UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

or

Commission file number: 001-33790

SoundBite Communications, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code:

(781) 897-2500

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 ¨  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No þ

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

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes þ  No ¨

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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definition 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 ¨  No þ

As of March 1, 2012, the aggregate market value of common stock (the only outstanding class of common equity of the registrant) held by non-affiliates of the registrant was $23.7 million based on a total of 9,802,886 shares of common stock held by non-affiliates and on a closing price of $2.42 on June 30, 2011 for the common stock as reported on The NASDAQ Global Market.

As of March 1, 2012, 16,464,504 shares of common stock were outstanding.

Documents Incorporated by Reference

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days after December 31, 2011. Portions of such proxy statement are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this annual report on Form 10-K.

TABLE OF CONTENTS

SOUNDBITE is our registered service mark in the United States, and SOUNDBITE AGENT PORTAL, SOUNDBITE DIALOG ENGINE, SOUNDBITE ENGAGE and SOUNDBITE INSIGHT are our service marks. This annual report also includes trademarks, trade names and service marks of other entities.

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Forward-Looking Information

This annual report contains, in addition to historical information, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, including information relating to revenues generated from our services to businesses, our efforts to expand our presence in mobile marketing, our expected gross margins for the foreseeable future, our ability to remain competitive and achieve future growth, information with respect to other plans and strategies for our business, and factors that may influence our revenues for 2012 and thereafter. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of these words and similar expressions are intended to identify our forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those described in “Item 1A. Risk Factors” and elsewhere in this annual report and that may be described from time to time in our reports filed with the SEC after the filing of this annual report. The forward-looking statements included in this annual report represent our estimates as of the date of this annual report. We specifically disclaim any obligation to update these forward-looking statements in the future, except as specifically required by law or the rules of the SEC. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this annual report.

This annual report also contains market data related to the industries in which we operate. These market data include projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our common stock.

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PART I

Overview

We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use the SoundBite Engage and SoundBite Insight platforms to communicate proactively with their customers through automated voice messaging, predictive dialing, emails, text messaging and web communications that are relevant, timely, personalized and engaging.

Our services are provided using a multi-tenant, cloud-based architecture that enables us to serve all of our clients cost-effectively. “Cloud-based” refers to the delivery of technology services through the Internet, which includes delivery of software as a service or SaaS. Because our services are cloud-based, businesses using our services do not need to invest in or maintain new hardware or to hire and manage additional dedicated information technology staff. In addition, we are able to implement new features on our platforms that become part of our services automatically and can benefit all clients immediately. Our secure platforms are designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platforms to scale reliably and cost-effectively.

We serve two global markets: hosted contact centers and mobile marketing. Our hosted contact center services are used primarily by companies in the accounts receivable management (or collections), energy and utilities, financial services, retail, and telecommunications and media industries. Our mobile marketing client base consists principally of companies in the consumer package goods, retail, and telecommunications and media industries.

In 2011 our services were used by more than 400 businesses located in the United States and Europe, including approximately 25 Global 500 and 50 Fortune 500 companies. These businesses included 7 of the 10 largest global issuing banks, 5 of the 10 largest U.S. telecommunications and media providers, 5 of the 10 largest U.S. retailers, 12 of the 20 largest U.S. utility providers, and approximately 60 accounts receivable management agencies. We use our direct sales channel principally to target large business-to-consumer companies, and we leverage our partnership channel to offer our services more broadly within our target markets, to enter new vertical markets, to augment our international expansion and to sell to smaller businesses cost effectively.

We were founded in Delaware in April 2000. Our principal executive offices are located at 22 Crosby Drive, Bedford, Massachusetts 01730, and our telephone number is +1 781 897 2500. Our website address is www.soundbite.com. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating it by reference into, this annual report.

Industry Background and Trends

Improving customer communications is a key strategy by which businesses can increase revenue, drive market share and control operational costs. Businesses operate contact centers to serve as central points from which they can manage all customer contacts. A customer contact center typically includes one or more online call centers and also may include other types of customer contact such as email, postal mail, website inquiries and social media.

Traditionally, businesses have focused their customer contact centers on responding quickly and effectively to consumer inquiries and requests. A business cannot, however, afford to simply wait to be contacted by consumers. In recent years, increased competition, heightened expectations for — and costs of — customer service, dynamic regulatory environments, and a weakened economy have been helping to drive the implementation

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of “proactive” communication solutions that can help businesses increase customer loyalty and satisfaction and generate more revenue at a lower cost.

Development of Mobile Marketing

At the same time as they are seeking to address changing market dynamics, businesses have been trying to respond to — and take advantage of — continuing technological developments, most notably the emergence of mobile phones, smartphones, tablet computers and other mobile devices as the primary communications device of consumers worldwide. In an October 2011 publication, the International Telecommunication Union estimated that there would be close to 6 billion mobile cellular subscriptions around the world as of December 31, 2011. Consumers increasingly rely on their mobile devices and mobile device applications and no longer consider the home phone, if it exists, as their primary communications devices.

Mobile devices provide access to multiple communications channels, and consumers increasingly access and exchange information over a variety of communications channels, including email, text messaging, web, instant messaging, social media and voice. Moreover, as consumers have gained experience with the multiple communications channels offered by their mobile devices, they increasingly are developing and expressing preferences for the types of communications they wish to receive and the channels over which those communications are to be received.

By communicating with consumers through different channels and honoring customer communications preferences, businesses can provide relevant and timely information to consumers effectively and efficiently and can achieve higher response rates, stronger customer relationships and improved customer experiences — all of which can result in increased revenue and profitability.

In response to the trend across all demographics to utilize their mobile device as their primary communications device, businesses have increasingly sought to leverage the mobile medium as a means of communication to consumers. ABI Research estimated in the second quarter of 2011 that U.S. mobile marketing and advertising revenues totaled $1.6 billion in 2011 and will grow to $4.5 billion in 2015, representing a compound annual growth rate of 29%. Gartner projected in April 2011 that worldwide mobile advertising revenues will grow from $3.3 billion in 2011 to $20.6 billion in 2015, representing a compound annual growth rate of 58%.

Emergence of Hosted Contact Centers

Over the past several years, businesses have been able to begin communicating with customers proactively due not only to the proliferation of mobile devices but also to the emergence and enhancement of technologies that enable businesses to initiate outbound messages to consumers rather than waiting to respond to inbound consumer inquiries. Outbound messaging initially became feasible through the introduction of on-premise predictive dialers. On-premise predictive dialers are, however, costly to implement and maintain.

More recently, many contact center vendors have begun to offer hosted services that are alternatives to on-premise solutions and are delivered via the cloud in order to improve the time to deployment, reduce the maintenance burden and expedite the delivery of new features that can integrate seamlessly into an existing technology infrastructure. Hosted contact center solutions can support the automated placement of outbound consumer contacts using automated voice messaging, predictive dialing, email and text messaging. Based on third-party reports, we estimate that revenues from hosted outbound customer contact applications totaled $220 million in 2011 and will grow to $425 million in 2015, representing a compound annual growth rate of 18%.

Requirements of Proactive Communication

In order to establish and build trusted, long-term, profitable relationships with customers, businesses increasingly require a comprehensive solution that will enable them to communicate proactively throughout the

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customer life-cycle via marketing, customer care, payments and collections applications. With a proactive communication, a business can send a timely message to a consumer’s preferred access device using one or more communications channels. The consumer can respond immediately over his or her preferred communications channel. By proactively communicating timely and relevant information to their customers, businesses can increase customer satisfaction and loyalty to drive revenue and reduce inbound communications, resulting in operational cost savings.

A proactive communication solution must enable businesses to manage all digital communications through key channels such as voice, text, email and the web, and must be designed with the ability to add support for other channels as they emerge and gain broad-based market acceptance. The solution must offer businesses the flexibility to use the most appropriate channel based on a customer’s communication preferences, the channel’s efficacy, the message content and other business goals. The solution should provide a business with a unified view of its customers’ communications in order to facilitate consistent and personalized communications at every stage in the customer lifecycle. It should have the ability to capture and manage an increasing variety of both customer and client preferences related to the communication outreach. In addition, the solution should increase contact center efficiencies not only by further increasing the productivity of contact center agents, but also by facilitating “agent-less” communications where appropriate.

In order to support coherent, preference-based multi-channel communications, a communications solution should be delivered using a multi-tenant, cloud-based model. This model enables proactive communications to be delivered and deployed to a business quickly and cost-effectively. Moreover, this model can provide the flexible, robust architecture needed to respond to — and take advantage of — current and future technological advances and customer communication trends.

Our Solution

We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use the SoundBite Engage and SoundBite Insight platforms to communicate proactively with their customers through automated voice messaging, predictive dialing, text, email messages and web communications that are relevant, timely, personalized and engaging.

Our multi-channel communications platform, SoundBite Engage, enables clients to design, execute and measure customer communications across the customer lifecycle. Our preference management platform, SoundBite Insight, helps businesses design relevant and targeted customer communications strategies. SoundBite Insight centralizes the ongoing tracking and management of consumer profile data, stated preferences and observed customer behavior. Our client management team assists clients in selecting service features and adopting best practices that enable them to use our multi-channel cloud-based platforms effectively. We offer performance analytical capabilities to assist clients in improving the design and execution of their campaigns. Our secure platforms are designed to scale reliably and cost-effectively.

Key benefits of our services for clients include:

Acquisition and Segmentation of Customers.    Businesses can use our services to support a variety of marketing programs targeted at converting consumers to customers. Market realities and regulatory restrictions can make it difficult for businesses to communicate with consumers who are not customers. Our services support the efforts of a business to obtain “opt-in” consents that will allow the business to communicate with a potential customer and make that consumer a customer. Once a customer is acquired, the business can use our services to identify segments of customers that the business wishes to target with a particular program.

Unified Communications Across Multiple Channels.    Using our services, a business can interact with its customers by automated voice messaging, predictive dialing, text, web or email, or by blending a combi-

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nation of those channels. As a result, the business can select a channel or channels based on a combination of a customer’s channel preferences, the channel’s efficacy, the message content and other business goals.

Lower Total Cost of Ownership.    Our services do not require a business to invest in or maintain new hardware, or to hire and manage dedicated information technology staff. Because new features are implemented on our cloud-based platforms, those features become part of our services automatically and benefit clients immediately.

Automation of Communications.    Businesses can reduce their contact center expense by using our services to fully automate a variety of customer communications, ranging from simple one-way notifications to more sophisticated customer interactions such as surveys or payments.

Improvement of Contact Center Performance.    Our services automate many of the routine tasks otherwise handled by a contact center agent, thus reducing operating costs and freeing agents to focus on more significant tasks. By intelligently routing messages to the appropriate agent, our services provide those agents with access to customer data and alternative channels to interact with customers, thereby increasing agent productivity.

Burstable Capacity.    Our services can initiate more than one million outbound messages each hour. This capacity enables clients to “burst” extremely large campaigns during short time periods, when customers are most likely to be responsive.

Rapid Initiation and Modification of Campaigns.    A new client can initiate its first campaign using our services in a period as short as a week, using only its existing contact center infrastructure and Internet connections. New clients avoid the delay associated with installing the hardware and software required for an on-premise solution. Using the performance analytics of our services, clients can improve the design and execution of existing campaign strategies immediately by self service or quickly through our professional services organization.

Our Strategy

Our objective is to become the leading global provider of multi-channel customer communications solutions. To achieve this goal, we are pursuing the following:

Target Mobile Marketing Opportunities.    Our platforms offer a wide array of features that facilitate interactive communications between clients and their customers, including automated and agent-assisted customer dialog over multiple delivery channels. In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications solutions, and in February 2012 we acquired 2ergos Americas, a provider of mobile business and marketing solutions. In February 2012 we also added comprehensive support for the web channel to SoundBite Engage, and we will continue to enhance our services to provide additional interactive mobile messaging capability.

Expand Internationally.    In recent years, we have enhanced our services to enable the delivery of multi-channel proactive customer communications in countries outside of North America. We now offer support for 40 countries. We will continue to invest in marketing and selling our services internationally, both directly and through partners, in order to broaden and deepen relationships we have established as well as to expand our penetration into new clients and resellers.

Extend Technology Leadership.    In 2011 we released multiple updates to the SoundBite Engage platform that improved internationalization support, introduced support for the web channel, and enhanced our voice channel offering by adding support for preview and progressive dialing, session transfer and call recording. In 2012 we intend to broaden our hosted customer contact offerings by con-

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tinuing to enhance the SoundBite Engage and SoundBite Insight platforms through additional capabilities for the voice channel, extended support for self-service for the text channel, and advanced support for the web channel. We also intend to broaden our service offerings based upon core technology obtained through our acquisition of 2ergo Americas in February 2012.

Extend Indirect Channel.    In 2009 we made a strategic decision to begin partnering with resellers, solution providers, original equipment manufacturers or OEMs, and international distributors in order to broaden our distribution reach. Our Business Partner Program enables us to offer our services more broadly within our target markets, to enter new vertical markets, to augment our international expansion, and to sell cost effectively to smaller businesses. We will seek to increase our revenues from the indirect channel by both leveraging existing relationships and selectively recruiting additional new partners.

Selectively Seek Strategic Acquisitions.    To complement and accelerate our internal growth, we will selectively pursue acquisitions of businesses, technologies and products that will provide access to new markets or clients, expand the feature set of our services, or otherwise complement our existing operations. We have accelerated our growth in mobile marketing through our acquisition of key assets of SmartReply in June 2011 and our acquisition of 2ergo Americas in February 2012.

Our Services

We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use the SoundBite Engage and SoundBite Insight platforms to communicate with their customers through automated voice messaging, predictive dialing, text, email messages and web communications that are relevant, timely, personalized and engaging.

Our multi-channel communications platform, SoundBite Engage, enables clients to design, execute and measure customer communications across the customer lifecycle. Our preference management platform, SoundBite Insight helps businesses design relevant and targeted customer communications strategies. SoundBite Insight centralizes the ongoing tracking and management of consumer profile data, stated preferences and observed customer behaviors.

Our services are provided using a multi-tenant architecture, which enables us to serve our clients cost-effectively. To use our services, a business does not need to invest in or maintain new hardware or to hire and manage additional dedicated information technology staff. In addition, we are able to implement new features on our platforms that become part of our services automatically and can benefit all clients immediately. As a result, a new client can begin using our services within a week and take advantage of new features as they become available.

Our secure platforms are designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platforms to scale reliably and cost-effectively. We provide our services under a combination of usage- and subscription-based models.

SoundBite Insight

Clients use the SoundBite Insight platform to design relevant and targeted proactive customer communications that can improve business results. SoundBite Insight helps businesses create a comprehensive view of their customer communications by centralizing the ongoing tracking and management of consumer profile data, stated preferences and observed consumer behaviors.

Designed to enable quick implementation and results, the cloud-based SoundBite Insight platform has the flexibility and scalability to be deployed on a departmental or enterprise-wide basis. It supports the growing needs of businesses seeking to manage and honor changing customer communications preferences.

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The following diagram illustrates the key elements of the SoundBite Insight platform:

Client Access Layer.    Clients access SoundBite Insight using one of the following secure interfaces:

Client Web Interface enables a client, using a web browser, to prime contact lists, manage individual contacts and generate near real-time reports. All of the SoundBite Insight features can be accessed through this secure, easy-to-use interface, which makes the service available to clients on a self-service basis.

Web Services API allows a client’s systems to interact directly with SoundBite Insight and permits the SoundBite Engage platform to interrogate SoundBite Insight for data related to the current interaction. Web Services API is an application programming interface that provides clients with the ability to exchange information directly with any customer relationship management system.

Agent Portal is a web-based user interface that enables an agent to access and manage limited data pertaining to an individual customer. The agent can use this interface to manage each customer’s attributes, such as opt-ins.

Enterprise Management.    This component provides a client with the ability to manage access and identity across the SoundBite Insight platform.

Core Components.    The SoundBite Insight platform includes the following core components, each of which can be accessed via the web or by integrating a client’s customer management system with the platform:

Contact Modeling manages the importing and updating of a client’s model of its customer. This component enables a client to define the particular attributes of each customer that need to be captured or managed. These attributes consist of the following:

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Contact Management enables a client to review and update the attributes of a particular customer.

Subscription and Event Management defines the set of subscriptions and events that a consumer can subscribe to receive. For example, a client may define an event that reflects a late departure of an airline flight and a consumer could elect to subscribe to text notifications of the event on the consumer’s mobile device.

Historical Reporting provides a client with reports in a variety of formats that can be exported at any time. These reports typically include details regarding consumer profile data, stated preferences and observed consumer behaviors. These types of reports often are used to review the performance of other marketing campaigns in order to provide insight into the number of opt-ins consents received with respect to a particular campaign.

SoundBite Engage

Clients use the SoundBite Engage platform to create and manage integrated, multi-channel customer communication campaigns for a variety of marketing, customer care, payments and collections processes. A campaign is a series of communications with a targeted group of customers, typically for a defined period of time. The targeted group is identified by a contact list containing customer-specific attributes, including first and last names, telephone numbers, email addresses and other information specific to the campaign. A campaign often encompasses multiple passes through the contact list. Campaigns can be conducted using contact center agents or on an agent-less basis. Sample campaigns include:

The following diagram illustrates the key elements of the SoundBite Engage platform:

Client Access Layer.    Clients access SoundBite Engage using one of the following secure interfaces:

Client Web Interface enables a client, using a web browser, to upload contact lists, initiate and manage campaigns, and generate near real-time customized reports. All of the platform features can be accessed

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through this secure, easy-to-use interface, which makes the SoundBite Engage service available to clients on a self-service basis.

FTP Automation facilitates a client’s uploading of contact lists and other information by providing the ability for a client to transfer at a pre-determined time a file using a variety of transfer protocols. Protocols supported include FTP, FTPS and SFTP.

Web Services API allows a client’s systems to interact directly with the SoundBite Engage platform. Web Services API is an application programming interface that provides clients with the ability to load information directly from any customer information management system. This approach also enables additional applications, such as fraud notifications and enhanced computer telephony integrations, that rely on real-time data exchange.

Agent Portal is a web-based user interface that enables automated and agent-assisted interactive customer communications over the voice and text messaging channels. Clients use Agent Portal in concert with predictive dialing or to support messages that, because of message content or business rules, are best handled by a customer support agent. Agent Portal allows agents to log in and to interact with customers in near real-time and to transfer a customer to another agent. SoundBite Engage can seamlessly transition between fully automated and agent-assisted dialogs, and supervisors can monitor agent activity as well as overall campaign status.

CTI Connect bridges a client’s contact center infrastructure to the SoundBite Engage platform, enabling a high-quality customer service experience while reducing operational costs. Through computer telephony integration, or CTI functionality, contact centers can match caller needs to agent resources and easily integrate functions such as screen pops, intelligent call routing and dynamic call pacing.

Enterprise Management.    This component provides a client with the ability to manage, using a single control panel, all campaigns in any of the client’s accounts. Accounts and privileges can be created and customized at the enterprise level for greater security. The Enterprise Management component allows a client to share interaction scripts and suppression lists across the client’s entire enterprise and reports covering all of the client’s accounts can be provided on an enterprise-wide basis.

Core Components.    The SoundBite Engage platform includes the following core components, each of which can be accessed via the web or by integrating a client’s customer management system with the platform:

Contact and Preference Management manages the importing and accessing of a client’s contact list. This component also manages contact suppression, which removes one or more contacts from a campaign either before the campaign begins or while the campaign is progressing. For example, contacts may be suppressed due to a customer who previously expressed a preference not to receive the proposed type of communication or a recipient who takes the requested action before all of the passes within a campaign are completed.

Campaign Strategy Manager defines the frequency and nature of the customer interactions to be employed to achieve the goals of a campaign. This component includes the following features:

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Campaign and Contact Center Management supports the initiation and management of campaigns. For those campaigns that require agents, this component manages the routing of qualified customers to agents and seeks to maximize the use of agents’ time while minimizing customers’ wait time. This component includes the following features:

Analytics and Reporting produces reports in a variety of formats that can be exported at any time during or after a campaign. We offer flexible report formatting, scheduling and delivery options. Reports typically contain details regarding contact attempts and outcomes. Reports are available for a specific campaign or for all of the campaigns of a department, group or other client account. This component also includes performance analytics capabilities to assist clients in improving the design and execution of their campaigns. For example, a client might determine, based on our analysis of campaign data, that the client’s next campaign should be executed at a different time of day or should target wireless customers via text rather than voice.

Dialog Engine tests and manages any number of contact scripts to be used to determine the content presented during customer interactions. In a telephone call, for example, a script specifies the sequence of audio prompts that are played and the step or action to result when a customer takes a particular action, such as pressing a button on the telephone or saying “yes.” An individual customer interaction is supported by a flexible scripting language and personalized messaging. Scripts can be modified and repurposed over time. Our personalized voice messages use professional voice talent recordings or text-to-speech technology to insert customer-specific information into an interaction. In a typical text interaction, a script may specify the action to be taken based upon a customer’s response to an initial outbound text message, such as requiring some form of authentication. This component supports the following activities:

Delivery Channels.    The SoundBite Engage platform supports automated voice messaging, inbound voice, predictive dialing, outbound and inbound text (both standard and Free-to-End User or FTEU), web and outbound email communications. The predictive dialing channel supports both predictive and preview dialing. An outbound voice or text channel can be used for either a contact center agent-assisted or an agent-less campaign. An inbound channel typically is used in support of outbound campaigns or as part of an inbound-only agent-less campaign. These delivery channels can be used individually or combined on the SoundBite Engage platform.

Security and Compliance.    Our SoundBite Insight and SoundBite Engage platforms include a number of security features designed to keep customer data safe and confidential, such as encryption of sensitive data, secure

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transmission, audit trails, non-shared accounts, need-to-know access policies and formal incident response. Clients can elect to use supplemental security features such as email and FTP address restrictions for report deliveries and encryption of reports. Compliance management provides a client with the ability to define a set of rules to control when a customer is contacted based on the customer’s location, which is determined either by reference to the phone number being contacted or by reference to the address of the customer. In September 2011, we renewed our compliance status as a Payment Card Industry Data Security Standard, or PCI/DSS, compliant Level 1 Service Provider, which enables us to work closely and exchange extensive data with banks and credit card companies. We have registered with the U.S. Department of Commerce and incorporate the European Union Safe Harbor Principles relating to the protection of personal data. In addition, we have instituted periodic internal and third-party reviews of our security structure, including an annual voluntary external Type II audit of our information technology-related control activities for our platforms under the Statement on Auditing Standards for Attestation Engagements No. 7016, also referred to as Service Organization Control No. 1, Reports on the Processing of Transactions by Service Organizations.

Our Client Management Services

Our client management organization helps clients select service features and adopt best practices that will enable the clients to use our multi-channel services effectively. This organization provides varying levels of support, such as managing entire campaigns, providing best practice recommendations and supporting self-service clients. It offers a range of services that includes script development, campaign strategy, professional voice talent recording, custom reporting and detailed analysis of campaign results. By hiring former employees of SmartReply and retaining employees of 2ergo Americas, we have augmented our client management services in mobile marketing to include strategic services that enable our clients to grow their mobile marketing databases and then leverage those databases with investment in marketing programs that can provide high returns on investment. At March 1, 2012, our client management organization had 45 employees.

Our client management organization consists of three principal teams:

Enterprise Program Directors help key clients fully understand their customer communications needs and then assist those clients in designing solutions to meet defined goals. This team works with sales personnel to help design successful program strategies and ensure effective execution. The team also works directly with prospective and existing clients to determine the most effective use of our platforms in their businesses. Demonstrations of our platforms are used to highlight features and functionality that are available in current or will be available in future releases.

Professional Services members provide implementation services and project management, including detailed requirements gathering, test, design and setup script development, voice talent recording, and all aspects of file interchange. This team builds and maintains a library of best practices based upon experience gained in helping design and optimize campaigns.

Training, Documentation and General Help Desk members provide clients with training both initially and on a continuing basis, in order to assist the clients in using our services more effectively and efficiently. Training modules include self-paced tutorials, on-line job aids and live instructor led classes. Our help desk is available around-the-clock to provide immediate support to clients.

Business Segments and Geographic Information

We manage our operations on a consolidated, single operating segment basis for purposes of assessing performance and making operating decisions. Accordingly, we have only one reporting segment. Businesses in the United States accounted for more than 90% of our revenues in 2011 and substantially all of our revenues in each of 2010 and 2009.

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Clients

We target companies in industries that are characterized by the need for regular interactions with large consumer bases throughout all of the phases of the customer lifecycle. Our Hosted Contact Center services are used primarily by companies in the accounts receivable management (or collections), energy and utilities, financial services, retail, and telecommunications and media industries. Our Mobile Marketing client base consists principally of companies in the consumer package goods, retail, and telecommunications and media industries.

In 2011 our services were used by more than 400 businesses located in the United States and Europe, including approximately 25 Global 500 and 50 Fortune 500 companies. Our clients include approximately 60 accounts receivable management agencies. Our services are used by a number of the largest business-to-consumer companies (measured by revenue) in our targeted industries, including:

We use our direct sales channel principally to target large business-to-consumer companies, and we leverage our partnership channel to offer our services more broadly within our target markets, to enter new vertical markets, to augment our international expansion and to sell to smaller businesses cost effectively.

We provide our services under a combination of usage- and subscription-based models. Our pricing agreements with the significant majority of our clients do not require minimum levels of usage or payments.

T-Mobile USA, Inc., a provider of mobile telephone services, and NCO Group, a provider of business process outsourcing services, each accounted for more than ten percent of our revenues in each of 2011, 2010 and 2009. Neither T-Mobile USA, Inc. nor NCO Group accounted for twenty percent or more of our revenues in any of those years.

Sales and Marketing

We offer our services principally through our industry-aligned direct sales force. Sales leads are generated through cold calling, client and other referrals, and a variety of marketing programs. Once a lead is qualified, the sales process typically involves a web-based or in-person presentation and demonstration, together with pre-sales support from our client management organization. These presentations focus on explaining the benefits of our service offerings, including the speed with which the services can be deployed and demonstrating the potential return on investment from the use of our services. We encourage prospective clients to engage in a pilot campaign to evaluate the efficacy of our services. As of March 1, 2012, our direct sales force consisted of 24 employees located in the United States and the United Kingdom.

In order to broaden our distribution reach, we also offer our services through an indirect channel comprised of resellers, solution providers, OEMs and international distributors. Using our Web Services API, OEMs can integrate their applications into the SoundBite Engage platform. Since we launched our Business Partner Program in January 2009, our indirect channel has enabled us to offer our services more broadly within our target markets, enter new vertical markets, augment our international expansion and sell to smaller businesses cost effectively. During 2011, we continued to successfully transition to certain partners a number of smaller clients that were better suited working with a channel partner and added a number of resellers both in the U.S. and internationally.

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Our marketing communications and programs strategy has been designed to increase awareness of our services, generate qualified sales leads and expand relationships with existing clients. We reinforce our brand identity through our website and public relations, which are intended to build market awareness of our company. We host webinars, sponsor white papers, build relationships with leading analysts, and participate in industry events and associations. We distribute communications to prospects and to our clients through social media networks such as Twitter and Facebook. At March 1, 2012, our marketing group had 7 employees.

Our sales and marketing expenses totaled $14.1 million in 2011, $14.2 million in 2010 and $14.8 million in 2009.

Technology, Development and Operations

Technology

We launched our first multi-tenant, cloud-based service in 2000. Our services are provided through a secure, scalable platform written primarily in Java using the Java 2 Enterprise Edition, or J2EE, development framework. We use a combination of proprietary and commercially available software, including Apache web servers, Oracle WebLogic and JBoss application servers, Nuance text-to-speech and automated speech recognition software, and Oracle and MySQL databases. The software runs primarily on Linux servers.

Our services manage clients as separate tenants within our platforms. As a result, we amortize the cost of delivering our services across our entire client base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our solution faster than on-premise solutions.

Our services enable clients to import and access data independent of format and to customize the script interaction and reporting output of their campaigns. The web user interface of our platforms can be customized for a client that wishes to have a specific “look and feel” across its enterprise.

Research and Development

Our research and development organization is responsible for developing new features and other new offerings for our platforms. The research and development organization also is responsible for performing platform functionality and load testing, as well as quality assurance activities. The organization currently is working on a number of enhancements, including work related to further enhancement of the SoundBite Engage and SoundBite Insight platforms through additional capabilities for the voice channel, extended support for self-service for the text channel, and advanced support for the web channel. In addition the organization is continuing to enhance the scalability and reliability of our core platforms. At March 1, 2012, our research and development organization had 38 employees.

Our research and development expenses totaled $6.1 million in 2011, $5.9 million in 2010 and $5.6 million in 2009.

Operations

We serve our clients from five third-party hosting facilities. One facility is located in Ashburn, Virginia, and is leased under an agreement that expires in March 2012. Another facility is located in Somerville, Massachusetts, and is leased under an agreement that expires in May 2012. Our agreements for these two facilities automatically renew for one-month periods under current terms unless written notification is made by either party 90 days prior to renewal. Our third hosting facility is located in Slough, United Kingdom and leased under an agreement that automatically renews for twelve-month periods unless written notification is made by either party three months prior to the expiration date. Our fourth facility is located in Las Vegas, Nevada and is leased under

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an agreement that automatically renews for monthly periods unless written notification is made 30 days prior to the expiration date. Our fifth facility, which also is located in Ashburn, Virginia, is leased by 2ergo Americas under an agreement that expires in 2014.

Facilities in the United States and United Kingdom have multiple Tier 1 interconnects to the Internet and are connected by a SONET ring. All of the hosting facilities provide around-the-clock security personnel, video surveillance and biometric access screening, and are serviced by uninterrupted power supplies, which are backed up by diesel-electrical generators for extended power loss. Each facility employs fire detection apparatus as well as dry-pipe pre-action fire suppression systems. We maintain insurance policies covering substantially all of the assets deployed at our hosting facilities. For information regarding the facility locations, operators and agreement terms, see “Item 2. Properties.”

We have multiple telecommunication carriers for voice termination, including Global Crossing, Level 3, Qwest and Equinix. We have selected our mix of telecommunication carriers to limit service interruptions, even in the event of a localized loss of a major provider.

We own all the hardware deployed in support of our platforms, except that we lease certain equipment at the third-party hosting facility used by 2ergo Americas. We continuously monitor the performance and availability of our services. We designed our service infrastructure using load-balanced service pools, redundant interconnected network switches and firewalls, clustered application servers and fault-tolerant storage devices. Production databases are backed up on a daily basis to ensure transactional integrity and restoration capability.

We have deployed a security infrastructure that includes internal and perimeter firewalls, network intrusion detection, and host intrusion detection systems. We maintain on-site as well as off-site third party log-aggregation services for audits and forensics. All inter-site connectivity is over a private wide area network. We perform at least three internal vulnerability scans of our production equipment every week. See “— Our Services — Security and Compliance” above.

We have service level agreements or arrangements with a small number of clients under which we warrant certain levels of system reliability and performance. If we fail to meet those levels, those clients are entitled to either receive credits or terminate their agreements with us. We did not provide any material credits in 2011, 2010 or 2009 pursuant to any service level provisions.

At March 1, 2012, our operations organization had 10 employees.

Competition

The market for our service offerings is intensely competitive, changing rapidly and fragmented. The following summarizes the principal products and services that compete with our hosted contact center and mobile marketing services.

On-Premise Predictive Dialers

Our voice service competes with on-premise predictive dialers from established vendors such as Aspect and Avaya as well as a number of smaller vendors. Our voice service competes with on-premise predictive dialers on the basis of both available features and delivery model, including:

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A number of predictive dialer vendors offer forms of hosted solutions, which we believe are typically services in which predictive dialers are hosted by first-generation application service providers, or ASPs, rather than on a multi-tenant basis. We believe these ASP-hosted services are deployed on individual servers and application infrastructures, using dedicated predictive dialers. We compete with ASP-hosted predictive dialer services on the same basis as on-premise predictive dialers, except that deployment speed and required capital investment are less significant in differentiating our services from these ASP-hosted services.

Predictive dialers have been the basic method of automated customer communications for the last two decades, particularly for collections activity. The vast majority of telephony customer contact today is completed using predictive dialer technology. Many businesses are likely to continue using on-premise predictive dialers that have been purchased and are still operative, despite the availability of new features and functionality in alternative services.

Some vendors of predictive dialers, particularly Aspect and Avaya, have significantly greater financial, technical, marketing, service and other resources than we have. Many of these vendors also have larger installed client bases and longer operating histories. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns.

Hosted Customer Communications Solutions

Our services compete with a number of hosted customer communications solutions in both the hosted contact center and mobile marketing markets. Most vendors of hosted customer communications solutions focus on providing a basic service with limited features and compete principally on the basis of price. These vendors consist principally of a number of relatively small, privately held companies and a small number of larger, multi-product line companies such as CSG Systems, Nuance Communications and West Corporation. We compete with these vendors on the basis of the following:

We also compete directly with a small number of vendors in the customer communications and hosted contact center market, such as Adeptra and Varolii, that deliver services utilizing one or more channels on a SaaS delivery model similar to ours.

In the past few years, there have been a number of new entrants in the hosted customer communications market. Most of these new entrants offer basic, price-oriented customer communications services hosted on an ASP model. We believe that companies wishing to target this portion of the market may seek to acquire existing vendors. It is likely any such acquiring companies would have greater financial, technical, marketing, service and other resources than we have and may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer.

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Mobile Marketing Solutions

The market for mobile marketing solutions is developing rapidly and highly fragmented, and we compete with a wide array of companies in selling our mobile marketing offering. For example, we compete with a large number of vendors that focus on providing point solutions, each of which addresses a specific element of the mobile marketing solution set. These vendors typically compete on the basis of technology features and price. Some vendors focus on providing packaged solutions that target a broader range of mobile marketing and advertising applications. These vendors generally compete on the basis of the breadth of their offerings and the return on investment. For example, our mobile marketing offering competes directly with mobile marketing applications provided by Augme Technologies (in part through its acquisition of HipCricket in August 2011), Lenco Mobile (principally through its acquisition of iLoop Mobile in December 2011) and Velti. We compete with these vendors based on the breadth of our multi-channel functionality, our strategic client management services, the flexibility of our pricing model and our referenceable client base.

Intellectual Property

Our success depends in part on our ability to protect our intellectual property and to avoid infringement of the intellectual property of third parties. We rely on a combination of trade secret laws, trademarks and copyrights in the United States and other jurisdictions, as well as contractual provisions and licenses, to protect our proprietary rights and brands. We cannot, however, be sure that steps we take to protect our proprietary rights will prevent misappropriation of our intellectual property.

We have adopted a strategy of seeking patent protection with respect to certain technologies used in or relating to our products. We have three issued U.S. patents, which relate to: (a) a voice message delivery method and system (patent number U.S. 6,785,363 B3) that was issued in August 2004 and will expire in January 2021; (b) an address book for a voice message delivery method and system (patent number U.S. 6,829,331 B2) that was issued in December 2004 and will expire in January 2022; and (c) answering machine detection for voice message delivery and system (patent number U.S. 7,054,419) that was issued in May 2006 and will expire in April 2021. We have eleven pending U.S. patent applications that relate to the optimization of interactive communications campaigns and the provision of messages to mobile devices in an enterprise-centric architecture. Additionally, we evaluate ideas and inventions for patent protection with a team of engineers and product managers, in consultation with our outside patent counsel. We expect to file additional patent applications in the ordinary conduct of our business.

“SoundBite” is our sole registered service mark in the United States. We have unregistered service marks identifying some of our service offerings. None of our unregistered service marks is material to our business. We seek to protect our source code for our platforms, as well as documentation and other written materials, under trade secret and copyright laws.

We may not receive competitive advantages from the rights granted under our intellectual property rights. Others may develop technologies that are similar or superior to our proprietary technologies or duplicate our proprietary technologies. Our pending and any future patent applications may not be issued with the scope of claims sought by us, if at all, or the scope of claims we are seeking may not be sufficiently broad to protect our proprietary technologies. Our issued patents and any future patents we are granted may be circumvented, blocked, licensed to others or challenged as to inventorship, ownership, scope, validity or enforceability. We may be advised of, or otherwise become aware of, prior art or other literature that could negatively affect the scope or enforceability of any patent. If our issued patents, any future patents we are granted, our current or any future patent applications, or our services are found to conflict with any patents held by third parties, we could be prevented from selling our services, any current or future patent may be declared invalid, or our current or any future patent application may not result in an issued patent. In addition, in foreign countries, we may not receive effective patent and trademark protection. We may be required to initiate litigation in order to enforce any patents issued to us, or to determine the scope or validity of a third party’s patent or other proprietary rights. In addition, in the future we may be subject to lawsuits by third parties seeking to enforce their own intellectual property

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rights, as described in “Item 1A. Risk Factors — Our product development efforts could be constrained by the intellectual property of others, and we could be subject to claims of intellectual property infringement, which could be costly and time-consuming.”

We seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute nondisclosure and assignment of intellectual property agreements and by restricting access to our source code. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties.

Our service offerings incorporate technology licensed from third-party providers. If these providers were no longer to allow us to use these technologies for any reason, we would be required to:

Any one of these outcomes could delay further sales of our services, impair the functionality of our services, delay the introduction of new features or offerings, result in our substituting inferior or more costly technologies, or injure our reputation. In addition, we may be required to license additional technology from third parties, and we cannot assure you that we could license that technology on commercially reasonable terms or at all. Because of the relative immateriality of this third-party licensed technology as well as the availability of alternative equivalent technology, we do not expect that our inability to license this technology in the future would have a material effect on our business or operating results.

Government Regulation

Our business operations are affected, directly or indirectly, by a wide range of U.S. federal, state and international laws and regulations, including regulations that restrict customer communications activities using our services, our handling of information and other aspects of our business. On the U.S. federal level, for example, regulatory measures include:

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Many states and state agencies in the U.S, have also adopted and promulgated laws and regulations governing debt collection, contact with wireless, business and residential telephone numbers, telemarketing, and data privacy. These laws and regulations may, in certain cases, impose restrictions that are more stringent than the federal measures discussed above. To date, our employees have performed a significant portion of our activities in complying with U.S. federal and state laws and regulations and we have not incurred material out-of-pocket compliance costs.

Our foreign business operations are affected, directly or indirectly, by foreign laws and regulations. For example, our current telemarketing activities in the United Kingdom are subject to a comprehensive telemarketing regulation, which includes a prohibition on calls to numbers on the U.K.’s national do-not-call registry, the Telephone Preference Service, and other regulations imposed by the U.K. regulatory authority, Ofcom. Canada has also established a similar national do-not-call registry, which was first implemented on September 30, 2008. Furthermore, we may in the future determine to commence or expand our operations to other countries, and these countries may have laws or regulations comparable to or more stringent than those affecting our domestic business.

Our business, operating results and reputation may be significantly harmed if we violate, or are alleged to violate, U.S. federal, state or foreign laws or rules covering customer communications. In the pricing agreements they enter into with us, our clients typically agree to comply in all material respects with all applicable legal and regulatory requirements relating to their use of our services. We cannot be certain, however, that our clients comply with these obligations, and typically we cannot verify whether clients are complying with their obligations. Violations by our clients may subject us to costly legal proceedings and if we are found to be wholly or partially responsible for such violations, may subject us to damages, fines or other penalties. For a further description of some of the governmental regulations that may affect our business operations, see “Item 1A. Risk Factors — Risks Related to Regulation of Use of Our Services.”

Employees

As of March 1, 2012, we had a total of 140 employees, consisting of 45 employees in client management, 38 employees in research and development, 31 employees in sales and marketing, 10 employees in operations, and 16 employees in general and administrative. A total of 99 of our employees are based at our headquarters in Bedford, Massachusetts.

From time to time we also employ independent contractors and temporary employees to support our operations. None of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.

Our History

We were founded in Delaware in April 2000. Our principal executive offices are located at 22 Crosby Drive, Bedford, Massachusetts 01730, and our telephone number is +1 781 897 2500. Our website address is www.soundbite.com, and we make available through the investor relations section of our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after such reports are electronically filed with the SEC. We also make our code of ethics and certain other governance documents and policies available through this site. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating it by reference into, this annual report.

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An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below and all of the other information contained in this report before deciding whether to purchase our common stock. The market price of our common stock could decline due to any of these risks and uncertainties, and investors might lose all or part of their investments in our common stock.

Risks Related to Our Business and Industry

Our hosted contact center services face intense competition, and our failure to compete successfully would make it difficult for us to add and retain clients and would impede the growth of our business.

The market for hosted contact center services is intensely competitive, changing rapidly and highly fragmented. It is subject to rapidly developing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of industry participants. Increased competition could result in pricing pressure, reduced sales or lower margins, and could prevent our current or future services from achieving or maintaining broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients and our business, financial condition and operating results will be seriously harmed.

Predictive dialers have been the basic method of automated customer communications for the last two decades, particularly for collections activity. The vast majority of telephony customer contact today is completed using predictive dialer technology. Our hosted customer contact services compete with on-premise predictive dialers from a limited number of established vendors and a number of smaller vendors, as well as predictive dialers hosted by some of those smaller vendors on an application service provider basis. Many businesses have invested in on-premise predictive dialers and are likely to continue using those dialers until the dialers are no longer operational, despite the availability of additional functionality in our hosted customer contact services.

We also compete with a number of providers of hosted contact center services. A limited number of established vendors and a number of smaller, privately held companies offer hosted services that compete principally on the basis of price rather than features. In addition, a small number of vendors focus on providing hosted services with features more comparable to ours. These vendors generally compete on the basis of return on investment, features and price. Other companies may enter the market by offering competing products or services based on emerging technologies, such as open-source frameworks, or by competing on the basis of either features or price. Clients could also potentially employ a multi-vendor strategy for risk mitigation purposes.

We increasingly compete with companies providing hosted contact center services focused on specific vertical markets, such as healthcare, or on a single communications channel, such as text messaging. Because these solutions are targeted to more narrowly defined markets and enable their providers to develop targeted domain expertise, those providers may be able to develop and offer targeted customer contact solutions than a company, such as ours, that seeks to offer a broad range of hosted customer contact services to businesses across a variety of vertical markets.

Some of our competitors have significantly greater financial, technical, marketing, service and other resources than we have. These vendors also have larger installed client bases and longer operating histories. Competitors with greater financial resources might be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors could be in a stronger position to respond quickly to new technologies and could be able to undertake more extensive marketing campaigns.

We have begun to invest in our mobile marketing offerings, and our business could be negatively affected if the market does not develop as we expect or if we fail to offer services that successfully address the needs of a rapidly changing market.

In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications solutions, and in February 2012 we acquired 2ergos Americas, a provider of mobile business and marketing

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solutions. As a result of these acquisitions and our internal development of mobile messaging solutions based on our existing technology, we have invested, and expect to continue to invest, significant financial and management resources in building and offering our mobile marketing services.

Our mobile marketing business is at an early stage of development, and we may not achieve or sustain demand for our mobile marketing offerings. Our success in this effort will depend in part on the performance, availability and pricing of our mobile marketing services in comparison to a wide array of competing products and services. It will also depend on the willingness of businesses to increase their use of mobile marketing applications. The market for these types of services is changing and developing rapidly, as competitors introduce new and enhanced products and services and react to changes in technology, client demands and regulatory requirements. To succeed, we need to enhance our current services and develop new services on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of clients. New products and services based on emerging technologies or industry standards could render our existing services obsolete and unmarketable.

Our mobile marketing endeavors involve significant risks and uncertainties, including distraction of management from other operations, insufficient revenues to offset associated expenses and inadequate return on capital. We cannot assure you that our mobile marketing strategies and offerings will be successful and will not materially adversely affect our reputation, financial condition or operating results.

Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of our common stock.

Our quarterly revenues and other operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter. Our agreements with clients typically do not require minimum levels of usage or payments, and our revenues therefore fluctuate based on the actual usage of our services each quarter by existing and new clients. Quarterly fluctuations in our operating results also might be due to numerous other factors, including:

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Many of these factors are beyond our control, and the occurrence of one or more of them could cause our operating results to vary widely. Because of quarterly fluctuations, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful.

We may fail to forecast accurately the behavior of existing and potential clients or the demand for our services. Our expense levels are based, in significant part, on our expectations as to future revenues and are largely fixed in the short term. As a result, we could be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues.

Variability in our periodic operating results could lead to volatility in our stock price as equity research analysts and investors respond to quarterly fluctuations. Moreover, as a result of any of the foregoing or other factors, our operating results might not meet our announced guidance or expectations of investors and analysts, in which case the price of our common stock could decrease significantly.

We could be subject to substantial damages and expenses if our clients violate U.S. Telephone Consumer Protection Act restrictions as the result of the use of mobile termination text messages.

Over the past several months, class action litigation has been initiated against a number of banks and retailers, including some of our clients, alleging that “mobile termination” text messages violate the U.S. Telephone Consumer Protection Act or TCPA, which seeks to protect the privacy interests of residential telephone subscribers. When a business receives a text message indicating that the sender wishes to “opt out” of further text communications from the business, a mobile termination text message may be transmitted automatically in order to confirm that the business received the opt-out message and will not send any additional text messages.

On October 21, 2011, we received a notice from GameStop Corp. and GameStop Inc., which together we refer to as GameStop, requesting indemnification in connection with a class action litigation entitled Karayan v. GameStop Corp. and GameStop Inc., which we refer to as the Karayan Litigation, which had been initiated against GameStop based in part on mobile termination text messages. We are not a named defendant or other party in the Karayan Litigation.

On January 6, 2012, we delivered a letter agreement to GameStop, in which we agreed to indemnify GameStop in relation to the Karayan Litigation. After investigation, we determined to deliver the letter agreement dated January 6, 2012 in order to, pursuant to the provisions of our Master Pricing Agreement with GameStop, (a) indemnify GameStop for damages, losses and fees resulting from the aspects of the Karayan Litigation relating to mobile termination text messages and (b) confirm that we will take sole control over the defense, and any settlement, of those aspects of the Karayan Litigation. In addition to claims relating to mobile termination text messages, the Karayan Litigation also asserts claims alleging that GameStop is liable to certain of its customers because it failed to obtain prior express consent to the delivery of text messages. In the letter agreement, we reserved our rights concerning any argument that we may have as to our obligation to indemnify

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GameStop with respect to the aspects of the Karayan Litigation relating to the alleged lack of prior express consent.

We intend to defend vigorously against the claims in the Karayan Litigation that allege GameStop violated provisions of the TCPA in delivering mobile termination text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of our indemnification obligations to GameStop, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Karayan Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

We are not a party to any litigation involving a claim that we or any other party violated the TCPA as the result of mobile termination text messages, and we have not been requested to indemnify any client other than GameStop in connection with any such claim under the TCPA. Class action litigation has been initiated against a number of businesses to date with respect to claims under the TCPA involving mobile termination text messages, and it is likely that similar claims will be asserted in the future against businesses, some of which may be our clients. If we are required to indemnify a client under such a future claim, we could incur material costs and expenses that would have a material adverse effect on our business, financial condition and operating results. Moreover, if we were obligated to indemnify clients with respect to multiple class actions of this type, the costs of defending those actions could, by themselves and without regard to the ultimate outcomes of the actions, have a material adverse effect on our business, financial condition and operating results.

Defects in our platforms, disruptions in our services or errors in execution could diminish demand for our services and subject us to substantial liability.

Our multi-channel platforms are complex and incorporate a variety of hardware and proprietary and licensed software. From time to time we have found and corrected defects in a platform. Cloud-based services such as ours frequently experience issues from undetected defects when first introduced or when new versions or enhancements are released. Defects in either of our platforms could result in service disruptions for one or more clients. For example, in October 2008 we experienced a partial outage of the SoundBite Engage platform, which precluded some clients from executing their campaigns in their desired timeframes. Our clients might use our services in unanticipated ways that cause a service disruption for other clients attempting to access their contact list information and other data stored on a platform. In addition, a client may encounter a service disruption or slowdown due to high usage levels of our services.

Clients engage our client management organization to assist them in creating and managing a campaign. As part of this process, we typically construct and test a script, map the client’s input file into our platforms, and map our output files to a client-specific format. In order for a campaign to be executed successfully, our client management staff must correctly design, implement, test and deploy these work products. The performance of these tasks can require significant skill and effort, and from time to time has resulted in errors that adversely affected a client’s campaign.

Because clients use our services for critical business processes, any defect in one of our platforms, any disruption in our services or any error in execution could cause existing or potential clients not to use our services, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients’ businesses.

The insurers under our existing liability insurance policy could deny coverage of a future claim that results from an error or defect in our platforms or a resulting disruption in our services, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceed our insurance coverage, or the occur-

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rence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

Interruptions, delays in service or errors in execution from our key vendors would impair the delivery of our services and could substantially harm our business and operating results.

In delivering our cloud-based services, we rely upon a combination of hosting providers, telecommunication and data carriers, and text and email aggregators. We serve our clients from five hosting facilities that are owned and operated by third parties. Three of the lease agreements for these facilities effectively renew for one-year periods, subject to three months’ advance notice of termination, and one renews monthly, subject to thirty days’ advance notice of termination. The fifth lease agreement terminates in 2014. If one of these lease agreements terminates and we are unable to renew the agreement on commercially reasonable terms, we may need to incur significant expense to relocate the data center or to agree to the terms demanded by the hosting provider, either of which could harm our business, financial position and operating results.

Our clients’ campaigns are handled through a mix of telecommunication and data carriers as well as text and email aggregators. We rely on these service providers to handle millions of customer contacts each day. From time to time these service providers may fail to handle contacts correctly, which could cause existing or potential clients not to use our services, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients’ businesses for which we are not fully indemnified or insured. While we have entered into contracts with multiple telecommunication carriers and text aggregators, we currently do not have fully redundant data, text or email services. Our contracts with carriers and aggregators generally can be terminated by either party at the end of the contract term upon written notice delivered by the party a specified number of days before the end of the term. In addition, we generally can terminate a contract at any time upon written notice delivered a specified number of days in advance, subject to the payment of specified termination charges. If a contract is terminated, we might be unable to obtain pricing on similar terms from another provider, which would affect our gross margins and other operating results.

Our hosting facilities and the infrastructures of our service providers are vulnerable to damage or interruption from floods, fires and similar natural events, as well as acts of terrorism, break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of such a natural disaster or misconduct, a loss of power, a decision by a hosting provider to close a facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our provision of our services. Any interruption or delay in providing our services, even if for a limited time, could have an adverse effect on our business, financial condition and operating results.

Actual or perceived breaches of our security measures could diminish demand for our services and subject us to substantial liability.

Our services involve the storage and transmission of clients’ proprietary information. Cloud-based services such as ours are particularly subject to security breaches by third parties. Breaches of our security measures also might result from employee error or malfeasance or other causes, including as a result of adding new communications services and capabilities to our platforms. In the event of a security breach, a third party could obtain unauthorized access to our clients’ contact list information and other data. Techniques used to obtain unauthorized access or to sabotage systems change frequently, and they typically are not recognized until after they have been launched against a target. As a result, we could be unable to anticipate, and implement adequate preventative measures against, these techniques. Because of the critical nature of data security, any actual or perceived breach of our security measures could subject us to litigation and significant liability for damage to our clients’ businesses, could cause existing or potential clients not to use our services, and could harm our reputation.

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We currently are integrating the operations of two businesses that we acquired recently and we may enter into additional acquisitions in the future, which may be difficult to integrate, disrupt our business, dilute stockholder value and divert management attention.

In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications solutions, and in February 2012 we acquired 2ergos Americas, a provider of mobile business and marketing solutions.

If we encounter unforeseen technical or other challenges in these integration and migration processes, our business and results of operations could be harmed. In particular, challenges or difficulties in migrating or expanding the legacy SmartReply and 2ergo Americas client bases may distract our management’s attention from focusing on our other business operations and may result in our recognizing a lower level of revenues than we expected when we entered into the transactions.

Our business strategy contemplates that we will seek to identify and pursue additional acquisitions of businesses, technologies and products that will complement our existing operations. We cannot assure you that any acquisition we make in the future will provide us with the benefits we anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including:

Acquisitions could result in the incurrence of debt, restructuring charges and large one-time write-offs. Acquisitions could also result in goodwill and other intangible assets that are subject to impairment tests, which

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might result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders would be diluted and earnings per share could decrease.

From time to time, we might enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we are unable to evaluate and execute acquisitions properly, we could fail to achieve our anticipated level of growth and our business and operating results could be adversely affected.

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

The customer communications industry and the telecommunications industry are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. We have in the past been subject to litigation, now concluded, with a third party that alleged that our services violated the third party’s intellectual property rights. As we seek to extend and expand our services, we could be constrained by the intellectual property rights of others.

We might not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements. If our services violate any third-party proprietary rights, we could be required to re-engineer our platforms or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-engineer our services, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Further, our platforms incorporate open source software components that are licensed to us under various public domain licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown.

The expansion of our business into international markets exposes us to additional business risks, and failure to manage those risks could adversely affect our business and operating results.

Historically we targeted substantially all of our sales and marketing efforts principally to businesses located in the United States. In recent years, however, we have focused on increasing resources on businesses located in Europe. We anticipate that an increasing portion of our revenue in future periods will be derived from outside the United States. The continued expansion of our international operations will require substantial financial investment and significant management efforts and will subject us to a number of risks and potential costs, including:

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Our failure to manage the risks associated with our international operations could limit the growth of our business and adversely affect our operating results.

The global economic conditions and related credit crisis may continue to adversely affect our business.

Global market and economic conditions have been negative in recent years, with tighter credit conditions in most major economies since 2009. Continuing concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility, declining business and consumer confidence, increased unemployment, and diminished economic expectations. These market conditions have led to a decrease in spending by businesses and consumers. Continuing turbulence in the United States and international markets and economies and prolonged declines in business and consumer spending could result in lower sales of our services, longer sales cycles, difficulties in collecting accounts receivable, gross margin deterioration, slower adoption of new technologies and increased price competition, any of which may have a negative effect on our financial condition and results of operations.

Many of our clients are not obligated to pay any minimum amount for our services on an on-going basis, and if those clients discontinue use of our services or do not use our services on a regular basis, our revenues would decline.

The agreements we enter into with many of our clients do not require minimum levels of usage or payments and are terminable at will by our clients. The periodic usage of our services by an existing client could decline or fluctuate as a result of a number of factors, including the client’s level of satisfaction with our services, the client’s ability to satisfy its customer contact processes internally, and the availability and pricing of competing products and services. If our services fail to generate consistent business from existing clients, our business, financial condition and operating results will be adversely affected.

We derive a significant portion of our revenues from the sale of our services for use in the collections process, and any event that adversely affects the accounts receivable management industry or in-house accounts receivable management departments would cause our revenues to decline.

We sell our hosted customer contact services for use in the collections process by accounts receivable management agencies and by large in-house accounts receivable management departments. Revenues from these businesses represented 70% of our revenues in 2011, 75% of our revenues in 2010 and 77% of our revenues in 2009. We expect that revenues from accounts receivable management businesses will continue to account for a substantial part of our revenues for the foreseeable future.

Accounts receivable management businesses are particularly subject to changes in the overall economy. In a sustained economic downturn such as the recession experienced globally since 2009, accounts receivable management agencies can be affected adversely by declines in liquidation rates as a result of higher debt and lower disposable income. A prolonged economic downturn will impact these agencies as fewer loans are granted due to the imposition by lenders of conditions on the extension of credit that are not acceptable to potential borrowers. Accounts receivable management businesses also can be affected adversely by a sustained economic upturn, which may result in lower levels of consumer debt default rates. In addition, these businesses may be affected adversely by tightening of credit granting practices as well as technological advances and regulatory changes that affect the collection of outstanding indebtedness. Any such changes, conditions or events that adversely affect these businesses could cause us to lose some or all of the recurring business of our clients in the

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accounts receivable management industry, which in turn could have a material adverse effect on our business, financial condition and operating results.

Moreover, two clients accounted for a total of 23% of our revenues in 2011, 23% of our revenues in 2010 and 29% of our revenues in 2009. One of these clients is an accounts receivable management agency and the other is a large in-house accounts receivable management department of a telecommunications business. In addition to the risks associated with accounts receivable management businesses in general, our business, financial condition and operating results would be negatively affected if either of these clients were to significantly decrease the extent to which it uses our hosted customer contact services.

Our business will be harmed if we fail to develop new features that keep pace with technological developments and emerging consumer trends.

Businesses can use a variety of communication channels to reach their customers. Emerging consumer trends have forced a greater focus on alternative channels, customer preferences and communications via mobile devices and a failure to address these trends would be a threat to the adoption of our services. Our business, financial condition and operating results will be adversely affected if we are unable to complete and introduce, in a timely manner, new features for our existing services that keep pace with technological developments. For example, because most of our clients access our cloud-based services using a web browser, we must modify and enhance our services from time to time to keep pace with new browser technology.

Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could harm our operating results.

Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or will be acquired. For example, in February 2011 West Corporation, a provider of voice and data solutions, announced it had acquired Twenty First Century Communications, Inc., a provider of automated alerts and notification solutions. In August 2011 Augme Technologies, Inc., a mobile marketing service, acquired substantially all of the assets of Hipcricket, Inc, a mobile marketing and advertising company. In December 2011 Lenco Mobile Inc., a provider of advertising and technical platforms primarily for the high-growth mobile and online marketing sectors, acquired iLoop Mobile, Inc., a mobile marketing service organization.

In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could have a material adverse effect on our business, operating results and financial condition.

Failure to maintain our direct sales force will impede our growth.

We are highly dependent on our direct sales force to obtain new clients and to generate repeat business from our existing client base. It is therefore critical that our direct sales force maintain regular contact with our clients, both to gauge client satisfaction with our services as well as to highlight the value that use of our services adds to their enterprises. There is significant competition for direct sales personnel. Our ability to achieve growth in revenues in the future will depend in large part on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. New hires require significant training and typically take more than a year before they achieve full productivity. Our recent and planned hires might not achieve full productivity as quickly as intended, or at all. If we fail to keep, hire and successfully train sufficient numbers of direct sales personnel, we will be unable to increase our revenues and the growth of our business will be impeded.

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Because competition for employees in our industry is intense, we might not be able to attract and retain the highly skilled employees we need to execute our business plan.

To continue to execute our business plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior engineers and senior sales executives. We might not be successful in attracting and retaining qualified personnel. We have experienced from time to time in the past, and expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in technology-based industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Volatility in the price of our common stock could therefore, adversely affect our ability to attract or retain key employees. Furthermore, the requirement to expense stock options could discourage us from granting the size or type of stock options awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business plan and future growth prospects could be severely harmed.

If we are unable to protect our intellectual property rights, we would be unable to protect our technology and our brand.

If we fail to protect our intellectual property rights adequately, our competitors could gain access to our technology and our business could be harmed. We rely on trade secret, copyright and trademark laws, and confidentiality and assignment of invention agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property might not prevent misappropriation of our proprietary rights. We have three issued patents and eleven patent applications pending in the United States. Our issued patents and any patents issued in the future may not provide us with any competitive advantages or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and might afford little or no effective protection of our proprietary technology. Consequently, we could be unable to prevent our intellectual property rights from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of intellectual property rights is expensive, difficult and, in some cases, impossible. Litigation could be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we might not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

We are subject to risks associated with outsourcing services to third parties, and failure to manage those risks could adversely affect our business and operating results.

We contract with several third-party vendors that provide services to us or to whom we delegate selected functions. These third-party vendors supplement our internal engineering efforts. Our arrangements with these third-party vendors may make our operations vulnerable if the third parties fail to satisfy their obligations to us:

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Our third-party vendor arrangements could be adversely impacted by changes in a vendor’s operations or financial condition or other matters outside of our control. There is no assurance that our third-party vendors will continue to provide services to us or that they will renew or not terminate their arrangements with us. Any interruption in their services could adversely affect our operations unless and until we can identify a new vendor or replace an existing vendor’s services with internal resources at additional cost.

Our platforms rely on technology licensed from third parties, and our inability to maintain licenses of this technology on similar terms or errors in the licensed technology could result in increased costs or impair the implementation or functionality of our cloud-based services, which would adversely affect our business and operating results.

Our multi-tenant customer communication platforms relies on technology licensed from third-party providers. For example, we use the Apache web server, the Oracle WebLogic application server, the JBoss Application server, Nuance Communications text-to-speech and automated speech recognition software, the Oracle database, and the MySQL database. We anticipate that we will need to continue to license technology from third parties in the future. There might not always be commercially reasonable software alternatives to the third-party software that we currently license. Any such software alternatives could be more difficult or costly to replace than the third-party software we currently license, and integration of that software into our platforms could require significant work and substantial time and resources. Any undetected errors in the software we license could prevent the implementation of our cloud-based services, impair the functionality of our services, delay or prevent the release of new features or offerings, and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which might not be available on commercially reasonable terms or at all.

Industry consolidation could reduce the number of our clients and adversely affect our business.

Some of our significant clients from time to time may merge, consolidate or enter into alliances with each other. The surviving entity or resulting alliance may subsequently decide to use a different service provider or to manage customer contact campaigns internally. Alternatively, the surviving entity or resulting alliance may elect to continue using our services, but its strengthened financial position or enhanced leverage may lead to pricing pressure. Either of these results could have a material adverse effect on our business, operating results and financial condition. We may not be able to offset the effects of any such price reductions, and may not be able to expand our client base to offset any revenue declines resulting from such a merger, consolidation or alliance.

Our ability to use net operating loss carryforwards in the United States may be limited.

As of December 31, 2011, we had net operating loss carryforwards of $24.0 million for U.S. federal tax purposes and an additional $6.0 million for state tax purposes. These carryforwards expire between 2013 and 2031. To the extent available, we intend to use these net operating loss carryforwards to reduce the corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We experienced ownership changes

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for these purposes in 2007, which resulted in an annual limitation amount of approximately $8.0 million on the use of net operating loss carryforwards generated from November 29, 2001 through November 8, 2007. To the extent our use of net operating loss carryforwards is limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

If we are unable to raise capital when needed in the future, we may be unable to execute our growth strategy, and if we succeed in raising capital, we may dilute investors’ percentage ownership of our common stock or may subject our company to interest payment obligations and restrictive covenants.

We may need to raise additional funds through public or private debt or equity financings in order to:

Any additional capital raised through the sale of equity may dilute investors’ percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all. A failure to obtain additional funding could prevent us from making expenditures that may be required to grow or maintain our operations.

Risks Related to Regulation of Use of Our Services

We derive a significant portion of our revenues from the sale of our services for use in the collections process, and our business and operating results could be substantially harmed if new U.S. federal and state laws or regulatory interpretations in one or more jurisdictions either make our services unavailable or less attractive for use in the collections process or expose us to regulation as a debt collector.

Revenues from clients in the accounts receivable management industry and large in-house, or first-party, accounts receivable management departments represented approximately 70% of our revenues in 2011, 75% of our revenues in 2010 and 77% of our revenues in 2009. These clients’ use of our services is affected by an array of complex federal and state laws and regulations. The U.S. Fair Debt Collection Practices Act, or FDCPA, limits debt collection communications by clients in the accounts receivable management industry, including third parties retained by creditors. For example, the FDCPA prohibits abusive, deceptive and other improper debt collection practices, restricts the timing and content of communications regarding a debt or a debtor’s location, and allows consumers to opt out of receiving debt collection communications. In general, the FDCPA also prohibits the use of debt collection communications to cause debtors to incur more debt. Many states impose additional requirements on debt collection communications, including limits on the frequency of debt collection calls, and some of those requirements may be more stringent than the comparable federal requirements. Moreover, debt collection communications are subject to new regulations, as well as changing regulatory interpretations that may be inconsistent among different jurisdictions. For example, in February 2012 the Federal Communications Commission, or FCC, modified its rules to require opt-in for all prerecorded calls made to mobile phones, which limits our clients’ ability to use our services to call a mobile phone for the purposes of collections without having prior written consent from a customer. Our business, financial position and operating results could be substantially harmed by the adoption or interpretation of U.S. federal or state laws or regulations that make our services either unavailable or less attractive for debt collection communications by existing and potential clients.

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We provide our services for use by creditors and debt collectors, but we do not believe that we are a debt collector for purposes of these U.S. federal or state regulations. An allegation by one or more jurisdictions that we are a debt collector for purposes of their regulations could cause existing or potential clients not to use our services, harm our reputation, subject us to administrative proceedings, or result in our incurring significant legal fees and other costs. If it were to be determined that we are a debt collector for purposes of the regulations of one or more jurisdictions, we could be exposed to government enforcement actions and regulatory penalties and would be subject to additional rules, including licensing and bonding requirements. The costs of complying with these rules could be substantial, and we might be unable to continue to offer our services for debt collection communications in those jurisdictions, which would have a material adverse effect on our business, financial condition and operating results. In addition, if clients use our services in violation of limits on the content, timing and frequency of their debt collection communications, we could be subject to claims by consumers that result in costly legal proceedings and that lead to civil damages, fines or other penalties.

We could be subject to significant penalties or damages if our clients violate U.S. federal or state restrictions on the use of artificial or prerecorded messages to contact wireless telephone numbers, and our business and operating results could be substantially harmed if those restrictions make our service unavailable or less attractive.

Under the TCPA, it is unlawful to use an automatic telephone dialing system or an artificial or prerecorded message to contact any cellular or other wireless telephone number, unless the recipient previously has consented to receiving this type of communication. In February 2012 the FCC modified its rules to require opt-in for all autodialed or prerecorded calls made to mobile phones, which limits our clients’ ability to use our service to call a mobile phone for the purposes of information, customer care or telemarketing without having prior written consent from a customer. Many states have enacted restrictions on using automatic dialing systems and artificial and prerecorded messages to contact wireless telephone numbers, and some of those state requirements may be more stringent than the comparable federal requirements.

Our services provide our clients with the capability to transmit artificial and prerecorded messages. Although our services are designed to enable a client to screen a contact list to remove wireless telephone numbers, a client may determine that autodialed or prerecorded communication to certain wireless telephone numbers are permitted because the recipients previously have consented to receiving such communication. We cannot ensure that, in using our services for a campaign, a client removes from its contact list the names of all persons who are associated with wireless telephone numbers and who have not consented to receiving artificial or prerecorded communication. On January 11, 2012, a class action litigation, which we refer to as the Sager Litigation, was filed against Bank of America and us as co-defendants. The Sager Litigation alleges that we and Bank of America sent text massages to the plaintiff without the plaintiff’s prior express consent, in violation of the TCPA. Plaintiff is seeking confirmation of a class of individuals who received unauthorized text message solicitations from us. We intend to defend vigorously against the claims in the Sager Litigation that allege we violated provisions of the TCPA in delivering text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of the Sager Litigation, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Sager Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

In May 2008, a federal district court in California held that the Telemarketing and Consumer Fraud and Abuse Prevention Act prohibits any autodialed or prerecorded telephone call to a consumer’s cell phone unless the consumer had specifically consented to such calls. The same provision of such Act also applies to the sending of commercial text messages to cell phones. The ruling overturned an earlier FCC interpretation that permitted autodialed and prerecorded calls to the cell phone of any consumer who had provided the cell phone number in connection with requesting a product or service. The ruling applied only in California and was subsequently overturned but, as a result of the initial decision, some existing or potential clients may decide to limit their use of our service to reach consumers on wireless numbers, which could materially adversely affect our revenues and other operating results.

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If clients use our services in a manner that violates any of these governmental regulations, federal or state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our service. If clients use our services to screen for wireless telephone numbers and our screening mechanisms fail, we may be subject to regulatory fines or other penalties as well as contractual claims by clients for damages, and our reputation may be harmed.

Regulatory restrictions on the use of artificial and prerecorded messages present particular problems for businesses in the accounts receivable management industry. These third-party accounts receivable management agencies and debt buyers do not have direct relationships with the consumer debtors and therefore typically do not have the ability to obtain from a debtor the consent required to permit the use of autodialed or prerecorded messages in contacting a debtor at a wireless telephone number. These businesses’ lack of a direct relationship with debtors also makes it more difficult for them to evaluate whether a debtor has provided such consent. For example, a accounts receivable management agency frequently must evaluate whether past actions taken by a debtor, such as providing a cellular telephone number in a loan application, constitute consent sufficient to permit the agency to contact the debtor using autodialed or prerecorded messages. Moreover, a significant period of time elapses between the time at which a loan is made and the time at which a accounts receivable management agency or debt buyer seeks to contact the debtor for repayment, which further complicates the determination of whether the accounts receivable management agency or debt buyer has the required consent to use an automatic telephone dialing system or prerecorded messages. The difficulties encountered by these third-party accounts receivable management businesses are becoming increasingly problematic as the percentage of U.S. consumers using cellular telephones continues to increase. If these third-party accounts receivable management businesses are unable to use an automatic telephone dialing system or prerecorded messages to contact a substantial portion of their debtors, our services will be less useful to them. If our clients in the accounts receivable management industry significantly decrease their use of our services, our business, financial position and operating results would be substantially harmed.

We could be subject to penalties if we or our clients violate U.S. federal or state telemarketing restrictions due to a failure of our services or otherwise, which could harm our financial position and operating results.

The use of our services for marketing communications is affected by extensive federal and state telemarketing regulation. The Telemarketing and Consumer Fraud and Abuse Prevention Act and the TCPA, among other U.S. federal laws, empower both the Federal Trade Commission, or FTC, and the FCC to regulate interstate telephone sales calling activities. The FTC’s Telemarketing Sales Rule and analogous FCC rules require us to, for example, transmit Caller ID information, disclose certain information to call recipients, and retain certain business records. FTC and FCC rules proscribe misrepresentations, prohibit the abandonment of telemarketing calls and limit the timing of calls to consumers. Both the FTC and FCC also prohibit telemarketing calls to persons who have placed their numbers on the national Do-Not-Call Registry, except for calls made with an existing business relationship, or EBR, or subject to other limited exceptions. If we fail to comply with applicable FTC and FCC telemarketing regulations, we may be subject to substantial regulatory fines or other penalties as well as contractual claims by clients for damages, and our reputation may be harmed. The FTC’s Telemarketing Sales Rule, for example, imposes fines of up to $16,000 per violation. The FCC may also impose forfeitures of up to $16,000 per violation of its telemarketing rules. If clients use our services in a manner that violates any of these telemarketing regulations, the FTC or FCC may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our services.

In addition, in 2008 the FTC adopted an amendment to the Telemarketing Sales Rule requiring that “express written consent” be obtained for all pre-recorded sales calls that are delivered as of September 1, 2009. Thus, a business that attempts to sell goods or services through the use of prerecorded messages will need to take the extra step to obtain “opt-in” from consumers before pre-recorded sales calls can be delivered, even with respect to consumers with whom the business has an EBR. We cannot ensure that, in using our services for a campaign, a client will obtain appropriate “opt-in” authorization before placing prerecorded telemarketing calls or that the client properly interprets and applies the “opt-in” requirement. If clients use our services to place unauthorized

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calls or in a manner that otherwise violates FTC or FCC restrictions on prerecorded telemarketing calls, U.S. federal or state authorities may seek to subject us to substantial regulatory fines or other penalties, even if the violation did not result from a failure of our screening mechanisms.

Many states have enacted prohibitions or restrictions on telemarketing calls into their states, specifically covering the use of automatic dialing system and predictive dialing techniques. Some of those state requirements are more stringent than the comparable federal requirements. If clients use our services in a manner that violates any of these telemarketing regulations, state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our services.

To the extent that our services are used to send text or email messages, our clients will be, and we may be, affected by regulatory requirements in the United States. Businesses may determine not to use these channels because of prior consent, or opt-in, requirements or other regulatory restrictions, which could harm our future business growth.

Our failure to comply with numerous and overlapping information security and privacy requirements could subject us to fines and other penalties as well as claims by our clients for damages, any of which could harm our reputation and business.

Our collection, use and disclosure of personal information are affected by numerous privacy, security and data protection regulations. We are subject to the Gramm-Leach-Bliley Privacy Act when we receive nonpublic personal information from clients that are treated as financial institutions under those rules. These rules restrict disclosures of consumer information and limit uses of such information to certain purposes that are disclosed to consumers. The related Gramm-Leach-Bliley Safeguards Rule requires our financial institution clients to impose administrative, technical and physical data security measures in their contracts with us. Compliance with these contractual requirements can be costly, and our failure to satisfy these requirements could lead to regulatory penalties or contractual claims by clients for damages.

In some instances our services require us to receive consumer information that is protected by the Fair Credit Reporting Act, which defines permissible uses of consumer information furnished to or obtained from consumer reporting agencies. We generally rely on our clients’ assurances that any such information is requested and used for permissible purposes, but we cannot be certain that our clients comply with these restrictions. We could incur costs or could be subject to fines or other penalties if the FTC determines that we have mishandled protected information.

Many jurisdictions, including the majority of states, have data security laws including data security breach notification laws. When our clients operate in industries that have specialized data privacy and security requirements, they may be subject to additional data protection restrictions. For example, the federal Health Insurance Portability and Accountability Act, or HIPAA, regulates the maintenance, use and disclosure of personally identifiable health information by certain health care-related entities. States may adopt privacy and security regulations that are more stringent than federal rules, and we may be required by such regulations to establish comprehensive data security programs that could be costly. If we experience a breach of data security, we could be subject to costly legal proceedings that could lead to civil damages, fines or other penalties. We or our clients could be required to report such breaches to affected consumers or regulatory authorities, leading to disclosures that could damage our reputation or harm our business, financial position and operating results.

Since 2007 we have been certified as compliant with the Payment Card Industry, or PCI, Data Security Standard, which mandates a set of comprehensive requirements for protecting payment account data. Our continuing PCI compliance is essential for many of our customer communication offerings, such as fully-automated payment transactions and payment authorizations, and is particularly important for financial institutions, credit card issuers and retailers. We must seek and receive certification of PCI compliance on an annual basis. PCI compliance measures are rigorous and subject to change, and our implementation of new customer communication platform technology and solutions could adversely affect our ability to be re-certified. As a

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result, we cannot assure you that we will be able to maintain our certification for PCI compliance. Our loss of PCI certification could make our customer communication solutions less attractive to potential customers, particularly those in the financial and retail industries, which in turn could have an adverse effect on our revenue and other operating results.

We may record certain of our calls for quality assurance, training or other purposes. Many states require both parties to consent to such recording, and may adopt inconsistent standards defining what type of consent is required. Violations of these rules could subject us to fines or other penalties, criminal liability, or claims by clients for damages, any of which could hurt our reputation or harm our business, financial position and operating results.

It may be impossible for us to comply with the different data protection regulations that affect us in different jurisdictions. For example, the USA PATRIOT Act provides U.S. law enforcement authorities certain rights to obtain personal information in the control of U.S. persons and entities without notifying the affected individuals. Some foreign laws, including some in the European Union, prohibit such disclosures. Such conflicts could subject us and clients to costs, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.

The expansion of our business into international markets requires us to comply with additional debt collection, telemarketing, data privacy or similar regulations, which may make it costly or difficult to operate in these markets.

Although historically we have targeted substantially all of our sales and marketing efforts principally to businesses located in the United States, more recently we have begun focusing more resources on businesses located in Europe. In April 2010, for example, we formed a subsidiary under UK law to target businesses located in the United Kingdom. Countries other than the United States have laws and regulations governing debt collection, telemarketing, data privacy or other communications activities comparable in purpose to the U.S. and state laws and regulations described above. Compliance with these requirements may be costly and time consuming, and may limit our ability to operate successfully in one or more foreign jurisdictions.

Many of the regulations governing our activities in the European Union result from EU legislation on privacy and data protection. As a result, the principal lawmakers for our purposes are European institutions – the European Commission, the European Parliament and the Council of Ministers. We take into account developments in the European Union as well as developments in the United Kingdom. Because our primary international business is driven from the United Kingdom, our regulatory due diligence to date has been focused on this member State. In terms of enforcement, the UK regulators of primary importance to us are:

The Communications Act of 2003 gives Ofcom the power to issue and enforce notifications when it has reasonable grounds to believe a person has persistently misused an electronic communications network or service in such a manner, or otherwise engage in conduct that has either the effect, or likely effect, of causing another person unnecessarily to suffer annoyance, inconvenience or anxiety. The other sector-specific legislation governing our UK operations consists of The Privacy and Electronic Communications (EC Directive) (Amendment) Regulations (2003) as amended in 2011 to implement the new e-privacy EU Directive. These regulations contain marketing rules governing businesses that send marketing and advertising by electronic means such as telephone,

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fax, email, text message and picture (including video) message and by using an automated calling system. These regulations also cover related areas such as telephone directories, traffic and location data, and the use of cookies.

Risks Related to Ownership of Our Common Stock

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock depends in part on the research and reports that equity research analysts publish about our company and business. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about our company and business.

Future sales of our common stock by existing stockholders could cause our stock price to decline.

If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. The market price of shares of our common stock could drop significantly if our officers, directors or other stockholders decide to sell shares of our common stock into the market.

Our directors, executive officers and their affiliated entities will continue to have substantial control over us and could limit the ability of other stockholders to influence the outcome of key transactions, including changes of control.

As of March 1, 2012, our executive officers and directors and their affiliated entities, in the aggregate, beneficially owned 41% of our common stock. In particular, affiliates of North Bridge Ventures Partners, including James A. Goldstein, one of our directors, in the aggregate, beneficially owned 29% of our common stock. Our executive officers, directors and their affiliated entities, if acting together, are able to control or significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These stockholders may have interests that differ from those of other investors, and they might vote in a way with which other investors disagree. The concentration of ownership of our common stock could have the effect of delaying, preventing, or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and could negatively affect the market price of our common stock.

Our corporate documents and Delaware law make a takeover of our company more difficult, which could prevent certain changes in control and limit the market price of our common stock.

Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain provisions that could enable our management to resist a takeover of our company. These provisions could discourage, delay, or prevent a change in the control of our company or a change in our management. They could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. Some provisions in our charter and by-laws could deter third parties from acquiring us, which could limit the market price of our common stock.

We do not intend to pay dividends on our common stock in the foreseeable future.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Accordingly, investors are not

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likely to receive any dividends on their common stock in the foreseeable future, and their ability to achieve a return on their investment will therefore depend on appreciation in the price of our common stock.

None.

In May 2007 we entered into a lease for 37,000 square feet of office space for our headquarters in Bedford, Massachusetts. The term of the lease commenced as of September 17, 2007 and will expire in September 2013. We have the option to extend the lease term through September 2018 by providing written notice. In addition, in May 2008 we entered into a lease for a single sales office in Grapevine, Texas. This lease is for a seven month term and automatically renews for an additional seven months unless written notification is made at least 60 days prior to the expiration of the renewal. In connection with the SmartReply asset acquisition in June 2011, we entered into a lease for office space in Irvine, California. This lease will expire in April 2012. We are not opting to extend this lease and are currently evaluating other lease options. In connection with the 2ergo Americas acquisition in February 2012, we became party to a lease for office space in Arlington, Virginia. This lease will expire in April 2012. We expect to extend the lease for a three year term.

We serve our clients from five third-party hosting facilities. One facility is located in Ashburn, Virginia, and is leased under an agreement that expires in March 2012. Another facility is located in Somerville, Massachusetts, and is leased under an agreement that expires in May 2012. Our agreements for these two facilities automatically renew for one-month periods under current terms unless written notification is made by either party 90 days prior to renewal. Our third hosting facility is located in Slough, United Kingdom and leased under an agreement that automatically renews for twelve-month periods unless written notification is made by either party three months prior to the expiration date. Our fourth facility is located in Las Vegas, Nevada and is leased under an agreement that automatically renews for monthly periods unless written notification is made 30 days prior to the expiration date. Our fifth facility, which also is located in Ashburn, Virginia, is leased by 2ergo Americas under an agreement that expires in 2014.

Indemnification Regarding Karayan Litigation

Over the past several months, class action litigation has been initiated against a number of banks and retailers, including some of our clients, alleging that “mobile termination” text messages violate the U.S. Telephone Consumer Protection Act or TCPA, which seeks to protect the privacy interests of residential telephone subscribers. When a business receives a text message indicating that the sender wishes to “opt out” of further text communications from the business, a mobile termination text message may be transmitted automatically in order to confirm that the business received the opt-out message and will not send any additional text messages.

On October 21, 2011, we received a notice from GameStop Corp. and GameStop Inc., which together we refer to as GameStop, requesting indemnification in connection with a class action litigation entitled Karayan v. GameStop Corp. and GameStop Inc., which we refer to as the Karayan Litigation, which had been initiated against GameStop based in part on mobile termination text messages. We are not a named defendant or other party in the Karayan Litigation.

On January 6, 2012, we delivered a letter agreement to GameStop, in which we agreed to indemnify GameStop in relation to the Karayan Litigation. After investigation, we determined to deliver the letter agreement dated January 6, 2012 in order to, pursuant to the provisions of our Master Pricing Agreement with GameStop, (a) indemnify GameStop for damages, losses and fees resulting from the aspects of the Karayan Litigation relating to mobile termination text messages and (b) confirm that we will take sole control over the defense, and any settlement, of those aspects of the Karayan Litigation. In addition to claims relating to mobile

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termination text messages, the Karayan Litigation also asserts claims alleging that GameStop is liable to certain of its customers because it failed to obtain prior express consent to the delivery of text messages. In the letter agreement, we reserved our rights concerning any argument that we may have as to our obligation to indemnify GameStop with respect to the aspects of the Karayan Litigation relating to the alleged lack of prior express consent.

We intend to defend vigorously against the claims in the Karayan Litigation that allege GameStop violated provisions of the TCPA in delivering mobile termination text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of our indemnification obligations to GameStop, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Karayan Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

See “Item 1A. Risk Factors – We could be subject to substantial damages and expenses if our clients violate U.S. Telephone Consumer Protection Act restrictions as the result of the use of mobile termination text messages.”

Sager Litigation

On January 11, 2012, a class action litigation, which we refer to as the Sager Litigation, was filed against Bank of America and us as co-defendants. The Sager Litigation alleges that we and Bank of America sent text massages to the plaintiff without the plaintiff’s prior express consent, in violation of the TCPA. Plaintiff is seeking confirmation of a class of individuals who received unauthorized text message solicitations from us. We intend to defend vigorously against the claims in the Sager Litigation that allege we violated provisions of the TCPA in delivering text messages. We are continuing to investigate this matter. At this time it is not possible for us to estimate the amount of damages, losses, fees and other expenses that we will incur as the result of the Sager Litigation, but such an amount could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in defending against the Sager Litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

See “Item 1A. Risk Factors – We could be subject to significant penalties or damages if our clients violate U.S. federal or state restrictions on the use of artificial or prerecorded messages to contact wireless telephone numbers, and our business and operating results could be substantially harmed if those restrictions make our service unavailable or less attractive.”

Other Proceedings

The customer communications industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various legal proceedings from time to time.

Not applicable.

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PART II

Market Price of Common Stock

Our common stock has been traded on The NASDAQ Global Market under the symbol “SDBT” since November 6, 2007. Prior to that time, there was no established public trading market for our common stock. The following table presents the high and low sale prices of our common stock as reported by The NASDAQ Global Market, for the periods indicated.

The last sale price of the common stock on March 1, 2012, as reported by The NASDAQ Global Market, was $3.10 per share. As of March 1, 2012, there were 42 holders of record of the common stock.

We have never declared or paid any cash dividends on our common stock and currently expect to retain future earnings for use in our business for the foreseeable future.

Purchases of Equity Securities by the Issuer

The following table sets forth, for the month indicated, our purchases of common stock in the fourth quarter of fiscal 2011:

Issuer Purchases of Equity Securities

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The following table summarizes selected financial data for our business and is derived from our historical consolidated financial statements. You should read the selected financial data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and our consolidated financial statements and related notes included elsewhere herein.

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You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this annual report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Item 1A. Risk Factors” and elsewhere in this annual report.

Overview

We provide cloud-based, multi-channel services that enable businesses to design, execute and measure customer communication campaigns for a variety of marketing, customer care, payment and collection processes. Clients use the SoundBite Engage and SoundBite Insight platforms to communicate proactively with their customers through automated voice messaging, predictive dialing, emails, text messaging and web communications that are relevant, timely, personalized and engaging.

Our services are provided using a multi-tenant, cloud-based architecture that enables us to serve all of our clients cost-effectively. “Cloud-based” refers to the delivery of technology services through the Internet, which includes delivery of software as a service or SaaS. Because our services are cloud-based, businesses using our services do not need to invest in or maintain new hardware or to hire and manage additional dedicated information technology staff. In addition, we are able to implement new features on our platforms that become part of our services automatically and can benefit all clients immediately. Our secure platforms are designed to serve increasing numbers of clients and growing demand from existing clients, enabling the platforms to scale reliably and cost-effectively.

We serve two global markets: hosted contact centers and mobile marketing. Our hosted contact center services are used primarily by companies in the accounts receivable management (or collections), energy and utilities, financial services, retail, and telecommunications and media industries. Our mobile marketing client base consists principally of companies in the consumer package goods, retail, and telecommunications and media industries.

In 2011 our services were used by more than 400 businesses located in the United States and Europe. We use our direct sales channel principally to target large business-to-consumer companies, and we leverage our partnership channel to offer our services more broadly within our target markets, to enter new vertical markets, to augment our international expansion and to sell to smaller businesses cost effectively.

We derive, and expect to continue to derive for the foreseeable future, a substantial majority of our revenues from the hosted contact center market. Our strategy for achieving long-term, sustained growth in our revenues and net income is focused on building upon our leadership position in the hosted contact center market and executing on our key initiatives. For example, one of our strategic initiatives is targeted on the high growth area of mobile marketing, which leverages our text capabilities. In line with this strategy, in June 2011 we acquired

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key assets and assumed certain liabilities of SmartReply, a mobile marketing company located in Irvine, California. Additionally, in February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc, a mobile business and marketing solutions company located in Arlington, Virginia.

Key Components of Results of Operations

Revenues

We currently derive a substantial portion of our revenues by providing our services for use by clients in communicating with their customers through voice, text and email messages. We provide our services under a combination of usage and subscription-based models. Under our usage-based model, prices are calculated on a per-message or per-minute basis in accordance with the terms of pricing agreements with clients. We primarily invoice our clients on a monthly basis.

Our pricing agreements with a substantial majority of our clients either do not require any minimum usage or payments, or require only an immaterial level of usage or payments. Each executed message represents a transaction from which we derive revenues, and we therefore recognize revenue based on actual usage within a calendar month. We do not recognize revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable.

Cost of Revenues

Cost of revenues consist primarily of telephony and text message charges, compensation expense for our operations personnel, depreciation and maintenance expense for our platforms and lease costs for our data center facilities. As we continue to grow our business and add features to our platforms, we expect cost of revenues will continue to increase on an absolute dollar basis. Our annual gross margin was 59.1% in 2011, 59.6% in 2010 and 60.4% in 2009. We currently are targeting a gross margin of 59% to 61% for the foreseeable future. Our gross margin may vary significantly from our target range for a number of reasons, including revenue levels, the mix of types of messaging campaigns executed, as well as the extent to which we build our infrastructure through, for example, significant acquisitions of hardware or material increases in leased data center facilities.

Operating Expenses

Research and Development.    Research and development expenses consist primarily of compensation expenses and depreciation expense of certain equipment related to the development of our services. We have historically focused our research and development efforts on improving and enhancing our platforms, as well as developing new features and offerings.

Sales and Marketing.    Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We expect to further invest in developing our marketing strategy and activities to extend brand awareness and generate additional leads for our sales staff.

General and Administrative.    General and administrative expenses consist of compensation expenses for executive, finance, accounting, administrative and management information systems personnel, accounting and legal professional fees and other corporate expenses.

Recent Developments

Cost Saving Activities.    In May 2011, we eliminated two research and development positions, five sales and marketing positions, and one general and administrative position in order to lower our cost of operations. In addition to these reductions, we also reduced the use of external contracting resources. These actions resulted in cost savings of approximately $500,000 in 2011.

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SmartReply Asset Acquisition.    As a result of our acquisition of key assets of SmartReply in June 2011, we incurred an additional $2.2 million in operating expenses in 2011, excluding costs related to the purchase price. The additional operating expenses incurred during 2011 included $688,000 of amortization expense related to the acquisition of intangible assets, primarily customer lists. We estimate this expense will be $907,000 for 2012 and $569,000 for 2013.

2ergo Americas Acquisition.    In February 2012, we acquired 2ergo Americas, the U.S. operations of 2ergo Group plc, for a cash purchase price of $3.8 million (subject to post closing adjustment). 2ergo Americas is a mobile business and marketing solutions company located in Arlington, Virginia and has a current annualized revenue run rate of approximately $3.5 million.

Additional Key Measures of Financial Performance

We present information below with respect to cash flow from operating activities and free cash flow. Free cash flow is a measure of financial performance calculated as cash flow from operating activities plus proceeds from the sale of equipment, less payments of contingent purchase price, investments in capitalized software and purchases of property and equipment.

Management uses these metrics to track business performance. Due to the current economic environment, management decisions are based in part, on a goal of maintaining positive cash flow from operating activities and free cash flow. We believe these metrics are useful measures of the performance of our business because, in contrast to statement of operations metrics that rely principally on revenue and profitability, cash flow from operating activities and free cash flow capture the changes in operating assets and liabilities during the year and the effect of noncash items such as depreciation and stock-based compensation. We believe that, for similar reasons, these metrics are often used by security analysts, investors and other interested parties in the evaluation of SaaS and other software companies.

The term “free cash flow” is not defined under U.S. generally accepted accounting principles, or GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. All or a portion of free cash flow may be unavailable for discretionary expenditures. Free cash flow has limitations as an analytical tool and when assessing our operating performance, you should not consider free cash flow in isolation from or as a substitute for data, such as net income (loss), derived from financial statements prepared in accordance with GAAP.

Our operating activities used net cash in the amount of $701,000 for the year ended December 31, 2011 reflecting a net loss of $1.5 million, which was offset in part by non-cash charges and changes in working capital of $806,000. Those charges and changes consisted primarily of (a) depreciation and amortization expense of $2.2 million and (b) stock-based compensation expense of $1.2 million, partially offset by (c) an increase in accrued expenses and accounts payable of $786,000, (d) an increase in accounts receivable and prepaid expenses of $1.1 million, and (e) a deferred income tax benefit of $905,000. The increase in accrued expenses and accounts payable was due to the timing of payments, and the increase in accounts receivable and prepaid expenses reflected the timing of receipts from our clients, as well as advance payments of certain operating costs.

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Our operating activities generated net cash in the amount of $313,000 for the year ended December 31, 2010 reflecting a net loss of $3.3 million, which was offset by non-cash charges and changes in working capital of $3.5 million consisting primarily of (a) depreciation expense of $1.8 million, (b) stock-based compensation expense of $1.4 million, and (c) a decrease in accounts receivable, prepaid expenses and other assets of $302,000 due to the timing of receipts from our clients and the advance payments of certain operating costs.

Our operating activities used net cash in the amount of $294,000 for the year ended December 31, 2009 reflecting a net loss of $4.0 million and an increase in accounts receivable, prepaid expenses and other assets of $460,000, mainly due to the timing of receipts from our clients. These changes were partially offset by non-cash charges of $3.8 million, which consisted primarily of depreciation expense of $2.5 million, as well as an increase in accrued expenses and accounts payable of $429,000 due to the timing of payments to our vendors.

Free cash flow in each of the years presented reflects, in addition to the factors driving cash flow from operating activities, our purchases of property and equipment, which consists primarily of computer equipment and software, investments in capitalized software, proceeds from the sale of our equipment and our payments of contingent purchase price in connection with our acquisition of the assets of Mobile Collect in 2008.

Critical Accounting Policies

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

We believe that of our significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment and complexity. A critical accounting policy is one that both is material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Valuation of Goodwill

We have recognized goodwill from our February 2008 acquisition of the assets of Mobile Collect, in which a significant portion of the consideration was contingent on the future revenues of the acquired assets. Because of the accounting rules in effect at the time of the acquisition and the uncertainties with respect to future revenues, the contingent consideration was recognized as additional purchase price as the consideration was determined and became payable. We expect the final payment for this asset acquisition, approximating $200,000, will come due in 2012. As of December 31, 2011, we have recognized $1.6 million of goodwill from this acquisition. In addition, we have recognized $2.7 million of goodwill from our June 2011 acquisition of key assets of Smart Reply.

Recorded goodwill at December 31, 2011 totaled $4.3 million. Goodwill is not amortized, but instead is reviewed for impairment annually or more frequently if impairment indicators arise. We evaluate goodwill on an annual basis for impairment and have selected November 1 as the annual impairment testing date. We operate as a single operating segment and have concluded that our Company is comprised of one reporting unit.

As a result of the economic environment impacting our business and operating results coupled with a material decline of our stock price, we determined impairment triggering events had occurred that required interim impairment evaluations, which resulted in impairment charges totaling $121,000 for the year ended December 31, 2009.

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At November 1, 2011, the last impairment testing date, the fair value of the reporting unit was determined using a market approach, which utilized our market capitalization as a basis for estimating fair value and we applied a control premium of 40%.

Our fair market value exceeded our carrying value by approximately 34% at November 1, 2011, our most recent annual impairment assessment date. As such, no indications of impairment were noted. Our stock price is volatile, however, and future changes in the quoted price of our stock or in other judgments that underlie the fair value estimates, including an estimated control premium, may indicate that the fair value of our reporting unit is less than the carrying value, which may result in future impairment charges.

Valuation of Contingent Consideration

For the June 2011 Smart Reply asset acquisition, we recorded contingent consideration at its fair value on the acquisition date. Each reporting period thereafter, we remeasure the fair value of this obligation and record increases or decreases in their fair value as an adjustment to contingent consideration expense within the consolidated statement of operations. Changes in the fair value of the contingent consideration obligations can result from adjustments to the discount rates and passage of time, as well as updates in the assumed achievement or timing of any performance targets. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market (for a discussion of the fair value hierarchy, including Level 3, see Note 10 to our consolidated financial statements included elsewhere herein).

Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in the assumptions could have a material impact on the amount of contingent consideration expense we record in any given period.

As a result of the June 2011 acquisition of SmartReply assets, we recognized a liability totaling $1.2 million, representing the present value of the probability-weighted estimate of the future payments that arose from a contingent consideration arrangement in the form of an earn-out. The earn-out requires cash payments that we estimated will be $1.7 million, but the arrangement provides for up to a maximum of $8.9 million, which may become payable annually over three years based upon year-over-year revenue growth from the acquired mobile marketing business and enhancements to our select legacy customer revenues. As actual mobile marketing revenues are recognized, the liability for the contingent consideration will periodically be adjusted to reflect our best estimate of the ultimate payout under this arrangement. The adjustments to the fair value from the acquisition date to December 31, 2011 were not material.

Income Taxes

We are subject to federal and various state income taxes in the United States, and we use estimates in determining our provision for these income taxes. In addition, we are subject to Canadian and UK taxes for profits generated from our wholly owned subsidiaries. Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. At December 31, 2011, our deferred tax assets consisted primarily of federal net operating loss carryforwards and state research and development credit carryforwards. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At December 31, 2011, we had a full valuation allowance against our deferred tax assets, which totaled approximately $10.1 million, due to the current uncertainty related to when, if ever, these assets will be realized. In the event that we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase earnings in the period in which such a determination is made. In 2011, we recorded deferred tax liabilities of $905,000, primarily related to the intangible assets acquired with SmartReply, and released a corresponding amount of deferred tax asset valuation allowance. The $905,000 release of the valuation allowance was recognized as a benefit for income taxes during the year ending December 31, 2011.

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Results of Operations

The following table sets forth selected statements of operations data for 2011, 2010 and 2009 indicated as percentages of revenues.

Comparison of Years Ended December 31, 2011 and 2010

Revenues

The $2.2 million increase in revenues in 2011 as compared to 2010 was mainly due to the acquisition of SmartReply assets in June 2011. Revenues from legacy clients of SmartReply totaled $3.1 million. Revenues from new clients, excluding legacy clients of SmartReply, totaled $814,000, which was offset by a $1.7 million decrease in revenues attributable to clients from which we derived revenue during 2010. Non-voice revenues increased $3.0 million, which was offset by a decrease in voice revenues of $819,000. Non-voice revenues as a percentage of total revenues were 25.2% in 2011 and 19.5% in 2010. The growth of non-voice revenues is a trend we expect to continue.

Cost of Revenues and Gross Profit

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The $1.1 million increase in cost of revenues in 2011 as compared to 2010 reflected a $698,000 increase in telephony expense mainly due to higher delivery costs, a $444,000 increase in text and email costs primarily due to higher client usage, a $113,000 increase in co-location costs due to the opening of a data center in the United Kingdom in the fourth quarter of 2010 and a $139,000 increase in amortization expense relating to our internal use software. These increases were partially offset by a $378,000 decrease in depreciation expense due to a lower depreciable base of our property and equipment. The decrease in gross margin in 2011 as compared to 2010 reflected lower price structure agreements entered into with some of our clients and changes in industry, service and geographic mix.

Operating Expenses

Research and Development.    The $228,000 increase in research and development expenses in 2011 as compared to 2010 was primarily attributable to a $127,000 increase in personnel related costs and a $96,000 increase in occupancy related costs.

Sales and Marketing.    The $87,000 decrease in sales and marketing expenses in 2011 as compared to 2010 resulted primarily from a $358,000 decrease in personnel related costs, a $208,000 decrease in marketing costs and a $145,000 decrease in travel and entertainment costs. These decreases were partially offset by $637,000 increase in amortization expense mainly related to customer lists from the acquisition of intangible assets from SmartReply in June 2011.

General and Administrative.    The $36,000 increase in general and administrative expenses in 2011 as compared to 2010 reflected a $566,000 increase in professional service costs related to merger and acquisition activities and a $152,000 increase in consulting fees, partially offset by a $333,000 decrease in personnel related costs, a $175,000 decrease in professional service costs and a $120,000 decrease in depreciation expense.

Operating Loss and Other Income