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CALLIDUS SOFTWARE INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Form 10-K

Commission file number: 000-50463

Callidus Software Inc.
(Exact name of registrant as specified in its charter)

6200 Stoneridge Mall Road, Suite 500
Pleasanton, California 94588
(Address of principal executive offices, including zip code)

(925) 251-2200
(Registrant's Telephone Number, including area code)

         Securities registered pursuant to Section 12(b) of the Act:

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. 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 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 ý

         The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant's common stock on June 30, 2010, as reported on the NASDAQ Global Market, was approximately $102.2 million. Shares of common stock held by each executive officer and director and by each person who may be deemed to be an affiliate of the Registrant have been excluded from this computation. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes. As of March 1, 2011, the Registrant had 33,451,308 shares of its common stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         The Registrant is incorporating by reference into Part III of this Annual Report on Form 10-K portions of its Proxy Statement for its 2010 Annual Meeting of Stockholders to be held on June 1, 2011.

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CALLIDUS SOFTWARE INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2010

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© 1998-2011 Callidus Software Inc. All rights reserved. Callidus Software, the Callidus Software logo, and TrueComp Manager are trademarks, servicemarks, or registered trademarks of Callidus Software Inc. in the United States and other countries. All other brand, service or product names are trademarks or registered trademarks of their respective companies or owners.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in Item 7 of this report, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will," and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following: levels of recurring revenues, changes in and expectations with respect to license revenues and gross margins, future operating expense levels, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels and the impact of foreign exchange rate fluctuations. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, occurring after the date of this Annual Report on Form 10-K. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. For a detailed discussion of these risks and uncertainties, see the "Business" and "Risk Factors" sections in Items 1 and 1A, respectively, of this Annual Report on Form 10-K.

PART I

Item 1.    Business

Callidus Software Inc.

        Incorporated in Delaware in 1996, Callidus Software Inc. is the market and technology leader in Sales Performance Management (SPM) software applications and services, sold to companies of every size throughout the world. Companies use SPM solutions to optimize investments in sales planning and performance, specifically in the areas of sales and channel quota, coverage, and incentive management. SPM solutions enable businesses to achieve new insights into the principal levers that drive sales force performance and specific business objectives so they can repeat sales successes for more sustainable, predictable sales growth. Sales performance programs are key vehicles in aligning sales and channel partner goals with top business objectives.

        The Callidus SPM suite has recently expanded to deliver a more comprehensive sales lifecycle management solution with the launch and successful deployment of On Demand Onboarding for the extended enterprise, and our acquisition of partner ForceLogix Inc. in 2011 for sales coaching and optimization. By facilitating effective management of sales selection and onboarding, sales goals, sales incentives and rewards, and performance optimization, our products allow our customers to optimize cost efficiencies and drive sales effectiveness across the lifecycle of the sales professional.

        While we offer our customers a range of purchasing and deployment options, from on demand subscription to on premise time-based licensing, our business and revenue model is focused on recurring revenue.

        Our software suite is based on our proprietary technology and extensive expertise in sales performance management, and provides the flexibility and scalability required to meet the dynamic SPM requirements of global companies of every size across multiple verticals.

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        Our software consulting services offer customers a full range of SPM solution implementations, system upgrades, compensation plan enhancements, migration assistance, reporting and integration consulting and solution architecture services.

        As of December 31, 2010, over 2.0 million salespeople, brokers and channel representatives have their sales performance managed by our products.

Products

        The Callidus product suite provides an end-to-end solution for all aspects of sales and channel performance management, including sales capacity planning, agent recruiting and onboarding, sales goal planning, incentive and reward design and payment, sales coaching and optimization, and sales and channel effectiveness monitoring. Our products combine a complete web-based solution with flexible rules-based architecture, grid-based computing, reporting and analytics framework, and workflow functionality. While our horizontal solution is applicable to every industry, Callidus additionally provides value-added industry-specific solutions, particularly in financial services and insurance, telecommunications, life sciences and pharmaceuticals, and technology. Callidus solutions are cross-platform and standards-based, enabling them to be integrated with a wide range of IT systems and processes. Callidus also provides packaged integration with salesforce.com, enabling an organization's sales team to seamlessly access Callidus applications from its Sales Force Automation/Customer Relationship Management system.

        We offer our customers various options to purchase and deploy our products, primarily through on demand software-as-a-service (SaaS) subscription. Leveraging the Callidus On Demand service, organizations gain the benefit of SPM with a rapid deployment that provides flexibility, efficiency, cost savings, security, and reliability. Callidus On Demand can be configured with a selection of business process outsourcing levels and options that suit an organization's business objectives, requirements, and resources. Callidus On Demand customers rely on our Technical Operations services to provide the infrastructure, including operations, and software application operations layers required for SPM.

        Customers that prefer to run our products on their own premises can purchase time-based term, or in certain cases, perpetual licenses. Our time-based term license offering gives our customers the right to use our products for a period of time, typically 12 to 36 months. Fees under the time-based term licenses are generally billed annually. Thus, the up-front cost to purchase a time-based term license is significantly lower than that of a perpetual license. We started offering time-based term licenses on several of our products in the third quarter of 2009.

        Our products currently offered are listed below.

TrueComp Manager Application

        Our TrueComp Manager application automates the modeling, design, administration, reporting, and analysis of pay-for-performance programs for organizations ranging from hundreds to hundreds of thousands of sales people. Our customers use the TrueComp Manager application to design, test, and implement sales compensation plans that reward sales professionals based on customer-defined key performance indicators (KPIs), including profitability of sales or customer value, team-selling, and new product introduction or geographic expansion, or other sales- and service-based activities. The TrueComp Manager application enables our customers to define flexible market- and organizational-based goals and coverage models for its sales force and channels, accurately collect sales performance and financial data, apply it to each position's goals, and process and pay their sales force for achievement on target. The TrueComp Manager application provides a flexible, user-maintainable system that can be easily modified throughout fiscal periods based on organizational or market changes. The solution also provides sophisticated modeling functionality to enable organizations to simulate different organizational, incentive, and/or market scenarios and project financial results and sales

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expenditures. This combined modeling functionality enables organizations to structure efficient incentive plans and assess their cost to the organization.

        The TrueComp Manager application serves as the business user-facing application to set up compensation plans and incentives, territories, and goals, and to manage day-to-day operations of sales collections and payments. The solution collects and integrates multiple data feeds used to measure and process sales performance. The TrueComp grid component provides high-performance processing of compensation data and results and, together with our parallel processing functionality, enables organizations to manage global compensation. The application's modular, date-effective approach to defining compensation plans avoids the maintenance and change problems associated with homegrown solutions. The TrueComp Manager application was initially shipped in the first quarter of 1999 and is being offered to our customers predominantly through an on demand SaaS solution or under a time-based term license.

Callidus Reporting & Analytics

        Callidus Reporting delivers real-time production reports for detailed and summarized sales goal information. It delivers goal updates, progress to goal, order to payment tracking, and summarized compensation statements, enabling transparency and confidence in the sales incentive process across stakeholders, including the sales force, dealer networks, brokers and channel partners. With integrated reporting capabilities as part of the Callidus Software suite, businesses can quickly and efficiently deploy sales incentives, knowing that sales and channel partners receive up-to-date, transparent details on their performance and payments. The reports deliver at-a-glance summary snapshots for sales and enable quick and easy navigation to the orders and events that drive their compensation. Callidus Reporting software was initially shipped in the first quarter of 2006 and is being offered to our customers predominantly through an on demand SaaS solution, or under a time-based term license.

        Callidus Analytics enables businesses to quickly deploy performance dashboards across the finance, sales executive, and sales force teams to monitor and identify trends affecting sales team, product, territory, and customer performance. The solution provides out-of-the-box dashboards for sales, finance, and sales operations roles to interactively assess and identify trends affecting selling performance, and provides ad-hoc query capabilities for deeper analysis of the drivers of performance trends.

        Callidus Analytics is integrated with the TrueComp Manager solution. Callidus Analytics also allows integration with salesforce.com via AppExchange and other external CRM and ERP systems. Callidus Analytics software was initially shipped in the first quarter of 2006 and is being offered to our customers predominantly through an on-demand SaaS solution, or under a time-based term license.

Callidus Objective Management

        Callidus Objective Management enables organizations to design and deploy strategic objective-based bonus plans and long term incentive programs to drive business critical to the company's longer term development. Callidus Objective Management enables businesses to incorporate strategic initiatives, such as new product growth, regional expansion, pivotal competitive wins, and key customer initiatives with a well-aligned commissions strategy to promote the company's long-term health. The self-service application empowers administrators and managers to set, review, and reward objectives, and analyze objective performance, to achieve maximum impact on their key initiatives. Callidus Objective Management was initially available in the fourth quarter of 2008 and is being offered to our customers through an on-demand SaaS solution.

Callidus Quota Management

        Callidus Quota Management is designed to provide sales and finance teams with a solution that ensures sales quotas are allocated fairly based on market performance and coverage, on time, and are

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aligned with corporate revenue goals. Quota Management helps allocate quotas effectively and quickly using sophisticated business rules, and manages the rollout and approval process across sales teams and regions in a coordinated and timely manner, enabling everyone to be brought into the process. Callidus Quota Management was initially available in the fourth quarter of 2008 and is being offered to our customers through an on-demand SaaS solution.

Callidus Communicator

        Callidus Communicator is designed to help accelerate and streamline communications with a business' sales force and sales channels to help drive higher impact and more consistent results with incentive deployments. The solution can dramatically accelerate the process of rolling out new and updated compensation plans, special incentives, and strategic objective plans to the field, and helps track these documents through the inquiry, sign-off, and approval processes. The software helps expedite go-to-market for new products and services and accelerates sales readiness for new fiscal periods. Callidus Communicator was initially available in the third quarter of 2009 and is being offered to our customers through an on-demand SaaS solution.

Callidus Channel Management

        Callidus Channel Management for Telecommunications is targeted at telecommunication companies with large independent channels that need one central location to view and update dealer information. The solution provides businesses with a comprehensive view of dealer information, essential for providing the maximum service level to dealers. It helps businesses not only realize significant savings with better control and flexibility of incentive plans and payments to dealers, but also to manage disputes and adjustments required for independent dealers. Callidus Channel Management was initially shipped in the second quarter of 2007 and is being offered to our customers predominantly through an on-demand SaaS solution, or under a time-based term license.

Callidus Producer Management

        Callidus Producer Management is designed for insurance carriers with large independent distribution channels or a large number of captive agents. Callidus Producer Management streamlines producer administration by helping onboard, deploy, and pay producers, while providing visibility into channel operations. Producer management helps businesses not only realize significant hard-dollar savings with better control and flexibility of incentive plans and payments to producers, but also to rapidly onboard new producers, grow producer revenue, and ensure long-term producer loyalty. Callidus Producer Management was initially shipped in the second quarter of 2007 and is being offered to our customers predominantly through an on-demand SaaS solution, or under a time-based term license.

Callidus Onboarding

        Callidus Onboarding provides a platform to enable businesses to build and optimize discrete, re-usable workflows for critical sales and partner recruiting, background checking, and onboarding processes. Using Callidus Onboarding, businesses can integrate and automate coordinated systems and people processes to improve their operational productivity of onboarding sales and channel partners as part of a comprehensive sales performance management solution. The solution helps accelerate sales hiring and producer recruiting and contracting, enabling companies to reduce the time to meet critical capacity requirements and revenue goals, and control the costs of doing business with large producer volumes. At the same time, through built-in background checking and accreditation processing and tracking, the solution manages the risk of new appointments, enabling companies to focus on driving revenue and long-term sales growth. The product was initially shipped in the fourth quarter of 2010 and is being offered to our customers predominantly through an on-demand SaaS solution.

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Callidus Coaching

        Callidus Coaching enables organizations to optimize and increase the effectiveness of their sales force and call centers. The flexible and open platform enables businesses to rank sales professionals and agents based on different KPIs from multiple data stores across the enterprise. Using the rankings, managers can easily identify the core activities and behaviors that drive top performance on specific KPIs with built-in visualization technology. They can then use these profiles to implement the right onboarding and training processes throughout their sales channels—building a concrete roadmap for their new hires and existing sales professionals to replicate the performance of their stars. This product was initially offered through resale. However, with the completion of our acquisition of Forcelogix in 2011, it will be offered as part of our SaaS solution set.

Callidus Plan Communicator

        Callidus Plan Communicator is a 100% native solution on the Force.com platform (developed by Salesforce.com) that accelerates the process of rolling out and communicating incentive plans across the sales force and obtaining acknowledgement from each sales person. With this solution, organizations can transform the sales plan deployment and approval process, accelerating new go-to-markets and fiscal period rollouts, and rolling out changes to sales strategy throughout the year. Plan Communicator was initially available in the third quarter of 2008 and is being offered to our customers through an on demand SaaS solution.

Callidus Commissions Manager

        Callidus Commissions Manager is a 100% native solution on the Force.com platform (developed by Salesforce.com) that delivers an easy-to-use application that can be rapidly deployed to help companies drive adoption of Salesforce CRM. With Callidus Commissions Manager, sales professionals can track their projected commissions, initiate claims for credit and payment on closed deals, file disputes on payments, and track the status and amounts of paid and pending commissions, all as part of their day-to-day opportunity management in Salesforce.com. Commissions Manager was initially available in the third quarter of 2009 and is now being offered to our customers through an on-demand SaaS solution.

ACom3™

        ACom3™ is an incentive compensation automation suite which provides automation in integration, plan configuration, producer management, payout calculation and communication. ACom3 is built for business users, with product development focused on continual expansion of core product functionality to ensure ACom3 delivers end to end automation. The result of this focus is a highly user configurable system supporting rapid deployment, ease of use and reduced operational complexity. ACom3 is being offered to our customers predominantly through an on-demand SaaS solution and time-based term license since our acquisition of Actek in January 2010.

Services

        We provide a full range of services to our customers, including professional services, maintenance and technical support services, and professional development services.

        Professional Services.    We provide integration and configuration services to our customers and partners. Our on demand customers benefit from a quicker time to value than our traditional on-premise customers because our software is already up and running in our hosting facility. For these customers, professional services typically include the identification and sourcing of legacy data, configuration of application rules to create compensation plans, set up of pre-defined reports and custom reports, and the ability to interface our hosted application with other applications used by our

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customers. For those customers who purchase our on-premise solution, our services include the installation of our software, identification and sourcing of legacy data, configuration of the TrueComp Manager application rules necessary to create compensation plans, creation of custom reports and integration of our software with other products, and other general testing and tuning services. Installation, configuration, and other professional services related to our software can be performed by our customers, or at their discretion, by us or third-party implementation providers. We also provide services to our implementation partners to aid them in certain projects and training programs. In addition, we provide Callidus Strategic and Expert Services to help customers optimize incentive compensation business processes and management capability. The professional services we perform are generally performed on a time and materials basis.

        Sales Operations Services.    We provide a suite of value-added business outsourcing solutions designed to drive specific customer outcomes. Each solution includes clearly defined engagement plans, rapid deployment methods, and a proven track record of delivering value to customers. Services include Sales Operations Management for managing day-to-day operations and maintenance of the SPM system; Sales Performance Management for designing and deploying the right territory, quota, incentive plan, and coaching strategy to drive specific financial targets; Sales Performance Intelligence for analysis of capacity, coverage, and incentive effectiveness; and Sales Performance Optimization for benchmarking and tuning of the SPM system.

        Maintenance and Technical Support Services.    We have maintenance and technical support centers in the United States and India. We currently offer two levels of support, standard and premium, which are generally provided on a yearly basis. Under both levels of support, our customers are provided with online access to our customer support database, telephone, web and e-mail support, and all product enhancements and new releases. In addition, online chat is offered for clients as an alternative option. In the case of premium support, our customers are provided with access to a support engineer 24 hours a day, 7 days a week. In addition, our customers who subscribe to standard or premium support can be provided access to a remote technical account manager to assist with management and resolution of support requests.

        Education and Professional Development Services.    We offer a comprehensive set of over 20 performance-oriented, role-based training courses for our customers, partners, and employees. Our educational services include self-service web-based training, classroom training, remote (virtual training with off-site instructor), on-site training, and custom training. Our professional certification is available to promote standards for SPM professionals who demonstrate the ability to implement our suite of products.

Operations, Technology and Development

        We offer our customers various options to purchase and deploy our products, primarily through on-demand, SaaS subscription and on-premise time based term license. Callidus On-Demand delivers all the advantages of SPM. By using Callidus On-Demand, organizations gain the benefit of SPM with a rapid deployment that provides flexibility, efficiency, cost savings, security, and reliability. Callidus On-Demand can be configured with a selection of service levels and options that suit an organization's business objectives, requirements, and resources. Callidus On-Demand customers rely on our Technical Operations services to provide the infrastructure, infrastructure operations, and Callidus Software application operations layers required for SPM. In addition to Technical Operations, we make available to all customers Sales Operations services. Sales Operations provides plan and reporting administration services, which includes compensation plan maintenance, report design and maintenance, customer service, issue resolution, production support, and incentive change management. Companies selecting this service do not need to hire and train a compensation analyst or compensation administration team to design and run the system.

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        We have developed our On-Demand infrastructure on a high-performance fault-tolerant network with the goal of maximizing the availability, performance, and security of our application. We serve our customers primarily through a third-party facility, Raging Wire, located in California and in the fourth quarter of 2010 have opened a second data center located in Virginia owned by Latisys Systems to better serve the European market. Our hosting operations incorporate state-of-the-art x86 hardware running Solaris and Linux operating systems with a highly scalable proprietary grid computing engine. This allows our operations to support small and medium sized business at a low cost with the flexibility to scale to large and complex customer environments. Our hosting infrastructure and application architecture enables us to offer a service level commitment to our customers of 99% uptime per period, excluding designated periods of maintenance. We have adopted information security policies modeled on the ISO 27001 guideline and have a Chief Information Security Officer (CISO) who oversees our On-Demand privacy procedures. Our operations are SAS 70 Type 2 certified and comply with the HIPPA security guidelines.

        Callidus Software products are written in Java. TrueComp Manager is based on our proprietary rules engine, which is implemented on our scalable TrueComp Grid computing architecture. This technology offers our customers high degrees of functionality and flexibility, coupled with the scalability and reliability that enables them to maximize the return on investment in their SPM systems.

        Our research and development organization consists of experienced software engineers, software quality engineers, and technical writers. We organize the development staff along product lines, with an engineering services group providing centralized support for quality assurance, technical documentation, and advanced support. In 2010, 2009 and 2008, we recorded research and development expenses of $10.4 million, $13.9 million and $14.6 million, respectively. These expenses include stock-based compensation.

Customers

        While our products and services can serve the Sales Performance Management needs of all companies, we have driven particular penetration with our solutions and expertise in the telecommunications, insurance, banking, technology, and life sciences/pharmaceuticals markets. In 2010, 2009 and 2008, no customer accounted for more than 10% of our total revenues. Americas' revenues represented 88%, 87% and 86% of our total revenues in 2010, 2009 and 2008, respectively. The remaining amounts of revenue in each of the past three years have been generated in Europe and the Asia Pacific region.

        Now at over 230 customers, with $50 billion of incentives and compensation paid, for over 2.0 million payees in over 140 countries, we believe that we are the leader in the sales performance management space.

Sales and Marketing

        We sell and market our software through a direct sales force and in conjunction with our partners. In the United States, we have sales and service offices in Austin, Birmingham (Alabama), New York, and Pleasanton (HQ). Outside the United States, we have sales and service offices in the United Kingdom, Singapore and Hong Kong and will open an office in Australia in early 2011.

        Sales.    Our direct sales force, consisting of account executives, technical pre-sales engineers and field management, is responsible for the sale of our products to global enterprises across multiple industries, and is organized into geographic and new business and account-based territories. Our new business team is responsible for generating new qualified opportunities and following up on marketing campaigns.

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        Marketing.    Our marketing activities include product, service, field, customer, and industry marketing functions as well as marketing communications. Product marketing is responsible for defining new product requirements, managing product life cycles, and generating content for sales collateral and marketing programs. Marketing communications is focused on both primary demand generation efforts to help increase awareness of SPM, and secondary demand generation efforts to drive sales leads for our products and services. This is done through multiple channels, including advertising, webcasts, industry events, email marketing, web marketing, and telemarketing. In addition, our corporate website is optimized to drive prospects to our solutions and generate additional sales opportunities.

Alliances and Partnerships

        We actively promote and maintain strategic relationships with systems integrators, consulting organizations, independent software vendors, value-added resellers, and technology providers. These relationships provide both customer referrals and co-marketing opportunities, which have helped in expanding our customer base. On a national and global basis, we have established alliances with partners such as Accenture and OpenSymmetry. We signed 8 new partners in 2010.

Competition

        Our principal competition comes from Oracle Corporation and internally developed software solutions. We also compete with other software and consulting companies that generally focus on specific industries or sectors, including Xactly, Merced Systems, Synygy, and Varicent. We believe that the principal competitive factors affecting our market are:

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industry-specific domain expertise;



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scalability and flexibility of solutions;



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excellent customer service;



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functionality of solutions; and



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total cost of ownership.

        We believe that we compete effectively with the established enterprise software companies due to our focus, established market leadership, domain expertise, comprehensive suite and roadmap of solutions outside of core commission management, and highly scalable architecture. We believe we have more fully developed the domain expertise necessary to meet the dynamic requirements of today's complex sales performance and incentive compensation programs.

        Our On Demand offering competes favorably in terms of speed of implementation, reliability, security, scalability, and portability to an on-premise solution. The addition of our lifecycle solutions enhanced our ability to provide a comprehensive sales management solution delivered from a single vendor. While our competitors offer viable market alternatives, we believe that we have developed superior breadth and depth of functionality demanded by specific vertical markets, while providing increased operational flexibility to support more rapid deployment capability. Additionally, we have created substantial product differentiation by adding features into our products that are specific to each of our target markets, and that scale to growing business needs.

        We believe that our products offer a more cost-effective and complete alternative to internally developed solutions. Internally-developed solutions are generally expensive, inflexible, and difficult to maintain for companies with increasingly complex sales performance and incentive compensation programs, thereby increasing total cost of ownership and limiting the ability to implement programs that effectively address targeted business objectives.

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        Although we believe that our products and services currently compete effectively with those of our competitors, the market for SPM products is rapidly evolving. Our larger competitors have significantly greater financial, technical, marketing, service, and other resources. Many of these companies also have a larger installed base of users, longer operating histories, and greater name recognition. Our competitors may also be able to respond more quickly to changes in customer requirements, or may announce new products, services, or enhancements that better meet the needs of customers or changing industry standards. In addition, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Increased competition may cause price reductions, reduced gross margins, and loss of market share.

Intellectual Property

        Our success and ability to compete is dependent, in part, on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. We rely primarily on a combination of copyrights, trade secrets, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information. We also have a patent registration program within the United States and have an ongoing trademark registration program pursuant to which we register some of our product names, slogans and logos in the United States and in some foreign countries. However, due to the rapidly changing nature of applicable technologies, we believe that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how and development of new products are generally more advantageous than patent and trademark protection.

        Our agreements with customers include restrictions intended to protect and defend our intellectual property. We also require our employees, contractors and many of those with whom we have business relationships to sign non-disclosure and confidentiality agreements.

        Some of our products include third-party software that we use based on rights granted under license agreements. While third-party software comprises important elements of our product offerings, it is commercially available and we believe there are other commercially available substitutes that can be integrated with our products on reasonable terms. In certain cases we also believe we could develop substitute technology to replace these products if these third-party licenses were no longer available on reasonable terms.

Employees

        As of December 31, 2010, we had a total of 260 employees. Of those employees, 46 were in sales and marketing, 60 were in research and development and technical support, 66 were in professional services and training, 42 were in on-demand operations, and 46 were in general and administration. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

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Executive Officers of the Company

        The following table sets forth certain information with respect to our executive officers as of March 1, 2010:

        Leslie J. Stretch has served as our President and CEO since December 2007 and has served as a director on our board of directors since July 2008. Previously, Mr. Stretch was our Senior Vice President, Global Sales, Marketing and On-Demand Business from July 2007 to November 2007, Senior Vice President, Worldwide Sales from April 2006 to July 2007, and Vice President, Worldwide Sales from November 2005 to April 2006. Prior to joining Callidus, Mr. Stretch served as interim CEO for The Hamsard Group, plc. in the United Kingdom from April 2005 to September 2005. Previously, Mr. Stretch served in a variety of roles at Sun Microsystems, most recently as Senior Vice President of Global Channel Sales from January 2005 to April 2005, UK Vice President and Managing Director from February 2003 to January 2005, and UK Sales Director from May 1996 to February 2003. Prior to joining Sun Microsystems, Mr. Stretch served in a variety of roles at Oracle Corporation, U.K. including Director of Retail and Commercial Business UK from June 1995 to June 1996, Branch Manager Western Canada from 1994 to 1995, and Branch Manager Scotland from 1989 to 1994. Mr. Stretch holds a B.A. in Economics and Economic History from the University of Strathclyde and a Postgraduate Diploma in Computer Systems Engineering from the University of Edinburgh.

        Ronald J. Fior has served as our Senior Vice President, Finance and Operations and Chief Financial Officer since April 2006. Since joining us, Mr. Fior has also served as our Vice President, Finance and Chief Financial Officer from September 2002 to April 2006. From December 2001 to July 2002, Mr. Fior served as Vice President of Finance and Chief Financial Officer for Ingenuity Systems, a bioinformatics software development company. From July 1998 until October 2001, Mr. Fior served as Chief Financial Officer and Vice President of Finance and Operations of Remedy Corporation, an enterprise software applications company. Prior to this, Mr. Fior served for 13 years as Chief Financial Officer of numerous divisions and companies within the publishing operations of The Thomson Corporation, including the ITP Education Group and the International Thomson Publishing Group. Mr. Fior holds a Bachelor of Commerce degree from the University of Saskatchewan and is a Chartered Accountant.

        V. Holly Albert has served as our Senior Vice President, General Counsel and Secretary since August 2006. Previously, Ms. Albert was in private legal practice from April 2004 until August 2006. Prior to that, Ms. Albert was the Vice President, General Counsel and Corporate Secretary at Docent Inc., (now SumTotal Systems, Inc.) a provider of integrated software applications, services, and content from December 2002 to April 2004. Prior to Docent, Ms. Albert served as Vice President, General Counsel and COO at Tradenable, Inc., an Internet financial services company. Prior to Tradenable, she was the Vice President and General Counsel at infoUSA.com. Prior to infoUSA, she served in a variety of roles at Honeywell Inc. from 1983 to 2000, with her last position being the

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General Counsel for Honeywell-Measurex Corporation. Ms. Albert is a member of both the California and New Mexico State bars and received her J.D. from the University of Pittsburgh School Of Law. Ms. Albert also holds an M.A. from John F. Kennedy University in Psychology and a B.A. in Economics from Washington and Jefferson College.

        Meredith Calvert has served as our Senior Vice President, Customer Service and Support since June 2010. Ms. Calvert has also served as our Vice President, Technical Services and Business Operations, from March 2008 to May 2010, Director of Technical Support from May 2006 to February 2008, and Call Center Manager from January 2004 to April 2006. Prior to joining Callidus Ms. Calvert served in a variety of roles at Journee Software, an enterprise application software company focused on data integration solutions, and PCOrder, an enterprise application software company focused on hardware delivery solutions, including Support Manager and Program Manager from December 1998 to January 2004. Ms. Calvert holds a Bachelor of Science degree in Business Administration from Texas Tech University.

        Jimmy C. Duan has served as our Senior Vice President, Asia Pacific and Latin America since February 2010. Mr. Duan has also served as our Senior Vice President, Mid-Market Business from October 2008 to February 2010, Vice President, Strategic Services from October 2005 to April 2006, Managing Director, Expert Services from April 2004 to September 2005, and Managing Director, Western Area Consulting from March 2001 to March 2004. From February 2008 to October 2008, Mr. Duan was employed by Xactly Corporation, an on-demand sales compensation solution provider, serving as its Vice President, Products and Professional Services and as its Vice President, Client Services from May 2006 to January 2008. Mr. Duan also served as Director of Business Intelligence and Data Warehousing at Quovera, a business consulting and technology integration provider, from May 1999 March 2001 and as Solutions Manager at Talus Solutions, a pricing and revenue management software solution provider, from October 1996 to May 1999. Mr. Duan holds a B.S. in Engineering from Central-South University in China and a Ph.D. in Industrial and Systems Engineering from Virginia Tech.

        Michael L. Graves has served as our Senior Vice President, Engineering since February 2007. Previously, Mr. Graves served in a variety of roles at Oracle Corporation, an enterprise application software company, from October 1997 to February 2007, most recently as Vice President of Engineering, Oracle Applications from January 2006 to February 2007, and Senior Director of Engineering from October 1997 to January 2006. Mr. Graves holds a B.S. Finance-Economics from the University of California, Berkeley.

        Lorna Heynike has served as our Senior Vice President, Marketing, since July 2009. Prior to that, Mrs. Heynike was our Vice President, Product Management from January 2009 to July 2009, and our Senior Director, Product Management from April 2007 to January 2009. Previously, Mrs. Heynike worked in a variety of product management related positions with Oracle Corporation, from April 2001 to March 2007, most recently as Director, Product Management. Mrs. Heynike holds an MBA from Heriot-Watt University in Edinburgh, Scotland; an M.Sc. from the University of Edinburgh, Scotland; and a B.A. degree with Honors from the University of California at Berkeley.

        Saied Karamooz has served as our Senior Vice President, Client Services since May 2010. Prior to joining Callidus, from January 2009 to April 2010, Mr. Karamooz was on a personal sabbatical and from September 2003 to December 2008, he was a partner at Accenture, a global management consulting, technology services and outsourcing company. Mr. Karamooz holds a BS degree in Computer Science, an MBA, and an MS degree in Information Sciences from Pennsylvania State University.

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Available Information

        We make available, free of charge, on our website (www.callidussoftware.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other periodic reports as soon as reasonably practicable after we have electronically filed or furnished such materials to the Securities and Exchange Commission.

Item 1A.    Risk Factors

Factors That Could Affect Future Results

        We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

RISKS RELATED TO OUR BUSINESS

         We have a history of losses, and we cannot assure you that we will sustain our recent profitability.

        Our transition to a recurring revenue model resulted in non-GAAP quarterly operating profits in the third and fourth quarters of 2010. The profits were insufficient to offset losses in the first half of 2010. Consequently, we incurred net losses of $12.7 million in 2010, which follows net losses of $18.0 million and $13.8 million in 2009 and 2008, respectively. Additionally, as part of our transition, revenues from perpetual licenses and professional services have declined significantly, and we do not expect revenues from either to return to historical levels. Furthermore, as a result of the transition to a recurring revenue model and in the face of challenging macro-economic conditions, our revenue decreased by 13% from 2009 to 2010. To maintain our recent non-GAAP profitability, we must further increase our total revenues, principally by growing our recurring revenue offerings by entering into more or larger transactions and maintaining or reducing the rate of existing customer cancellations. As an example of ways to increase our recurring revenue, beginning in the second half of 2009 we began to offer time-based term licenses of our software applications to those customers that are only interested in solutions available for use on their premises. While we have closed a number of time-based term license transactions since its introduction, there is no assurance that this new licensing structure or others will be well received by the customers in our target markets or result in substantial growth of our recurring revenues. If we cannot increase our recurring revenue, our future results of operations and financial condition will be adversely affected and we may be unable to maintain profitability.

        To maintain non-GAAP profitability, we must also ensure that our cost structure is aligned with our new model. To reduce our expenses, we took a number of cost reduction steps in 2010. These cost reduction efforts included headcount reductions. In connection with restructurings in 2010, 2009 and 2008, we incurred expenses of $1.7 million, $3.0 million, and $1.6 million, respectively. We are continuing to monitor our expenses in an effort to further optimize our performance for the long-term. However, there is no assurance that these steps to manage our expenses will be adequate or that unforeseen expenses, or difficulties or delays may prevent us from realizing our goals. Consequently, we may be required to incur additional restructuring expenses or implement other cost reduction efforts in the future and, even with these or any future actions, we cannot be sure that we will sustain profitability on a quarterly or annual basis in the future. In addition, we cannot be certain that steps taken to control our costs in the near term will not adversely affect our prospects for long-term revenue growth. If we cannot increase our total and recurring revenues, continue to improve our gross

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margins, and control our costs, our future results of operations and financial condition will be negatively affected.

         If we are unable to increase the profitability of our recurring revenue products and services, experience significant customer attrition, or if we are required to defer recognition of revenue, our operating results could be adversely affected.

        We have invested, and expect to continue to invest, substantial resources to expand, market, and implement and refine our recurring revenue products and services offerings. Our business model shift to recurring revenues, and our on-demand services in particular, has generally generated much lower gross margins than our traditional perpetual license sales. If we are unable to increase the volume of our on-demand business to offset the lower margins, we may not be able to achieve sustained profitability.

        In order to sustain or increase our recent operating profitability, we must improve gross margins in our recurring revenue product and services offerings. Factors that could harm our ability to improve our gross margins include:

•

Increased costs to license and maintain third party software embedded in our software applications or the cost to create or substitute such third party software if it can no longer be licensed on commercially reasonable terms;



•

our inability to maintain or increase the prices customers pay for our products and services based on competitive pricing pressures and general economic conditions limiting customer demand;



•

increased cost of third party services providers, including hosting facilities for our on-demand operations and professional services contractors performing implementation and technical support services to on-demand customers;



•

customer contractual requirements that delay revenue recognition until customer implementations commence production operations or customer-specific requirements are met;



•

significant attrition as customers decide for their own economic or other reasons to not renew their on-demand contracts when they are up for renewal could negatively impact the efficiency of our data centers and lead to the costs being spread over fewer customers negatively impacting gross margin;



•

inefficiencies, delays and unacceptable quality from our third party vendors performing product development, technical support and professional implementation services;



•

the inability to implement, or delays in implementing, technology-based efficiencies and efforts to streamline and consolidate processes to reduce operating costs; and



•

higher wage and benefits costs for our existing personnel or the need to increase the number of our employees to support increasing customer demands for our professional services, technical support or general operations.

        If we are unable to increase our recurring revenue gross margins, our ability to sustain or increase our operating profits will be hindered and our operating results and financial condition will be adversely affected.

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         Because we recognize revenue from subscriptions for our on-demand service and maintenance support over the terms of the subscription and maintenance support agreements, downturns or upturns in sales may not be immediately reflected in our operating results.

        We generally recognize on-demand and maintenance revenues from customers ratably over the terms of their subscription and maintenance support agreements, which are typically 12 to 24 months, although terms can range from one to 60 months. As a result, most of the recurring revenues we report in each quarter result from the recognition of deferred revenue relating to subscription and maintenance agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions and maintenance in any one quarter will not necessarily be fully reflected in the revenue in that quarter but will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to reflect the changes in revenues. Accordingly, the effect of significant downturns in sales and market acceptance of our on-demand service and time-based term licenses may not be fully reflected in our results of operations until future periods. Our on-demand 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 success depends upon our ability to develop new products and services and enhance our existing products and services rapidly and cost-effectively. Failure to successfully introduce new or enhanced products and services may adversely affect our operating results.

        The sales performance management software market is characterized by:

•

Rapid technological advances in hardware and software development;



•

evolving standards in computer hardware, software technology and communications infrastructure;



•

changing customer needs; and



•

frequent new product introductions and enhancements.

        To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, achieve market acceptance and effectively respond to competitive product introductions, we must quickly identify emerging trends and requirements, accurately define and design enhancements and improvements for existing products and services and introduce new products and services. Accelerated introductions and short product life cycles for products and services require high levels of expenditures for research and development that could adversely affect our operating results. Further, any new products or services we develop may not be introduced in a timely manner or available in a distribution model acceptable to our target markets and may therefore not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to quickly and successfully develop and distribute new products and services cost-effectively or enhance existing products and services or if we fail to position and price our products and services to meet market demand, our business and operating results will be adversely affected.

         Our use of third-party international product development, support and professional services may prove difficult to manage or of inadequate quality to allow us to realize our cost reduction goals and produce new products and services and provide professional services in order to drive growth.

        We use an India-based firm to provide certain software engineering services for product development, customer technical support and professional consulting services and we expect to expand our use of this and other offshore third-parties to perform technical services in the future. Shifting more of our new product and services development, support and professional consulting efforts to offshore resources has required and will continue to require, detailed technical and logistical

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coordination to ensure that international resources are aware of and understand development specifications and customer support, implementation and configuration requirements and that they can meet applicable timelines or, if they are not met, that any delays are not significant. We may not be able to maintain acceptable standards of quality in support, product development and professional services. If we are unable to successfully maintain the quality of services provided by our international third-party service providers, our attempts to reduce costs and drive growth through new products and margin improvements in technical support and professional services may be negatively impacted, which would adversely affect our results of operations. Additionally, if we transition too much of our development, support or professional services offshore and we are not able to effectively manage these out-sourced providers, our ability to quickly respond to changing market demands and support our customers may be severely compromised which could adversely affect our business and results of operations. In addition, outsourcing services to offshore providers may expose us to misappropriation of our intellectual property or that of our customers, or make it more difficult to defend our rights in our technology.

         Our quarterly revenues and operating results are likely to continue to fluctuate, possibly substantially, which may harm our results of operations.

        Although our revenue is primarily focused on recurring revenues, we anticipate continuing perpetual license revenue business, particularly with international customers. Some perpetual license revenue is difficult to forecast and which is likely to fluctuate, sometimes significantly, from quarter to quarter due to a number of factors, many of which are wholly or partially beyond our control. We expect that our ongoing focus on our on-demand business will result in lower revenues from perpetual licenses and decreased customer expenditures on professional services over historical levels. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as definitive indicators of future performance.

        Factors that may cause our quarterly revenue and operating results to fluctuate include:

•

the discretionary nature of our customers' purchase and budget cycles and changes in their budgets for software and related purchases;



•

the priority our customers place on the purchase of our products as compared to other information technology and capital acquisitions;



•

competitive conditions in our industry, including new product introductions, product announcements and discounted pricing or special payment terms offered by our competitors;



•

changes in the average selling prices of our products;



•

varying size, timing and contractual terms of orders for our products, which may delay the recognition of revenues;



•

indeterminate and often lengthy sales cycles;



•

changes in the mix of revenues attributable to higher-margin product license or maintenance revenues as opposed to substantially lower-margin on-demand and professional services and other revenues;



•

disruption in the financial and insurance industries and the global financial crisis, which may result in the deferral or cancellation of future purchases of our products and services;



•

strategic actions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;



•

merger and acquisition activities among our customers, which may alter their buying patterns, or failure of potential customers, which may reduce demand for our products and services;

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•

the extent to which our customer's needs for professional services are reduced as a result of product improvements as well as implementation efficiencies in our on-demand offering over traditional on-premise implementations;



•

the utilization rate of our professional services personnel and the degree to which we use third-party consulting services;



•

the rates the market will bear for our professional services and our ability to efficiently and profitably perform such services based on those market rates; and



•

increased operating expenses associated with channel sales and increased product development efforts.

         Decreases in renewal rates for customer on-demand subscription or on premise maintenance arrangements could materially impact our future revenues or operating results.

        Our customers have no obligation to renew their subscriptions for our on-demand service or maintenance support for term or perpetual license transactions after the expiration of their initial subscription or maintenance period, which is typically 12 to 24 months, and some customers have elected not to renew. Our customers may renew for fewer payees or renew for shorter contract lengths. In addition, in 2009 we began to offer a pay-as-you-go model, whereby customers can pay for our on-demand service on a monthly basis without a long-term commitment, which may unexpectedly increase the rate of customer non-renewals and thus negatively affect our recurring revenue during any reporting period. Accordingly, although renewal rates have remained relatively consistent for our on-demand and license customers, there is no assurance that this will continue. If our customers' renewal rates decline or fluctuate as a result of a number of factors, including their reduced spending levels, their decision to do more of the work themselves internally, or dissatisfaction with our service, or if our customers do not renew their subscriptions for our on-demand services or maintenance support, our revenue will be adversely affected and our business will suffer.

         Our professional services revenues declined materially in recent periods as a result of changes to our business model, and we do not expect them to return to previous historical levels.

        Historically, a significant portion of our revenues were derived from the performance of professional services, primarily implementation, configuration, training and other consulting services in connection with perpetual licenses and ongoing projects. However, given the shift in our business model to on-demand and other factors, services revenue has declined materially, and we expect services revenues to be a much smaller portion of our revenues going forward. Characteristics of our on-demand offering contributing to the decline in our service revenue include:

•

The initial implementation time for our on-demand solution is substantially less than our traditional on-premise enterprise software model resulting in a decreased need for our professional services.



•

Historically, our on-premise enterprise software license transactions require post-implementation professional services, typically in the form of upgrade, updates and configuration support. Under our on-demand solution model, upgrades and updates are included in our on-demand technical operations thereby further reducing customers' professional services needs.



•

The number of third party professional services providers capable of implementing, configuring and performing other consulting services related to our on-demand solutions, including our partners and traditional subcontractors, continues to expand, increasing competition with our internal professional services organization.

For these and other reasons, our professional service revenues may decline further in the future.

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         We might not be able to manage our operations efficiently or profitably.

        Since 2008, we have significantly reduced the size of our internal organization as we have transitioned to a recurring revenue model, expanded our offshore and third party professional services partnerships and in reaction to the challenging economic environment during this time. As we continue to optimize our operations in relation to our recurring revenue model, we expect additional adjustments or restructuring in our organizational structure will continue. The actions we have taken and may take in the future may cause disruptions in or add complexity to our operations. In addition, during periods of growth in our operations, we will likely need to expand the size of our staff, grow and manage our related operations and third party partnerships and strengthen our financial and accounting controls. Any expansion may increase our expenses, and there is no assurance that our infrastructure would be sufficiently scalable to efficiently manage any growth that we may experience. If we expand our operations, our systems, procedures or controls might not be adequate to support expansion. Further, to the extent we invest in additional resources and growth in our revenues does not ensue, our operating results would be adversely affected. If we are unable to further leverage our operating cost investments as a percentage of revenues our ability to generate or increase profits will be adversely impacted.

         Our service revenues produce substantially lower gross margins than our license and recurring revenues, and periodic variations in the proportional relationship between services revenues and higher margin recurring and license revenues have harmed, and may continue to harm, our overall gross margins.

        Our services revenues, which include fees for consulting, implementation and training, were 21%, 37%, and 46% of our revenues for 2010, 2009 and 2008, respectively. Our services revenues have substantially lower gross margins than our recurring and license revenues.

        Historically, services revenues as a percentage of total revenues have varied significantly from period to period due to a number of circumstances including fluctuations in licensing and, to a lesser extent, recurring revenues, changes in the average selling prices for our products and services and the effectiveness and appeal of competitive service providers. More recently, the extent of the fluctuations has diminished, primarily as a consequence of decreased need for consulting services and fewer perpetual license transactions under our recurring revenue model. However, while the fluctuation in the percentage of services revenues as compared to total revenues has moderated on a quarterly basis, we continue to expect wider variability in services revenue itself from quarter-to-quarter, principally as the number of new recurring revenue customer transactions varies from quarter to quarter.

        In addition, the volume and profitability of services can depend in large part upon:

•

Competitive pricing pressure on the rates that we can charge for our professional services;



•

increases or decreases in the number of services projects being performed on a fixed bid or acceptance basis that may defer recognition of revenue;



•

the timing and amount of any remediation services related to professional services warranty claims;



•

the complexity of the customers' information technology environments;



•

the priority and resources customers place on their implementation projects; and



•

the extent to which outside consulting organizations provide services directly to customers.

        As an example of pressure on our services offerings, many of our potential customers are outsourcing technology projects offshore to take advantage of lower labor costs and we have also begun utilizing more offshore subcontracting resources to provide professional services at competitive market rates. Additionally, market rates for the types of professional services we offer may be greater or less

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than the rates we charge domestically depending on the geographic regions where the services are performed. Moreover, as we expand our international services operations, revenues may be impacted by fluctuations in currency exchange rates. Consequently, as we expand our customer base internationally, we expect greater variation in the proportion of services revenues compared to our other higher margin recurring and license revenues, which may increase or erode margins for our service revenues and our overall gross margins.

         The market for sales performance management software is still evolving and may not continue to develop as we expect.

        Our business is in the market for sales performance management software, which is an evolving market. We believe one of our key challenges is to convince prospective customers of their need for our products and services and to persuade them that they should make purchases of our products and services a higher priority relative to other projects. Our future financial performance will depend in large part on continued growth in the number of organizations adopting sales performance management software as a solution to address the problems related to managing the performance of their sales organizations. The market for sales performance management software may not develop as we expect, or at all. Moreover, our competitors may be more successful than we are in capturing the market. In either case, our business and operating results will be adversely affected.

         Disruptions in the financial and insurance industries or the global economic crisis may adversely affect our revenues, operating results and financial condition.

        A substantial portion of our revenues have been derived from sales of our products and services to customers in the insurance, high technology, manufacturing, and pharmaceuticals industries. The substantial disruptions in these industries and in the financial sector in 2009 and 2010 resulted in customers deferring or cancelling future planned expenditures on our products and services. Further, consolidations and business failures in these industries could reduce demand for our products and services even more. In addition, the disruptions in these industries and the concurrent global financial crisis may cause other potential customers to defer or cancel future purchases of our products and services as they seek to conserve resources in the face of economic turmoil and the drastically reduced availability of capital in the equity and debt markets. Any of these developments, or the combination of these developments, may adversely affect our revenues, operating results and financial condition in future periods.

         Acquisitions and investments present many risks, and we may not realize the anticipated financial and strategic goals for any such transactions.

        We continue to evaluate opportunities to expand our product and services offerings to meet our customers' needs and grow revenues, both through internal development efforts and external acquisitions and partnerships. Consequently, we may in the future acquire or make investments in other companies, products, services and technologies. For example, in February 2011, we acquired ForceLogix, Inc., an online sales processes and coaching solution provider and in January 2010, we completed the acquisition of Actek, a leading provider of commissions and compliance software for complex selling environments for the insurance and financial services industries. We may not realize the expected benefits of acquisitions or investments we made or may make in the future. For example, after acquiring Compensation Technologies in January 2008 to strengthen our professional service operation, demand for our professional services declined substantially, in the face of challenging macro-economic conditions. In addition, acquisitions and investments involve a number of risks, including the following:

•

We may have difficulty integrating the operations and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;

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•

we may find that the acquired business or assets do not further our business strategy, or that we overpaid for the business or assets, or that economic conditions change, all of which may generate a future impairment charge;



•

we may have difficulty integrating the acquired technologies or products with our existing product lines;



•

there may be customer confusion where our products overlap with those of the acquired business;



•

we may become exposed to liabilities associated with the sale of the acquired business' products and services;



•

our ongoing business and management's attention may be disrupted or diverted by transition or integration issues or the complexity of managing geographically and culturally diverse locations;



•

we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;



•

acquisitions may result in litigation from terminated employees or third-parties; and



•

we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

        These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket expenses.

        The consideration paid in connection with an investment or acquisition also affects our financial condition and operating results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash or incur substantial debt to consummate such acquisitions. If we incur substantial debt, it could result in material limitations on the conduct of our business. To the extent we issue shares of stock or other rights to purchase stock, including options, existing stockholders may be diluted. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as acquired in-process research and development) and restructuring charges. They may also result in the acquisition of goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

         The loss of key personnel, higher than normal employee attrition in key departments, or the inability of replacements to quickly and successfully perform in their new roles could adversely affect our business.

        Our success depends to a significant extent on the abilities and effectiveness of our personnel, and in particular our president and chief executive officer and our other executive officers. All of our existing personnel, including our executive officers, are employed on an "at-will" basis. If we lose or terminate the services of one or more of our current executives or key employees or if one or more of our current or former executives or key employees joins a competitor or otherwise competes with us, it could impair our business and our ability to successfully implement our business plan. Likewise, if a number of employees from specific departments were to depart, our short-term ability to maintain business operations and implement our business plan may be impaired. Additionally, if we are unable to quickly hire qualified replacements for our executives, other key positions or employees within specific departments, our ability to execute our business plan could be harmed. Even if we can quickly hire qualified replacements, we would expect to experience operational disruptions and inefficiencies during any transition.

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         Our products have long sales cycles, which makes it difficult to plan our expenses and forecast our results.

        The sales cycles for our various recurring revenue solutions are still evolving, and as we continue to broaden our offerings it is difficult to determine with any certainty how long our sales cycles for our solutions will be in the future. Consequently, it remains difficult to predict the quarter in which a particular sale will close and to plan expenditures accordingly. Moreover, because sales are often completed in the final two weeks of a quarter, the impact of recurring revenue transactions is typically not reflected in our financial statements until subsequent quarters. Additionally, global economic uncertainty and corporate cost-cutting are likely to continue throughout 2011, thereby prolonging the difficulty of predicting sales into the foreseeable future. The period between our initial contact with a potential customer and its purchase of our products and services is relatively long due to several factors, which may include:

•

The complex nature of our products;



•

the need to educate potential customers about the uses and benefits of our products and services;



•

budget cycles of our potential customers that affect the timing of purchases;



•

customer requirements for competitive evaluation and internal approval before purchasing our products and services;



•

potential delays of purchases due to announcements or planned introductions of new products and services by us or our competitors; and



•

the lengthy approval processes of our potential customers, many of which are large organizations.

        The failure to complete sales of our on-demand solution in a particular quarter will defer revenues into subsequent quarters as revenue from our on-demand services are recognized ratably over the term of the agreement.

         Deployment of our products and services frequently requires substantial technical implementation and support by us or third-party service providers. Failure to meet these requirements could cause a decline or delay in recognition of our revenues and an increase in our expenses.

        Deployments of our products and services frequently require a substantial degree of technical and logistical expertise. Moreover, our customers can require large, enterprise-wide deployments of our products and services. It may be difficult for us to manage these deployments, including the timely allocation of personnel and resources by us and our customers. Failure to successfully manage the process could harm our reputation both generally and with specific customers and may cause us to lose existing customers, face potential customer disputes or limit the number of new customers that purchase our products, each of which could adversely affect our revenues and increase our technical support and litigation costs.

        If implementation services are not provided successfully and in a timely manner, our customers may experience increased costs and errors, which may result in customer dissatisfaction and costly remediation and litigation, any of which could adversely impact our reputation, operating results and financial condition. We make estimates of sales return reserves related to potential future requirements to provide remediation services in connection with current period service revenues, which are accounted for in the consolidated financial statements. If actual remediation services exceed our estimates we could be required to take additional charges, which could be material.

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         Breaches of security or failure to safeguard customer data could create the perception that our products and services are not secure, causing customers to discontinue or reject the use of our products or services and potentially subject us to significant liability. Implementing, monitoring and maintaining adequate security safeguards may be costly.

        Our on-demand service allows our customers to access our software and transmit confidential data, including personally identifiable individual data of their employees, agents, and customers over the Internet. We also store data provided to us by our customers on servers in a third-party data warehouse. In addition, we may have access to confidential and private individual data as part of our professional services organization activities, including implementation, maintenance and support of our software for time-based term and perpetual license customers.

        Moreover, many of our customers are subject to heightened security obligations regarding the personally identifiable information of their customers. In the United States, these heightened obligations particularly affect the financial services, healthcare and insurance sectors, which are subject to stringent controls over personal information under the Gramm-Leach-Bliley Act, Health Insurance Portability and Accountability Act, Health Information Technology for Economic and Clinical Health Act and other similar state and federal laws and regulations. In addition, the European Union Directive on Data Protection as well as the laws and regulations of the Member States of the European Union implementing the directive create international obligations on the protection of personal data that typically exceed security requirements mandated in the United States. The security measures we have implemented and may need to implement, monitor and maintain in the future to satisfy the requirements of our customers may be substantial and involve significant time and effort, which are typically not chargeable to our customers.

        If we do not adequately safeguard the information imported into our software or otherwise provided to us by our customers, or if third parties penetrate our systems or security and misappropriate our customers' confidential information, our reputation may be damaged and we may be sued and incur substantial damages in connection with such disclosures or misappropriations. Even if it is determined that our security measures were adequate, the damage to our reputation may cause customers and potential customers to reconsider the use of our software and services, which may have a material adverse effect on our results of operations.

         If we are unable to hire and retain qualified employees and subcontractors, including sales, professional services, technical support and engineering personnel, our growth may be impaired.

        To expand our business successfully and maintain a high level of quality, we need to continually recruit, retain and motivate highly skilled employees and subcontractors in all areas of our business, including sales, professional services and engineering. In particular, if we are unable to hire or subcontract for and retain talented professional services and technical support personnel with the skills, and in the locations, we require, we might need to redeploy existing personnel or further increase our reliance on subcontractors to fill certain of our labor needs. As our customer base increases and as we continue to evaluate and modify our organizational structure to increase efficiency, we are likely to experience staffing constraints in connection with the deployment of trained and experienced professional services and support resources capable of implementing, configuring, maintaining and support our software and related services for existing customers. Moreover, as a company focused on the development of complex products and providing online services, we are often in need of additional software developers and engineers.

         If we do not compete effectively, our revenues may not grow and could decline.

        We have experienced, and expect to continue to experience, intense competition from a number of software companies. We compete principally with vendors of Sales Performance Management (SPM)

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software, Enterprise Incentive Management (EIM) software, enterprise resource planning software, and customer relationship management software. Our competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry standards. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

        Many of our enterprise resource planning competitors and other potential competitors have significantly greater financial, technical, marketing, service and other resources. Many also have a larger installed base of users, longer operating histories or greater name recognition. Some of our competitors' products may also be more effective at performing particular SPM or EIM system functions or may be more customized for particular customer needs in a given market. Even if our competitors provide products with less SPM or EIM system functionality than our products, these products may incorporate other capabilities, such as recording and accounting for transactions, customer orders or inventory management data. A product that performs these functions, as well as some of the functions of our software solutions, may be appealing to some customers because it would reduce the number of software applications used to run their business.

        Our products must be integrated with software provided by a number of our existing or potential competitors. These competitors could alter their products in ways that inhibit integration with our products, or they could deny or delay our access to advance software releases, which would restrict our ability to adapt our products for integration with their new releases and could result in the loss of both sales opportunities and renewals of on-demand services and maintenance.

         A substantial majority of our revenues are derived from our TrueComp® software application and related products and services, and a decline in sales of these products and services could adversely affect our operating results and financial condition.

        We derive, and expect to continue to derive, a substantial majority of our product revenues from our TrueComp application and related products and services. Our on-demand solution consists substantially of our TrueComp application. In addition, our installed base of perpetual license customers predominantly purchased our TrueComp application, and our ability to generate maintenance revenue from these customers depends on their continued use of our TrueComp application. As a result of these factors, on-demand and maintenance revenue from these customers depends on the customer use of our TrueComp application, we are particularly vulnerable to fluctuations in demand for our TrueComp application. Accordingly, if demand for our TrueComp application and related products and services decline significantly, our business and operating results will be adversely affected.

         If we reduce prices, alter our payment terms or modify our products or services in order to compete successfully, our margins and operating results may be adversely affected.

        The intensely competitive market in which we do business may require us to reduce our prices and/or modify our pricing strategies in ways that may adversely affect our operating results. If our competitors offer deep discounts on competitive products or services, we may be required to lower prices or offer other terms more favorable to our customers in order to compete successfully. Some of our competitors may bundle their software products that compete with ours with their other products and services for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, limit the prices that we can charge for our products or cause us to modify our existing market strategies for our products and services. If we cannot offset price reductions and other terms more favorable to our customers with a corresponding increase in sales or decreased spending, then the reduced revenues resulting from lower prices or revenue recognition delays would adversely affect our margins and operating results.

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         Our products rely on third party software licenses to operate and the delivery of our on-demand services relies on services provided by third parties, and the loss or inability to maintain these licenses or receive these services, errors in such software, discontinuation or updates to such software, or disruption in such services could result in increased costs, delayed sales, or customer claims against, or termination of, our existing agreements.

        We license technology from several software providers for our rules engine, analytics, and web viewer application, and we anticipate that we will continue to do so for these features and other applications and from these or other providers in connection with future products. We also rely on generally available third-party software to run our applications. Any of these software applications may not continue to be available on commercially reasonable terms, if at all, or new versions may be released that are incompatible with our prior or existing software releases. Some of the products could be difficult to replace, and developing or integrating new software with our products could require months or years of design and engineering work. The loss or modification of any of these technologies could result in delays in the license of our products until equivalent technology is developed or, if available, is identified, licensed and integrated. Acquisitions of our third-party technology licenses by our competitors or otherwise may have a material adverse impact on us if the acquirer seeks to cancel or change the terms of our license.

        We use a third party data center facility in California and, a third party data center in Virginia to deliver our on demand solution. We do not control the operation of these facilities and the third party operators of these facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. In addition, these facilities are vulnerable to damage and service interruptions particularly considering they are located in areas known for risks from natural and other types of disasters such as earthquakes, hurricanes, floods, power losses, and telecommunications failures. Interruptions in the services provided by these facilities, whether by disasters or the inability to reach contractual agreements with our third party hosting providers, may result in unexpected and possibly lengthy service interruptions. Any service interruptions, regardless of the cause, may result in material liability claims against us for breach of service level commitments to our customers, customer terminations and damage to our reputation.

        In addition, our products depend upon the successful operation of third-party products in conjunction with our products and services and, therefore, any undetected errors in these products could prevent the implementation or impair the functionality of our products, delay new product introductions or limit availability of our products via our on-demand service and/or injure our reputation. Our use of additional or alternative third-party software that requires us to enter into license agreements with third parties could result in new or higher royalty payments.

         Errors in our products and interruptions in our services could be costly to correct and time consuming to repair, and adversely affect our reputation and impair our ability to sell our products and services.

        Our products and services are complex and, accordingly, they may contain errors, or "bugs," that could be detected at any point in their product life cycle or interrupt the availability of our applications via our on-demand offering at any time. Errors in our products and vulnerabilities in our hosted services are likely to be found in the future. Any errors or vulnerabilities could be extremely costly to correct, materially and adversely affect our reputation and impair our ability to sell our products and services. Further, our efforts to reduce costs by employing more subcontracting personnel to perform product development, technical support, professional services and application hosting tasks may make it more difficult for us to timely respond to product errors and service interruptions. Moreover, customers relying on our products to calculate and pay incentive compensation may have a greater sensitivity to product errors, security vulnerabilities and service interruptions than customers for software products in general. If we incur substantial costs to correct any product errors or repair service availability issues, our operating margins would be adversely affected.

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        Because our customers depend on our software for their critical business functions, any interruptions could result in:

•

Lost or delayed market acceptance and sales of our products and services;



•

product liability suits against us;



•

diversion of development resources; and



•

substantially greater service level credits and warranty costs.

         Our latest product features and functionality may require existing on premise customers to migrate to more recent versions of our software. Moreover, we may choose to or be compelled to discontinue maintenance support for older versions of our software products, forcing our on premise customers to upgrade their software in order to continue receiving maintenance support. If existing on premise customers fail to migrate or delay migration to newer versions of our software, our revenues may be harmed.

        We plan to pursue sales of new product modules to our existing customers who currently have on premise perpetual and time-based term licenses of TrueComp software. To take advantage of new features and functionality in our latest modules, customers with on-premise license using older versions of our software applications may need to migrate to a more current version of our products. We also expect to periodically terminate maintenance support on older versions of our products for various reasons including, without limitation, termination of support by third-party software vendors whose products complement ours or upon which we are dependent. Termination of maintenance may force our perpetual license customers to migrate to more current versions of our software. Regardless of the reason, upgrading to more current versions of our products is likely to involve additional cost, which our customers may delay or decline to incur. If a sufficient number of our customers do not migrate to newer versions of our software, our continued maintenance support opportunities and our ability to sell additional products to these customers, and as a result, our revenues and operating income, may possibly be harmed significantly.

         Our revenues might be harmed by resistance to adoption of our software by information technology departments.

        Some potential customers have already made a substantial investment in third-party or internally developed software designed to model, administer, analyze and report on pay-for-performance programs. These companies may be reluctant to abandon these investments in favor of our software. In addition, information technology departments of potential customers may resist purchasing our software solutions for a variety of other reasons, particularly the potential displacement of their historical role in creating and running software and concerns that packaged and hosted software products are not sufficiently customizable or pose data security concerns for their enterprises.

         We may lose sales opportunities and our business may be harmed if we do not successfully develop and maintain strategic relationships to implement and sell our products and services.

        We have relationships with third-party consulting firms, systems integrators and software vendors. These third parties may provide us with customer referrals, cooperate with us in the design, sales and/or marketing of our products and services, provide valuable insights into market demands and provide our customers with systems implementation services or overall program management. However, in some cases we may not have formal agreements governing our ongoing relationship with certain of these third-party providers and the agreements we do have generally do not include specific obligations with respect to generating sales opportunities or cooperating on future business.

        We also have and are considering strategic relationships that are new or unusual for us and which can pose additional risks. While reseller arrangements offer the advantage of leveraging larger sales

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organizations than our own to sell our products, they also require considerable time and effort on our part to train and support our strategic partner's personnel, and require our strategic partners to properly motivate and incentivize their sales force. Also, if the reseller agreement is an exclusive arrangement, there is risk that the exclusivity prevents us from pursuing the applicable markets ourselves, which if the reseller is not being successful there on our behalf, may adversely affect our results of operations.

        Should any of these third parties go out of business or choose not to work with us; we may be forced to develop new capabilities internally, which may cause significant delays and expense, thereby adversely affecting our operating results. Any of our third-party providers may offer products of other companies, including products that compete with our products. If we do not successfully and efficiently establish, maintain, and expand our industry relationships with influential market participants, we could lose sales and service opportunities, which would adversely affect our results of operations.

         If we fail to adequately protect our proprietary rights and intellectual property, we may lose valuable assets, experience reduced revenues and incur costly litigation to protect our rights.

        Our success and ability to compete is dependent on the proprietary technology embedded in our products and services. We rely on a combination of copyrights, patents, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights. We cannot protect our intellectual property if we are unable to enforce our rights or if we do not detect its unauthorized use. Despite our precautions, it may be possible for unauthorized third parties to copy and/or reverse engineer our products and services and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed programs and services may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent that we engage in international activities, our exposure to unauthorized copying and use of our products, services and proprietary information increases.

        We enter into confidentiality or license agreements with our employees and consultants and with the customers and corporations with whom we have strategic relationships. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products, services and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products and services. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

         Our results of operations may be adversely affected if we are subject to a protracted infringement claim or one that results in a significant damage award.

        From time to time, we receive claims that our products, services offerings or business infringe or misappropriate the intellectual property rights of third parties and our competitors or other third parties may challenge the validity or scope of our intellectual property rights. For example, we recently were sued by a party claiming that we are infringing certain of their patent rights. We believe that claims of infringement are likely to increase as the functionality of our products and services expand and as new products and services are introduced. A claim may also be made relating to technology that we acquire or license from third parties. If we are subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:

•

Require costly litigation to resolve;

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•

absorb significant management time;



•

cause us to enter into unfavorable royalty or license agreements;



•

require us to discontinue the sale of all or a portion of our products or services;



•

require us to indemnify our customers or third-party systems integrators; or



•

require us to expend additional development resources to redesign our products or services.

         Our inclusion of open source software in our products may expose us to liability or require release of our source code.

        We use a limited amount of open source software in our products and may use more in the future. From time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. In addition, some open source software is provided under licenses that require that proprietary software, when combined in specific ways with open source software, become subject to the open source license and thus freely available. While we take steps to minimize the risk that our software, when combined with open source software, would become subject to open source licenses, few courts have interpreted open source licenses. As a result, the manner in which these licenses will be enforced is unclear. If our software were to become subject to open source licenses, our ability to commercialize our products and services and our operating results would be materially and adversely affected.

         Uncertain economic conditions may adversely impact our business.

        Our business may be adversely affected by adverse worldwide economic conditions and geopolitical instability. Further weakening in the global economy, or a further decline in confidence in the economy, could adversely impact our business in a number of important respects. These include (i) reduced bookings and revenues, as a result of longer sales cycles, reduced, deferred or cancelled customer purchases and lower average selling prices; (ii) increased operating losses and reduced cash flows from operations; (iii) greater than anticipated uncollectible accounts receivable and increased allowances for doubtful accounts receivable; and (iv) impairment in the value of our financial and non-financial assets resulting in non-cash impairment charges.

        We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of amounts identified for specific customers. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, and we may be required to defer revenue recognition on sales to affected customers, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.

         If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed.

        Our ability to successfully implement our business plan and comply with regulations, including the Sarbanes-Oxley Act, requires an effective planning and management process. We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. For example, we were unable to timely file our Annual Report on Form 10-K for the year-ended December 31, 2010 primarily as a result of performing additional analyses and reviews of our internal control over financial reporting. These additional procedures were required because we did not receive a Statement on Auditing Standards No. 70 (SAS 70) attestation report from one of our third party service providers prior to our filling deadline. Although

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we have used their software application and received SAS 70 attestation reports from this service provider for the last four years, after their acquisition in 2010 by another vendor, their process to obtain a SAS 70 Certification for 2011 was not timely commenced to allow completion prior to the filing deadline for our Annual Report on Form 10-K. As a result, we were unable to rely on their internal control environment as it relates to our use of their professional services automation service and we were unable to complete our additional testing to timely file our Annual Report on Form 10-K. Because we did not receive the attestation report and were unable to rely on their internal control environment, we concluded that this control deficiency represented a significant deficiency in our internal control over financial reporting. The Company has implemented additional measures to monitor the timely receipt of SAS 70 reports from all of our service providers. However we will continue to be dependent on our service providers to provide their SAS 70 reports on a timely basis. If we experience a significant deficiency, material weakness or any other delay in the implementation of, or disruption in the transition to, new or enhanced system, procedures or controls, our ability to accurately forecast sales demand, manage our system integrators and other third-party service vendors and record and report financial and management information on a timely and accurate basis could be impaired.

         We expect to continue expanding our international operations but in some international markets we have little or no experience, and may not achieve the expected results.

        We have been expanding our international operations since 2006 and expect to continue expanding these operations in 2011. International expansion in certain markets may require substantial financial resources and a significant amount of attention from our management. International operations involve a variety of risks, particularly:

•

Unexpected changes in regulatory requirements, taxes, trade laws and tariffs;



•

differing abilities to protect our intellectual property rights;



•

use of international resellers and compliance with the foreign corrupt practices act;



•

differing labor regulations;



•

greater difficulty in supporting and localizing our products and services;



•

greater difficulty in establishing, staffing and managing foreign operations;



•

possible political and economic instability; and



•

fluctuating exchange rates.

        We have limited experience in marketing, selling and supporting our products and services abroad. If we invest substantial time and resources to grow our international operations and fail to do so successfully and on a timely basis, our business and operating results could be seriously harmed.

RISKS RELATED TO OUR STOCK

         Our stock price is likely to remain volatile.

        The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to a number of factors, including those described in this section. We receive only limited attention by securities analysts, and there frequently occurs an imbalance between supply and demand in the public trading market for our common stock due to limited trading volumes. Investors should consider an investment in our common stock as risky and should purchase our common stock only if they can withstand significant losses. Other factors that affect the volatility of our stock include:

•

Our operating performance and the performance of other similar companies;

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•

significant sales or distributions by existing investors coupled with a lack of trading volume for our stock;



•

announcements by us or our competitors of significant contracts, results of operations, projections, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;



•

changes in our management team;



•

publication of research reports about us or our industry by securities analysts; and



•

developments with respect to intellectual property rights.

        Additionally, some companies with volatile market prices for their securities have been subject to securities class action lawsuits filed against them. For example, in 2004 we were sued in connection with the decline in our stock price following the announcements of disappointing operating results and changes in senior management. Any future suits such as these could have a material adverse effect on our business, results of operations, financial condition and the price of our common stock.

         Future sales of substantial amounts of our common stock by us or our existing stockholders could cause our stock price to fall.

        Additional equity financings or other share issuances by us could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public trading market (or in private transactions) including sales by our executive officers, directors or institutional investors, or the perception that such additional sales could occur, could cause the market price of our common stock to drop.

         Provisions in our charter documents, our stockholder rights plan and Delaware law may delay or prevent an acquisition of our company.

        Our certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. The acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and would not be able to cumulate votes at a meeting, which would require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted. In addition, we are a party to a stockholder rights agreement, which effectively prohibits a person from acquiring more than 15% (subject to certain exceptions) of our common stock without the approval of our board of directors. Furthermore, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. All of these factors make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders. Our board of directors could choose not to negotiate with an acquirer that it does not believe is in our strategic interests. If an acquirer is discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by these or other measures, you could lose the opportunity to sell your shares at a favorable price.

Item 1B.    Unresolved Staff Comments

        None

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Item 2.    Properties

        We lease our headquarters in Pleasanton, California which consists of approximately 31,000 square feet of office space. We relocated to Pleasanton in August 2010 after the lease on our San Jose, California headquarters expired. We also lease facilities in Austin, Birmingham (Alabama), London, New York, and Scottsdale. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion. Refer to Note 7 to the Consolidated Financial Statements for information regarding our lease obligations.

Item 3.    Legal Proceedings

        We are from time to time a party to various litigation matters and customer disputes incidental to the conduct of our business, none of which, at the present time, is likely to have a material adverse effect on our future financial results.

        In accordance with accounting for contingencies, we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review the need for any such liability on a quarterly basis and record any necessary adjustments to reflect the effect of ongoing negotiations, contract disputes, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At December 31, 2010, we have not recorded any such liabilities in accordance with accounting for contingencies. We believe that we have valid defenses with respect to the contract disputes and other legal matters pending against us and that the probability of a loss under such matters is not probable.

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

        None

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock has been traded on the NASDAQ Global Market under the symbol "CALD" since our initial public offering in November 2003. The following table sets forth, for the periods indicated, the high and low closing sales prices reported on the NASDAQ Global Market.

        As of March 1, 2011, there were 33,451,308 shares of our common stock outstanding and held by 37 stockholders of record. We believe that there are a greater number of beneficial owners.

        We have never declared or paid cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

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Performance Graph

        The following performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such information by reference, and shall not otherwise be deemed filed under such acts.

        The graph compares the cumulative total return of our common stock from December 31, 2005 through December 31, 2010 with the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index.

        The graph assumes (i) that $100 was invested in our common stock at the closing price of our common stock on December 31, 2005, (ii) that $100 was invested in each of the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index at the closing price of the respective index on such date and (iii) that all dividends received were reinvested. To date, no cash dividends have been declared or paid on our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Callidus Software Inc., The NASDAQ Composite Index
and The NASDAQ Computer & Data Processing Index

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*

$100 invested on 12/31/2005 in stock or index, including reinvestment of dividends.

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Item 6.    Selected Financial Data

        The following selected consolidated financial data should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section and the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report. The selected consolidated statements of operations data for each of the years in the three-year period ended December 31, 2010, and the consolidated balance sheet data as of December 31, 2010 and 2009, are derived from our audited consolidated financial statements that have been included in this annual report. The selected consolidated statement of operations data for each of the years in the two year period ended December 31, 2007 and the selected consolidated balance sheet data as of December 31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements that have not been included in this annual report.

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