Vocus 10-Q 2008 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2008
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number000-51644

Vocus, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 58-1806705
(I.R.S. Employer
Identification No.)

4296 Forbes Boulevard
Lanham, Maryland 20706
(301) 459-2590
(Address including zip code, and telephone number,
including area code, of principal executive offices)

Not applicable
(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.

Yesþ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

Yeso     No þ

As of August 4, 2008, 18,790,970 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

TABLE OF CONTENTS

			Page
PART I — FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements		3
		Consolidated Balance Sheets as of December 31, 2007 and June 30, 2008		3
		Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2008		4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2008		5
		Notes to Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19
	Item 4.	Controls and Procedures		19
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings		19
	Item 1A.	Risk Factors		19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
	Item 4.	Submission of Matters to a Vote of Security Holders		31
	Item 6.	Exhibits		32
SIGNATURES				33

2

PART I

Item 1.   Consolidated Financial Statements

Vocus, Inc. and Subsidiaries

Consolidated Balance Sheets

	December 31,			June 30,
	2007			2008
				(Unaudited)
	(Dollars in thousands, except per share data)
Current assets:
Cash and cash equivalents	$	56,541		$	58,120
Short-term investments		10,939			23,238
Accounts receivable, net of allowance for doubtful accounts of $251 and $241 at December 31, 2007 and June 30, 2008, respectively		14,354			10,559
Current portion of deferred income taxes		—			596
Prepaid expenses and other current assets		1,957			2,333
Total current assets		83,791			94,846
Property, equipment and software, net		4,236			5,200
Intangible assets:
Customer relationships, net		2,599			1,863
Trade name, net		3,154			2,871
Agreements not-to-compete, net		2,804			2,413
Purchased technology, net		71			11
Intangible assets, net		8,628			7,158
Goodwill		17,090			17,090
Deferred income taxes, net of current portion		—			3,839
Other assets		498			676
Total assets	$	114,243		$	128,809
Current liabilities:
Accounts payable	$	1,043		$	618
Accrued compensation		3,057			3,040
Accrued expenses		3,112			2,568
Current portion of notes payable and capital lease obligations		233			236
Current portion of deferred revenue		34,333			36,400
Total current liabilities		41,778			42,862
Notes payable and capital lease obligations, net of current portion		102			186
Deferred income taxes		639			—
Other liabilities		89			81
Deferred revenue, net of current portion		631			1,106
Total liabilities		43,239			44,235
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2007 and June 30, 2008		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 18,656,415 and 19,634,951 shares issued at December 31, 2007 and June 30, 2008, respectively; 17,645,638 and 18,624,174 shares outstanding at December 31, 2007 and June 30, 2008, respectively		186			196
Additional paid-in capital		109,553			117,854
Treasury stock, 1,010,777 shares at cost		(3,283	)		(3,283	)
Accumulated other comprehensive loss		(60	)		(62	)
Accumulated deficit		(35,392	)		(30,131	)
Total stockholders’ equity		71,004			84,574
Total liabilities and stockholders’ equity	$	114,243		$	128,809

See accompanying notes.

3

Vocus, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2008			2007			2008
	(Unaudited)
	(Dollars in thousands, except per share data)
Revenues	$	14,080		$	19,085		$	26,677		$	36,952
Cost of revenues, including amortization expense of $30 for the three months ended June 30, 2007 and 2008, and $60 for the six months ended June 30, 2007 and 2008		2,805			3,627			5,285			7,059
Gross profit		11,275			15,458			21,392			29,893
Operating expenses:
Sales and marketing		6,616			8,483			12,227			16,659
Research and development		976			1,360			1,721			2,573
General and administrative		3,666			5,356			7,074			9,994
Amortization of intangible assets		723			705			1,446			1,410
Total operating expenses		11,981			15,904			22,468			30,636
Loss from operations		(706	)		(446	)		(1,076	)		(743	)
Other income (expense):
Interest and other income		717			510			1,104			1,105
Interest expense		(14	)		(9	)		(29	)		(14	)
Total other income		703			501			1,075			1,091
Income (loss) before benefit from income taxes		(3	)		55			(1	)		348
Benefit from income taxes		—			(5,609	)		—			(4,913	)
Net income (loss)	$	(3	)	$	5,664		$	(1	)	$	5,261
Net income (loss) per share:
Basic	$	(0.00	)	$	0.32		$	(0.00	)	$	0.30
Diluted	$	(0.00	)	$	0.30		$	(0.00	)	$	0.28
Weighted average shares outstanding used in computing per share amounts:
Basic		17,364,691			17,868,247			16,694,309			17,775,375
Diluted		17,364,691			18,957,313			16,694,309			18,788,388

See accompanying notes.

4

Vocus, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2007				2008
	(Unaudited)
	(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)	$	(1	)		$	5,261
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property, equipment and software		710				883
Amortization of intangible assets		1,506				1,470
Gain on sale of property and equipment		(28	)			—
Stock-based compensation		2,699				5,158
Provision for doubtful accounts		43				156
Deferred income taxes		—				(5,094	)
Changes in operating assets and liabilities:
Accounts receivable		1,419				3,637
Prepaid expenses and other current assets		(573	)			(376	)
Other assets		(55	)			(175	)
Accounts payable		(485	)			(427	)
Accrued compensation		238				(19	)
Accrued expenses		(521	)			(546	)
Deferred revenue		1,551				2,540
Other liabilities		10				(7	)
Net cash provided by operating activities		6,513				12,461
Cash flows from investing activities:
Purchases of short-term investments		(2,420	)			(34,939	)
Maturities of short-term investments		4,121				22,671
Software development costs		(341	)			—
Purchases of property and equipment		(558	)			(1,489	)
Proceeds from sale of property and equipment		28				—
Net cash provided by (used in) investing activities		830		��		(13,757	)
Cash flows from financing activities:
Proceeds from public offering, net of costs		21,666				—
Proceeds from exercise of stock options and warrants		573				3,152
Payments on notes payable and capital lease obligations		(241	)			(267	)
Net cash provided by financing activities		21,998				2,885
Effect of exchange rate changes on cash and cash equivalents		3				(10	)
Net increase in cash and cash equivalents		29,344				1,579
Cash and cash equivalents, beginning of period		26,506				56,541
Cash and cash equivalents, end of period	$	55,850			$	58,120

See accompanying notes.

5

Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1.   Business Description

Basis of Presentation

Vocus, Inc. (Vocus or the Company) is a leading provider of on-demand software for public relations management. The Company’s on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. The Company is headquartered in Lanham, Maryland with sales and other offices in Virginia, Maryland, California, Washington, London, England, Dusseldorf, Germany and Bangkok, Thailand.

2.   Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions toForm 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The consolidated balance sheet at December 31, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form10-K for the year ended December 31, 2007 filed with the Securities Exchange Commission on March 14, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of Vocus, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Short-term Investments

Management determines the appropriate classification of short-term investments at the time of purchase and evaluates such determination as of each balance sheet date. Available-for-sale securities are stated at fair value based on quoted market prices. Realized gains and losses are included in other income (expense) based on the specific identification method. Net unrealized holding gains and losses on available-for-sale securities are reported as a component of other comprehensive loss, net of tax. As of June 30, 2008, the net unrealized gains on available-for-sale securities were not material. The Company owns no investments that are considered to be trading or held-to-maturity securities.

The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at June 30, 2008.

6

Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Revenue Recognition

The Company derives its revenues from subscription arrangements and related services permitting customers to access and utilize the Company’s on-demand software and from the online distribution of press releases. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable.

Subscription agreements contain multiple service elements and deliverables. These elements include access to the Company’s on-demand software and often specify initial services including implementation and training. Subscription agreements do not provide customers the right to take possession of the software at any time.

The Company considers all elements in its multiple element subscription arrangements as a single unit of accounting and recognizes all associated fees over the subscription period. In applying the guidance in Emerging Issues Task Force IssueNo. 00-21,Revenue Arrangements with Multiple Deliverables(EITF 00-21), the Company determined that it does not have objective and reliable evidence of the fair value of the subscription fees after delivery of specified initial services. The Company therefore accounts for its subscription arrangements and its related service fees as a single unit of accounting. As a result, all revenue from multiple element subscription arrangements is recognized ratably over the term of the subscription. The subscription term commences on the start date specified in the subscription arrangement or the date access to the software is provided to the customer. The Company also has entered into a royalty agreement with a reseller of its application service. The Company recognizes this revenue over the term of the end-user subscription upon obtaining persuasive evidence, which includes monthly notification from the reseller, that the service has been sold and delivered. The Company recognizes revenue from professional services sold separately from subscription arrangements as the services are performed.

The Company distributes press releases over the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. The Company recognizes revenue on a per-transaction basis when the press releases are made available to the public.

Sales Commissions

Sales commissions, including commissions related to deferred revenue, are expensed when a subscription agreement is executed by the customer.

Income Taxes

Income taxes are determined utilizing the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

7

Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Earnings Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Unvested shares of restricted stock are not included in the computation of basic net income (loss) per share until vested. Diluted net income per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common. Diluted net income per share also includes the effect of unvested shares of restricted stock. The following summarizes the calculation of basic and diluted net income (loss) per share (dollars in thousands, except per share amounts):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2008		2007			2008
Net income (loss)	$	(3	)	$	5,664	$	(1	)	$	5,261
Weighted average shares outstanding, basic		17,364,691			17,868,247		16,694,309			17,775,375
Dilutive effect of:
Options to purchase common stock		—			1,071,784		—			1,013,013
Unvested shares of restricted stock		—			17,282		—			—
Weighted average shares outstanding, diluted		17,364,691			18,957,313		16,694,309			18,788,388
Net income (loss) per share:
Basic	$	(0.00	)	$	0.32	$	(0.00	)	$	0.30
Diluted	$	(0.00	)	$	0.30	$	(0.00	)	$	0.28

For the three and six months ended June 30, 2007, 3,533,397 outstanding stock options were excluded from the calculation of diluted earnings per share as the result would have been anti-dilutive. For the six months ended June 30, 2008, 672,345 unvested shares of restricted stock were excluded from the calculation of diluted earnings per share as the result would have been anti-dilutive.

Segment Data

The Company manages its operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company reports on one segment.

3.   Financial Instruments

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 157,Fair Value Measurements(SFAS No. 157), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP)No. 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13(FSPNo. 157-1), andEffective Date of FASB Statement No. 157(FSPNo. 157-2) as amendments to SFAS No. 157, which exclude lease transactions from the scope of SFAS 157 and also defer the effective date of the adoption of SFAS No. 157 for non-financial assets and non-financial liabilities that are nonrecurring. The provisions of SFAS No. 157 are effective for the fiscal year beginning January 1, 2008, except for certain non-financial assets and non-financial liabilities for which the effective date has been deferred to January 1, 2009. The Company adopted SFAS No. 157 on January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSPNo. 157-2, and such adoption did not have a material impact on its financial statements.

The Company measures certain financial assets at fair value, including cash equivalents and short-term investments. SFAS No. 157 specifies a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect

8

Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1	—	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3	—	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The following financial assets are measured at fair value on a recurring basis. The fair value of these financial assets was determined using the following levels of inputs as of June 30, 2008 (in thousands):

	Total		Level 1		Level 2		Level 3
Cash equivalents(1)	$	41,292	$	41,292	$	—	$	—
Short-term investments(2)		23,238		23,238		—		—
Total	$	64,530	$	64,530		—		—

(1)	Cash equivalents consist of money market funds and debt securities with original maturity dates of less than three months for which the fair value is determined through quoted market prices.
(2)	Short-term investments consist of available-for-sale debt securities, with original maturity dates of three months or greater for which the fair value is determined through quoted market prices.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS No. 159), which allows companies to elect to measure certain eligible financial instruments at fair value at specified election dates. The Company adopted SFAS No. 159 on January 1, 2008. However, the Company did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 or during the six months ended June 30, 2008 and therefore such adoption did not have any impact on its financial statements.

4.   Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with Statement of Financial Accounting Standard No. 123(R),Share-Based Payment(SFAS No. 123R). The Company’s share-based arrangements include stock option awards and restricted stock awards.

The following table sets forth the stock-based compensation expense for option awards and restricted stock awards determined pursuant to Statement of Financial Accounting Standard No. 123(R),Share-Based Payment(SFAS No. 123R), that is recorded in the consolidated statements of operations for the three and six months ended June 30, 2007 and 2008 (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2008		2007		2008
Cost of revenues	$	172	$	295	$	287	$	560
Sales and marketing		377		683		703		1,352
Research and development		153		184		263		365
General and administration		737		1,517		1,324		2,839
Total	$	1,439	$	2,679	$	2,577	$	5,116

9

Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Stock Option Awards

The Company uses the Black-Scholes option pricing model to measure the fair value of its option awards. The Company became a public entity in December 2005, and therefore has a limited history of volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is based on the “simplified” method allowed by Staff Accounting Bulletin No. 107, as amended by Staff Accounting Bulletin No. 110 (SAB No. 110) whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and accordingly, uses an expected dividend yield of zero. The Company recognizes compensation expense for its option awards on a straight-line basis over the requisite service period of the award.

The following weighted-average assumptions were used in calculating stock-based compensation for options granted during the three and six months ended June 30, 2007 and 2008:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2008		2007			2008
Stock price volatility		53	%		—		52	%		54	%
Expected term (years)		6.3			—		6.2			6.0
Risk-free interest rate		4.6	%		—		4.8	%		3.1	%
Dividend yield		0	%		—		0	%		0	%

The summary of stock option activity for the six months ended June 30, 2008 is as follows:

				Weighted-				Aggregate
				Average		Weighted-		Intrinsic
				Exercise		Average		Value as of
	Number of			Price per		Contractual		June 30,
	Options			Share		Term		2008
								(In thousands)
Balance outstanding at December 31, 2007		3,351,363		$	13.03
Granted		75,540			29.42
Exercised		(296,109	)		10.65
Forfeited or cancelled		(148,668	)		17.66
Balance outstanding at June 30, 2008		2,982,126		$	13.45		7.8	$	55,868
Options vested and expected to vest at June 30, 2008		2,826,676		$	13.34		7.8	$	53,220
Exercisable at June 30, 2008		1,064,165		$	10.54		7.2	$	23,023

The weighted-average grant date fair value of options granted during the three months ended June 30, 2007 was $12.91. The Company did not grant options during the three months ended June 30, 2008. The weighted-average grant date fair value of options granted during the six months ended June 30, 2007 and 2008 was $10.55 and $15.94, respectively.

The fair value of options that vested during the three months ended June 30, 2007 and 2008 was $211,000 and $228,000, respectively. The fair value of options that vested during the six months ended June 30, 2007 and 2008 was $320,000 and $3,793,000, respectively.

The aggregate intrinsic value represents the difference between the exercise price of the underlying awards and the quoted closing price of the Company’s common stock at June 30, 2008 multiplied by the number of shares that would have been received by the option holders had all option holders exercised their options on June 30, 2008. The aggregate intrinsic value of options exercised during the three months ended June 30, 2007 and 2008 was

10

Vocus, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

$1,609,000 and $3,980,000, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2007 and 2008 was $2,247,000 and $5,211,000, respectively.

As of June 30, 2008, $12.2 million of total unrecognized compensation cost is related to nonvested option awards and is expected to be recognized over a weighted-average period of 1.9 years.

Restricted Stock Awards

The fair value of the restricted stock awards is determined based on the quoted closing market price of the Company’s common stock on the grant date and is recognized on a straight-line basis over the related vesting period.

The summary of restricted stock award activity for the six months ended June 30, 2008 is as follows:

	Number of Shares
	Underlying
	Stock Awards
Balance unvested at December 31, 2007		—
Awarded		682,218
Vested		(9,873	)
Balance unvested at June 30, 2008		672,345

The weighted-average grant date fair value of restricted stock awards granted during the three and six months ended June 30, 2008 was $32.17 and $29.41, respectively.

As of June 30, 2008, $16.4 million of total unrecognized compensation cost is related to unvested shares of restricted stock and is expected to be recognized over a weighted-average period of 3.5 years.

5.   Debt

On May 21, 2008, the Company modified its Equipment Line of Credit to extend the expiration date to June 30, 2010.

6.   Income Taxes

At each balance sheet date, the Company assesses the likelihood that it will be able to realize its deferred tax assets. The Company considers all available positive and negative evidence in assessing the need for a valuation allowance. As of December 31, 2007 and March 31, 2008, the Company determined that a full valuation allowance against its deferred tax assets was necessary primarily due to the effect of historical operating losses.

At June 30, 2008, the Company assessed the need for a valuation allowance against its deferred tax assets. The Company concluded that it was more likely than not that it would be able to realize certain of its deferred tax assets primarily as a result of expected future taxable income. Accordingly, the Company reversed the valuation allowance against its U.S. deferred tax assets recording an income tax benefit of $5,609,000 for the three months ended June 30, 2008. As of June 30, 2008, the Company maintained a full valuation allowance against its foreign deferred tax assets consisting primarily of net operating loss carryforwards.

The effective tax rate for the three and six months ended June 30, 2008 differs from the U.S. Federal statutory rate primarily due to the reversal of the valuation allowance and, to a lesser extent, state income taxes, certain non-deductible expenses and operating losses in foreign jurisdictions for which no tax benefit is currently available.

7.   Commitments and Contingencies

The Company from time to time is subject to lawsuits, investigations and claims arising out of the ordinary course of business, including those related to commercial transactions, contracts, government regulation and employment matters. In the opinion of management based on all known facts, all such matters, if any, are either without merit or are of such kind, or involve such amounts that would not have a material effect on the financial position or results of operations of the Company if disposed of unfavorably.

11

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form10-K for the year ended December 31, 2007.

This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” “will,” “should,” “seeks” or other similar expressions. Forward-looking statements reflect our plans, expectations and beliefs, and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” in Item 1A of Part II.

Overview

We are a leading provider of on-demand software for public relations management. Our web-based software suite helps organizations of all sizes fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact. Our on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our on-demand software.

We sell access to our on-demand software primarily through our direct sales channel. As of June 30, 2008, we had 2,911 active subscription customers from a variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an active subscription and have not been suspended for non-payment.

Separately, we are a provider of online distribution of press releases. We enable our customers to achieve visibility on the Internet by distributing search engine optimized press releases directly to various news sites and the public. We offer an on-demand solution which allows our customers to widely distribute press releases containing important elements of content-rich media such as images, podcasts and video messages designed to drive Internet traffic to websites and increase brand awareness.

We plan to continue the expansion of our customer base by expanding our direct distribution channels, expanding our international market penetration and selectively pursuing strategic acquisitions. As a result, we plan to hire additional personnel, particularly in sales and professional services, and expand our domestic and international selling and marketing activities, increase the number of locations around the world where we conduct business and develop our operational and financial systems to manage a growing business. We also intend to identify and acquire companies which would either expand our solution’s functionality, provide access to new customers or markets, or both.

Sources of Revenues

We derive our revenues from subscription agreements and related services and from the online distribution of press releases. Our subscription agreements contain multiple service elements and deliverables, which include use of our on-demand software, hosting services, content and content updates, implementation and training services and customer support. The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with multi-year terms. We invoice our customers in advance of their annual subscription, with payment terms that require our customers pay us within 30 days of invoice. Our subscription agreements are non-cancelable, though customers typically have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Additionally, we derive revenue on a per-transaction basis from the online distribution of press releases. We generally receive payment in advance of the distribution of the press release.

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Professional services revenue consists primarily of data migration, training and configuration services sold separately after the initial subscription agreement. Typically, our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us within 30 days of invoice. Revenues from professional services sold separately from subscription agreements have not been material to our business. During the three months ended June 30, 2008, professional services sold separately accounted for less than 3% of our revenues.

Cost of Revenues and Operating Expenses

Cost of Revenues.  Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution, acquisition and amortization of content, amortization of purchased technology, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their PR efforts. We expect to continue to make investments in both our own content as well as content acquired from third parties and to continue to enhance our proprietary information database and news on-demand service. We expect that in 2008, cost of revenues will increase in absolute dollars but will remain relatively consistent as a percentage of revenues, as we incur expenses to expand our content offerings and our capacity to support new customers.

Sales and Marketing.  Sales and marketing expenses are our largest operating expense, accounting for 44% of our revenues for the three months ended June 30, 2008. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, events and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur incremental sales expense before the recognition of the related revenues.

As our revenues increase, we plan to continue to invest heavily in sales and marketing by increasing the number of sales personnel in order to add new customers and increase sales to our existing customers. We also plan to expand our marketing activities in order to build brand awareness and generate additional leads for our growing sales personnel. We expect that in 2008, sales and marketing expenses will increase in absolute dollars but will remain relatively consistent as a percentage of revenues.

Research and Development.  Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our on-demand software. Because of our hosted, on-demand model, we are able to provide all of our customers with a single, shared version of our most recent application. As a result, we do not have to maintain legacy versions of our software, which enables us to have relatively low research and development expenses as compared to traditional enterprise software business models. We expect that in 2008, research and development expenses will increase in absolute dollars as we upgrade and extend our service offerings and develop new technologies, but will remain relatively consistent or increase slightly as a percentage of revenues.

General and Administrative.  General and administrative expenses consist of compensation and related expenses for executive, finance, accounting and administrative and personnel, professional fees, other corporate expenses and allocated overhead. We expect that in 2008, general and administrative expenses will increase in absolute dollars but will remain relatively consistent or decrease slightly as a percentage of revenues.

Amortization of Intangible Assets.  Amortized intangible assets consist of customer relationships, a trade name and agreements not-to-compete acquired in business combinations.

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Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 2 to the accompanying consolidated financial statements and in our annual report onForm 10-K for the year ended December 31, 2007, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition.  We recognize revenues in accordance with SEC Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104,Revenue Recognition.We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue.

Our subscription agreements contain multiple service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training. Our subscription agreements do not provide customers the right to take possession of the software at any time.

Our revenue recognition policy considers all elements in our multiple element subscription agreements as a single unit of accounting, and accordingly, we recognize all associated fees over the subscription period, which is typically one year. We recognize our revenue over the subscription period because the access to our software is the last element delivered to the customer and the predominant element of our agreements. In applying the guidance in Emerging Issues Task Force IssueNo. 00-21,Revenue Arrangements with Multiple Deliverables(EITF 00-21), we determined that we do not have objective and reliable evidence of the fair value of the subscription to our on-demand software after delivery of specified initial services. When we sell this subscription separately from professional services the price charged varies and, therefore, we cannot objectively and reliably determine the subscription’s fair value. As a result, subscription revenues are recognized ratably over the subscription period. Professional services sold separately from a subscription arrangement are recognized as the services are performed.

We distribute press releases over the Internet that are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

Sales Commissions.  Sales commissions are expensed when a subscription agreement is executed by the customer. As a result, we incur incremental sales expense before the recognition of the related revenues.

Stock-Based Compensation.  We recognize stock-based compensation in accordance with Statement of Financial Accounting Standard No. 123(R),Share-Based Payment(SFAS No. 123R). Our share-based arrangements include stock option awards and restricted stock awards.

We use the Black-Scholes option pricing model to measure the fair value of our option awards. We became a public entity in December 2005, and therefore have a limited history of volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is based on the “simplified” method allowed by Staff Accounting Bulletin No. 107, as amended by Staff Accounting Bulletin No. 110 (SAB No 110) whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and accordingly, use an expected dividend yield of zero. We recognize compensation expense for our option awards on a straight-line basis over the requisite service period of the award.

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The fair value of our restricted stock awards is determined based on the quoted closing market price of our common stock at the grant date and is recognized on a straight-line basis over the related vesting period.

Stock-based compensation expense recognized is based on the estimated portion of the awards that are expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors.

Income Taxes.  We make certain estimates and judgments in determining the need for the valuation allowance for deferred income taxes. At each balance sheet date, we assess the likelihood we would be able to recover our deferred tax assets. We consider all available positive and negative evidence in assessing the need for the valuation allowance. We also consider our historical operating results and our estimates of future taxable income in assessing the need for the valuation allowance. As a result of our analysis at June 30, 2008, we concluded that it was more likely than not that we would generate sufficient future taxable income to realize our deferred tax assets. Accordingly, we reversed the valuation allowance against our U.S. deferred tax assets and recognized an income tax benefit of $5.6 million in the three months ended June 30, 2008. The assumptions we used to estimate future taxable income are consistent with the forecasts used to manage our business. However, should there be a change in our estimates or our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that recovery is not likely.

Results of Operations

The following tables set forth selected unaudited consolidated statements of operations data for each of the periods indicated as a percentage of total revenues for the respective periods.

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2007			2008			2007			2008
Revenues		100	%		100	%		100	%		100	%
Cost of revenues		20			19			20			19
Gross profit		80			81			80			81
Operating expenses:
Sales and marketing		47			44			46			45
Research and development		7			7			6			7
General and administrative		26			28			27			27
Amortization of intangible assets		5			4			5			4
Total operating expenses		85			83			84			83
Loss from operations		(5	)		(2	)		(4	)		(2	)
Other income (expense), net		5			3			4			3
Income (loss) before benefit from income taxes		—			1			—			1
Benefit from income taxes		—			(29	)		—			(13	)
Net income (loss)		0	%		30	%		0	%		14	%

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The following table sets forth our total deferred revenue and net cash provided by operating activities for each of the periods indicated and number of active subscription customers as of the last day of each of the periods indicated.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2008		2007		2008
Total deferred revenue (in thousands at end of period)	$	28,228	$	37,506	$	28,228	$	37,506
Net cash provided by operating activities (in thousands)	$	2,744	$	6,517	$	6,513	$	12,461
Active customers		2,004		2,911		2,004		2,911

Three Months Ended June 30, 2008 and 2007

Revenues.  Revenues for the three months ended June 30, 2008 were $19.1 million, an increase of $5.0 million, or 36%, over revenues of $14.1 million for the comparable period in 2007. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 2,911 as of June 30, 2008 from 2,004 as of June 30, 2007. The increase in active subscription customers was the result of additional sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $4.2 million, or 37% of revenue from active subscription customers for the comparable period in 2007. The remaining increase in revenue is primarily attributable to the online distribution of press releases. Total deferred revenue as of June 30, 2008 was $37.5 million, representing an increase of $9.3 million, or 33%, over total deferred revenue of $28.2 million as of June 30, 2007.

Cost of Revenues.  Cost of revenues for the three months ended June 30, 2008 was $3.6 million, an increase of $822,000, or 29%, over cost of revenues of $2.8 million for the comparable period in 2007. The increase in cost of revenues was primarily due to $456,000 in employee related costs from additional personnel, $300,000 in third-party license and royalty fees and $123,000 in stock-based compensation. We had 131 full-time employee equivalents in our professional and other support services group at June 30, 2008 compared to 105 full-time employee equivalents at June 30, 2007.

Sales and Marketing Expenses.  Sales and marketing expenses for the three months ended June 30, 2008 were $8.5 million, an increase of $1.9 million, or 28%, over sales and marketing expenses of $6.6 million for the comparable period in 2007. The increase was primarily due to $560,000 in employee related costs from additional personnel, $555,000 in sales commissions and incentive based compensation, $232,000 in marketing program costs and $306,000 in stock-based compensation. Our sales and marketing headcount increased by 30% as we hired additional sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our activities to build brand awareness. We had 193 full-time employee equivalents in sales and marketing at June 30, 2008 compared to 149 full-time employee equivalents at June 30, 2007.

Research and Development Expenses.  Research and development expenses for the three months ended June 30, 2008 were $1.4 million, an increase of $384,000, or 39%, over research and development expenses of $976,000 for the comparable period in 2007. The increase in research and development expenses was primarily due to $287,000 in employee related costs from additional personnel and an increase of $31,000 in stock-based compensation. For the three months ended June 30, 2008, we did not capitalize any employee-related costs for internally developed software used in our subscription services. For the three months ended June 30, 2007, we capitalized $94,000 of employee-related costs for internally developed software. We had 41 full-time employee equivalents in research and development at June 30, 2008 compared to 28 full-time employee equivalents at June 30, 2007.

General and Administrative Expenses.  General and administrative expenses for the three months ended June 30, 2008 were $5.4 million, an increase of $1.7 million, or 46%, over general and administrative expenses of $3.7 million for the comparable period in 2007. The increase in general and administrative expenses was primarily due to $182,000 in employee related costs from additional personnel, $368,000 in professional fees and $780,000 in stock-based compensation. We had 44 full-time employee equivalents in our general and administrative group at June 30, 2008 compared to 42 full-time employee equivalents at June 30, 2007.

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Other Income (Expense).  Other income for the three months ended June 30, 2008 was $501,000, a decrease of $202,000, or 29%, compared to $703,000 for the comparable period in 2007. The decline in interest rate yields for debt and fixed income securities resulted in decreased interest income in 2008.

Benefit from Income Taxes.  The benefit from income taxes for the three months ended June 30, 2008 was $5.6 million. No provision for or benefit from income taxes was recorded in the three months ended June 30, 2007 as such amount was not material.

At each balance sheet date, we assess the likelihood that we would be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of profitability and estimates of future taxable income, to determine the need for the valuation allowance. At June 30, 2008, we concluded that it was more likely than not that we would be able to generate sufficient future taxable income to realize our deferred tax assets. As a result, we reversed the valuation allowance against our U.S. deferred tax assets and recorded an income tax benefit of $5.6 million. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to the reversal of the valuation allowance and, to a lesser extent, state income taxes, certain non-deductible expenses and operating losses in foreign jurisdictions for which no tax benefit is currently available.

Six Months Ended June 30, 2008 and 2007

Revenues.  Revenues for the six months ended June 30, 2008 were $37.0 million, an increase of $10.3 million, or 39%, over revenues of $26.7 million for the comparable period in 2007. The increase in revenues was due to the increase in the number of total active subscription customers to 2,911 as of June 30, 2008 from 2,004 as of June 30, 2007. The increase in active subscription customers was the result of additional sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $8.1 million, or 37% of revenue from active subscription customers for the comparable period in 2007. The remaining increase in revenue is primarily attributable to the online distribution of press releases. Total deferred revenue as of June 30, 2008 was $37.5 million, representing an increase of $9.3 million, or 33%, over total deferred revenue of $28.2 million as of June 30, 2007.

Cost of Revenues.  Cost of revenues for the six months ended June 30, 2008 was $7.1 million, an increase of $1.8 million, or 34%, over cost of revenues of $5.3 million for the comparable period in 2007. The increase in cost of revenues was primarily due to $890,000 in employee related costs from additional personnel, $523,000 in third-party license and royalty fees, $248,000 in hosting infrastructure costs and $273,000 in stock-based compensation. We had 131 full-time employee equivalents in our professional and other support services groups at June 30, 2008 compared to 105 full-time employee equivalents at June 30, 2007.

Sales and Marketing Expenses.  Sales and marketing expenses for the six months ended June 30, 2008 were $16.7 million, an increase of $4.5 million, or 36%, over sales and marketing expenses of $12.2 million for the comparable period in 2007. The increase was primarily due to $1.3 million in employee related costs from additional personnel, $1.2 million in sales commissions and incentive based compensation, $1.1 million in marketing program costs and $649,000 in stock-based compensation. Our sales and marketing headcount increased by 30% as we hired additional sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our marketing activities to build brand awareness. We had 193 full-time sales and marketing employee equivalents at June 30, 2008 compared to 149 full-time employee equivalents at June 30, 2007.

Research and Development Expenses.  Research and development expenses for the six months ended June 30, 2008 were $2.6 million, an increase of $852,000, or 50%, over research and development expenses of $1.7 million for the comparable period in 2007. The increase in research and development expenses was primarily due to $403,000 in employee related costs from additional personnel and an increase of $102,000 in stock-based compensation. For the six months ended June 30, 2008, we did not capitalize any employee related costs for internally developed software used in our subscription services. For the six months ended June 30, 2007, we capitalized $341,000 of employee-related costs for internally developed software. We had 41 full-time research and development employee equivalents at June 30, 2008 compared to 28 full-time employee equivalents at June 30, 2007.

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General and Administrative Expenses.  General and administrative expenses for the six months ended June 30, 2008 were $10.0 million, an increase of $2.9 million, or 41%, over general and administrative expenses of $7.1 million for the comparable period in 2007. The increase in general and administrative expenses was primarily due to $341,000 in employee related costs from additional personnel, $435,000 in professional fees, $188,000 in rents and facility costs relating to expansion of our offices and $1.5 million in stock-based compensation. We had 44 full-time employee equivalents in our general and administrative group at June 30, 2008 compared to 42 full-time employee equivalents at June 30, 2007.

Amortization of Intangible Assets.  Amortization of intangible assets for the six months ended June 30, 2008 and 2007 was $1.4 million.

Other Income (Expense).  Other income for the six months ended June 30, 2008 and 2007 was $1.1 million.

Benefit from Income Taxes.  The benefit from income taxes for the six months ended June 30, 2008 was $4.9 million. No provision or benefit from income taxes was recorded for the six months ended June 30, 2007 as such amount was not material.

At each balance sheet date, we assess the likelihood that we would be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of profitability and estimates of future taxable income, to determine the need for the valuation allowance. At June 30, 2008, we concluded that it was more likely than not that we would be able to generate sufficient future taxable income to realize our deferred tax assets. As a result, we reversed the valuation allowance against our U.S. deferred tax assets and recorded an income tax benefit of $4.9 million. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to the reversal of the valuation allowance and, to a lesser extent, state income taxes, certain non-deductible expenses and operating losses in foreign jurisdictions for which no tax benefit is currently available.

Liquidity and Capital Resources

At June 30, 2008, our principal sources of liquidity were cash and cash equivalents totaling $58.1 million, short-term investments totaling $23.2 million and net accounts receivable of $10.6 million.

Net cash provided by operating activities was $12.4 million for the six months ended June 30, 2008 and $6.5 million for the comparable period in 2007. The increase of $5.9 million was primarily attributable to an increase in non-cash charges of $2.5 million for stock-based compensation, an increase in the net change in accounts receivable of $2.2 million and an increase in our deferred revenue balance compared to the same period last year of $989,000. For the six months ended June 30, 2008, our net income increased by $5.3 million compared to the same period last year. Included in the $5.3 million increase was a benefit from income taxes of $4.9 million resulting from the reversal of the valuation allowance against our U.S. deferred tax assets. Our accounts receivable balance as of June 30, 2008 decreased by $3.8 million from December 31, 2007 compared to a decrease of $1.4 million for the same period last year, reflecting primarily the collections of amounts invoiced to our customers in the fourth quarter of 2007.

Net cash used in investing activities was $13.8 million during the six months ended June 30, 2008, and net cash provided by investing activities was $830,000 for the comparable period in 2007. The increase in net cash used of $14.6 million was due primarily to increased net purchases of short-term investments of $14.0 million for the six months ended June 30, 2008.

Net cash provided by financing activities was $2.9 million during the six months ended June 30, 2008 and $22.0 million for the comparable period in 2007. The decrease of $19.1 million is primarily attributable to the sale of our common stock in a public offering in April 2007. We received net proceeds of $21.7 million from this offering.

As of June 30, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Other than our operating leases for office space and equipment, we do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our current cash, cash equivalents and short-term investments together with our expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our annual report onForm 10-K for the year ended December 31, 2007. Our exposures to market risk have not changed materially since December 31, 2007.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on the evaluation of our disclosure controls and procedures (as defined in theRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this quarterly report onForm 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules andForm 10-Q.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II

Item 1.   Legal Proceedings

We are not currently subject to any material legal proceedings. From time to time, however, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could arise with respect to legal actions currently pending against us, we do not expect that any such liability will have a material adverse effect on our financial positions, operating results or cash flows.

Item 1A.   Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our

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industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

Risks Related to Our Business and Industry

The markets for our on-demand software and solutions are emerging, which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.

The market for software specifically designed for public relations is relatively new and emerging, making our business and future prospects difficult to evaluate. Many companies have invested substantial personnel and financial resources in their PR departments, and may be reluctant or unwilling to migrate to on-demand software and services specifically designed to address the public relations market. Widespread market acceptance of our solutions is critical to the success of our business. You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market of on-demand public relations management solutions. These challenges, risks and difficulties include the following:

•  generating sufficient revenue to maintain profitability;

•  managing growth in our operations;

•  managing the risks associated with developing new services and modules;

•  attracting and retaining customers; and

•  attracting and retaining key personnel.

We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Failure to adequately do so could adversely affect our business, results of operations or financial condition.

If our on-demand solutions are not widely accepted, our business will be harmed.

We derive, and expect to continue to derive for the foreseeable future, principally all of our revenue from providing on-demand solutions. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand solutions in general and for on-demand public relations software and services in particular. If businesses do not perceive the benefits of our on-demand solutions, then the market 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.

A majority of our on-demand solutions are sold pursuant to subscription agreements, and if our existing subscription customers elect either not to renew these agreements or renew these agreements for fewer modules or users, our business, financial condition and results of operations will be adversely affected.

A majority of our on-demand solutions are sold pursuant to annual subscription agreements and our customers have no obligation to renew these agreements. As a result, we may not be able to consistently and accurately predict future renewal rates. Our subscription customers’ renewal rates may decline or fluctuate or our subscription customers may renew for fewer modules or users as a result of a number of factors, including their level of satisfaction with our solutions, budgetary or other concerns, and the availability and pricing of competing products. Additionally, we may lose our subscription customers due to the high turnover rate in the PR departments of small and mid-sized organizations. If large numbers of existing subscription customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

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Because we recognize subscription revenue over the term of the applicable subscription agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.

We recognize revenue from our subscription customers over the terms of their subscription agreements. The majority of our quarterly revenue usually represents deferred revenue from subscription agreements entered into during previous quarters. As a result, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Our business model continues to evolve, which may cause our results of operations to fluctuate or decline.

Our business model continues to evolve, and is therefore subject to additional risk and uncertainty. For example, through our acquisition of PRWeb International, Inc. in August 2006, we began providing online press release distribution. We anticipate that our future financial performance and revenue growth will depend, in part, upon the growth of these services. Unlike our historical, subscription-based model, we recognize revenue from our online news distribution services on a per transaction basis when our customers’ press releases are made available to the public. Since our transaction revenue is not derived from subscription agreements, the amount of transaction revenue we recognize in any period could fluctuate significantly from prior periods, which could adversely affect our financial condition and results of operations.

We depend on search engines to attract new customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers and our business may be harmed.

We rely on search engines to attract new customers, and many of our customers locate our websites by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic search results are determined and organized solely by automated criteria set by the search engine and a ranking level cannot be purchased. Advertisers can also pay search engines to place listings more prominently in search results in order to attract users to advertisers’ websites. We rely on both algorithmic and purchased listings to attract customers to our websites. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, then our websites may not appear at all or may appear less prominently in search results which could result in fewer customers clicking through to our websites, requiring us to resort to other potentially costly resources to advertise and market our services. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. Additionally, the cost of purchased search listing advertising is rapidly increasing as demand for these channels grows, and further increases could greatly increase our expenses.

We might not generate increased business from our current customers, which could limit our revenue in the future.

The success of our strategy is dependent, in part, on the success of our efforts to sell additional modules and services to our existing customers and to increase the number of users per subscription customer. These customers might choose not to expand their use of or make additional purchases of our solutions. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or decrease.

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

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

If we fail to develop our brands, our business may suffer.

We believe that developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

Our online press release and news distribution is a trusted information source. To the extent we were to distribute an inaccurate or fraudulent press release, our reputation could be harmed, even though we are not responsible for the content distributed via our online new distribution service.

If our information database does not maintain market acceptance, our business, financial condition and results of operations could be adversely affected.

We have developed our own content that is included in the information database that we make available to our customers through our on-demand software. If our internally-developed content does not maintain market acceptance, current subscription customers may not continue to renew their subscription agreements with us, and it may be more difficult for us to acquire new subscription customers. It may become necessary for us to license content from third parties, and such content may not be available on commercially reasonable terms, if at all.

We depend on search engines for the placement of our customers’ online news distribution, and if those search engines change their listings or our relationship with them deteriorates or terminates, our reputation will be harmed and we may lose customers or be unable to attract new customers.

Our online news distribution business depends upon the placement of our customers’ news releases. If search engines on which we rely modify their algorithms or purposefully block our content, then information distributed via our online service may not be displayed or may be displayed less prominently in search results, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.

We have incurred operating losses in the past and may incur operating losses in the future.

We have incurred operating losses in the past and we may incur operating losses in the future. Our recent operating losses were $4.9 million for 2005, $1.1 million for 2006, and $821,000 for 2007. We expect our operating expenses to increase as we expand our operations, and if our increased operating expenses exceed our revenue growth, we may not be able to achieve operating income. You should not consider recent quarterly revenue growth

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as indicative of our future performance. In fact, in future quarters we may not have any revenue growth or our revenue could decline.

Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.

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 customers and attract new customers;

•  changes in the volume and mix of subscriptions sold and press releases distributed in a particular quarter;

•  seasonality of our business cycle, given that our subscription volumes are normally lowest in the first quarter and highest in the fourth quarter;

•  our policy of expensing sales commissions at the time our customers are invoiced for a subscription agreement, while the majority of our revenue is recognized ratably over future periods;

•  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 accounting policies or the timing of non-recurring charges;

•  changes in the payment terms for our products and services; and

•  the purchasing and budgeting cycles of our customers.

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.

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

The public relations market is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies enter our market. 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 maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be seriously harmed. We face competition from:

•  PR solution providers offering products specifically designed for PR;

•  generic desktop software and other commercially available software not specifically designed for PR;

•  outsourced PR service providers; and

•  custom-developed solutions.

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Many of our current and potential competitors have longer operating histories, a larger presence in the general PR market, 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, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer 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 customer, that customer may be unwilling to switch vendors due to existing time and financial commitments with our competitors.

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 enter the on-demand public relations management market with competing products as the on-demand public relations management market develops and matures. Many of these potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential customers, alliance partners or other third parties or may combine and consolidate to become more formidable competitors with better resources. It is possible that these new competitors could rapidly acquire significant market share.

If we fail to respond to evolving industry standards, our on-demand solutions may become obsolete or less competitive.

The market for our on-demand solutions is characterized by changes in customer requirements, changes in protocols and evolving industry standards. If we are unable to enhance or develop new features for our existing solutions or develop acceptable new solutions that keep pace with these changes, our on-demand software and services may become obsolete, less marketable and less competitive and our business will be harmed. The success of any enhancements, new modules and on-demand software and services depends on several factors, including timely completion, introduction and market acceptance of our solutions. Failure to produce acceptable new offerings and enhancements may significantly impair our revenue growth and reputation.

If there are interruptions or delays in providing our on-demand solutions due to 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 customers and subject us to liability.

All of our solutions reside on hardware that we own or lease and operate. Our hardware is currently located in two third-party facilities maintained and operated in Virginia and Washington. Our third-party facility providers do not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend, in part, on our third-party facility providers’ ability to protect systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangements are terminated, or there is a lapse of service or damage to such third-party facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.

Our disaster recovery computer hardware and systems are located at a third-party facility in Baltimore, Maryland. Our disaster recovery 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 at our third-party facilities. Moreover, our disaster recovery computer hardware and systems are located within the same geographic region as one of our third-party facilities and may be equally or more affected by any disaster affecting such third-party facilities. Any or all of these events could cause our customers to lose access to our on-demand software. In addition, the failure by our third-party facilities to meet our capacity requirements could result in interruptions in such service or impede our ability to scale our operations.

We architect the system infrastructure and procure and own or lease the computer hardware used for our services. 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 service. Any interruptions or delays in our service, 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 customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These

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factors in turn could reduce our revenue, subject us to liability, and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, financial condition and results of operations.

The market for our solutions among large customers may be limited if they require customized features or functions that we do not currently intend to provide in our solutions or that would be difficult for individual customers to customize within our solutions.

Prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, and that would be difficult for them to implement themselves, then the market for our solutions will be more limited and our business could suffer.

Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and consume resources that are necessary to sustain our business.

One of our business strategies is to selectively acquire companies which would either expand our solutions’ functionality, provide access to new customers or markets, or both. An acquisition may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from subscription customers obtained through acquisitions than our typical renewal rates. Moreover, we cannot provide assurance that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of these transactions, we may:

•  issue additional equity securities that would dilute the ownership of our stockholders;

•  use cash that we may need in the future to operate our business;

•  incur or assume debt on terms unfavorable to us or that we are unable to repay;

•  incur large charges or substantial liabilities;

•  encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; and

•  become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

To date, we have completed several acquisitions. For example, in November 2004 we acquired substantially all of the assets of Gnossos Software, Inc., and in August 2006 we acquired certain assets and assumed certain liabilities of PRWeb International, Inc. In each of these transactions, the consideration we paid included both cash and shares of our common stock. The issuance of shares of our common stock diluted the ownership of our existing stockholders, and the cash consideration paid reduced the cash available to us for other purposes.

We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements or if there is a loss of data.

The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems or failure by our third-party facilities to meet our capacity requirements. In addition, computer viruses and intentional or unintentional acts of our employees may harm our systems causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our

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customers’ data that we cannot rectify in a certain time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.

Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on acceptable terms, or at all. In addition, we cannot provide assurance that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

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 on-demand software may contain undetected errors or defects that may result in product failures or otherwise cause our solutions to fail to perform in accordance with customer expectations. Because our customers use our solutions for important aspects of their business, any errors or defects in, or other performance problems with, our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing subscription customers could elect to not renew. 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 solutions fail to perform or contain a technical defect, a customer may assert a claim against us for substantial damages, whether or not we are responsible for our solutions’ 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 arbitration/dispute resolution 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 claim successfully brought against us could cause our business to suffer.

Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. 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 use of the Internet as a commercial medium and the use of email for marketing or other consumer communications. In addition, certain government agencies or private organizations have begun 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.

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.

If we are unable to protect our proprietary technology and other intellectual property rights, it will reduce our ability to compete for business.

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our solutions. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying our solutions or otherwise

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infringing on our intellectual property rights. Existing laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop solutions similar or superior to ours. In addition, the laws of some countries in which our solutions are or may be licensed do not protect our solutions and intellectual property rights to the same extent as do the laws of the United States.

To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

If a third-party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third-parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters, or other forms of communication. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third-parties. We expect that the number of infringement claims in our market will increase as the number of solutions and competitors in our industry grows. These claims, whether or not successful, could:

•  divert management’s attention;

•  result in costly and time-consuming litigation;

•  require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or

•  require us to redesign our solutions to avoid infringement.

As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third-parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time, which could adversely affect our business.

Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure. Between January 1, 2005 and December 31, 2007, the number of our full time equivalent employees increased by approximately 134%, from 146 to 341. We anticipate that additional growth will be required to address increases in our customer base, as well as expansion into new geographic areas.

Our success will depend in part upon the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments

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we expect to add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

We are dependent on our executive officers and other key personnel, and the loss of any of them may prevent us from implementing our business plan in a timely manner if at all.

Our success depends largely upon the continued services of our executive officers. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our development personnel that require them to remain our employees nor do the employment agreements we have with our executive officers require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an executive’s services. The loss of one or more of our key employees could seriously harm our business.

We may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with high levels of experience in designing and developing software. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than us. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options and awards they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

Because we conduct operations in foreign jurisdictions, which accounted for approximately 9% of our 2007 revenues, and because our business strategy includes expanding our international operations, our business is susceptible to risks associated with international operations.

We have small but growing international operations and our business strategy includes expanding these operations. Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:

•  fluctuations in currency exchange rates;

•  unexpected changes in foreign regulatory requirements;

•  difficulties in managing and staffing international operations;

•  potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; and

•  the burdens of complying with a wide variety of foreign laws and different legal standards.

The occurrence of any one of these risks could negatively affect our international operations and, consequently, our results of operations generally. In addition, the Internet may not be used as widely in international markets in which we expand our international operations and, as a result, we may not be successful in offering our solutions internationally.

We might require additional capital to support business growth, and this capital might not be available.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions,

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enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in further equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior 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 and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Compliance with new regulations governing public company corporate governance and reporting is uncertain and expensive.

Many new laws, regulations and standards have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices and have created uncertainty for public companies. These new laws, regulations and standards are subject to interpretations due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by varying regulatory bodies. This may cause continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our implementation of these reforms and enhanced new disclosures may result in increased general and administrative expenses and a significant diversion of management’s time and attention from revenue-generating activities. Any unanticipated difficulties in implementing these reforms could result in material delays in complying with these new laws, regulations and standards or significantly increase our operating costs.

Risks Related to our Common Stock and the Securities Markets

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well-established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.

Volatility of our stock price could adversely affect stockholders.

The market price of our common stock could fluctuate significantly as a result of:

•  quarterly variations in our operating results;

•  seasonality of our business cycle;

•  interest rate changes;

•  changes in the market’s expectations about our operating results;

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•  our operating results failing to meet the expectation of securities analysts or investors in a particular period;

•  changes in financial estimates and recommendations by securities analysts concerning our company or the on-demand software industry in general;

•  operating and stock price performance of other companies that investors deem comparable to us;

•  news reports relating to trends in our markets;

•  changes in laws and regulations affecting our business;

•  material announcements by us or our competitors;

•  sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and

•  general economic and political conditions such as recessions and acts of war or terrorism.

Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

•  establish a classified board of directors so that not all members of our board of directors are elected at one time;

•  provide that directors may only be removed “for cause” and only with the approval of 662/3 percent of our stockholders;

•  require super-majority voting to amend our bylaws or specified provisions in our amended and restated certificate of incorporation;

•  authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

•  limit the ability of our stockholders to call special meetings of stockholders;

•  prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

•  provide that the board of directors is expressly authorized to adopt, amend, or repeal our bylaws; and

•  establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.

Future sales, or the availability for sale, of our common stock may cause our stock price to decline.

Our directors and officers hold shares of our common stock that they generally are currently able to sell in the public market. We have also registered shares of our common stock that are subject to outstanding stock options, or reserved for issuance under our stock option plan, which shares can generally be freely sold in the public market upon issuance. Moreover, many of our executive officers and directors have established trading plans underRule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.

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

Sale of Unregistered Securities

None.

Use of Proceeds

In connection with our initial public offering of our common stock, the SEC declared our Registration Statement onForm S-1(No. 333-125834), filed under the Securities Act of 1933, effective on December 6, 2005. On December 12, 2005, we closed the sale of 5,000,000 shares of our common stock registered under the Registration Statement. On January 6, 2006, certain selling stockholders sold 750,000 shares of our common stock pursuant to the exercise in full of the underwriters’ over-allotment option. Thomas Weisel Partners LLC, RBC Capital Markets, Wachovia Securities and William Blair & Company served as the managing underwriters.

The initial public offering price was $9.00 per share. The aggregate sale price for all of the shares sold by us was $45.0 million, resulting in net proceeds to us of approximately $40.0 million after payment of underwriting discounts and commissions and legal, accounting and other fees incurred in connection with the offering of approximately $5.0 million. The aggregate sales price for all of the shares sold by the selling stockholders was approximately $6.8 million. We did not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

In December 2005, we used approximately $6.8 million from the net proceeds received from our initial public offering to repay certain indebtedness.

In August 2006, we used approximately $20.9 million of the offering proceeds for the acquisition of PRWeb International, Inc. We have invested the remainder of the proceeds from the initial public offering in short-term, interest-bearing, investment-grade securities and money market funds. We anticipate that we will use the remaining proceeds to fund working capital and general corporate purposes, which may include the expansion of our content and service offerings and potential acquisitions of complementary businesses, products and technologies. We cannot specify with certainty all of the particular uses for the proceeds. The amounts we actually spend for these purposes may vary significantly and will depend on a number of factors. Accordingly, our management will retain broad discretion in the allocation of the proceeds.

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

Our Annual Meeting of Stockholders was held on May 22, 2008. We solicited proxies for the meeting pursuant to Regulation 14 under the Exchange Act; there was no solicitation in opposition to management’s nominees as listed in the proxy statements and all such nominees were elected. The continuing directors whose terms expire in 2009 are Gary Golding and Richard Moore. The continuing director whose term expires in 2010 is Robert Lentz. At the meeting, the matters listed below were submitted to a vote of our stockholders.

Proposal One:  The election of three directors to serve until the 2011 Annual Meeting of Stockholders. The vote with respect to each nominee was as follows:

(1) 15,036,255 votes were cast for the election of Kevin Burns as a director, and 1,132,445 votes were withheld; and

(2) 15,045,450 votes were cast for the election of Ronald Kaiser as a director, and 1,123,250 votes were withheld; and

(3) 8,145,177 votes were cast for the election of Richard Rudman as a director, and 8,023,523 votes were withheld.

Proposal Two:  Ratification of independent registered public accounting firm for 2008. The vote with respect to Ernst & Young LLP was as follows:

16,055,418 votes were cast for the ratification of Ernst & Young LLP as our independent registered accounting firm, 72,515 against, and 40,766 abstentions.

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Item 6.   Exhibits

Exhibit
Number			Exhibit
	3	.1	Fifth Amended and Restated Certificate of Incorporation.(1)
	3	.2	Amended and Restated Bylaws.(1)
	31	.1*	Certification of Chairman and Chief Executive Officer pursuant toRule 13a-14(a) andRule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
	31	.2*	Certification of Chief Financial Officer pursuant toRule 13a-14(a) andRule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
	32	.1*	Certification of Chairman and 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.

*	Filed herewith
(1)	Incorporated by reference to an exhibit to the Registration Statement onForm S-8 of Vocus, Inc. (RegistrationNo. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006.

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SIGNATURES

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

VOCUS, INC.

By:  /s/  Richard Rudman

Richard Rudman

Chief Executive Officer,

President and Chairman

By:  /s/  Stephen Vintz

Stephen Vintz

Chief Financial Officer,

Treasurer and Secretary

Date: August 11, 2008

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INDEX TO EXHIBITS

Exhibit
Number			Exhibit
	3	.1	Fifth Amended and Restated Certificate of Incorporation.(1)
	3	.2	Amended and Restated Bylaws.(1)
	31	.1*	Certification of Chairman and Chief Executive Officer pursuant toRule 13a-14(a) andRule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
	31	.2*	Certification of Chief Financial Officer pursuant toRule 13a-14(a) andRule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
	32	.1*	Certification of Chairman and 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.

*	Filed herewith
(1)	Incorporated by reference to an exhibit to the Registration Statement onForm S-8 of Vocus, Inc. (RegistrationNo. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006.