—
Payments on long-term debt	(3,573		)	(8		)
Cash provided by financing activities	39,093			3,726

Effect of foreign exchange rates on cash and cash equivalents	1			(131		)

Increase in cash and cash equivalents	13,446			20,650

Cash and cash equivalents at beginning of period	8,360			18,944
Cash and cash equivalents at end of period	$	21,806		$	39,594

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Business Description and Basis of Presentation

Business Description

RightNow Technologies, Inc. (the “Company” or “RightNow”) provides on-demand customer relationship management software solutions for companies of all sizes. The Company’s on-demand software supports multiple customer interaction points in a business’s customer service, marketing and sales operations. Founded in 1997, RightNow is headquartered in Bozeman, Montana, with additional offices in Chicago, Illinois; Dallas, Texas; San Mateo, California; Princeton, New Jersey; Rochester, New York; London, England; Sydney, Australia; Munich, Germany; and a liaison office in Tokyo, Japan. The Company operates in one segment, which is the customer relationship management market.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the interim consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in the Annual Report on Form 10-K and include all adjustments necessary for the fair presentation of the Company’s financial position at September 30, 2005, and results of operations and cash flows for the three and nine month periods ended September 30, 2004 and 2005. The interim period results are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Management evaluates these estimates and assumptions on an on-going basis. Significant estimates and assumptions made by management include estimates and assumptions regarding revenue recognition, valuation allowances for trade receivables and deferred income tax assets, and accounting for equity-based compensation.

(2) Certain Risks and Concentrations

The Company’s revenue is derived from the license, hosting and support of its software products and provision of related professional services. The market in which the Company operates is highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect the Company’s operating results. The Company has historically derived a majority of its revenue from customer service software solutions. These products are expected to continue to account for a significant portion of revenue for the foreseeable future. As a result of this revenue concentration, the Company’s business could be harmed by a decline in demand for, or in the prices of, these products or as a result of, among other factors, any change in pricing model, a maturation in the markets for these products, increased price competition or a failure by the Company to keep up with technological change.

The Company’s customers are located worldwide with approximately 75% of sales in the United States. One individual customer represented approximately 14% of the Company’s total revenue for the three month period ended September 30, 2005. No individual customer represented more than 10% or revenue for the nine month periods ended September 30, 2004 or 2005. No individual customer represented more than 10% of receivables at September 30, 2004 or 2005.

Assets located outside the United States were 7% of total assets at December 31, 2004 and 9% of total assets at September 30, 2005. The loss from operations outside of the United States totaled $3.1 million for the year ended December 31, 2004 and $5.3 million for the nine months ended September 30, 2005. Revenue by geographical region follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2005		2004		2005

United States	$	12,421	$	17,291	$	32,564	$	47,699
Europe	3,188		3,752		9,184		9,876
Asia Pacific	817		2,111		2,297		4,999
	$	16,426	$	23,154	$	44,045	$	62,574

(3) Revenue Recognition

Software, hosting and support revenue is comprised of fees from term and perpetual licenses of the Company’s software, hosting and support. The Company recognizes revenue for the fees associated with term licenses and the related hosting and support ratably over the term of the arrangement, generally two years, but can range between six months and four years. To date, the Company has not entered into an arrangement solely for the license of its products, and therefore, has not established vendor specific objective evidence (VSOE) of fair value for the license element. The Company has established VSOE for the hosting and support elements sold with perpetual licenses based on prices charged upon renewal. Accordingly, revenue is recognized for the fees associated with a perpetual license upon delivery if all other revenue recognition criteria are met using the residual method in accordance with Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions.

Hosting and support agreements provide maintenance and management of our software at third party facilities, technical support for our software products, and unspecified product upgrades on a when and if available basis. Basic hosting and support is included with the term license package and the initial perpetual license support packages. Basic hosting and support services included in the initial perpetual license support package are recognized ratably over the term provided in the arrangement.

Revenue is recognized when all of the following criteria at met: a) the Company has entered into a legally binding agreement with the customer; b) the software has been delivered or made available to the customer; c) the Company’s fee for providing the software and services is determinable; and d) the Company estimates that collection of its fee is reasonably probable.

If an arrangement includes a right of acceptance or a right to cancel, revenue is recognized when acceptance is received or the right to cancel has expired. If the fee for the license has any payment term that is due in excess of the Company’s normal payment terms (over 90 days), the fee is considered to not be fixed or determinable. Accordingly, the amount of revenue recognized (a) for perpetual license arrangements is limited to the amount due from the customer, or (b) for term license arrangements is limited to the lesser of the amount due from the customer during each reporting period or a ratable portion of the total unallocated arrangement fee.

License fee revenue from arrangements with resellers is recognized on a sell-through basis, which is when payment becomes due from the customer and delivery of the product has occurred, assuming no significant vendor obligations remain.

Certain customers have license agreements that provide for usage above fixed minimums. Usage above fixed minimums requires payment of additional license fees if the Company’s software is used by more than a specified number of users or for more than a specified number of interactions. Fixed minimums are recognized as revenue ratably over the term of the arrangement. Usage fees above fixed minimums are recognized as revenue when such amounts are reported to the Company and billed.

Professional services revenue is primarily comprised of revenue from consulting services, education and development services. Consulting services include implementation, upgrade and best practices services consulting. Education services include both group and individual courses. Development services include building of non-complex customizations and integrations services for the customer’s specific application. Professional services revenue is recognized upon delivery. The Company has determined that the service elements of its software arrangements are not essential to the functionality of the software. The Company has also determined that its professional services (a) are available from other vendors, (b) do not involve a significant degree of risk or unique acceptance criteria, and (c) qualify for separate accounting as the Company has sufficient experience in providing such services.

VSOE of fair value of services in multiple element arrangements is based upon rates for consulting, education and development services, which the Company has charged in stand-alone contracts for services.

The following table sets forth revenue by product or service as a percentage of total revenue:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2005		2004		2005

Revenue by type:
Recurring (term licenses, hosting and support)	58	%	51	%	60	%	53	%
Perpetual licenses	21		27		20		25
Professional services	21		22		20		22

Deferred revenue represents amounts received or due from customers for which the revenue recognition criteria have not been met. The majority of deferred revenue is due to the ratable revenue recognition of term licenses and support contracts. Deferred revenue is recognized into revenue when the Company provides its products and services, provided that all other revenue recognition criteria noted above are met. The Company does not provide refunds for customer cancellations.

(4) Net Income Per Share

A reconciliation of the denominator used in the calculation of basic and diluted net income per share is as follows (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2005	2004	2005

Weighted average common shares outstanding for basic net income per share	23,734	30,802	17,963	30,287
Effect of dilutive securities:
Convertible preferred stock	2,843	—	5,781	—
Employee stock options	4,036	2,840	3,746	3,214
Warrants	58	25	29	40
Weighted average shares outstanding for dilutive net income per share	30,671	33,667	27,519	33,541

The following common stock equivalents were excluded from the computation of diluted earnings per share because their impact was anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2005	2004	2005

Employee stock options	243	537	681	550

(5) Comprehensive Income

Comprehensive income for the comparative periods was as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2005			2004			2005

Net income	$	1,440		$	2,343		$	2,154		$	4,703
Other comprehensive income (loss):
Foreign currency translation adjustment	(27		)	39			(460		)	226
Unrealized loss on short-term investments	(3		)	(27		)	(3		)	(54		)
Comprehensive income	$	1,110		$	2,355		$	1,691		$	4,875

(6) Equity-Based Compensation

The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, but applies Accounting Principles Board Opinion No. 25 (“APB 25”) and related interpretations in accounting for its stock plans. Under APB 25, when the exercise price of an employee stock option equals the estimated market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding results of operations has been determined as if the Company had accounted for its stock options under the appropriate minimum value or fair value method. The Company uses the Black-Scholes valuation model to estimate the value of stock options granted under its equity incentive plans and stock purchased under the 2004 Employee Stock Purchase Plan. The estimated weighted average fair value per share of stock options granted in the nine months ended September 30, 2004 and 2005 was $4.39 and $6.93, respectively.

Assumptions used to obtain the estimated fair values of stock options were:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2005		2004		2005
Employee stock options
Weighted average risk free rate	3.6	%	4.2	%	3.6	%	3.9	%
Expected term	5 years		5 years		5 years		5 years
Volatility	99	%	70	%	73	%	74	%
Dividend yield	0	%	0	%	0	%	0	%

The Company’s Employee Stock Purchase Plan provides for two six-month purchase periods each year, with purchases effected on June 30 and December 31. The estimated value of shares purchased on June 30, 2005 was $5.79, and is based on the following assumptions: weighted average risk free rate of 2.9%; expected term of 0.5 years; volatility of 74%; and dividend yield of 0%. For the quarter ended September 30, 2005, no pro forma compensation expense was recorded because the terms of the plan were revised, effective July 1, 2005, to remove the look-back option and reduce the employee discount, so that the plan is deemed non-compensatory under SFAS 123.

Had the Company recorded compensation expense in accordance with SFAS No. 123, net income would have been (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2005			2004			2005

Net income as reported	$	1,440		$	2,343		$	2,154		$	4,703
Less equity-based compensation	(205		)	(544		)	(624		)	(2,528		)
Pro forma net income	$	1,235		$	1,799		$	1,530		$	2,175

Net income per share:
Basic:
As reported	$	0.06		$	0.08		$	0.12		$	0.16
Pro forma	0.05			0.06			0.09			0.07
Diluted:
As reported	$	0.05		$	0.07		$	0.08		$	0.14
Pro forma	0.04			0.05			0.06			0.07

From time to time the Company grants to certain of its consultants options to purchase stock. The Company accounts for consultant stock options in accordance with SFAS 123 and Emerging Issues Task Force Consensus Issue No. 96-18 (“EITF 96-18”), Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services. Compensation expense for the grant of stock options to consultants is determined based on the estimated fair value of the stock options at the measurement date as defined in EITF 96-18 and is recognized over the vesting period.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R (“123R”), Share-Based Payment, which replaces SFAS No. 123 and supercedes APB 25. Statement 123R covers a wide range of share-based compensation, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The statement requires the recognition of compensation cost related to share-based payment plans to be recognized in financial statements based on the fair value of the equity or liability instruments issued. The Company expects that this accounting change will materially and adversely affect its reported results of operations because the stock-based compensation expense will be charged directly against earnings. The Company expects to adopt the provisions of 123R using the modified prospective method beginning January 1, 2006.

(7) Commitments and Contingencies

Warranties and Indemnification

The Company’s on-demand application service is typically warranted to perform in accordance with its user documentation.

The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

The Company has entered into service level agreements with a small number of its customers warranting certain levels of uptime reliability and permitting those customers to receive credits or terminate their license agreements in the event that the Company fails to meet those levels. To date, the Company has not provided any material credits, and no license agreements have been terminated, related to these service level agreements.

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request.

Litigation

From time to time, the Company is involved in legal proceedings arising in the normal course of business. The Company believes that the resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity.

(8) Acquisition of Convergent Voice Assets

In May 2005, the Company purchased the intellectual property and other assets, and hired certain personnel, of Convergent Voice, Inc. Convergent Voice has developed voice enabled automation technologies that, when combined with the Company’s applications, enable: a) telephone queries of the Company’s knowledgebase; b) submission of questions over the phone that can be subsequently answered either electronically or by a return phone call; and c) submission of queries that access back office systems, such as an order processing system, to obtain status of an order. The Company had previously licensed certain Convergent Voice technologies for more than two years.

The purchase price consisted of $1 million paid in cash on May 5, 2005 to the shareholders of Convergent Voice, and $15,000 of transaction costs. Approximately $935,000 of the purchase price was allocated to identifiable intangible assets based on a discounted cash flow analysis. The identifiable intangible assets consist primarily of developed software, and will be amortized to earnings over a period of five years. The remaining purchase price of approximately $80,000 was allocated to other tangible assets acquired based on their estimated net realizable value or replacement cost.

Pro forma results of the business combination have not been provided because the effect is not material on an individual or aggregate basis.

(9) Leases

In the first quarter of 2005, the Company extended two office lease agreements, and entered into a new office lease agreement, with Genesis Partners, LLC. Annual minimum payments under operating leases are approximately $1.2 million in 2005 through 2009, approximately $750,000 in 2010, and approximately $150,000 thereafter. One of the office agreements includes $162,000 of tenant improvements, which have been capitalized and will be amortized over their expected useful lives of seven years. The Company’s Chief Executive Officer is a 50% member, and the Company’s Vice President of Delivery is a 25% member, of Genesis Partners, LLC. The Company expects to renew two of the office leases upon their term expirations in five years.

(10) Reclassifications

Certain reclassifications have been made to the prior year statement of cash flows to conform to the current year presentation. The reclassifications related to investments in auction rate securities at September 30, 2004 which are now classified as short-term investments and had been previously classified as cash and cash equivalents. The amount reclassified from cash and cash equivalents to short-term investments at September 30, 2004 was $19,830,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes in this report. This discussion contains forward-looking statements that are not guarantees of future results and are subject to risks, uncertainties, and assumptions that could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. Forward looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words and include but are not limited to, statements regarding projected results of operations and management’s future strategic plans.

The risks and uncertainties referred to above include, but are not limited to, risks associated with our business model, our past operating losses, possible fluctuations in our operating results and our rate of growth, interruptions or delays in our hosting operations, breaches of our security measures, our ability to expand, retain and motivate our employees and manage our growth, and our plans for new product releases. Further information on potential risk factors that could affect our financial results is included in this report on Form 10-Q under the heading “Risk Factors” and elsewhere in this report. We assume no obligation to update the forward-looking statements or such risk factors.

Overview

We are a leading provider of on-demand solutions for the customer relationship management (“CRM”) market. We offer a broad suite of solutions to automate the customer service, sales and marketing requirements of organizations across diverse industries.

We released our initial version of RightNow Service in 1997. This product addressed the new customer service needs resulting from the increasing use of the Internet as a customer service channel. Since then, we have significantly enhanced product features and functionality to address customer service needs across multiple communication channels, including web, interactive voice, e-mail, chat, telephone and proactive outbound e-mail communications. We have also added several products that are complementary to our RightNow Service solution, including RightNow Metrics and RightNow Locator. In 2003, we introduced an e-mail marketing automation solution, RightNow Outbound. In October 2004, we introduced RightNow CRM, which is comprised of three applications built on a common base: RightNow Service, RightNow Sales and RightNow Marketing. Each of these solutions is designed to automate organizations’ business operations. In May 2005, we purchased the intellectual property and other assets, and hired certain employees, of Convergent Voice, Inc., a developer of voice recognition software that integrates with RightNow solutions. To date, approximately 90% of our revenue has been generated from sales of RightNow Service.

Our client base currently consists of more than 1,400 active clients. During the nine months ended September 30, 2005, our products served approximately 530 million customer interactions, or unique sessions hosted by our solutions. Our solutions, whether sold pursuant to term or perpetual licenses, are available either on a hosted basis, where they are deployed in our co-location facilities and accessed on-demand by our clients, or on a non-hosted basis, where our clients deploy them in their own facilities. Approximately 87% of our clients have elected the hosted option as of September 30, 2005. We distribute our solutions primarily through direct sales efforts and to a lesser extent through indirect channels.

Sources of Revenue

Our revenue is comprised of fees for term and perpetual licenses of our software, fees for hosting and support related to our licenses, and fees for professional services. Our term license agreements, which are generally two years in length but can range from six months to four years, include our software and related upgrades, hosting and support for the term of the agreement. The majority of our revenue in each of

our last three years and the nine months ended September 30, 2005 was derived from two-year term license agreements. We also offer monthly term license agreements that contain a minimum commitment period of at least 12 months and include our software and related upgrades, hosting and support. Perpetual licenses are typically sold with annual contracts that include upgrades, hosting and support.

Hosting and support agreements provide management of our software at a third-party facility and technical support for our software products. Unspecified product upgrades are provided on a when and if available basis.

Professional services revenue is comprised of revenue from consulting, education and development services, and reimbursement of related travel costs. Consulting and education services include implementation and best practices services consulting. Development services include customizations and integrations for a client’s specific business application.

Our software license agreements generally provide for the purchase of a fixed amount of capacity, which is measured primarily by web pages served, user seats, outgoing email transactions, or minutes used, and for certain other fixed fees. A number of our agreements provide for additional fees for usage above established levels, which are billed and recognized into revenue when earned.

Professional services, consisting of consulting, education and development services, are sold with initial license agreements and periodically over the client engagement. The average deployment time for our clients is approximately 50 to 60 days. We typically invoice clients for the entire amount at the beginning of the agreement with payment generally due within 30 days for our term and perpetual license agreements, or due monthly for our monthly term agreements. Our typical education courses are billed on a per person, per class basis.

Depending on the size and complexity of the client project, our consulting or development services contracts are either fixed price/fixed scope or, less frequently, billed on a time and materials basis. We have determined that the professional services element of our software arrangements is not essential to the functionality of the software. We have also determined that our professional services: a) are available from other vendors; b) do not involve a significant degree of risk or unique acceptance criteria; and c) qualify for separate accounting as we have sufficient experience in providing such services.

Cost of Revenue and Operating Expenses

Cost of Revenue. Cost of revenue consists primarily of salaries and related expenses for our hosting, support and professional services organizations, third-party costs and equipment depreciation relating to our hosting services, travel expenses related to providing professional services to our clients, amortization of acquired intangible assets and allocated overhead.

We allocate most overhead expenses, such as office supplies, computer supplies, utilities, rent, depreciation for furniture and equipment, payroll taxes and employee benefits, based on headcount. As a result, overhead expenses are reflected in each cost of revenue and operating expense category.

Our hosting costs are affected by the percentage of clients who license our products on a hosted basis and the number of times our clients and their customers use our solutions, which we refer to as customer interactions. As a result of economies of scale in our hosting infrastructure and declines in computer hardware and telecommunications costs, we have been able to reduce hosting costs as a percentage of total revenue in 2003, 2004, and the first nine months of 2005, despite significant increases in the number of hosted clients and the level of customer interactions

As our client base and solutions usage grows, we intend to continue to invest additional resources in our hosting services, technical support and professional services. We expect our professional services costs to increase in absolute dollars as we increase our professional services as a percentage of total

revenue. Because cost as a percentage of revenue is higher for professional services revenue than for software, hosting and support revenue, an increase in professional services as a percentage of total revenue reduces gross profit as a percentage of total revenue. During the first nine months of 2005, gross profit as a percentage of total revenue declined to 76% from 78% in the comparable period in 2004 due to an increase in professional services as a percentage of total revenue, combined with higher professional services costs in 2005.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, product management expenses, travel costs and allocated overhead. We expense our sales commissions at the time the related sale is invoiced to the client and we recognize the majority of our revenue from our agreements ratably over the terms of the licenses. Accordingly, we generally experience a delay between increasing sales and marketing expenses and the recognition of corresponding revenue. We expect significant additional increases in sales and marketing expenses in absolute dollars as we continue to hire additional sales and marketing personnel and increase the level of marketing activities.

Research and Development Expenses. Research and development expenses consist primarily of salary and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, translation fees, quality assurance, testing and allocated overhead. To date, we have not capitalized any software development costs because the timing of the commercial releases of our products has substantially coincided with the attainment of technological feasibility. As a result, research and development costs have been expensed as incurred. We intend to continue to expand and enhance our product offerings. To accomplish this, we plan to hire additional personnel and, from time to time, contract with third parties. We expect that research and development expenses will increase in absolute dollars as we seek to expand our technology and product offerings.

General and Administrative Expenses. General and administrative expenses consist primarily of salary and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate expenses and allocated overhead. We anticipate that we will incur additional employee salaries and related expenses, professional service fees and insurance costs related to the growth of our business and operations.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These assumptions are affected by management’s application of accounting policies. Our critical accounting policies include: revenue recognition; valuation of receivables and deferred tax assets; and accounting for equity-based compensation.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue Recognition

Software, hosting and support revenue is comprised of fees from term and perpetual licenses of the Company’s software, hosting and support. To date we have not entered into an arrangement solely for the license of products and, therefore we have not demonstrated vendor specific objective evidence (VSOE) of fair value for the license element. Consequently, we recognize revenue for the fees associated with the term license and the related hosting and support ratably over the term of the agreement, which is generally two years, but can range between six months and four years. We have established VSOE for the annual hosting and support elements sold with each perpetual license based on the price paid when sold separately. Accordingly, we recognize revenue for each perpetual license using the residual method in accordance with Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect

to Certain Transactions. Amounts that have been invoiced to clients are recorded to accounts or term receivables and deferred revenue. Deferred revenue is then recognized into revenue when earned.

We begin to recognize revenue from the licensing, hosting and support of our products when all the following criteria are met: a) we have entered into a legally binding agreement with the client; b) our products and services have been delivered or made available to the client; c) our fee for providing the products and services is determinable; and d) we believe collection of our fee is reasonably probable.

VSOE of fair value of services in multiple element arrangements is based upon rates for consulting, education and development services, which we charge in stand-alone contracts for services. We recognize revenue from professional services when they are delivered.

Valuation of Receivables

We regularly assess the collectibility of outstanding customer invoices and, in so doing, we maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as: historical collection experience; a customer’s current creditworthiness; customer concentration; age of the receivable balance; and general economic conditions that may affect a customer’s ability to pay. Actual customer collections could differ from our estimates and exceed our related loss allowance.

Income Taxes

We record income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. When applicable, a valuation allowance is established to reduce any deferred tax asset when it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

We have established a valuation allowance equal to our net deferred tax assets due to uncertainties regarding the realization of our net operating loss carryforwards, tax credits, and deductible timing differences. The uncertainty of realizing these benefits is based primarily on our lack of historical taxable earnings.

Equity-Based Compensation

We account for our employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Option (“APB”) No. 25, Accounting for Stock Issued to Employees. We make disclosure regarding employee stock-based compensation using the fair value method in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. We have calculated the fair value of options granted and have determined the pro forma impact on net income (loss). We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.

In measuring the cost of equity-based compensation, we make assumptions regarding our stock price volatility and the average expected life of our outstanding stock options. Our assumptions are based on our historical information, some of which was developed when we were a private company, which are then compared with other like companies for reasonableness. Actual results could differ from our estimates.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), Share-Based Payment, which replaces SFAS 123 and supercedes APB No. 25. The statement’s effective date was amended in April 2005 to apply to certain public companies beginning with their first fiscal year beginning after June 15, 2005. SFAS 123R covers a wide range of share-based compensation, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The statement requires the recognition of compensation cost related to share-based payment plans to be recognized in financial statements based on the fair value of the equity or liability instruments issued. We expect that adoption of the provisions of SFAS 123R beginning January 1, 2006 will materially and adversely affect our reported results of operations because the stock-based compensation expense will be charged directly against reported earnings. We do not expect the accounting change to materially affect our liquidity because stock-based compensation is a non-cash expense.

Results of Operations

The following table sets forth certain consolidated statement of operations data expressed as a percentage of total revenue for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2005		2004		2005
Revenue:
Software, hosting and support	79	%	78	%	80	%	78	%
Professional services	21		22		20		22
Total revenue	100		100		100		100

Cost of revenue:
Software, hosting and support	11		10		11		10
Professional services	12		13		11		14
Total cost of revenue	23		23		22		24

Gross profit	77		77		78		76

Operating expenses:
Sales and marketing	49		48		52		51
Research and development	12		13		13		12
General and administrative	7		7		8		7
Total operating expenses	68		68		73		70

Income from operations	9		9		5		6

Interest and other income (expense), net	—		2		—		2

Income before income taxes	9		11		5		8
Provision for income taxes	—		(1	)	—		(1	)
Net income	9	%	10	%	5	%	7	%

The following table sets forth our on-demand customer interactions and percent of clients hosting and our revenue by type and geography expressed as a percentage of total revenue for each of the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2005		2004		2005

Customer interactions (in millions)	140		188		352		530
Percentage of clients hosting	86	%	87	%	86	%	87	%

Revenue by type:
Recurring (term licenses, hosting and support)	58	%	51	%	60	%	53	%
Perpetual licenses	21		27		20		25
Professional services	21		22		20		22

Revenue by geography:
United States	76	%	75	%	74		76	%
Europe	19		16		21		16
Asia Pacific	5		9		5		8

Overview of Current Period

The quarter ended September 30, 2005 represented our 31st consecutive quarter of revenue growth. Total revenue for the quarter ended September 30, 2005 increased 41% over the comparable period in 2004 from growth in our average number of customers and growth in our average selling prices. Gross profit as a percent of total revenue for the three months ended September 30, 2005 was equal to the comparable 2004 quarter, as improved margins on software, hosting and support offset a higher mix of lower margin professional services. Operating expenses for the three months ended September 30, 2005, in total, increased 41% over the three months ended September 30, 2004 due to our investment in personnel to support our overall growth. Operating income for the comparative third quarter periods of 2005 and 2004 was 9% of revenue.

Our revenue growth in 2004 and the first nine months of 2005 resulted from the release of broader product offerings, a corresponding increase in service offerings, and the addition of sales personnel focused on new client acquisition. In the third quarter of 2005, we signed 92 new customers, bringing our total active client base to more than 1,400.

For the three months ended September 30, 2005, we generated $5.2 million of cash from operations compared to $1.1 million of cash in the comparable 2004 quarter, and increased our deferred revenue to $63.8 million at September 30, 2005 from $44.5 million one year earlier.

As of September 30, 2005, we had an accumulated deficit of $36.3 million. This deficit resulted primarily from costs incurred in the development, sales and marketing of our products and for general and administrative purposes. We intend to continue to invest in our sales and marketing activities, product development and business infrastructure. During periods of investment and growth, because the majority of expenses are recorded as incurred and the majority of revenue is deferred, we anticipate that any growth in revenue will be largely offset by an increase in cost of revenue and operating expenses.

Three and Nine Months Ended September 30, 2004 and 2005

Revenue

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2004		2005		Percent Change		2004		2005		Percent Change

Software, hosting and support	$	12,976	$	18,005	39	%	$	35,405	$	48,743	38	%
Professional services	3,450		5,149		49		8,640		13,831		60
Total revenue	$	16,426	$	23,154	41	%	$	44,045	$	62,574	42	%

Software, hosting and support

For the quarter ended September 30, 2005, software, hosting and support revenue increased $5 million, or 39%, over the third quarter of 2004. The increase resulted primarily from a 19% increase in average revenue per client and a 17% increase in the average number of clients. Average revenue per client has grown from client purchases of additional products and/or capacity. The increase in the average number of clients was primarily due to the addition of sales representatives focused on new client acquisition. Recurring software, hosting and support revenue was $11.7 million in the quarter ended September 30, 2005, or 22% more than the comparable quarter in 2004.

Perpetual license fee revenue represented 27% of total revenue in the quarter ended September 30, 2005 compared to 21% in the quarter ended September 30, 2004. One customer’s purchase of a perpetual license during the quarter ended September 30, 2005 represented approximately 14% of total revenue for the quarter. This is the first quarter that a single customer has accounted for more than 10% of total revenue in any quarterly period. The mix of perpetual license revenue affects our overall profitability in any given period since it is recorded into revenue upon delivery instead of being ratably recognized into revenue, as is the case with term licenses. Over the previous eight quarters, perpetual license revenue has ranged between 15% and 29% of total revenue. We believe there are many factors that cause our perpetual license revenue to fluctuate as a percentage of total revenue, including the strategic importance of our products in client organizations, client planning horizons, and client purchasing preferences and patterns. We expect perpetual license revenue to range between 20% and 25% of total revenue in future periods.

For the nine months ended September 30, 2005, software, hosting and support revenue increased $13.3 million, or 38%, from the corresponding period in 2004. Average revenue per client increased 21% in the first nine months of 2005 and average number of clients increased 14%. Recurring software, hosting and support revenue increased $6.7 million, or 25%, in the first nine months of 2005 compared to the first nine months of 2004. Perpetual license revenue increased $6.7 million, or 74%, in the first nine months of 2005 as compared to the similar period in 2004.

Professional services

For the quarter ended September 30, 2005, professional services revenue increased $1.7 million, or 49%, over the third quarter of 2004. Average professional services revenue per client increased 28% in the third quarter of 2005 compared to the third quarter of 2004, and average number of clients increased 17%. Revenue per client increased from our focus on expanding service offerings provided in conjunction with our broader product offerings. We increased our capacity to deliver professional services by increasing our average employee count to 89 employees during the quarter ended September 30, 2005 from 59 employees one year earlier.

Professional services revenue for the first nine months of 2005 increased $5.2 million, or 60%, over the comparable period in 2004 mostly due to growth in average number of clients and average professional services revenue per client.

The mix of professional services revenue to total revenue also affects our operating results from period-to-period, due to the lower gross profit earned on professional services revenue as compared to

software, hosting and support revenue. The amount of professional services revenue in any quarter is primarily a function of the number and complexity of consultation and training engagements. During the past eight quarters, professional services revenue has ranged from 17% to 24% of total revenue. We expect professional services revenue to range between 20% and 25% of total revenue in future periods.

Revenue from European and Asia Pacific customers increased $3.4 million, or 30%, in the first nine months of 2005 compared to the first nine months of 2004. Total revenue outside the United States was 26% and 24% of consolidated revenue for the nine months ended September 30, 2004 and 2005, respectively. We have invested in additional sales representatives in continental Europe and the Asia Pacific region in 2005 which, we believe is the primary driver of revenue growth in those regions.

Cost of Revenue

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2004		2005		Percent Change		2004		2005		Percent Change

Software, hosting and support	$	1,729	$	2,253	30	%	$	4,944	$	6,593	33	%
Professional services	1,979		3,026		53		4,862		8,601		77
Total cost of revenue	$	3,708	$	5,279	42	%	$	9,806	$	15,194	55	%

Software, hosting and support

For the quarter ended September 30, 2005, cost of software, hosting and support revenue increased $524,000, or 30%, over the comparable 2004 quarter mostly due to the addition of staff to support new product offerings. Staff additions in our software, hosting and support organizations increased salaries and related employee costs by $401,000 in the third quarter of 2005 over the third quarter of 2004, and equipment depreciation expenses and amortization of purchased technologies increased $116,000. Average employee count in our hosting and support organization was 60 in the third quarter of 2005 compared to 45 in the third quarter of 2004. As a percent of the associated revenue, cost of software, hosting and support remained constant at 13% in each of the third quarters of 2005 and 2004.

For the nine months ended September 30, 2005, cost of software, hosting and support increased $1.6 million, or 33%, over the similar period in 2004 due to the staff additions and increased depreciation and amortization expenses noted above. We acquired the intellectual property of Convergent Voice, Inc. in May 2005 at a cost of approximately $935,000, which will be amortized to cost of software, hosting and support over 5 years.

Professional services

For the quarter ended September 30, 2005, professional services costs increased $1.0 million, or 53%, over the comparable 2004 quarter. The growth in absolute dollars in the third quarter of 2005 resulted from staff additions and associated travel and living expenses. Average employee count in our professional services group was 89 in the third quarter of 2005 compared to 59 in the third quarter of 2004. As a percent of the associated revenue, professional services costs were 59% in the 2005 quarter as compared to 57% in the 2004 quarter. Professional services costs have ranged between 52% and 70% of the associated revenue in the past seven quarters, mostly due to changes in the volume of services provided and client scheduling requirements.

Operating Expenses

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2004		2005		Percent Change		2004		2005		Percent Change

Sales and marketing	$	8,055	$	11,248	40	%	$	22,940	$	31,262	36	%
Research and development	2,028		2,937		45		5,640		7,524		33
General and administrative	1,164		1,627		40		3,333		4,623		39
Total operating expenses	$	11,247	$	15,812	41	%	$	31,913	$	43,409	36	%

Sales and Marketing Expenses

For the quarter ended September 30, 2005, sales and marketing expense increased $3.2 million, or 40%, over the comparable 2004 quarter primarily due to the addition of employees to our sales and marketing group. Average employee count in our sales and marketing group was 197 for the third quarter of 2005 compared to 151 for the third quarter of 2004, which increased salaries and related employee costs by approximately $1.5 million. In addition, severance costs of $300,000 were incurred in the third quarter of 2005 from the departure of our Vice President of Marketing and Business Development. We also incurred incremental sales incentive costs of $927,000 in the 2005 quarter due to growth in new contracts signed. As a percent of total revenue, sales and marketing expenses were constant at 49% in each of the third quarters of 2005 and 2004.

For the nine months ended September 30, 2005, sales and marketing expenses increased $8.3 million, or 36%, over the first nine months of 2004 due to increased staff and higher sales incentive costs. Staff additions in our sales and marketing group added approximately $5.2 million in salaries and and employee related expenses in the first nine months of 2005 over the comparable 2004 period, and growth in new contracts increased sales incentive costs by $2.0 million.

Research and Development Expenses

For the quarter ended September 30, 2005, research and development expenses increased $909,000, or 45%, over the comparable 2004 quarter mostly due to staff additions, including employees acquired as part of the Convergent Voice transaction in May 2005. Average employee count in our research and development organization grew to 106 employees in the third quarter of 2005 from 88 employees in the third quarter of 2004, and the corresponding payroll and related expenses increased by approximately $766,000.

For the nine months ended September 30, 2005, research and development expenses increased $1.9 million, or 33%, over the comparable 2004 period due to the staff additions described above.

General and Administrative Expenses

For the quarter ended September 30, 2005, general and administrative expenses increased $463,000, or 40%, over the third quarter of 2004 due to employee growth and incremental expenses of being a public company. Average employee count in our general and administrative organization was 42 in the third quarter of 2005 and 33 in the third quarter of 2004, which increased payroll and related costs by approximately $242,000. Third quarter 2005 general and administrative expenses also include incremental financial audit and Sarbanes-Oxley compliance costs of $138,000, and state filing fee expenses of $65,000, which result from the reporting and compliance requirements for public companies.

For the nine months ended September 30, 2005, general and administrative expenses increased $1.3 million, or 39%, over the comparable period in 2004 due to the staff additions, and incremental financial audit, Sarbanes-Oxley and state filing fees noted above.

Interest and Other Income (Expenses), Net

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2004			2005			2004			2005

Interest income	$	109		$	437		$	154		$	1,082
Interest expense	(81		)	(3		)	(238		)	(3		)
Other income (expense)	2			6			4			(16		)
Total other income (expense)	$	30		$	440		$	(80	)	$	1,063

Interest income of $437,000 in the quarter ended September 30, 2005 consisted of earnings on our cash equivalent and short-term investment portfolio. In August 2004, we completed our initial public offering of common stock and received net proceeds of approximately $40 million, most of which was invested in short-term, investment-grade, interest-bearing securities. Interest expense in the first half of 2004 consisted primarily of amounts paid or accrued under our outstanding long-term debt at that time. Other income and expense consists primarily of currency exchange gains or losses and gains or losses on equipment disposals.

Provision for Income Taxes

Our provision for income taxes was approximately 6% of pre-tax income for the three and nine months ended September 30, 2005 as compared to 4% for the comparable 2004 periods. The 2005 provision consists of the expense associated with the U.S. alternative minimum tax, and to a lesser extent, foreign withholdings for which net operating losses are not available. Our provision for income taxes is less than the statutory rate mostly due to the generation of U.S. net operating losses in the current period.

At September 30, 2005, we had $23.6 million of net deferred income tax assets that have been reserved in full by a valuation allowance. In the future, if available evidence indicates that it is more likely than not that we will be able to utilize some or all of our deferred tax assets, we will record an income tax benefit in the amount of the asset recognized, and our effective tax rate would likely increase at that time.

Liquidity and Capital Resources

Information regarding deferred revenue and cash provided by operating activities follows (in thousands):

	Quarter Ended
(Amounts in thousands)	Sep 30, 2004		Dec 31, 2004		Mar 31, 2005		Jun 30, 2005		Sep 30, 2005

Deferred revenue	$	44,491	$	49,125	$	52,810	$	57,368	$	63,752
Cash provided by operating activities	1,063		3,320		3,239		2,564		5,248

We have historically funded our operations with cash from operations, equity financings and debt borrowings. In August 2004, we completed our initial public offering of 6.4 million shares of common stock and received net proceeds of approximately $40 million. The offering proceeds were invested in short-term, interest-bearing securities. During the second half of 2004, we paid down all of our then outstanding long-term debt. At September 30, 2005 cash and cash equivalents, and short-term investments, totaled $60.5 million

Operating activities provided $11.1 million of cash during the nine months ended September 30, 2005, as compared to $3.4 million of cash from operations in the corresponding period of the prior year. The majority of our cash from operations in the first nine months of 2005 was from growth in net income and deferred revenue, offset in part by growth in receivables. We typically bill customers on net 30-day terms at the beginning of the license period, which is reflected in accounts receivable and deferred revenue. Customers may elect a monthly payment option, or in certain circumstances, installment payments, which are reflected in current and non-current term receivables. During the first nine months of 2005, the percentage of customers choosing the monthly payment option has increased to approximately 20% of new business from approximately 15% in the first nine months of 2004. An increase in the percentage of monthly payment terms may adversely affect near-term cash provided by operations. However, because our monthly payment option is a higher priced alternative to our net-30 payment option, we would expect an overall positive effect to earnings and cash provided by operations over time.

Cash required for income taxes has not been historically significant due to our cumulative operating losses to date, and is not expected to be significant for the remainder of 2005.

Investing activities provided $6.0 million in cash during the nine months ended September 30, 2005 due to the liquidation of short-term investments and re-investment of proceeds in cash equivalents. Other investing activities included $3.3 million of equipment acquisitions for our hosting operations and employee growth, and $1.0 million for the acquisition of the intellectual property and certain other assets of Convergent Voice, Inc. in May 2005.

Financing activities provided $3.7 million in the nine months ended September 30, 2005 from the exercise of stock options and shares purchased under the employee stock purchase plan.

We believe our existing cash and short-term investments, together with funds generated from operations, should be sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth and expansion of our sales and marketing activities, the possible acquisition of complementary products or businesses, the timing and extent of spending required for research and development efforts, and the continuing market acceptance of our products. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financings. Additional equity or debt financing may not be available on terms favorable to us or at all.

Contractual Obligations and Commitments

In the first quarter of 2005, we entered into a new office lease agreement, and extended two existing office lease agreements, with Genesis Partners LLC. The new office lease agreement includes $162,000 of leasehold improvements, which have been capitalized and will be amortized over their expected lives of seven years. The Company expects to renew the office leases upon their initial term expiration. These office lease agreements will increase our contractual obligations under operating leases, as disclosed in our most recent annual report on Form 10-K, by approximately $250,000 in 2005, and approximately $360,000 each year from 2006 through 2009.

We also plan to enter into a ten year operating lease with Genesis Partners LLC for approximately 29,100 square feet of additional office space in Bozeman, Montana. The space is expected to be available in approximately one year and the lease obligation is expected to be approximately $425,000 per year. There have been no other material contractual obligations or commitments incurred in the current year.

Risk Factors

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below, in addition to the other cautionary statements and risks described elsewhere and the other information contained in this report and in our other filings with the SEC, including our reports on Forms 10-Q, 10-K and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on RightNow, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

We may not be able to sustain or increase our profitability in the future.

We may not be able to sustain or increase our profitability in the future. Prior to 2004, we incurred significant operating losses of approximately $4.1 million in 2003, $2.7 million in 2002 and $15.3 million in 2001. As of September 30, 2005, we had an accumulated deficit of approximately $36.3 million. We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses as we expand our operations and, as a result, we will need to generate significant revenue to maintain profitability. Even if we continue to achieve profitability, we may not be able to increase profitability on a quarterly or annual basis in the future, which may cause the price of our stock to decline.

Our quarterly results of operations may fluctuate in the future.

Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section:

• our ability to retain and increase sales to existing clients, attract new clients and satisfy our clients’ requirements;

• changes in the volume and mix of term and perpetual licenses sold in a particular quarter, because perpetual license revenue is recorded into revenue upon delivery whereas term licenses are recorded into revenue ratably over the period of license;

• our policy of expensing sales commissions at the time of invoice, while the majority of our revenue is recognized ratably over future periods;

• changes in the mix of revenue between professional services and software, hosting and support, because the gross margin on professional services is typically lower than the gross margin on software, hosting and support;

• changes in the mix of voice self service applications sold and/or usage volume;

• the timing and success of new product introductions or upgrades by us or our competitors;

• changes in our pricing policies or those of our competitors;

• the amount and timing of expenditures related to expanding our operations;

• changes in the payment terms for our products and services, including changes in the mix of payment options chosen by our customers;

• the purchasing and budgeting cycles of our clients; and

• general economic, industry and market conditions.

Because the sales cycle for the evaluation and implementation of our solutions typically ranges from 60 to 180 days, we may also experience a delay between increasing operating expenses and the generation of corresponding revenue, if any. Moreover, because the majority of our clients purchase term licenses, and we recognize revenue from these licenses over the term of the agreement, downturns or upturns in sales may not be immediately reflected in our operating results. Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.

Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

If our efforts to enhance existing solutions, introduce new solutions or expand the applications for our products and solutions to broader CRM markets do not succeed, our ability to grow our business will be adversely affected.

Approximately 90% of our revenue is derived from RightNow Service, a suite of solutions used to optimize customer service operations. If we are unable to successfully develop and sell new and enhanced versions of RightNow Service, or introduce new products and solutions for the customer service market, our financial performance will suffer. Although to date the majority of business has been focused on providing solutions for customer service operations, we recently introduced RightNow Sales, RightNow Marketing, and voice-enabled CRM applications to expand our solution offerings. Our efforts to expand beyond the customer service market may not be successful because certain of our competitors have far greater experience and brand recognition in the broader segments of the CRM market. In addition, our efforts to expand our on-demand software solutions beyond the customer service market may divert management resources from our existing operations and require us to commit significant financial resources to a market where we are unproven, which may harm our business, financial condition and results of operations.

We face intense competition, and our failure to compete successfully could make it difficult for us to add and retain clients and could reduce or impede the growth of our business.

The market for customer relationship management solutions is highly competitive and fragmented, and is subject to rapidly changing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of other industry participants. Competition has intensified with our most recent product releases. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients, and our business, financial condition and results of operations will be seriously harmed.

We face competition from:

• companies currently providing customer service solutions, some of whom offer hosted services, including Amdocs Limited, BMC Software Corporation, Inc., eGain Communications Corporation, FrontRange Solutions, Inc., IBM Corporation, Kana Software, Inc., Microsoft

Corporation, Oracle Corporation, SAP AG, salesforce.com, inc., SSA Global and Siebel Systems, Inc.;

• CRM systems that are developed and maintained internally by businesses;

• CRM products or services that are developed, or bundled with other products or services, and installed on a client’s premises by software vendors;

• outsourced contact center providers who bundle solutions and agent labor in their service offerings;

• new companies entering the CRM software market, the on-demand applications market and the on-demand CRM market, or expanding from any one of these markets to the others; and

• voice system integrators and telecommunication vendors, such as Avaya, Nortel, and Intervoice, that customize voice applications for CRM applications.

Many of our current and potential competitors have longer operating histories and larger presence in the general CRM market, greater name recognition, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have. As a result, such competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or client requirements or devote greater resources to the promotion and sale of their products and services than we can. To the extent our competitors have an existing relationship with a potential client, that client may be unwilling to switch vendors due to the time and financial commitments already made with our competitors.

In addition, many of our current and potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential clients, alliance partners or other third parties, or may combine and consolidate to become more formidable competitors with better resources. For example, in September 2005 Oracle Corporation announced its intent to acquire Siebel Systems, Inc. We also expect that new competitors, such as enterprise software vendors and online service providers that have traditionally focused on enterprise resource planning or back office applications, will continue to enter the on-demand CRM market with competing products as the on-demand CRM market develops and matures. It is possible that these new competitors could rapidly acquire significant market share.

The market for our on-demand application services is at an early stage of development, and if it does not develop or develops more slowly than we expect, our business will be harmed.

The market for on-demand application services is at an early stage of development, and it is uncertain whether these application services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand application services in general and for on-demand customer relationship management applications in particular. Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand application services. While we have supported and continue to support traditional on-site deployment of our software applications, widespread market acceptance of our on-demand software solutions is critical to the success of our business. Other factors that may affect the market acceptance of our solutions include:

• on-demand security capabilities and reliability;

• concerns with entrusting a third party to store and manage critical customer data;

• our ability to meet the needs of broader segments of the CRM market or other on-demand markets;

• the level of customization we offer;

• our ability to continue to achieve and maintain high levels of client satisfaction;

• concerns with purchasing critical CRM solutions from a company with a history of operating losses that only recently turned profitable; and

• the price, performance and availability of competing products and services.

If businesses do not perceive the benefits of our on-demand solutions, then the market for these solutions may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations.

Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our client base and achieve broader market acceptance of our solutions.

Increasing our client base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. We plan to continue to expand our direct sales force and engage additional third-party channel partners, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated channel partners, if any existing or future channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services.

The majority of our solutions are sold pursuant to term license agreements, and if our existing clients elect not to renew their licenses or to renew their licenses on terms less favorable to us, our business, financial condition and results of operations will be adversely affected.

The majority of our solutions are sold pursuant to term license agreements that are subject to renewal every two years or less and our clients have no obligation to renew their licenses. Because our clients may elect not to renew, we may not be able to consistently and accurately predict future renewal rates. Our clients’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our solutions, their ability to continue their operations or invest in customer service, or the availability and pricing of competing products. If large numbers of existing clients do not renew their licenses, or renew their licenses on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new licenses generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We have substantially expanded our overall business, headcount and operations in recent periods. We have increased our total number of full-time employees to 494 at September 30, 2005 from 403 at December 31, 2004. To achieve our business objectives, we will need to continue to expand our business at a rapid pace. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We anticipate that this expansion will require substantial management effort and significant additional investment in our infrastructure. If we are unable to successfully manage our growth, our business, financial condition and results of operations will be adversely affected.

Part of the challenge that we expect to face in the course of our expansion is to maintain the high level of customer service to which our clients have become accustomed. To date, we have focused on providing personalized account management and customer service on a frequent basis to ensure our clients are effectively leveraging the capabilities of our solution. We believe that much of our success to date has been the result of high client satisfaction, attributable in part to this focus on client service. To the extent our client base grows, we will need to expand our account management, client service and other personnel, and third party channel partners, in order to enable us to continue to maintain high levels of client service and satisfaction. If we are not able to continue to provide high levels of client service, our reputation, as well as our business, financial condition and results of operations, could be harmed.

If there are interruptions or delays in our hosting services through third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with clients and subject us to liability.

As of September 30, 2005, 87% of our clients were using our hosting services for deployment of our software applications. We provide our hosting services through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in California and New Jersey. We do not maintain long-term supply contracts with either of our co-location providers, and neither provider guarantees that our clients’ access to hosted solutions will be uninterrupted, error-free or secure. Our operations depend on our co-location providers’ ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. Our back-up computer hardware and systems located in our Montana headquarters have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring simultaneously at both the California and New Jersey co-location facilities. In the event that our co-location facility arrangements were terminated, or there was a lapse of service or accidental or willful damage to such facilities, we could experience lengthy interruptions in our hosting service as well as delays and/or additional expense in arranging new facilities and services. Any or all of these events could cause our clients to lose access to their important data. In addition, the failure by our third-party co-location facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.

We architect the system infrastructure and procure and own the computer hardware used at our hosting co-location facilities. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our clients’ service to their customers. Any interruptions or delays in our hosting services, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with clients and our reputation. This in turn could reduce our revenue, subject us to liability, cause us to issue credits or pay penalties or cause clients to fail to renew their licenses, any of which could adversely affect our business, financial condition and results of operations. In the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.

If the security of our clients’ confidential information contained in our systems or stored by use of our software is breached or otherwise subjected to unauthorized access, our hosting service or our software may be perceived as not being secure and clients may curtail or stop using our hosting service and our solutions.

Our hosting systems and our software store and transmit proprietary information and critical data belonging to our clients and their customers. Any accidental or willful security breaches or other unauthorized access could expose us to a risk of information loss, litigation and other possible liabilities. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our clients’ data, our relationships with clients and our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we and our third-party hosting co-location facilities may be unable to anticipate these techniques or to implement adequate preventative measures.

We have significant international sales and are subject to risks associated with operating in international markets.

International sales comprised 24% of our revenue for the nine months ended September 30, 2005, and comprised 27% of our revenue in the year ended December 31, 2004. We intend to continue to pursue and expand our international business activities. Adverse political and economic conditions could make it difficult for us to increase our international sales or to operate abroad. International operations are subject to many inherent risks, including:

• political, social and economic instability, including conflicts in the Middle East and elsewhere abroad, terrorist attacks and security concerns in general;

• adverse changes in tariffs and other protectionist laws and business practices that favor local competitors;

• fluctuations in currency exchange rates;

• longer collection periods and difficulties in collecting receivables from foreign entities;

• exposure to different legal standards and burdens of complying with a variety of foreign laws, including employment, tax, privacy and data protection laws and regulations;

• reduced protection for our intellectual property in some countries;

• expenses associated with localizing products for foreign countries, including translation into foreign languages; and

• import and export license requirements and restrictions of the United States and each other country in which we operate.

We believe that international sales will continue to represent a significant portion of our revenue for the foreseeable future, and that continued growth will require further expansion of our international operations. A substantial percentage of our international sales are denominated in the local currency. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets. We typically do not engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations. Any of these factors may adversely affect our future international sales and, consequently, affect our business, financial condition and results of operations.

If we fail to respond effectively to rapidly changing technology and evolving industry standards, particularly in the on-demand CRM industry, our solutions may become less competitive or obsolete.

The CRM industry is characterized by rapid technological advances, changes in client requirements, frequent new product and service introductions and enhancements, changes in protocols and evolving industry standards. Our hosted business model and the on-demand CRM market are relatively new and may evolve even more rapidly than the rest of the CRM market. Competing products and services based on new technologies or new industry standards may perform better or cost less than our solutions and could render our solutions less competitive or obsolete. In addition, because our solutions are designed to operate on a variety of network hardware and software platforms using a standard Internet web browser, we will need to continuously modify and enhance our solutions to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies and to integrate with our clients’ systems as they change and evolve. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. If we are unable to successfully develop and market new and enhanced solutions that respond in a timely manner to changing technology and evolving industry standards, and if we are unable to satisfy the diverse and evolving technology needs of our clients, our business, financial condition and results of operations will suffer.

Our failure to attract and retain qualified or key personnel may prevent us from effectively developing, marketing, selling, integrating and supporting our products.

Our success and future growth depends to a significant degree upon the skills, experience, performance and continued service of our senior management, engineering, sales, marketing, service, support and other key personnel. Specifically, we believe that our future success is highly dependent on Greg Gianforte, our founder, Chairman and Chief Executive Officer. In addition, we do not have employment agreements with any of our senior management or key personnel that require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. If we lose the services of Mr. Gianforte or any of our other key personnel, our business will be severely disrupted and we may be unable to operate effectively. We do not maintain “key person” life insurance policies on any of our key employees except Mr. Gianforte. This life insurance policy would not be sufficient to compensate us for the loss of his services. Our future success also depends in large part upon our ability to attract, train, integrate, motivate and retain highly skilled employees, particularly sales, marketing and professional services personnel, software engineers, product trainers, and senior personnel. Competition for these personnel is intense, especially for engineers with high levels of expertise in designing and developing software and for senior sales executives.

If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.

Our software products may contain undetected errors or defects that may result in product failures, slow response times, or otherwise cause our products to fail to perform in accordance with client expectations. Because our clients use our products for important aspects of their business, any errors or defects in, or other performance problems with, our products could hurt our reputation and may damage our clients’ businesses. If that occurs, we could lose future sales, or our existing clients could elect to not renew or to delay or withhold payment to us, which could result in an increase in our provision for doubtful accounts and an increase in collection cycles for accounts receivable. Clients also may make warranty claims against us, which could result in the expense and risk of litigation. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our products fails to perform or contains a technical defect, a client may assert a claim against us for substantial damages, whether or not we are responsible for the product failure or defect. We do not currently maintain any warranty reserves.

Product liability claims could require us to spend significant time and money in litigation or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claims successfully brought against us would cause our business to suffer.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws, patents and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. We may not be able to obtain any further patents or trademarks, and our pending applications may not result in the issuance of patents or trademarks. Any of our issued patents may not be broad enough to protect our proprietary rights or could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary

in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Our product development efforts may be constrained by the intellectual property of others, and we may become subject to claims of intellectual property infringement, which could be costly and time-consuming.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. As we seek to extend our CRM product and service offerings, we may be constrained by the intellectual property rights of others. We have in the past been named as a defendant in a lawsuit alleging intellectual property infringement, and we may again in the future have to defend against intellectual property lawsuits. We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements. If any of our products violate third-party proprietary rights, we may be required to re-engineer our products or seek to obtain licenses from third parties, which may not be available on reasonable terms or at all. Because many of our license agreements require us to indemnify our clients from any claim or finding of intellectual property infringement, any such litigation or successful infringement claims could adversely affect our business, financial condition and results of operations. Any efforts to re-engineer our products, obtain licenses from third parties on favorable terms or license a substitute technology may not be successful and, in any case, may substantially increase our costs and harm our business, financial condition and results of operations. Further, our software products contain open source software components that are licensed to us under various public domain licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown. Use of open source standards also may make us more vulnerable to competition because the public availability of open source software could make it easier for new market entrants and existing competitors to introduce similar competing products quickly and cheaply.

Future acquisitions could disrupt our business and harm our financial condition and results of operations.

In order to expand our addressable market, we may decide to acquire additional businesses, products and technologies. In May 2005, we acquired the intellectual property and other assets of Convergent Voice, Inc., our first acquisition since becoming a public company. Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:

• an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;

• we may encounter difficulties in assimilating and integrating the business, technologies, products, personnel or operations of companies that we acquire, particularly if key personnel of the acquired company decide not to work for us;

• our existing and potential clients and the customers of the acquired company may delay purchases due to uncertainty related to an acquisition;

• an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

• the acquired businesses, products or technologies may not generate sufficient revenue to offset acquisition costs;

• we may have to issue equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock; and

• acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience.

We cannot assure you that we will be able to identify or consummate any future acquisitions on favorable terms, or at all. If we do pursue any acquisitions, it is possible that we may not realize the anticipated benefits from the acquisitions or that the financial markets or investors will negatively view the acquisitions. Even if we successfully complete an acquisition, it could adversely affect our business, financial condition and results of operations.

Changes in the accounting treatment of stock options will adversely affect our results of operations.

The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”). The statement requires that the compensation cost relating to share-based payment transactions be recognized in financial statement based on the fair value of the equity or liability instruments issued, and is effective for annual periods beginning after June 15, 2005. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R requires us to value our employee stock option grants, transactions under our Employee Stock Purchase Plan, and other possible equity-based transactions, pursuant to a fair value formula, and then amortize that value against our reported earnings over the vesting period in effect for those transactions. We currently account for stock-based awards to employees in accordance with APB 25, and have adopted the disclosure-only alternative of SFAS 123. This change in accounting treatment, beginning January 1, 2006, will materially and adversely affect our reported results of operations as the stock-based compensation expense would be charged directly against our reported earnings.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

We may require additional capital to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure, fund expansion, respond to competitive pressures and acquire complementary businesses, products and technologies. Absent sufficient cash flow from operations, we may need to engage in equity or debt financings to secure additional funds to meet our operating and capital needs. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, to pay dividends and to pursue business opportunities, including potential acquisitions. In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our interest or principal payments.

Risks Related to Our Industry

The success of our products and our hosted business depends on the continued growth and acceptance of the Internet as a business and communications tool, and the related expansion of the Internet infrastructure.

The future success of our products and our hosted business depends upon the continued and widespread adoption of the Internet as a primary medium for commerce, communication and business applications. Our business growth would be impeded if the performance or perception of the Internet, or companies providing hosted solutions, was harmed by security problems such as “viruses,” “worms” and other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet

activity, increased costs, decreased accessibility and quality of service, or increased government regulation and taxation of Internet activity.

Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy, the solicitation, collection, processing or use of personal or consumer information, the use of the Internet as a commercial medium and the use of e-mail for marketing or other consumer communications. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or for sending commercial e-mail. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet- based services such as ours and reduce the demand for our products, particularly our RightNow Marketing solution.

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.

Privacy concerns and laws or other domestic or foreign regulations may adversely affect our business or reduce sales of our solutions.

Businesses using our solutions collect personal information regarding their customers when those customers contact them with customer service inquiries. A valuable component of our solutions is their ability to allow our clients to use and analyze their customers’ information to increase sales, marketing and up-sell or cross-sell opportunities. Federal, state and foreign government bodies and agencies, however, have adopted and are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our clients may limit the use and adoption of this component of our solutions and reduce overall demand for our solutions. Furthermore, even where a client desires to make full use of these features in our solutions, privacy concerns may cause our clients’ customers to resist providing the personal data necessary to allow our clients to use our solutions most effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market acceptance of our products.

The European Union has also adopted a directive that requires member states to impose restrictions on the collection and use of personal data that are far more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States. All of these domestic and international legislative and regulatory initiatives may adversely affect our clients’ ability to collect and/or use demographic and personal information from their customers, which could reduce demand for our solutions.

In addition to government activity, privacy advocacy groups and the technology and direct marketing industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the gathering of profiling information were to be curtailed in this manner, customer service CRM solutions would be less effective, which would reduce demand for our solutions and harm our business.

Non-solicitation concerns, laws or regulations may adversely affect our clients’ ability to perform outbound marketing and other e-mail communications, which could reduce sales of our solutions.

In January 2004, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Act regulates the transmission and content of commercial e-mails and, among other things, obligates the sender of such e-mails to provide recipients with the ability to opt-out of receiving future e-mails from the sender, and establishes penalties for the transmission of e-mail messages which are intended to deceive the recipient as to source or content. Many state legislatures also have adopted laws that impact the delivery of commercial e-mail, and laws that regulate commercial e-mail practices have been enacted in many of the international jurisdictions in which we do business, including Europe, Australia, and Canada. In addition, Internet service providers and licensors of software products have introduced a variety of systems and products to filter out certain types of commercial e-mail, without any common protocol to determine whether the recipient desired to receive the e-mail being blocked. As a result, it is difficult for us to determine in advance whether or not e-mails generated by our clients using our solutions will be permitted by spam filters to reach the intended recipients.

Our RightNow Marketing solution specifically serves the market for mass distribution marketing and other e-mail communications. The increasing regulation of e-mail delivery, both domestically and internationally, and the spam filtering practices of Internet service providers and e-mail users generally, will place significant additional burdens on our clients who have outbound communication programs, and may cause those clients to substantially change their outbound communications programs or abandon them altogether. These factors may lead to a reduction in sales of our RightNow Marketing solution, may make it necessary to redesign our RightNow Marketing solution to make it easier for our clients to conform to the requirements of such laws and standards, which would increase our expenses, or may make it necessary for us to redefine the market for and use of our RightNow Marketing solution, which could reduce our revenue.

General economic conditions could adversely affect our clients’ ability or willingness to purchase our products, which could materially and adversely affect our results of operations.

Our clients consist of large and small companies in nearly all industry sectors and geographies. Potential new clients or existing clients could defer purchases of our products because of unfavorable macroeconomic conditions, such as rising interest rates, fluctuations in currency exchange rates, industry or country economic downturns, industry purchasing patterns, and other factors. Our ability to grow revenues may be adversely affected by unfavorable economic conditions.

Risks Related to Ownership of Our Common Stock

The significant control over stockholder voting matters and our office leases that may be exercised by our founder and Chief Executive Officer will limit your ability to influence corporate actions and may require us to find alternative office space to lease or buy in the future.

Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, together beneficially own approximately 39% of our currently outstanding common stock and, together with our other officers and directors, beneficially own approximately 42% of our currently outstanding common stock. In addition, none of the shares of common stock held by Mr. Gianforte and Mrs. Gianforte are subject to vesting restrictions. As a result, Mr. Gianforte and Mrs. Gianforte, acting alone or together with some of our other officers and directors, will be able to control all matters requiring stockholder approval, including the election of directors, management changes and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of RightNow, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of RightNow and might reduce the market price of our common stock.

In addition, Mr. Gianforte beneficially owns, directly or indirectly, a 50% membership interest in Genesis Partners, LLC, our landlord from whom we lease our principal offices in Bozeman, Montana. Consequently, Mr. Gianforte has significant control over any decisions by Genesis Partners regarding renewal, modification or termination of our Bozeman, Montana leases. In the event that our current leases

with Genesis Partners were terminated or otherwise could not be renewed, or came up for renewal on commercially unreasonable terms, we would be required to find alternative office space to lease or buy.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

Provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable and may limit the market price of our common stock. These provisions include the following:

• establishing a classified board in which only a portion of the total board members will be elected at each annual meeting;

• authorizing the board to issue preferred stock;

• providing the board with sole authority to set the number of authorized directors and to fill vacancies on the board;

• limiting the persons who may call special meetings of stockholders;

• prohibiting certain transactions under certain circumstances with interested stockholders;

• requiring supermajority approval to amend certain provisions of the certificate of incorporation; and

• prohibiting stockholder action by written consent.

It is possible that the provisions contained in our certificate of incorporation and bylaws, the existence of super voting rights held by insiders and the ability of our board of directors to issue preferred stock without stockholder action may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound, Australian dollar, and Japanese yen, because our contracts are frequently denominated in local currency. To date, we have not entered into any hedge transactions since exchange rate fluctuations have not had a significant impact on our operating results and cash flows. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures.

Interest Rate Sensitivity

Interest income and expense are sensitive to changes in the general level of U.S. interest rates. The remaining proceeds of our initial public offering of common stock are invested in short-term, interest-bearing securities, which are subject to credit and interest rate risk. Our investment portfolio is investment-grade and diversified among issuers and types to reduce credit risk. The average maturity of our investment portfolio is less than 90 days. If market interest rates were to increase by 100 basis points from the level at September 30, 2005, the fair value of our investment portfolio would decline by approximately $136,000.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Securities Exchange Act of 1934.

(b) Changes to Internal Control over Financial Reporting

During the most recent completed fiscal quarter covered by this report, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

From time to time, we are involved in legal proceedings in the ordinary course of business. We believe that the resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Sales of Registered Securities

On August 5, 2004, the Securities and Exchange Commission declared effective our Registration Statement on From S-1 (Reg. File No. 333-115331) under the Securities Act of 1933, as amended, in connection with the initial public offering of our common stock, par value $.0001 per share. Of the 7,245,000 shares registered under the registration statement for an aggregate offering price of $50,715,000, we sold 6,416,961 shares, including shares sold upon exercise of the underwriters’ over-allotment option, for an aggregate offering price of $44,918,727, and 321,945 shares, including shares sold upon exercise of the underwriters’ over-allotment option, were sold by a selling stockholder for an aggregate offering price of $2,253,615. After deducting $3.3 million in underwriting discounts and commissions and $1.8 million in other offering costs, we received net proceeds from the offering of approximately $40 million. In May 2005, we used $1 million of the proceeds to purchase the assets of Convergent Voice, Inc.

We currently intend to use the remaining offering net proceeds for general corporate purposes as described in the prospectus for the offering. We are currently assessing the specific uses and allocations for these net proceeds. Pending these uses, the net proceeds from the offering are invested in short-term, interest-bearing, investment-grade securities. None of the expenses and none of our net proceeds from the offering were paid directly or indirectly to any director, officer, general partner of RightNow or their associates, persons owning 10% or more of any class of equity securities of RightNow, or an affiliate of RightNow.

(c) Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibits

The exhibits listed below are part of this Form 10-Q, unless otherwise indicated.

Exhibit 3.1†		Amended and Restated Certificate of Incorporation of the Registrant.
Exhibit 3.2*		Amended and Restated Bylaws of the Registrant.
Exhibit 31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

† Incorporated by reference to Exhibit 4.2 to the Company’s registration statement of Form S-8 (File No. 333-118515) filed with the Securities and Exchange Commission on August 24, 2004.

* Incorporated by reference to the exhibit of the same number from the Company’s registration statement of Form S-1 (File No. 333-115331) initially filed with the Securities and Exchange Commission on May 10, 2004, as amended.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 8, 2005

RightNow Technologies, Inc.
(Registrant)

By:	/s/ Susan J. Carstensen
	Susan J. Carstensen
	Chief Financial Officer, Vice President,
	Treasurer and Assistant Secretary
	(Principal Financial and Accounting Officer)

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RightNow Inactive 10-Q2005 Q3 Quarterly report

Content analysis

FORM 10-Q

For the quarterly period ended September 30, 2005

For the transition period from to

Delaware

81-0503640

Item 1. Financial Statements