UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File No. 000-30901

SUPPORTSOFT, INC.
(Exact Name of Registrant as Specified in Its Charter)

1900 Seaport Boulevard, 3^rd Floor
Redwood City, CA 94063
(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (650) 556-9440

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

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

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

On October 31, 2007, 46,157,346 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.

SUPPORTSOFT, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUPPORTSOFT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes.

Open items:

Outstanding shares

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SUPPORTSOFT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

See accompanying notes.

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SUPPORTSOFT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes.

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SUPPORTSOFT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SupportSoft, Inc. (the “Company”, “SupportSoft” or “We”) and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The balance sheet as of September 30, 2007 and the statements of operations for the three and nine months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007 and 2006 are unaudited. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for, and as of, the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of December 31, 2006 is derived from audited financial statements as of that date. These unaudited interim condensed consolidated financial statements should be read with the consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 16, 2007.

Use of Estimates and Reclassifications

The preparation of interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates. In addition, certain amounts that were previously reported have been reclassified to conform to the current period presentation.

Revenue Recognition

We recognize revenue in accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9. Revenue is recognized when all of the following criteria are met:

•                  persuasive evidence of an arrangement exists;

•                  delivery has occurred;

•                  collection is considered probable; and

•                  the fees are fixed or determinable.

We consider all arrangements with payment terms longer than 90 days not to be fixed or determinable. If a fee is determined not to be fixed or determinable, revenue is recognized as payments become due from a customer. License revenue is comprised of fees for perpetual and term licenses of our software. Perpetual license revenue is recognized using the residual method, in compliance with SOP 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element including undelivered maintenance, consulting and training. The determination of fair value is based upon vendor specific objective evidence (VSOE). VSOE for maintenance is based upon separate renewals of maintenance from customers. VSOE for consulting and training is based upon separate sales of these services to customers. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue. In perpetual arrangements that include contractual obligations such as rights to unspecified future products, license revenue is recognized ratably over the contract period.

Term licenses are sold with maintenance for which we do not have VSOE to determine fair value for maintenance fees. As a result, license revenue for term licenses is recognized ratably over the duration of the agreement. License revenue in the accompanying financial statements includes maintenance for term licenses. We do not allocate maintenance revenue from term licenses to maintenance revenue, as we do not believe there is an allocation methodology that provides a meaningful and supportable allocation between license and maintenance revenues. Term license revenue was 3% and 5% of total revenue for

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the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, term license revenue was 4% and 6% of total revenue, respectively. Services revenue associated with the term licenses are recognized ratably over the term of the license.

We provide resellers with the right to sublicense our software to end user customers. Generally, we recognize revenue from our arrangements with resellers upon persuasive evidence that the reseller has actually sublicensed the software to a named end user (sell-through), assuming all other criteria for revenue recognition have been met. The forms of evidence of sell-through acceptable to us include one or more of the following: i) a copy of the agreement or license between the reseller and the end user, ii) a purchase order from the end user to the reseller, iii) a written communication from the reseller to us specifically identifying the end user, or iv) delivery made directly by us to the end user. Whether the license revenue is then recognized immediately or ratably depends upon the terms of the arrangements with the reseller regarding the sublicense (i.e. perpetual license or term license). If a reseller is not deemed creditworthy, revenue otherwise recognizable is deferred until cash is received. When licensing arrangements with resellers include guaranteed minimum amounts due, revenue is recognized ratably over the term of the arrangement commencing when payments are made or become due.

Maintenance revenue is primarily comprised of revenue from post-contract technical support services, which includes software product updates. Maintenance revenue is recognized ratably over the term of the maintenance period, which is generally one year. We invoice customers who elect to renew their maintenance agreements, at which time an equal amount is recorded as accounts receivable and deferred revenue.

Services revenue is primarily comprised of revenue from professional services such as consulting, hosting and training fees. Arrangements are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. In the event services are considered essential to the functionality of other elements of the arrangement, revenue under the arrangement is recognized using contract accounting. Services that are not essential to the functionality of the software, such as consulting and training revenues are generally recognized as the services are performed or project milestones are accepted by the customer. When non-essential services are bundled in a term licensing arrangement, revenue from the services is recognized ratably over the term of the license.

In connection with licensing arrangements we may also provide hosting of our own software, a service for which we do not currently have VSOE. If hosting services are sold with perpetual licenses, license revenue is recognized ratably over the longest period in the contract. Hosting, consulting and training revenue in such arrangements are also recognized ratably over the longest period in the contract.

Cash, Cash Equivalents and Marketable Securities

We consider all liquid instruments with an original maturity at the date of purchase of ninety days or less to be cash equivalents. At September 30, 2007, cash equivalents and marketable securities consisted primarily of money market funds, commercial paper, auction rate securities, corporate bonds and notes and treasury bills issued by the United States government and its agencies. Our marketable securities are classified as available-for-sale as of the respective balance sheet dates, and are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income within stockholders’ equity on the consolidated balance sheet. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income (expense), net in the consolidated statement of operations.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. We had net unrealized losses on marketable securities of $55,000 and $54,000 at September 30, 2007 and December 31, 2006, respectively.

We monitor our investments for impairment on a quarterly basis and determine whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the security’s issuer, the length of time an investment’s fair value has been below our carrying value, and our ability and intent to hold investments to maturity. If an investment’s decline in fair value is deemed to be other-than-temporary, we reduce its carrying value to its estimated fair value, as determined based on quoted market prices or liquidation values. Declines in value judged to be other-than-temporary, if any, are recorded in operations, as incurred.

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The following is a summary of cash, cash equivalents and marketable securities at September 30, 2007 (in thousands):

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities and trade accounts receivable. Our investment portfolio is diversified and consists of investment grade securities. Our investment policy limits the amount of credit risk exposure to any one issuer and in any one country, except the United States. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on our balance sheet. The credit risk in our trade accounts receivable is substantially mitigated by our credit evaluation process, reasonably short collection terms and because we sell our products primarily to large organizations in diversified industries.

For the three months ended September 30, 2007, one customer accounted for greater than 10%, or 21%, of our total revenue. For the same period of 2006, one customer accounted for 21% of total revenue. For the nine months ended September 30, 2007, one customer accounted for 18% of our total revenue. For the same period of 2006, no customer accounted for 10% or more of total revenue.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. We perform evaluations of our customers’ financial condition and generally do not require collateral. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables for which collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically provided for, provisions are recorded at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current payment trends. If the historical data we use to calculate the allowance for doubtful accounts does not accurately reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and our future results of operations could be materially affected. At September 30, 2007 and December 31, 2006, we had reserves for credit losses of $326,000 and $373,000, respectively. At September 30, 2007, one customer accounted for 18% of our total accounts receivable. At December 31, 2006, one customer accounted for 15% of our total accounts receivable.

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases based on estimated fair values.

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The fair value of our stock options granted to employees for the three and nine months ended September 30, 2007 and 2006 was estimated using the following assumptions:

We recorded the following stock-compensation expense for the three and nine months ended September 30, 2007 and 2006:

Prior to the adoption of SFAS 123R, our Board of Directors approved the acceleration of vesting of certain unvested and out-of-money stock options with exercise prices equal or greater than $5.00 per share. The acceleration of vesting was effective for stock options outstanding as of December 21, 2005. Approximately 3.0 million stock options or 32% of our outstanding unvested stock options were subject to this acceleration and their weighted average price was $7.02. The options accelerated excluded options previously granted to Board of Directors, employees who had terminations pending, and foreign employees who opted out of the acceleration for tax reasons. For all officers and vice-presidents (non-officers) the acceleration was accompanied by restrictions that prevent the sale of any such shares prior to the date such shares would have originally vested had the optionee been employed on such date.The purpose of the acceleration was to avoid recognizing compensation expense associated with these options in our Consolidated Statements of Operations upon the adoption of SFAS 123R on January 1, 2006.

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 The following table represents stock option activity for the nine months ended September 30, 2007:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders had they all exercised their options on September 30, 2007. This amount will change based on the fair market value of our stock.

During the three and nine months ended September 30, 2007, the aggregate intrinsic value of options exercised under our stock options plans was $89,000 and $1.5 million respectively. During the three and nine months ended September 30, 2006, the aggregate intrinsic value of options exercised under our stock options plans was $147,000 and $538,000. Total fair value of options vested during the three and nine months ended September 30, 2007 was$1.2 million and $3.6 million. Total fair value of options vested during the three and nine months ended September 30, 2006 was $733,000 and $2.1 million, respectively.

At September 30, 2007, there was $14.0 million of unrecognized compensation cost related to existing options outstanding which is expected to be recognized over a weighted average period of 2.9 years.

Net Loss Per Share

Basic and diluted net loss per share are presented in accordance with Statement of Financial Accounting Standards No. 128 “Earnings per Share” (SFAS 128), for all periods presented. In accordance with SFAS 128, basic and diluted net loss per share have been computed using the weighted-average number of common shares outstanding during the period.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

Warranties and Indemnifications

We generally provide a warranty for its software products and services to its customers and accounts for its warranties under the Financial Accounting Standards Board’s (FASB’s) Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies” (SFAS 5). Our standard warranty period is 90 days, but warranty periods can vary from customer to customer and sometimes be longer. In the event there is a failure of the product in breach of such warranties, we are generally obligated to correct the product or service to conform to the specifications or, if we are unable to do so, the customer is entitled to seek a refund of the purchase price of the defective product or service. We did not provide for a warranty accrual as of September 30, 2007 or December 31, 2006. To date, our product warranty expense has not been significant.

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We generally agree to indemnify our customers against legal claims that our software products infringe certain third-party intellectual property rights and account for our indemnification obligations under SFAS 5. To date, we have not been required to make any payment resulting from infringement claims asserted against our customers and have not recorded any related accruals.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. Although we are evaluating the application of SFAS No. 159, we do not currently believe adoption will have a material impact on our results of operations or financial position.

Note 2. Comprehensive Loss

Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” (SFAS 130) establishes standards for reporting and displaying comprehensive net income and its components in stockholders’ equity. SFAS 130 requires foreign currency translation adjustments and changes in the fair value of available-for-sale securities to be included in comprehensive income or loss.

The following are the components of comprehensive loss (in thousands):

The components of accumulated other comprehensive income (loss) relate entirely to foreign currency translation adjustment gains and losses and unrealized gains and losses on available-for-sale securities and are $(715,000) and $(55,000), respectively, at September 30, 2007.

Note 3. Income Taxes

The income tax provision was $212,000 and $558,000 for the three and nine months ended September 30, 2007, respectively. For the three and nine months ended September 30, 2006, we recorded a provision for income taxes of approximately $72,000 and $333,000, respectively. The higher income tax provision for the three and nine month periods ended September 30, 2007 as compared to the same periods in 2006 primarily reflects higher foreign income during the periods in 2007 as compared to 2006.

As of September 30, 2007 and December 31, 2006, our deferred tax assets are fully offset by a valuation allowance. FASB’s Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (SFAS 109) provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes SupportSoft’s historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, the Company provided a full valuation allowance against our net deferred tax assets. We reassess the need for our valuation allowance on a quarterly basis. If it is later determined that a portion of the valuation allowance should be reversed it will be a benefit to the income tax provision.

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Effective January 1, 2007, we adopted Financial Accounting Standards Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 “ (FIN 48). FIN 48 prescribes a recognition threshold and measurement guidance for the financial statement reporting of uncertain tax positions taken or expected to be taken in a company’s income tax return. FIN 48 also provides guidance related to derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition matters related to uncertain tax positions. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS 109. Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48, if any, is recorded as an adjustment to the opening balance of retained earnings as of the adoption date.

As a result of the implementation of FIN 48, SupportSoft recognized no change in the liability for unrecognized tax benefits related to tax positions taken in prior periods.  Additionally, SupportSoft reclassified $312,000 from current taxes payable to long-term taxes payable as FIN 48 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities.

As of January 1, 2007, the amount of unrecognized tax benefit with respect to which it is reasonably possible that a significant change may occur in the next 12 months is approximately $22,000. The change would result from expiration of the statute of limitations for audits in several foreign jurisdictions.

Upon adoption of FIN 48, the Company’s policy to include interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes did not change.  At September 30, 2007, the Company had $35,000 accrued for payment of interest and penalties related to unrecognized tax benefits ($23,000 as of the adoption date of FIN 48).  For the three and nine months ended September 30, 2007, the Company recognized $4,000 and $11,000, respectively, of interest and penalties related to unrecognized tax benefits in its provision for income taxes.

As of adoption of FIN 48, the Company’s total unrecognized tax benefits were $1,867,000 of which $335,000, if recognized, would affect its effective tax rate. At September 30, 2007, the Company’s total unrecognized tax benefits were $1,958,000, of which $425,000, if recognized, would affect its effective tax rate. The Company anticipates an increase to the unrecognized tax benefits during 2007 related primarily to tax credits and certain foreign tax exposures. While the increase in the unrecognized tax benefit cannot be estimated at this time, the 2007 changes are not expected to have a material effect on the financial statements. The tax years 1997 through 2006 remain open to examination in several jurisdictions, none of which have individual significance.

Note 4. Contingencies

Legal Matters

In re SupportSoft, Inc. Securities Litigation was a consolidated complaint filed in the United Stated District Court of the Northern District of California against the Company, our former CEO and former CFO. The complaint generally alleged violations of certain federal securities laws and sought unspecified damages. On June 1, 2006 this action was certified to proceed as a class action on behalf of all persons and entities who purchased or otherwise acquired the securities of the Company from January 20, 2004 to October 1, 2004 and who were allegedly damaged thereby. In May, 2007, the parties reached an agreement in principle to settle the consolidated lawsuit. The court approved the settlement and dismissed the consolidated lawsuit with prejudice on September 28, 2007. The settlement was fully funded by insurance.

White v. Basu et al. is a derivative shareholder complaint filed in the Superior Court of the State of California for the County of San Mateo. This complaint was filed on behalf of the Company as a nominal plaintiff against certain of our directors and former directors and alleges that the director defendants harmed the Company by making or permitting the Company to make false and misleading statements between January 20, 2004 and October 1, 2004. On October 4, 2006, the court denied the defendants’ demurrer to the plaintiffs’ First Amended Complaint. Plaintiffs filed a Second Amended Complaint on October 27, 2006, which the defendants answered on November 6, 2006. In September, 2007, the parties reached an agreement in principle to settle the lawsuit. The settlement is expected to be fully funded by insurance and is subject to final approval of the court. A final approval hearing is scheduled for December, 2007. We cannot predict with certainty the outcome of the litigation, and if the settlement is not finally approved by the court, we believe we have meritorious defenses to the claims in the Second Amended Complaint.

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In November 2001, a class action lawsuit was filed against us, two of our former officers, and certain underwriters in the United States District Court for the Southern District of New York. The lawsuit alleged that our registration statement and prospectus dated July 18, 2000 for the issuance and initial public offering of 4,250,000 shares of our common stock contained material misrepresentations and/or omissions related to alleged inflated commissions received by the underwriters of the offering. The lawsuit seeks unspecified damages as well as interest, fees and costs. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individual officers and directors of those companies. All of the complaints against the underwriters, issuers and individuals have been consolidated for pre-trial purposes before U.S. District Court Judge Scheindlin of the Southern District of New York. On June 26, 2003, the plaintiffs announced that a proposed settlement between the issuer defendants and their directors and officers had been reached. Under the proposed settlement, which is subject to court approval, our insurance carrier would be responsible for any payments other than attorneys’ fees prior to June 1, 2003. A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006. The district court took the matter under submission. Meanwhile the consolidated case against the underwriters has proceeded. On October 13, 2004, the district court certified a class in the underwriters’ proceeding. On December 5, 2006, however, the Second Circuit reversed, holding that the proposed class could not be certified, and denied a petition for rehearing on April 6, 2007. On June 25, 2007, the district court entered a stipulated order terminating the proposed issuer settlement. Plaintiffs are proceeding with discovery as to underwriters and issuers, although principally with respect to focus or test cases that do not name the Company as a defendant. The court set a briefing schedule for a new class certification motion, which is expected to be heard in early 2008. While we cannot predict with certainty the outcome of the litigation or whether the settlement will be approved, we believe we and our officers have meritorious defenses to the claims in the litigation.

We are also subject to other routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business, including assertions that we may be infringing patents or other intellectual property rights of others. We currently believe that the ultimate amount of liability, if any, for any pending claims of any type (alone or combined) will not materially affect our financial position, results of operations or cash flows. The ultimate outcome of any litigation is uncertain, however, and either unfavorable or favorable outcomes could have a material negative impact on our financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on us because of defense costs, negative publicity, diversion of management resources and other factors.

Sales Tax Contingencies

We are required to make periodic filings in the states where we are deemed to have a presence for tax purposes. We have undergone state audits in the past and have paid assessments arising from these audits. To date, such amounts have not been material. We evaluate estimated losses that could arise from similar assessments in accordance with SFAS 5. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss in making such evaluations.

Note 5. Subsequent Events

In the fourth quarter of 2007, we are implementing a reduction in workforce to align our cost structure with anticipated revenue. Approximately 12% of our workforce is affected by this restructuring. Currently, we expect to recognize $1.7 million to $1.9 million in restructuring costs during the fourth quarter of 2007. Actual costs may vary from this estimate. The restructuring charges will include personnel related costs as well as lease restructuring costs.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in conjunction with the unaudited condensed consolidated financial statements and related notes appearing in Item 1 of this report on Form 10-Q and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.

You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see Item 1A in Part II of this Quarterly Report on Form 10-Q for important information to consider when evaluating such statements.

Overview

We are a leading provider of technology problem resolution software and services. Our solutions are designed to reduce technology support costs, improve customer satisfaction and enable new revenue streams for organizations worldwide. In 2007, we expanded our offerings and now provide technology support services directly to consumers.

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Our corporate customers are IT organizations and digital service providers (telecommunications and cable companies). Corporate IT departments and managed service providers (IT outsourcing firms) use our software to improve the cost-effectiveness and efficiency of their support through an integrated portfolio of proactive service, self service and assisted service capabilities. Digital service providers use our products to automate the installation, activation and verification of broadband services, to reduce the cost and improve the quality of support for customers, to enable the remote management of devices located at customer premises, and to provide value-added services to consumers.

In addition to these offerings for corporate customers, we are now addressing the consumer technology support market. This offering is an extension of our traditional business and relies upon our products, technology and expertise in technology problem resolution. The new offering provides computer problem resolution for consumers over the phone and the Internet. We offer our consumer technology support services through www.support.com and through consumer-facing companies such as retailers and digital service providers.

Our revenue has historically consisted of software license fees and fees for maintenance, consulting, hosting and training services. In recent years, we have licensed our software to customers predominately on a perpetual basis in which we generally recognize the license revenue up front, assuming all criteria for revenue recognition under the applicable accounting rules have been met. We have experienced a trend of decreasing annual license revenue over the last three fiscal years. Maintenance fees relating to perpetual software licenses result in ratable revenue over the period of the maintenance term, which is generally one year. Consulting and training revenues are generally recognized as the services are performed or in accordance with predefined project milestones. Hosting fees are recognized ratably over the term of the hosting arrangement. Revenues associated with term licenses or arrangements in which we provide hosting services are recognized ratably over the expected period of performance of the contract, as we do not currently have VSOE for term licenses or hosting.

Our total revenue for the three months ended September 30, 2007 was $11.3 million. Our total revenue decreased in the third quarter of 2007 by $2.1 million, or 16%, from the second quarter of 2007, and by $500,000, or 5%, from the same quarter of 2006. The sequential and year-over-year decreases in total revenue were due primarily to the decreases in license revenue, partially offset by the increases in services revenue. The decreases in license revenue were due to closing fewer large licensing transactions in the third quarter of 2007. Historically, a relatively small number of customers have accounted for a substantial portion of our license revenue. Therefore, closure of or delays in closing a few large customer transactions can result in substantial fluctuations in license revenue from quarter to quarter as was the case in the third quarter of 2007. The sequential and year-over-year increases in services revenue were due to higher demand for our implementation consulting services, and to our consumer technology support services.

During 2007, we have also begun offering consumer technology support services to consumers. We do not expect immediate returns from this initiative, but believe it can create sustainable revenue growth over time. Although we are leveraging many of our existing resources, we are making significant incremental investments in furtherance of this initiative, including investments to operate call centers and to promote our consumer offerings. We expect that these additional investments will precede any material revenue increase from our new business initiatives. As a result, we currently expect quarterly net losses from this initiative to offset cost improvements from the reduction in workforce in our traditional business for the foreseeable future. Furthermore, we expect that our net loss for the full year in 2007, will significantly exceed the net losses we incurred during fiscal 2006.

In the fourth quarter of 2007, we are implementing a reduction in workforce to align our cost structure with anticipated revenue. Approximately 12% of our workforce is affected by this restructuring. Currently, we expect to recognize $1.7 million to $1.9 million in restructuring costs during the fourth quarter of 2007; however, the actual costs have not yet been determined and could vary from this estimate. The restructuring charges will include personnel related costs as well as lease restructuring costs.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements.

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Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we make assumptions, judgments and estimates that can have a significant impact on our net revenue and operating results, as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, allowance for doubtful accounts, accounting for income taxes, goodwill, intangible assets and stock-based compensation have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. For further information on the critical accounting policies, see Notes to Consolidated Financial Statements.

Revenue Recognition

We recognize revenue in accordance with generally accepted accounting principles that have been prescribed for the software industry. Revenue recognition requirements in the software industry are very complex. Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules that require us to make judgments. In applying our revenue recognition policy we must determine which portions of our revenue are recognized currently and which portions must be deferred. In order to determine current and deferred revenue, we make judgments with regard to the expected amount of future services to be performed and the appropriate fair value for those services. We also make judgments as to whether future services are essential to the functionality of other elements of the software arrangement. We do not record revenue on sales transactions when the collection of cash is in doubt at the time of sale. Rather, revenue is recognized from these transactions as cash is collected. The determination of collectibility requires significant judgment.

Allowance for Doubtful Accounts

We make judgments as to our ability to collect outstanding receivables and provide allowances for the appropriate receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically provided for, provisions are recorded at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current payment trends. If the historical data we use to calculate the allowance for doubtful accounts does not accurately reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and our future results of operations could be materially affected.

Accounting for Income Taxes

We are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves management’s estimation of our actual current tax exposures together with an assessment of temporary differences determined based on the difference between the financial statement and tax basis of certain items. These differences result in net deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess, based on the weight of available evidence, the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or adjust this allowance in a period, we must include a tax expense or benefit within the tax provision in our statements of operations.

Effective January 1, 2007, we adopted Financial Accounting Standards Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN48). FIN 48 prescribes a recognition threshold and measurement guidance for the financial statement reporting of uncertain tax positions taken or expected to be taken in a company’s income tax return. FIN 48 also provides guidance related to derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition matters related to uncertain tax positions. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS 109. Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement.

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Goodwill

We assess the impairment of goodwill annually or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss would be recognized when the sum of the discounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating performance. If we made different estimates, material differences may result in the write down of net long-lived and intangible assets, which would be reflected by charges to our operating results for any period presented. At September 30, 2007, we concluded our annual evaluation for impairment of goodwill and no impairment was recognized. We will continue to test for impairment during the third quarter of each year, or earlier if indicators of impairment exist.

Intangible Assets

We record purchased intangible assets at fair value. The original cost is amortized on a straight-line basis over the estimated useful life of each asset. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The assessment considers facts and circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. If and when indicators of impairment exist, we assess the need to record an impairment loss, by comparing the undiscounted net cash flows associated with related assets or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

Stock-based compensation

We account for stock-based compensation in accordance with the provisions of SFAS 123R. We adopted SFAS 123R using the modified prospective transition method which requires the application of the accounting standard starting from January 1, 2006. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. We estimate the fair value of stock-based awards on the grant date using the Black-Scholes-Merton option-pricing model. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life. If any of these assumptions used in the option-pricing models changes significantly, stock-based compensation may differ materially in the future from that recorded in our accompanying financial statements.

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RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and nine months ended September 30, 2007 and 2006 expressed as a percentage of total revenue.

Three and Nine Months Ended September 30, 2007 and 2006

License Revenue

License revenue is comprised of fees for term and perpetual licenses of our software. Perpetual license revenue is recognized using the residual method described in SOP 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues in these arrangements based upon the fair value of each undelivered element including undelivered maintenance, consulting and training. The determination of fair value is based upon vendor specific objective evidence

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(VSOE). VSOE for maintenance is based upon separate renewals of maintenance from customers. VSOE for consulting or training is based upon separate sales of these services to customers. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue.

Historically, a relatively small number of customers have accounted for a substantial portion of our license revenue. Therefore, closure of a few large customer transactions can result in fluctuations in license revenue from period to period. The decrease in license revenue for the three months ended September 30, 2007, as compared with the same period in 2006, was due to fewer sizable license transactions with our customers.  The increase in license revenue for the nine months period ended September 30, 2007 was due primarily to expansion of license agreements with existing customers in North America and Asia/Pacific. Key transactions that we hoped to close in the third quarter of 2007 remain in our sales pipeline, and as of the filing date of this Form 10-Q, we are in the sales and negotiation process with several companies for the purchase of our products and services. Ultimate closure of these and certain other sizable license transactions prior to December 31, 2007 will have a significant influence on whether we miss, meet or exceed expectations for revenue in the fourth quarter of 2007.

Services Revenue

Services revenue is primarily comprised of revenue from professional services, such as consulting, hosting and training, as well as revenue from our consumer technology support services. Services revenue is generally recognized as the services are performed. The increase in services revenue for the three and nine months periods ended September 30, 2007 compared with the same periods in 2006 were due primarily to higher demand for our implementation consulting services, and to our consumer technology support services.

Maintenance Revenue

Maintenance revenue is comprised primarily of revenue from post-contract technical support services which includes software product updates. Maintenance revenue for the three and nine months ended September 30, 2007, increased slightly over the same periods in 2006 due primarily to maintenance contract renewals and maintenance associated with new licensing contracts.

International Revenue.  Revenue from customers outside the North America accounted for approximately 24% and 21% of our total revenue for the three-month and nine-month periods ended September 30, 2007, compared with 19% and 22% for the three-month and nine-month periods ended September 30, 2006. The increase in international revenue as a percentage of total revenue in the three-month period ended September 30, 2007, as compared with the same period in the 2006 was due primarily to higher license revenue from Asia-Pacific customers and higher services revenue from EMEA customers in the third quarter of 2007. The percentage of international revenue of the total revenue for the nine months ended September 30, 2007 was relatively consistent with the comparable period in 2006.

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Cost of license