UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

or

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		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

136 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 x No o

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

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

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 31, 2007 was 33,360,768.

RightNow Technologies, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2007

INDEX

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RightNow Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands) (Unaudited)

	December 31, 2006			September 30, 2007
Assets
Cash and cash equivalents	$	39,208		$	33,109
Short-term investments	39,127			56,823
Accounts receivable	32,021			24,690
Term receivables, current	23,806			13,773
Allowance for doubtful accounts	(2,621		)	(2,009		)
Receivables, net	53,206			36,454
Prepaid & other current assets	2,498			5,786
Total current assets	134,039			132,172

Property and equipment, net	10,073			10,451
Term receivables, non-current	24,805			11,170
Intangible assets, net	8,836			7,865
Other	489			1,356
Total Assets	$	178,242		$	163,014

Liabilities and Stockholders’ Equity
Accounts payable	$	4,417		$	4,249
Commissions and bonuses payable	4,069			2,889
Other accrued liabilities	7,588			10,606
Current portion of long-term debt	31			42
Current portion of deferred revenue	67,560			69,665
Total current liabilities	83,665			87,451

Long-term debt, less current portion	85			79
Deferred revenue, net of current portion	47,018			37,139

Stockholders’ equity:
Common stock	33			33
Additional paid-in capital	86,069			92,486
Accumulated other comprehensive loss	(332		)	(551		)
Accumulated deficit	(38,296		)	(53,623		)
Total stockholders’ equity	47,474			38,345
Total Liabilities and Stockholders’ Equity	$	178,242		$	163,014

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,
	2006			2007			2006			2007
Revenue:
Software, hosting and support	$	23,754		$	22,366		$	63,700		$	62,878
Professional services	6,334			6,880			17,927			18,535
Total revenue	30,088			29,246			81,627			81,413

Cost of revenue:
Software, hosting and support	3,667			4,604			9,597			13,563
Professional services	4,969			5,667			14,014			15,874
Total cost of revenue	8,636			10,271			23,611			29,437

Gross profit	21,452			18,975			58,016			51,976

Operating expenses:
Sales and marketing	16,535			16,516			45,113			48,031
Research and development	3,740			4,308			10,346			12,947
General and administrative	2,333			2,680			7,098			8,718
Total operating expenses	22,608			23,504			62,557			69,696

Loss from operations	(1,156		)	(4,529		)	(4,541		)	(17,720		)

Interest and other income, net	740			1,004			2,180			2,717

Loss before income taxes	(416		)	(3,525		)	(2,361		)	(15,003		)
Provision for income taxes	(103		)	(59		)	(353		)	(324		)
Net loss	$	(519	)	$	(3,584	)	$	(2,714	)	$	(15,327	)

Net loss per share:
Basic	$	(0.02	)	$	(0.11	)	$	(0.08	)	$	(0.46	)
Diluted	$	(0.02	)	$	(0.11	)	$	(0.08	)	$	(0.46	)

Shares used in the computation:
Basic	32,316			33,094			32,144			32,979
Diluted	32,316			33,094			32,144			32,979

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,
	2006			2007
Operating activities:
Net loss	$	(2,714	)	$	(15,327	)
Non-cash adjustments:
Depreciation and amortization	3,998			5,424
Provisions for losses on accounts receivable	51			345
Stock-based compensation	3,575			4,501
Changes in operating accounts:
Receivables	(16,529		)	30,584
Prepaid expenses	(384		)	(3,886		)
Accounts payable	(64		)	(192		)
Commissions and bonuses payable	967			(1,219		)
Other accrued liabilities	244			2,839
Deferred revenue	33,509			(9,013		)
Other	99			(140		)
Cash provided by operating activities	22,752			13,916

Investing activities:
Net change in short-term investments	(13,527		)	(17,696		)
Acquisition of property and equipment	(4,930		)	(4,764		)
Business acquisitions, net of cash acquired	(8,731		)	��
Other	(10		)	(60		)
Cash used in investing activities	(27,198		)	(22,520		)

Financing activities:
Proceeds from issuance of common stock under employee benefit plans	1,362			1,688
Excess tax benefits of stock options exercised	—			228
Payments on long-term debt	(23		)	(25		)
Cash provided by financing activities	1,339			1,891

Effect of foreign exchange rates on cash and cash equivalents	347			614

Decrease in cash and cash equivalents	(2,760		)	(6,099		)

Cash and cash equivalents at beginning of period	40,874			39,208
Cash and cash equivalents at end of period	$	38,114		$	33,109

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 industry-leading software solutions that help companies improve customer experiences while reducing operating costs. The Company’s solutions are designed to go beyond traditional customer relationship management (“CRM”) solutions to support a business’ external customer-facing channels as well as sales, marketing and customer service operations. Founded in 1995, RightNow is headquartered in Bozeman, Montana, with additional offices in the United States, Europe, Australia and Japan. The Company operates in one segment, which is the customer experience management market.

Basis of Presentation

The accompanying condensed interim 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, 2006.

The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. In the opinion of management, the interim condensed 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, 2007, and results of operations for the three and nine month periods ended September 30, 2006 and 2007, and cash flows for the nine month periods ended September 30, 2006 and 2007. 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 United States generally accepted accounting principles 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 the identification and fair value of individual elements in multiple-element sales arrangements, whether the fees charged for our products and services are fixed and determinable, valuation allowances for trade receivables and deferred income tax assets, and assumptions used in estimating the fair value of stock options granted for stock-based compensation.

(2) Certain Risks and Concentrations

The Company’s revenue is derived from the subscription, license, hosting and support of its software products and provision of related professional services. The markets in which the Company competes are 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 around the world with approximately 70% to 75% of sales in the United States. No individual customer accounted for more than 10% of the Company’s revenue in the first nine months of 2006 or 2007. No individual customer balances were 10% or more of accounts or term receivables at September 30, 2006 or 2007. One customer represented 13% of accounts receivable at December 31, 2006 and one other customer represented 11% of term receivables at September 30, 2007.

As of December 31, 2006 and September 30, 2007, assets located outside the United States were 12% and 13% of total assets, respectively. The loss from operations outside of the United States totaled $6.7 million and $8.6 million for the nine months ended September 30, 2006 and 2007, respectively. Revenue by geographical region follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2007		2006		2007

United States	$	23,847	$	20,687	$	61,287	$	58,067
Europe	4,732		5,958		15,081		16,638
Asia Pacific	1,509		2,601		5,259		6,708
	$	30,088	$	29,246	$	81,627	$	81,413

(3) Revenue Recognition

The Company earns its revenues from the delivery of software, hosting and support services, and from the delivery of professional services. Beginning in 2007, the majority of software, hosting and support revenues are earned under subscription service arrangements (“subscriptions”). Prior to and continuing into 2007, software, hosting and support revenues are also earned under software license arrangements (“licenses”).

The Company recognizes revenue in accordance with the provisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Revenue is recognized when all of the following criteria are met: a) the Company has entered into a legally binding agreement with the customer; b) the software has been made available or delivered to the

customer; c) the Company’s fee for providing the software and services is fixed and determinable; and d) collection of the Company’s fee is probable.

Subscriptions include access to the Company’s software via its hosting services, technical support, and product upgrades when and if available, all for a bundled fee. Subscription revenue is recognized ratably over the contractual term. Under EITF 00-21, value is assigned to each deliverable of an arrangement using prices established when the elements are sold stand-alone. The arrangement fee is then allocated to the individual elements based on their relative fair values. Revenue for each element is recognized based on the criteria above.

The Company applies EITF 00-21 to its subscriptions as opposed to Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”) because under the Company’s subscription contracts, the customer does not have the right to take possession of the software. In accordance with Emerging Issues Task Force Issue No. 00-03, Application of AICPA Statement of Position 97-2, Software Revenue Recognition, to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware (“EITF 00-03”), such arrangements are considered service contracts and are not within the scope of SOP 97-2.

Professional services, when sold with a subscription offering, are accounted for separately when these services have value to the customer on a standalone basis and there is objective and reliable evidence of fair value of each deliverable. When accounted for separately, professional services revenues are recognized as performed based on hours incurred. If professional services do not qualify for separate accounting, the Company recognizes the professional services revenue ratably over the term of the agreement.

Prior to its change to selling subscriptions, the majority of the Company’s revenues were earned under license arrangements. License sales have continued into 2007 for a limited number of new and existing customers. Revenue under license arrangements is recognized pursuant to the requirements of SOP 97-2 and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions. Licenses include the same elements as subscriptions, plus the right to take possession of the software for no additional fee. Licenses are sold for a period of time (a “term” license) or perpetually. Term license revenue is recognized ratably over the contractual period. Revenue for perpetual licenses is determined using the residual method and is recognized upon delivery. Revenue for the hosting and support elements under a perpetual license is determined based on the price when sold separately, and recognized ratably over the contractual timeframe.

The Company records revenue net of any applicable sales, use or excise taxes.

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 not to be fixed or determinable, and the amount of revenue recognized (a) for perpetual license arrangements is limited to the amount currently due from the customer, or (b) for term license or subscription arrangements is limited to the lesser of the amount currently due from the customer or a ratable portion of the arrangement fee.

Certain customers have entered into agreements with us that require them to pay a minimum charge for fixed usage and excess usage charges if they exceed fixed minimums. Usage above fixed minimums requires payment of additional 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 known and billed.

Separate contracts with the same customer that are entered into at or near the same time are generally presumed to have been negotiated together and may be combined and accounted for as a single arrangement, depending on facts and circumstances.

Deferred revenue represents amounts received or due from customers for which the revenue recognition criteria have not been met. The majority of deferred revenue results from the up front billing of term and subscription contracts while revenue is recognized ratably over the contractual period. Deferred revenue is recognized into revenue when the Company provides its products and services, assuming all other revenue recognition criteria noted above are met. Under subscriptions, the amount currently due and payable from the customer is reflected in accounts receivable and deferred revenue. Under licenses, the full customer commitment is reflected in accounts receivable for amounts currently due, or term receivables for amounts due over the contractual term, and deferred revenue.

(4) Sales Incentives

In conjunction with the Company’s business model change, beginning in 2007 sales incentives paid for subscriptions are deferred and charged to expense in proportion to the revenue recognized. Sales incentives paid for licenses are expensed when earned, which is typically at the time the related sale is invoiced. Sales incentive expense was $11.4 million and $7.0 million for the nine months ended September 30, 2006 and 2007, respectively. Deferred commissions were zero and $3.1 million at September 30, 2006 and 2007, respectively.

(5) Net Loss Per Share

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2007	2006	2007

Weighted average common shares outstanding for basic net loss per share	32,316	33,094	32,144	32,979
Effect of dilutive securities:
Employee stock options	—	—	—	—
Weighted average shares outstanding for dilutive net loss per share	32,316	33,094	32,144	32,979

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,
	2006	2007	2006	2007

Employee stock options	4,156	4,002	4,156	4,002

(6) Comprehensive Income (Loss)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2007			2006			2007

Net loss	$	(519	)	$	(3,584	)	$	(2,714	)	$	(15,327	)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investments	49			57			64			60
Foreign currency translation adjustments	13			(101		)	87			(279		)
Comprehensive loss	$	(457	)	$	(3,628	)	$	(2,563	)	$	(15,546	)

(7) Stock-Based Compensation

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share Based Payment, (“SFAS 123R”), for its stock-based compensation plans. Under SFAS 123R, stock-based compensation costs are recognized based on the estimated fair value at the grant date for all stock-based awards. The Company estimates grant date fair values using the Black-Scholes-Merton option pricing model, which requires assumptions of the life of the award and the stock price volatility over the term of the award. The Company records compensation cost of stock-based awards using the straight line method, which is recorded into earnings over the vesting period of the award.

The following table illustrates the stock-based compensation expense resulting from stock-based awards included in the condensed consolidated statement of operations (amounts in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2007		2006		2007
Stock-based compensation expense:
Cost of software, hosting and support	$	52	$	84	$	145	$	221
Cost of professional services	124		217		358		491
Sales and marketing expenses	529		542		1,430		1,931
Research and development expenses	230		166		622		681
General and administrative expenses	179		199		1,020		1,177
Stock-based compensation expense	$	1,114	$	1,208	$	3,575	$	4,501

No stock-based compensation expense was capitalized during the three or nine months ended September 30, 2006 or 2007.

Unrecognized compensation expense of outstanding stock options at September 30, 2007 was approximately $13 million, which is expected to be recognized over a weighted average period of 2.6 years.

Information regarding the fair value of stock options granted, and the weighted-average assumptions used to obtain the fair values, for the respective periods follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2007			2006			2007
Fair value per share	$	7.86		$	6.22		$	8.43		$	7.33
Risk free rate	4.9		%	4.3		%	4.8		%	4.7		%
Expected term	4.4		yrs	4.5		yrs	4.4		yrs	4.1		yrs
Volatility	55		%	51		%	57		%	53		%
Dividend yield	0		%	0		%	0		%	0		%

Key assumptions used to estimate the fair value of stock awards are as follows:

Risk Free Rate: The risk-free rate is determined by reference to the U.S. Treasury yield curve in effect at or near the time of grant for the expected term of the award.

Expected Term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual term of the awards, vesting schedules and expectations of employee exercise behavior.

Volatility: The Company’s estimate of expected volatility is based on a combination of the Company’s historical volatility and peer-company volatilities for the expected term of the award. The Company has a limited history of volatility, as well as limited traded options from which to derive implied volatility. The Company believes the combination of its historical and peer-company volatilities is more representative of future stock price trends than its historical volatility alone.

Dividend Yield: The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Activity under the Company’s stock option plans for nine months ended September 30, 2007 was as follows (option shares in thousands):

	Shares available for grant		Outstanding options		Weighted average exercise price per share		Aggregate intrinsic value (in thousands)		Weighted average remaining contractual life (in years)
Balance at December 31, 2006	3,029		3,913		$	9.96
Annual reserve addition (1)	1,000		—		—
Granted	(979	)	979		15.82
Exercised	—		(417	)	3.76
Forfeited, expired or canceled (2)	461		(473	)	15.12
Balance at September 30, 2007	3,511		4,002		$	11.43	$	20,020	7.2

Vested or expected to vest at September 30, 2007			3,681		$	11.11	$	19,575	7.0

Exercisable at September 30, 2007			2,157		$	8.63	$	16,549	6.0

(1) The 2004 Equity Incentive Plan provides for an automatic, annual increase on the first of each year in an amount equal to the lesser of: a) 1,000,000 shares; b) 4% of the number of outstanding common shares on the last day of the previous fiscal year; or c) such lesser amount as determined by the board of directors. The annual automatic increase has been approved by shareholders through December 31, 2014.

(2) Shares forfeited, expired, exchanged or canceled under the 1998 Long-Term Equity Incentive and Stock Option Plan are not available for re-grant under the 2004 Equity Incentive Plan.

The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2007 was $6.9 million and $5.0 million, respectively.

(8) 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 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 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.

(9) Income Taxes

We adopted the Financial Accounting Standard Board’s Interpretation No. 48, Accounting for Income Tax Uncertainties (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertain income tax positions recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2006 and September 30, 2007, we had an insignificant amount of unrecognized tax benefits, none of which would materially affect our effective tax rate if recognized. We do not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. Our policy is to recognize interest and penalties on unrecognized tax benefits in provision for income taxes in the consolidated statements of operations. The amount of interest and penalties for the three and nine months ended September 30, 2007 was insignificant. Tax years beginning in 2003 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

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 financial statements and related notes in this report. This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. 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. Our actual results could differ significantly from those projected in the forward-looking statements as a result of factors, including those discussed under “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 customer experience management software solutions for companies of all sizes. Our on demand software is designed to go beyond traditional customer relationship management (“CRM”) solutions to help companies improve their customer experiences, while reducing operating costs. Our software solutions support a business’s external customer-facing channels as well as sales, marketing and customer service operations.

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, email, chat, telephone and proactive outbound email communications. We have also added several products that are complementary to our RightNow Service solution, including RightNow Marketing, RightNow Sales, and RightNow Feedback which automate aspects of marketing campaigns, sales operations, and customer monitoring. In May 2005, we purchased the assets of Convergent Voice, and added voice enabled-CRM capabilities to our product portfolio. In May 2006, we purchased Salesnet, Inc., a provider of sales automation solutions. In February 2007, we released RightNow 8, our newest enterprise-class solution for service, sales and marketing. To date, approximately 80% to 90% of our revenue has been generated by the RightNow Service suite.

We have approximately 1,800 customers worldwide as of September 30, 2007, and our products served more than 347 million customer interactions, or unique sessions hosted by our solutions, during the quarter ended September 30, 2007. We distribute our solutions primarily through direct sales efforts and to a lesser extent through indirect channels.

2007 Business Model Changes

To better align with industry practice, beginning in 2007 we changed our product offerings from software license arrangements to subscription service arrangements (e.g. “subscriptions”). As the industry and business models for “software as a service” or “on demand” have evolved, the standard form of sales arrangements are service agreements rather than licenses of software

that can be hosted. We believe providing offerings in this manner will ultimately increase our market penetration.

Accordingly, our terms of sale have been revised to provide a hosting service where the customer accesses the software and data via the Internet. Our previous terms of sale provided the customer a software license, and for no additional fee the customer could choose to have the software hosted by us, by themselves or by someone else. We believe that revenue recognition for service arrangements will not be materially different from our previous term license arrangements, as revenue under either type of contract is generally recognized ratably over the period of the agreement. We also believe that additions to deferred revenue for our subscriptions will be less than that deferred for our licenses because, under subscriptions, only the amount currently due from the customer is recorded to accounts receivable and deferred revenue. Under licenses, the full customer commitment is recorded to receivables and deferred revenue whether or not currently due because we have the contractual right to collect the entire arrangement fee.

As part of this business model change, we essentially discontinued sales of new perpetual software licenses which represented 21% of our revenue in 2006. Although we expect to ultimately increase the lifetime value of our customer arrangements through sales of subscriptions, the substantive elimination of perpetual license sales will materially and adversely impact our operating results for 2007 when compared to 2006 as perpetual revenue has generally been recognized in full upon delivery of the license.

Last, our policy for subscription contract acquisition costs, such as sales commissions, is to recognize them in proportion to the revenue recognized under the subscription arrangement. Since we expect the majority of new business to be subscriptions in 2007, we believe this policy will have a material and beneficial impact on our 2007 and 2008 operating results. Commissions paid on license sales in 2007 will continue to be expensed when earned.

Sources of Revenue

Our revenue is comprised of fees for software, hosting and support, and fees for professional services.

Software, hosting and support revenue includes fees earned under subscriptions and software license arrangements. Subscription arrangements include a bundled fee to access the software and data via our hosting services, and support services. Subscription revenue is recorded ratably over the length of the agreement. Our hosting services provide remote management and maintenance of our software and customers’ data which is physically located in third party facilities. Customers’ access “hosted” software and data via secure Internet connection. Support services include technical assistance for our software products and unspecified product upgrades on a when and if available basis.

License arrangements can be over time or perpetual. For term licenses, software, hosting and support revenue is recognized ratably over the length of the agreement. Perpetual license revenue is recorded in full upon delivery of the license, and the hosting and support elements are recognized ratably over the contractual period. Perpetual license revenue ranged from 21% to 25% of our total revenue from 2004 through 2006. Due to the change in our business model noted above, perpetual license revenue decreased from $17.9 million, or 22% of revenue in the nine months ended September 30, 2006 to $1.5 million, or 2% of revenue in the nine months ended September 30, 2007.

Our sales arrangements generally provide customers with the right to use our software up to a maximum number of users or transactions. A number of our arrangements provide for additional fees for usage above the maximum, which are billed and recognized into revenue when earned.

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 consulting. Development services include customizations and integrations for a client’s specific business application. Professional services revenue ranged from 19% to 22% of total revenue in the past three years.

Professional services are typically sold with initial sales arrangements and then periodically over the client engagement. 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.

Cost of Revenue and Operating Expenses

Cost of Revenue. Cost of revenue consists primarily of salaries and related expenses (such as employee benefits and payroll taxes) for our hosting, support and professional services organizations, third-party costs and equipment depreciation relating to our hosting services, third-party costs for voice enabled CRM applications, 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.

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. For subscription arrangements, we expense the related sales commission in proportion to the revenue recognized. We expense our sales commissions on license arrangements when earned, which is typically at the time the related sale is invoiced to the client. Since the majority of our historical revenue has been from license arrangements recognized over time, we have experienced 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 internal software development costs because the timing of the commercial releases of our products has

substantially coincided with the attainment of technological feasibility. 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 U.S. generally accepted accounting principles. 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 share-based compensation.

Revenue Recognition

Beginning in 2007, we changed the nature of our sales arrangements from license arrangements to subscription arrangements (“subscriptions”). For a bundled fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and, in accordance with EITF 00-03 such arrangements are considered service contracts which are outside the scope of SOP 97-2. Accordingly, we account for sales of subscriptions under EITF 00-21 and recognize subscription revenue ratably over the length of the agreement in accordance with SAB 104.

Prior to 2007, we sold the majority of products under software license arrangements (“licenses”) and accounted for them in accordance with SOP 97-2 and SOP 98-9. Licenses generally include multiple elements that are delivered up front or over time. For example, under a term license, we deliver the software up front and provide hosting and support services over time. Fair value for each element in a license does not exist since none are sold separately, and consequently, the bundled revenue is recognized ratably over the length of the agreement. Under a perpetual license, vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and therefore the license element is recognized immediately into revenue upon delivery using the residual method, and the hosting and support elements are recognized ratably over the contractual term.

The application of these rules requires judgment, including the identification of individual elements in multiple element arrangements, whether there is objective and reliable evidence of fair value, including vendor specific objective evidence (“VSOE”) of fair value, for some or all elements. Changes to the elements in our sales arrangements, or our ability to

establish VSOE or fair value for those elements may result in a material change to the amount of revenue recorded in a given period.

Fees charged for professional services are recognized when delivered. We believe the fees for professional services qualify for separate accounting because: a) the services have value to the customer on a stand-alone basis; b) objective and reliable evidence of fair value exists for these services; and c) performance of the services is considered probable and does not involve unique customer acceptance criteria.

Our standard payment terms are net 30, although payment within 90 days is considered normal. We periodically provide extended payment terms and we consider any fees due beyond 90 days to not be fixed and determinable In such cases, judgment is required in determining the appropriate timing of revenue recognition. Changes to our practice of providing extended payment terms or providing concessions following a sale, may result in a material change to the amount of revenue recorded in a given period.

Allowance for doubtful accounts

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 taxable earnings.

Share-Based Compensation

We have adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share Based Payment, (“SFAS 123R”) beginning January 1, 2006 utilizing the modified prospective method. This statement requires the cost of share-based payment arrangements to be recorded in the statement of operations. Prior to 2006, the estimated cost of share-based payment arrangements was disclosed in a footnote to the financial statements. Share-based compensation

amounts are affected by our stock price as well as our assumptions regarding the expected volatility of our stock, anticipated employee stock option exercise behaviors, expected forfeitures, and the related income tax effects. Our assumptions are based primarily on our historical information, some of which was developed when we were a private company.

Accounting Standards Issued But Not Yet Adopted

SFAS 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. This statement applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. We do not believe adoption of SFAS 157 will have a material effect on our financial statements.

The guidance in FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. This statement provides companies with an option to report selected assets and liabilities (principally financial assets and financial liabilities) at fair value. The objective of SFAS 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities, and does not eliminate disclosure requirements included in other accounting standards. We do not believe adoption of SFAS 159 will have a material effect on our financial statements.

Results of Operations

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2007		2006		2007

Revenue:
Software, hosting and support	79	%	77	%	78	%	77	%
Professional services	21		23		22		23
Total revenue	100		100		100		100
Cost of revenue:
Software, hosting and support	12		16		12		17
Professional services	17		19		17		19
Total cost of revenue	29		35		29		36
Gross profit	71		65		71		64
Operating expenses:
Sales and marketing	55		56		55		59
Research and development	12		15		13		16
General and administrative	8		9		9		11
Total operating expenses	75		80		77		86
Loss from operations	(4	)	(15	)	(6	)	(22	)
Interest and other income (expense), net	2		3		3		3
Loss before income taxes	(2	)	(12	)	(3	)	(19	)
Provision for income taxes	—		—		—		—
Net loss	(2	)%	(12	)%	(3	)%	(19	)%

The following table sets forth our on demand customer interactions 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,
	2006		2007		2006		2007

Customer interactions (in millions)	261		347		765		1,031
Revenue by type:
Recurring (subscriptions, term licenses, hosting and support)	56	%	75	%	56	%	75	%
Perpetual licenses	23		2		22		2
Professional services	21		23		22		23
Revenue by geography in:
United States	79	%	71	%	76	%	72	%
Europe	16		20		18		20
Asia Pacific	5		9		6		8

Quarter Overview

Total revenue in the third quarter of 2007 decreased 3% from the third quarter of 2006 mostly due to our change from selling software licenses to selling subscription services which we announced in early 2007. Under this business model change, perpetual license revenue decreased 92% to $0.6 million in the quarter ended September 30, 2007 from $7.0 million in the similar quarter in 2006. Offsetting much of the decreased perpetual revenue was 31% growth in recurring revenue in the third quarter of 2007 over the third quarter of 2006. Recurring revenue increased in the September 2007 quarter due to growth in the number of customers and higher average revenue per customer.

We continued to invest in our operations during 2007 by adding capacity to our hosting, technical support, and professional services organizations, by increasing the number of sales and marketing personnel to focus on new customer acquisition, and by increasing the number of software developers to broaden and enhance our solution offerings. These investments increased total expenses which, when combined with the much lower amount of perpetual license revenue, caused us to incur an operating loss of 15% of revenue in the quarter ended September 30, 2007 as compared to a 4% operating loss in the quarter ended September 30, 2006.

For the quarter ended September 30, 2007, we generated $3.8 million of cash from operations compared to $9.8 million of cash from operations in the comparative 2006 quarter, and increased our cash and short-term investment balances to $89.9 million at September 30, 2007 from $75.0 million one year earlier.

As of September 30, 2007, we had an accumulated deficit of $53.6 million. This deficit and our historical operating losses were primarily the result of costs incurred in the development, sales and marketing of our products and for general and administrative purposes.

Three Months and Nine Months Ended September 30, 2006 and 2007

Revenue

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2006		2007		Percent Change		2006		2007		Percent Change

Software, hosting and support:
Recurring	$	16,710	$	21,813	31	%	$	45,770	$	61,379	34	%
Perpetual	7,044		553		(92	)	17,930		1,499		(92	)
Professional services	6,334		6,880		9		17,927		18,535		3
Total revenue	$	30,088	$	29,246	(3	)%	$	81,627	$	81,413	—	%

Total revenue for the three months ended September 30, 2007 was $29.2 million, a decrease of $0.8 million, or 3%, from total revenue of $30.1 million for the three months ended September 30, 2006. Total revenue of $81.4 million for the nine months ended September 30, 2007 was slightly less than total revenue of $81.6 million for the nine months ended September 30, 2006.

Software, hosting and support revenue, consisting of recurring revenue and perpetual license revenue, for the three months ended September 30, 2007 decreased $1.4 million, to $22.4 million, from $23.7 million for the three months ended September 30, 2006. Recurring revenue, comprised of subscriptions, term licenses, hosting and support, for the three and nine month periods ended September 30, 2007 increased 31% and 34% over the comparable 2006 three and nine month periods, respectively. Recurring revenue has grown primarily due to a 21% increase in average revenue per customer and a 4% increase in average number of customers. Average revenue per customer increased as a result of sales of new products, capacity additions, and contract renewals. Customer interactions, a measure of unique customer sessions hosted in our data centers and customer usage volume, increased approximately 33% to 347 million in the quarter ended September 30, 2007 from the quarter ended September 30, 2006.

Perpetual license revenue decreased $6.5 million and $16.4 million, or 92%, in the three and nine month periods ended September 30, 2007, respectively, as compared to the similar periods of 2006. The mix of perpetual license revenue affects our profitability in any given period because it is recorded in full into revenue upon delivery instead of being recorded ratably into revenue over time, as is the case with subscriptions and term licenses. Beginning in 2007, we essentially discontinued sales of new perpetual licenses which caused the significant decrease in perpetual revenue from the prior year.

Professional services revenue increased $546,000, or 9%, in the quarter ended September 30, 2007 compared to the year-earlier quarter, and increased $608,000, or 3%, in the nine months ended September 30, 2007 over the comparable period ending September 30, 2006. The growth in professional services revenue is primarily due to higher utilization and a higher volume of large customer projects in the current year. Customers generally purchase professional services with initial license or subscription arrangements, and periodically over the life of the contract.

The mix of professional services revenue affects our profitability from period-to-period due to the lower gross profit earned on professional services as compared to the gross profit earned on software, hosting and support revenue. Professional services revenue represented 23% and 21% of total revenue in the three months ended September 30, 2007 and 2006, respectively.

We expect professional services revenue to range between 20% and 25% of total revenue in the future.

Revenue from international customers grew to represent 29% of total revenue in the quarter ended September 30, 2007 from 21% of total revenue in the quarter ended September 30, 2006. For the nine months ended September 30, 2007, revenue from international customers represented 28% of total revenue as compared to representing 25% of total revenue in the year-earlier period. The higher percentage of revenue from international customers is primarily the result of lower perpetual revenue in 2007, which was derived mostly from North American customers in previous years.

Cost of Revenue

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2006		2007		Percent Change		2006		2007		Percent Change

Software, hosting and support	$	3,667	$	4,604	26	%	$	9,597	$	13,563	41	%
Professional services	4,969		5,667		14		14,014		15,874		13
Total cost of revenue	$	8,636	$	10,271	19	%	$	23,611	$	29,437	25	%

Total cost of revenue for the quarter ended September 30, 2007 was $10.3 million, an increase of $1.7 million, or 19% over total cost of revenue of $8.6 million for the quarter ended September 30, 2006. Total cost of revenue for the nine months ended September 30, 2007 was $29.4 million, or 25% more than total cost of revenue of $23.6 million for the nine months ended September 30, 2006.

Cost of software, hosting and support increased $937,000, or 26% in the third quarter ended September 30, 2007 over the third quarter of 2006 due primarily to capacity additions to our hosting data centers, including new data centers in London, England, and Chicago, Illinois, and increased voice and non-voice hosting volume. Staff additions to our hosting and technical support organizations increased salaries and related expenses (i.e. payroll taxes, benefits, bonuses, stock-based compensation, allocated overhead) by $352,000 in the quarter ended September 30, 2007 when compared to the quarter ended September 30, 2006. Average employee count in our hosting and technical support operations was 82 in the third quarter of 2007 as compared to 74 in the third quarter of 2006. New data centers added in 2006 and 2007 and growth in customer interactions increased third party hosting provider costs by $441,000 in the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006. Equipment additions to our data centers increased depreciation expense in the third quarter of 2007 by $149,000 over the third quarter of 2006. As a percent of the associated revenue, software, hosting and support costs were 21% and 22% of revenue in the three months and nine months ended September 30, 2007 as compared to 15% in both the three months and nine months ended September 30, 2006 mostly due to the lower revenue contribution from perpetual licenses combined with the capacity increases noted above.

Cost of professional services increased $698,000, or 14%, in the quarter ended September 30, 2007 over the quarter ended September 30, 2006 due to employee staff additions partly offset by lower travel & entertainment expenses. Average employee count in our professional services organization grew to 143 in the third quarter of 2007 from 131 in the third quarter of 2006, which increased salaries and related expenses by $839,000. This increase was partially offset by lower

travel and entertainment expenses of $128,000. As a percent of the associated revenue, professional services costs increased to 82% and 86% in the three and nine months ended September 30, 2007, respectively, from 78% in the three and nine months ended September 30, 2006. Employee training and customer scheduling requirements can cause the cost of professional services to fluctuate as a percentage of revenue from period to period. We expect professional services costs to range between 80% and 85% of the associated revenue in 2007.

Operating Expenses

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2006		2007		Percent Change		2006		2007		Percent Change

Sales and marketing	$	16,535	$	16,516	—	%	$	45,113	$	48,031	7	%
Research and development	3,740		4,308		15		10,346		12,947		25
General and administrative	2,333		2,680		15		7,098		8,718		23
Total operating expenses	$	22,608	$	23,504	4	%	$	62,557	$	69,696	11	%

Sales and Marketing Expenses

Sales and marketing expenses of $16.5 million in the third quarter of 2007 were approximately even with the third quarter of 2006. Salaries and related expenses increased $1.7 million in the third quarter of 2007 compared to the third quarter of 2006 primarily due to staff additions and staff promotions. Average employee count in our sales and marketing organizations increased to 268 in the quarter ended September 30, 2007 from 261 in the quarter ended September 30, 2006. Offsetting the increased salaries and related expenses were lower sales incentive expenses caused by the deferral of sales incentives earned on subscription agreements. As noted above under “2007 Business Model Changes,” we changed the nature of our sales arrangements from licenses to subscriptions beginning in 2007. Under license arrangements, we expense sales incentives when earned, which is typically upon contract signing. Under subscription arrangements, we defer the related sales incentive costs and expense them in proportion to the revenue recognized. We deferred $1.4 million of sales incentives earned on subscription sales in the third quarter of 2007, as compared to zero deferred sales incentives in the third quarter of 2006. Net sales incentive expense in the quarter ending September 30, 2007 was $2.8 million as compared to $4.5 million in the quarter ended September 30, 2006.

Sales and marketing expenses for the nine months ended September 30, 2007 increased $2.9 million, or 7%, over the comparable 2006 period due to staff additions and promotions which increased salaries and related expenses by $6.4 million and was offset in part by lower sales incentive expenses of $3.9 million.

Research and Development Expenses

Research and development expenses of $4.3 million in the three months ended September 30, 2007 were $568,000, or 15%, more than research and development expenses of $3.7 million in the three months ended September 30, 2006, primarily due to increased salaries and related expenses and third party services. Salary and related expense increased $331,000 primarily due to annual merit increases and promotions within the group, as well as certain increased overhead expenses that are allocated based on headcount. Average employee count in our research and development remained approximately level at 133 in the comparative third quarters ended

September 30, 2006 and 2007. Higher outside service costs of $180,000 were incurred in the quarter ended September 30, 2007 principally related to language translations of installation and operation manuals for our newest product, RightNow 8, and subsequent quarterly releases.

Research and development expenses for the nine months ended September 30, 2007 increased 25% over the comparable 2006 period due to staff additions which increased salaries and related expenses by $1.9 million and higher third-party consulting services which increased by $539,000.

General and Administrative Expenses

General and administrative expenses increased $347,000, or 15%, in the third quarter of 2007 over the third quarter of 2006 mostly due to staff additions. Average employees in our general and administrative organization were 69 in the third quarter of 2007 as compared to 62 in the third quarter of 2006, which increased salaries and related expenses by $288,000.

General and administrative expenses for the nine months ended September 30, 2007 increased 23% over the comparable 2006 period due to staff additions which increased salaries and related expenses by $1.5 million.

Stock-Based Compensation Expense

Total stock-based compensation expense for the three and nine months ended September 30, 2007 was $1.2 million and $4.5 million, respectively, as compared to $1.1 million and $3.6 million in the three and nine months ended September 30, 2006, respectively. The year-over-year increase in stock-based compensation expense results primarily from growth in the fair market value of our stock since our initial public offering in 2004, which in turn drives growth in the estimated fair value of our stock options and the corresponding expense. Stock-based compensation expense fluctuates from period-to-period due to changes in the underlying market value of our stock and changes in our valuation assumptions, such as the expected volatility of our stock, the expected time an option will be outstanding, and expected option forfeiture rates.

Interest and Other Income (Expense), Net

	Three Months Ended September 30,								Nine Months Ended September 30,
(Amounts in thousands)	2006			2007			Percent Change		2006			2007			Percent Change

Interest income	$	776		$	1,055		36	%	$	2,170		$	2,859		32	%
Interest expense	(3		)	(2		)	n/m		(8		)	(5		)	n/m
Other income (expense)	(33		)	(49		)	n/m		18			(137		)	n/m
Total interest and other income (expense), net	$	740		$	1,004		36	%	$	2,180		$	2,717		25	%

Interest income increased 36% in the third quarter of 2007 over the third quarter of 2006 primarily due to growth in our cash and short-term investment balances, and to a lesser extent increased average yields on invested funds. Cash and investment balances have increased primarily from cash generated by the business. Our investment portfolio consists primarily of short-term, investment-grade government and corporate debt instruments. Other income (expense) consists primarily of gains or losses on miscellaneous asset sales and foreign currency transaction gains or losses.

Provision for Income Taxes

The provision for income taxes was $59,000 and $324,000 for the three and nine months ended September 30, 2007, respectively, as compared to $103,000 and $353,000 for the similar periods in 2006. Our provision for income taxes consists primarily of foreign tax withholdings and state provisions. Our effective tax rate differs from the federal statutory rate primarily due to unrealized operating losses, tax credits, federal alternative minimum taxes, foreign rate differentials, state taxes and non-deductible expenses. Our effective tax rate in 2007 will depend on a number of factors, such as the amount and mix of stock-based compensation expense to be recorded under SFAS 123R, the level of business in state and foreign tax jurisdictions, management’s expectation of the realization of deferred tax assets and the associated valuation allowance, and other factors.

Liquidity and Capital Resources

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2006		2007		Percent Change		2006		2007		Percent Change

Cash, cash equivalents and short-term investments	$	75,020	$	89,932	20	%	$	75,020	$	89,932	20	%
Cash provided by operating activities	9,836		3,793		(61	)	22,752		13,916		(39	)

At September 30, 2007, cash, cash equivalents, and short-term investments, totaled $89.9 million. In addition to our cash and short-term investments, other sources of liquidity at September 30, 2007 included a $3.0 million bank line of credit facility, under which there have been no borrowings.

Operating activities provided $3.8 million and $13.9 million of cash during the quarter and nine months ended September 30, 2007, respectively, as compared to $9.8 million and $22.8 million in the quarter and nine months ended September 30, 2006. We expect full year 2007 cash flow from operations to range between $15 and $20 million as compared to $27 million in cash flow from operations in 2006. However, cash flow from operations can vary significantly from quarter-to-quarter for many reasons, including the timing of business in a given period and customer payment preferences and patterns. The expected decrease in full year cash from operations is primarily the result of our business model change announced earlier this year where we discontinued selling perpetual software licenses, which are typically larger dollar contracts paid net 30.

Historically, we have generated cash from operations from increasing sales and the upfront billing of our sales arrangements, which is typically reflected in accounts receivable and deferred revenue. When customers chose to pay over time, we recorded a term receivable to reflect the customer commitment. Beginning in 2007, our change to subscriptions from license arrangements requires that we no longer record additions to term receivables, and consequently, we expect term receivables to gradually decline over time. This change in the recording of term receivables is not expected to negatively affect cash flow from operations.

The allowance for uncollectible accounts receivable represented approximately 5% of current accounts and term receivables at September 30, 2007 and December 31, 2006, respectively. We regularly assess the adequacy of the allowance for doubtful accounts. Actual write-offs could exceed our estimates and adversely affect operating cash flows in the future.

Investing activities used $5.3 million and $22.5 million in the quarter and nine months ended September 30, 2007, respectively. Year-to-date 2007 investing activities consisted of net purchases of short-term investments of $17.7 million and $4.8 million of capital expenditures. Capital asset additions consisted primarily of equipment acquisitions for our hosting operations and employee growth, and are expected to be approximately $7 million to $8 million for the full year 2007.

Financing activities provided $518,000 and $1.9 million in the three and nine months ended September 30, 2007, respectively, mostly from the employee purchases of our common stock under our equity incentive plans and the related excess tax benefits.

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.

Off-Balance Sheet Arrangements

As of September 30, 2007, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations or commitments since December 31, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuation 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. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures. We do not currently have any such contracts in place, nor did we enter into any such contracts during the quarters ended September 30, 2006 or 2007.

Interest Rate Sensitivity

Net proceeds from 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 portfolio is investment-grade and diversified among issuers and security types to reduce credit risk. We manage our interest rate risk by maintaining a large portion of our investment portfolio in instruments with short maturities or frequent interest rate resets. We also manage interest rate risk by maintaining sufficient cash and cash equivalents such that we are able to hold investments until maturity. If market interest rates were to increase by 100 basis points from the level at September 30, 2007, the fair value of our portfolio would decline by approximately $115,000.

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 ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes to Internal Control over Financial Reporting

During the most recently 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 1A. Risk Factors

A restated description of the risk factors associated with our business is set forth below. This description includes any and all changes (whether or not material) to, and supersedes, the description of the risk factors associated with our business previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.

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 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.

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

We incurred a net loss of more than $15 million in the first nine months of 2007, and as of September 30, 2007, we had an accumulated deficit of $53.6 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 achieve profitability. Additionally, with our business model change beginning in 2007 we expect to sell substantially less perpetual licenses than in prior years, which will unfavorably impact revenue and earnings. Even if we 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 recently announced business model changes carry a number of risks which may be harmful to our business.

In January 2007 we announced that we are changing the nature of our product offerings from substantially all software license arrangements to substantially all subscription service arrangements. We expect the impact of this change will be to largely eliminate perpetual license revenue in 2007 which will negatively and materially affect our operating results when compared to 2006. Increased operating losses in 2007 could result in a significant decline in the price of our common stock. Additionally, customers may choose to pay for their subscription agreements over time instead of upfront, or could choose to pay upfront for a shorter period of service, which could reduce our cash flow from operations as compared to prior years. A decline in cash flow from operations could cause investors and market analysts to react negatively towards investing in our stock which could materially and adversely affect the price of our stock. In addition, our subscription strategy caries a number of additional risks, including:

• we may incur declining demand for our products because certain customers may prefer license arrangements and select competitors’ products instead of ours;

• our average price per transaction could decline substantially;

• we may see declining demand for our implementation services;

• we may not achieve the expected level of market penetration under our subscription strategy; and

• we may have a short-term and/or long-term decrease in total revenue as a result of this transition.

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 subscriptions and perpetual licenses sold in a particular quarter, because perpetual license revenue is recorded into revenue upon delivery whereas subscriptions are recorded into revenue ratably over the contractual period;

• our success in shifting our business model away from software license arrangements and toward subscription services arrangements;

• our policy of expensing sales commissions when earned under license arrangements, which is typically 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, because the gross margin on voice self service applications is typically lower than the gross margin on our sales, marketing, feedback and service applications;

• 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 our assumptions of stock price volatility, employee exercise behaviors, and option forfeiture rates, or changes in the number of stock options granted and vesting requirements in any particular period, which effects the amount of stock-based compensation expense;

• 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 most of the revenue from new sales agreements is recognized over time, 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 80% to 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 have introduced sales, marketing, feedback and voice-enabled 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 less proven, 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 CRM 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 BMC Software Corporation, Inc., eGain Communications Corporation, FrontRange Solutions, Inc., IBM Corporation, Kana Software, Inc., Microsoft Corporation, Netsuite, Oracle Corporation/Siebel Systems, SAP AG, and salesforce.com;

• 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 voice-enabled IVR technology providers, such as Apptera, IBM, Intervoice, Microsoft, TuVox, Voxify, and Unveil Technologies.

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 January 2006, Oracle Corporation completed its acquisition of 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.

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. The willingness of companies to increase their use of any on demand application services is in part dependent on the actual and perceived reliability of hosted solutions. In addition, 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 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;

• customer acceptance of our subscription sales arrangements beginning in 2007; and

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

If businesses do not perceive the benefits of on demand solutions in general, or our on demand solutions in particular, 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 sales and marketing resources 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 sales and marketing resources if we are unable to hire and develop talented sales and marketing personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our existing sales and marketing 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 time-based agreements, and if our existing clients elect not to renew or to renew on terms less favorable to us, our business, financial condition and results of operations will be adversely affected.

Our solutions are generally sold pursuant to time-based agreements that are typically subject to renewal every two years or less and our clients have no obligation to renew. 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, their acceptance of our intended change from a term license agreement to a subscription service agreement beginning in 2007, or the availability and pricing of competing products. If large numbers of existing clients do not renew, or renew on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new agreements 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 691 at September 30, 2007 from 654 at September 30, 2006. 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.

Approximately 85% to 90% of our clients use our hosting services for deployment of our software applications. We generally provide our hosting services for our non-voice applications through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in California, Illinois, Massachusetts, New Jersey and London, England. Our voice applications for several International customers are hosted by third parties who also own and operate the hardware on which our applications reside. We do not maintain long-term supply contracts with any of our hosting providers, and providers do not guarantee that our clients’ access to hosted solutions will be uninterrupted, error-free or secure. Our operations depend on our 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 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 all hosting facilities. In the event that our hosting 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 hosting facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.

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 21% and 29% of our revenue for the quarters ended September 30, 2006 and 2007, respectively. 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 have

not entered into any transactions designed to 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.

Our software incorporates use of Microsoft’s .NET Framework, and its Smart Client methodology. The .NET Framework is core functionality that Microsoft incorporates into operating systems, while the Smart Client methodology enables development and deployment of software applications using the .NET Framework. We believe that the .NET Framework and Smart Client enable us to provide users with a richer experience and better functionality than would be possible using a pure Web-based application. However, the .NET Framework has not been universally adopted. If software users do not adopt the .NET Framework or if the .NET Framework is superseded, the potential market for our solutions will be reduced and we may need to develop an alternative architecture.

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 our sales agreements typically 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 assets of Convergent Voice and in May 2006, we acquired Salesnet, Inc. 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 future 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 to financial accounting standards may affect our results of operations and financial condition.

Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, such as software revenue recognition, accounting for stock-based compensation, and income tax uncertainties, are complex and involve subjective judgments by management. Changes to generally accepted accounting principles, their interpretation, or changes in our products or business could significantly change our reported earnings and financial condition and could add significant volatility to those measures. For example, since our inception in 1997, we have used stock options as a fundamental component of our employee compensation programs. New accounting requirements that began January 1, 2006 make the use of stock-based compensation much more expensive and introduce additional volatility in our results of operations.

The required adoption of SFAS 123R makes stock options a less attractive form of employee compensation, and our use of alternative forms of employee compensation in response to SFAS 123R could adversely affect our ability to attract and retain personnel.

We have historically used stock options as a key component of our employee compensation because we believe it aligns employees’ interests with our stockholders’ interest, encourages employee retention, and provides a competitive component of our overall compensation program. Due to the required adoption of SFAS 123R, and the recording of stock option expense on our operating statements, we may determine that it is in our best interest to reduce the number or size of our stock-based awards, or change the type of awards granted. In doing so, we may not be able to attract, retain and motivate our employees.

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.

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 email 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 email. 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.

European Union members have imposed 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 email 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 emails and, among other things, obligates the sender of such emails to provide recipients with the ability to opt-out of receiving future emails from the sender, and establishes penalties for the transmission of email 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 email, and laws that regulate commercial email 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 email, without any common protocol to determine whether the recipient desired to receive the email being blocked. As a result, it is difficult for us to determine in advance whether or not emails 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 email communications. The increasing regulation of email delivery, both domestically and internationally, and the spam filtering practices of Internet service providers and email 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 national economic downturns, industry purchasing patterns, and other factors. Our ability to grow revenues may be adversely affected by unfavorable economic conditions.

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.

At September 30, 2007, Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, together beneficially owned approximately 25% of our currently outstanding common stock and, together with our other officers and directors, beneficially owned approximately 41% 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 together with some of our other officers and directors, may be able to control 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 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. We sold 6.4 million shares, including shares sold upon exercise of the underwriters’ over-allotment option, for an aggregate offering price of $44.9 million, 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 $2.3 million. 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. 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.

In May 2005, we spent $1 million of the offering proceeds for the acquisition of the assets of Convergent Voice. In May 2006, we spent $8.7 million of the offering proceeds to acquire Salesnet, Inc. We currently intend to use the remaining proceeds for general corporate purposes as described in the prospectus for the offering. Pending these uses, the net proceeds from the offering are invested in investment-grade, interest-bearing securities.

(c) Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

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. 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.

Exhibit 3.2		Amended and Restated Bylaws of the Registrant. Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 000-31321) filed with the Securities and Exchange Commission on January 25, 2006.

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.

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, 2007

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-Q2007 Q3 Quarterly report

Content analysis

FORM 10-Q

For the quarterly period ended September 30, 2007

For the transition period from to

Delaware

81-0503640

(State or Other Jurisdiction of

(I.R.S. Employer

Bozeman, Montana 59718-9300

Item 1. Financial Statements

Sales and Marketing Expenses

September 30, 2006 and 2007. Higher outside service costs of $180,000 were incurred in the quarter ended September 30, 2007 principally related to language translations of installation and operation manuals for our newest product, RightNow 8, and subsequent quarterly releases.

Contractual Obligations and Commitments