Note 1. Organization and Summary of Significant Accounting Policies

Nature of Operations

Support.com, Inc. (“Support.com,” “the Company,” “We” or “Our”), was incorporated in the state of Delaware on December 3, 1997. We changed our name from SupportSoft, Inc. to Support.com, Inc. on June 22, 2009. Our common stock trades on the Nasdaq Global Select Market under the symbol “SPRT.”

We are a leading independent provider of online care for the digital home and small business.

Our premium services and software products install, set up, connect, repair and protect personal computers and related devices that are essential to our customers. We offer one-time services and subscriptions, and we also license software products to consumers who prefer do-it-yourself solutions.

Basis of Presentation

Support.com was founded in 1997 under the name SupportSoft, Inc. as an enterprise software provider focused on technical support organizations. In 2007, we launched our consumer services business, and in 2008 began reporting two operating segments, Enterprise and Consumer. In June 2009, we sold our Enterprise business and focused our efforts purely on the consumer market. In December 2009, through the acquisition of substantially all of the assets of Xeriton Corporation, we added software tools marketed under the Sammsoft brand to our Consumer business.

As a result of the sale of the Enterprise business, our audited consolidated financial statements, accompanying notes and other information provided in this Form 10-K reflect the Enterprise business as a discontinued operation for all periods presented. After reclassifying the Enterprise business to discontinued operations, our continuing operations consist solely of our remaining segment, the Consumer business, which includes our online support services as well as our consumer software products.

The Consolidated Financial Statements include the accounts of Support.com and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is generally the local currency. Assets and liabilities of our wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates prevailing during the year. Any material resulting translation adjustments are reflected as a separate component of stockholders' equity in accumulated other comprehensive income or loss. Realized foreign currency transaction gains and losses were not material during the years ending December 31, 2011, 2010, and 2009.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most significant, difficult and subjective judgments include the valuation and recognition of investments, the assessment of recoverability of intangible assets and their estimated useful lives, the valuations and recognition of stock-based compensation and the recognition and measurement of current and deferred income tax assets and liabilities. Actual results could differ materially from these estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, investments and trade accounts receivable. Our investment portfolio consists of investment grade securities. Except for obligations of the United States government and securities issued by agencies of the United States government, we diversify our investments by limiting our holdings with any individual issuer. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the balance sheet. The credit risk in our trade accounts receivable is substantially mitigated by our credit evaluation process and reasonably short payment terms.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount. We perform evaluations of our customers' financial condition and generally do not require collateral. We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Reserves are made based on a specific review of all significant outstanding invoices. For those invoices not specifically provided for, reserves are recorded at differing rates, based on the age of the receivable. In determining these rates, we analyze our historical collection experience and current payment trends. The determination of past-due accounts is based on contractual terms.

The following table summarizes the allowance for doubtful accounts as of December 31, 2011 and 2010 (in thousands):

	Balance at Beginning of Period		Charge/ (Recovery) to Costs and Expenses			Write- offs			Balance at End of Period
Allowance for doubtful accounts:

Year ended December 31, 2010	$	9	$	34		$	-		$	43
Year ended December 31, 2011	$	43	$	(16	)	$	(7	)	$	20

As of December 31, 2011, Comcast, Office Depot, Office Max and Staples accounted for 41%, 15%, 13% and 17% of our total accounts receivable, respectively. As of December 31, 2010, Office Depot, Office Max and Staples accounted for 57%, 12% and 21%, of our total accounts receivable, respectively. No other customers accounted for 10% or more of our total accounts receivable in 2011 or 2010.

Cash, Cash Equivalents and Investments

All liquid instruments with an original maturity at the date of purchase of 90 days or less are classified as cash equivalents. Cash equivalents and short-term investments consist primarily of money market funds, certificates of deposit, commercial paper, corporate and municipal bonds. Our interest income on cash, cash equivalents and investments is recorded monthly and reported as interest income and other in our consolidated statements of operations.

Prior to June 30, 2010 we held certain auction-rate securities (“ARS”) with UBS. On June 30, 2010, we exercised our rights under the Rights Agreement with UBS (the “put option”) and settled the ARS for cash on June 30 and July 1, 2010. As of December 31, 2011 and 2010, there were no ARS held by UBS as a result of this exercise. Long-term investments consist of other ARS positions not held with UBS. Our cash equivalents and short-term and long-term investments are classified as available-for-sale, and are reported at fair value with unrealized gains(losses) (when deemed to be temporary) included in accumulated other comprehensive income within stockholders' equity on the consolidated balance sheets. Prior to their sale the ARS held by UBS were classified as trading securities and were reported at fair value with realized gains(losses) included in interest income and other, net in the consolidated statements of operations. For the twelve months ended December 31, 2010, we recorded a realized loss of $1.3 million on re-valuation of the ARS put option, offset with a realized gain of $1.3 million on the ARS held by UBS, for a net realized gain(loss) of zero. For the year ended December 31, 2009, we recorded realized losses of $5.9 million on the ARS put option re-valuation, which was offset by realized gains of $5.9 million on the UBS ARS, for a net realized gain(loss) of zero. This was due to the put option re-valuation fully offsetting the UBS ARS re-valuation.

We monitor our investments for impairment on a quarterly basis and determine whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the security's issuer, the length of time an investment's fair value has been below our carrying value, the Company's intent to sell the security and the Company's belief that it will not be required to sell the security before the recovery of its amortized cost. If an investment's decline in fair value is deemed to be other-than-temporary, we reduce its carrying value to its estimated fair value, as determined based on quoted market prices or liquidation values. Declines in value judged to be other-than-temporary, if any, are recorded in operations as incurred. At December 31, 2011, the Company evaluated its unrealized losses on available-for-sale securities and determined them to be temporary. The ARS investments have been in a continuous unrealized loss position for more than 12 months. In accordance with ASC 320-2, Investments-Debt and Equity Securities, the Company concluded that it does not intend to sell the security with an unrealized loss and it will not be required to sell the security before the recovery of its amortized cost basis.

At December 31, 2011 and 2010, the fair value of cash, cash equivalents and investments was $53.0 million and $74.2 million, respectively. The following is a summary of cash, cash equivalents and investments at December 31, 2011 and 2010 (in thousands):

	For the Year Ended December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	6,461	$	-	$	-		$	6,461
Money market fund		15,698		-		-			15,698
Certificates of deposit		480		-		-			480
Commercial paper		6,295		-		(6	)		6,289
Corporate bonds		13,726		1		(14	)		13,713
Corporate notes		1,557		-		(2	)		1,555
U.S. government agency securities		7,707		-		(1	)		7,706
Auction-rate securities		1,400		-		(289	)		1,111
	$	53,324	$	1	$	(312	)	$	53,013
Classified as:
Cash and cash equivalents	$	22,159	$	-	$	-		$	22,159
Short-term investments		29,765		1		(23	)		29,743
Long-term investments		1,400		-		(289	)		1,111
	$	53,324	$	1	$	(312	)	$	53,013

	For the Year Ended December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	2,340	$	-	$	-		$	2,340
Money market fund		14,221		-		-			14,221
Commercial paper		6,992		-		(2	)		6,990
Corporate bonds		22,013		19		(20	)		22,012
Corporate Notes		20,997		25		(14	)		21,008
Treasuries		4,999		-		(2	)		4,997
Auction-rate securities		2,800		-		(133	)		2,667
	$	74,362	$	44	$	(171	)	$	74,235
Classified as:
Cash and cash equivalents	$	18,561	$	-	$	-		$	18,561
Short-term investments		53,001		44		(38	)		53,007
Long-term investments		2,800		-		(133	)		2,667
	$	74,362	$	44	$	(171	)	$	74,235

The following table summarizes the estimated fair value of our available-for-sale and trading debt securities classified by the stated maturity date of the security (in thousands):

	December 31,
	2011		2010
Due within one year	$	29,503	$	50,350
Due within two years		240		4,657
Due after three years		1,111		2,667
	$	30,854	$	57,674

We determined that the gross unrealized losses on our available-for-sale investments as of December 31, 2011 are temporary in nature. The fair value of our available-for-sale securities at December 31, 2011 and 2010 reflects a net unrealized loss of $311,000 and $127,000, respectively. We recognized net realized gains related to available-for-sale securities of $7,000 and $10,000 for the years ended December 31, 2011 and 2010, respectively. There were no net realized losses on available-for-sale securities in the years ended December 31, 2011 and 2010, respectively. The cost of securities sold is based on the specific identification method.

At December 31, 2011 and 2010 we had investments in AAA-rated ARS with various state student loan authorities with estimated fair values of $1.1 million and $2.7 million, respectively. The student loans made by these authorities are substantially guaranteed by the Federal government through the Federal Family Education Loan Program (FFELP). ARS are long-term floating rate bonds tied to short-term interest rates. After the initial issuance of the securities, the interest rate on the securities is reset periodically, at intervals established at the time of issuance (e.g., every seven days, 28 days, 35 days, or every six months), based on market demand, if the auctions are successful. ARS are bought and sold in the marketplace through a competitive bidding process often referred to as a “Dutch auction.” If there is insufficient interest in the securities at the time of an auction, the auction may not be completed and the ARS then pays a default interest rate. Following such a failed auction, we cannot access our funds that are invested in the corresponding ARS until a future auction of these investments is successful, new buyers express interest in purchasing these securities in between reset dates, issuers establish a different form of financing to replace these securities or final payments become due according to contractual maturities. Commencing in February 2008, conditions in the global credit markets resulted in failed auctions for all of our ARS. In the near term, our ability to liquidate our investments or fully recover the carrying values may be limited or not exist.

Fair value for non-UBS ARS, classified as available-for-sale, was based on a discounted cash flow valuation that takes into account a number of factors including the estimated weighted average remaining term (WART) of the underlying securities, the expected return, and the discount rate. The WART was estimated based on servicing reports and expectations regarding redemptions. The expected return was calculated based on the last twelve months' average for the 91 day T-bill plus a spread. This rate is the typical default rate for ARS held by us. The discount rate was calculated using the 3-month LIBOR rate plus adjustments for the security type. Changes in any of the above estimates, especially the weighted average remaining term or the discount rate, could result in a material change to the fair value. Presently we have determined the decline in value for the available-for-sale ARS to be temporary because i) we have no intent to sell the security, and we believe that we will not be required to sell the security before the recovery of its amortized cost due to our cash reserves; ii) through December 31, 2011 our remaining ARS instrument has maintained a AAA credit rating; and iii) loans made by the issuers are backed by the Federal government. In accordance with ASC 320, we also conclude that we do not intend to sell an impaired available-for-sale security and will not be required to sell such a security before the recovery of our amortized cost.

However, if circumstances change, we may be required to record an other-than-temporary impairment charge on the available-for-sale ARS. We may similarly be required to record other-than-temporary impairment charges if the rating on this security is reduced or if issuer defaults on its obligations. In addition to impairment charges, any of these events could cause us to lose part or all of our investment in this security. Any of these events could materially affect our results of operations and our financial condition. We currently believe this security is not significantly impaired for the reasons described above; however, it could take until the final maturity of the underlying notes (initially up to 30 years) to realize our investment's recorded value.

The following table sets forth the unrealized losses for the Company's available-for-sale investments as of December 31, 2011 and 2010 (in thousands):

As of December 31, 2011	In Loss Position Less Than 12 Months					In Loss Position More Than 12 Months					Total In Loss Position
Description	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Commercial Paper	$	4,288	$	(6	)	$	-	$	-		$	4,288	$	(6	)
Corporate Bonds		11,392		(14	)		-		-			11,392		(14	)
Corporate Notes		1,555		(2	)		-		-			1,555		(2	)
U.S. Government Agency Securities		3,805		(1	)		-		-			3,805		(1	)
Auction-rate securities		-		-			1,111		(289	)		1,111		(289	)
Total	$	21,040	$	(23	)	$	1,111	$	(289	)	$	22,151	$	(312	)

As of December 31, 2010	In Loss Position Less Than 12 Months					In Loss Position More Than 12 Months					Total In Loss Position
Description	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Commercial Paper	$	6,990	$	(2	)	$	-	$	-		$	6,990	$	(2	)
Corporate Bonds		15,813		(21	)		-		-			15,813		(21	)
Corporate Notes		11,664		(14	)		-		-			11,664		(14	)
Treasuries		4,998		(1	)		-		-			4,998		(1	)
Auction-rate securities		-		-			2,667		(133	)		2,667		(133	)
Total	$	39,465	$	(38	)	$	2,667	$	(133	)	$	42,132	$	(171	)

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation which is determined using the straight-line method over the estimated useful lives of two years for computer equipment and software, three years for furniture and fixtures, and the shorter of the estimated useful lives or the lease term for leasehold improvements. Repairs and maintenance costs are expensed as they are incurred.

Goodwill

We assess the impairment of goodwill annually or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. Consistent with our determination that we have only one reporting segment, we have determined that there is only one reporting unit and goodwill is evaluated for impairment oat the entity level. We test goodwill using the two-step process required by ASC 350, Intangibles – Goodwill and Other (“ASC 350”). In the first step, we compare the carrying amount of the reporting unit to the fair value based on quoted market prices of our common stock. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, if such comparison reflects potential impairment, we would compare the implied fair value of the goodwill, as defined by ASC 350, to its carrying amount to determine the amounts of impairment loss, if any.

We conduct our annual evaluation for impairment of goodwill on September 30. No goodwill impairment charges have been recorded through December 31, 2011.

Intangible Assets

We record purchased intangible assets at fair value. Useful life is estimated as the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Company. As we do not believe that we can reliably determine a pattern by which the economic benefits of these assets will be consumed, management adopted straight-line amortization in accordance with ASC 350. The original cost is amortized on a straight-line basis over the estimated useful life of each asset.

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

Revenue Recognition

For all transactions, we recognize revenue only when all of the following criteria are met:

●

Persuasive evidence of an arrangement exists;

●

Delivery has occurred;

●

Collection is considered probable; and

●

The fees are fixed or determinable.

We consider all arrangements with payment terms longer than 90 days not to be fixed or determinable. If the fee is determined not to be fixed or determinable, revenue is recognized as payment becomes due from the customer.

Services Revenue

Services revenue is comprised primarily of fees for technology support services, including the set-up, protection, optimization and repair of new and existing computers as well as other technology devices. We provide these services remotely, using work-from-home Personal Technology Experts who utilize our proprietary technology to deliver the services.

We provide services to consumers and small business, either through our channel partners (which include brick and mortar and online retailers, anti-virus providers, PC/CE manufacturers, ISP's, and others) or directly via our website at www.support.com. We transact with customers via reseller programs, referral programs and direct transactions. In reseller programs, the channel partner generally executes the financial transactions with the consumer and pays a fee to us which we recognize as revenue when the service is delivered. In referral programs, we transact with the consumer directly and pay a referral fee to the referring party. Referral fees are generally expensed in the period in which revenues are recognized. In such instances, since we are the transacting party and bear substantially all risks associated with the transaction, we record the gross amount of revenue. In direct-to-consumer transactions, we sell directly to the consumer at the retail price.

Our services are of three types for revenue recognition purposes:

●

Incident-Based Services-Customers purchase a discrete, one-time service. Revenue recognition occurs at the time of service delivery. Fees paid for services sold but not yet delivered are recorded as deferred revenue and recognized at the time of service delivery.

●

Subscriptions-Customers purchase subscriptions or “service plans” under which certain services are provided over a fixed subscription period. Revenues for subscriptions are recognized ratably over the respective subscription periods.

●

Service Cards / Gift Cards-Customers purchase a service card or a gift card, which entitles the cardholder to redeem a certain service at a time of their choosing. For these sales, revenue is deferred until the card has been redeemed and the service has been provided.

For certain direct and channel partnerships, we are paid for services that are sold but not yet delivered. We initially record such balances as deferred revenue, and recognize revenue when the service has been provided or, on the non-subscription portion of these balances, when the likelihood of the service being redeemed by the customer is remote (“services breakage”). Based on our historical redemption patterns for these relationships, we believe that the likelihood of a service being delivered more than 90 days after sale is remote. Beginning in 2010, we therefore recognized non-subscription deferred revenue balances older than 90 days as services revenue. For the twelve months ended December 31, 2011 and 2010, services breakage revenues were immaterial, and accounted for approximately one percent of revenue.

Channel partners are generally invoiced monthly. Fees from consumers via referral programs and direct transactions are generally paid with a credit card at the time of sale. Revenue is recognized net of any applicable sales tax.

We generally provide a refund period on services, during which refunds may be granted to consumers under certain circumstances, including inability to resolve certain support issues. For our channel sales, the refund period varies by partner, but is generally between five and 10 days. For referral programs and direct transactions, the refund period is generally five days. For all channels, we recognize revenue net of refunds and cancellations during the period. Refunds and cancellations have not been material.

Software and Other Revenue

Software and other revenue is comprised primarily of fees for software products provided through direct consumer downloads and, to a lesser extent, through the sale of this software via channel partners. Our software is sold to consumers as a perpetual license or as a fixed period subscription. We act as the primary obligor and generally control fulfillment, pricing, product requirements, and collection risk and therefore we record the gross amount of revenue.

For certain products, we sell perpetual licenses. We provide a limited amount of free technical support to customers and therefore we do not defer the recognition of revenue associated with sales of these products, since the cost of providing this free technical support is insignificant and free product enhancements are minimal and infrequent.

For certain of our products (namely SUPERAntiSpyware and RapidStart), we sell licenses for a fixed subscription period. We provide regular, significant updates over the subscription period and therefore recognize revenue for these products ratably over the subscription period.

Other revenue consists primarily of revenue generated through partners advertising to our customer base in various forms, including toolbar advertising, email marketing, and free trial offers. We recognize other revenue in the period in which our partners notify us that the revenue has been earned.

Research and Development

Research and development expenditures are charged to operations as they are incurred. Based on our product development process, technological feasibility is established on the completion of a working model. Costs incurred by us between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, we have charged all such costs to research and development expense in the period in which they were incurred in the consolidated statements of operations.

Purchased Technology and Internal Use Software

We capitalize costs related to software that we license and incorporate into our product and service offerings or develop for internal use. In 2009, we acquired purchased technology for $350,000 and recorded amortization expense related to this technology of $83,000, $83,000 and $41,000 in 2011, 2010 and 2009, respectively. In addition, in 2011, we accumulated $70,000 related to software developed for internal use and will amortize over the useful life of this software once it is placed into service.

Advertising Costs

Advertising costs are recorded as sales and marketing expense in the period in which they are incurred. Advertising expense was $10.8 million, $10.6 million, and $1.9 million for the years ended December 31, 2011, 2010, and 2009, respectively.

Net Loss Per Share

Basic net loss per share is computed using our net loss and the weighted average number of common shares outstanding during the reporting period. Diluted net loss per share is computed using our net loss and the weighted average number of common shares outstanding, including the effect from the potential issuance of common stock such as stock issuable pursuant to the exercise of stock options using the treasury stock method when dilutive.

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

	Year Ended December 31,
	2011			2010			2009
Net loss	$	(18,640	)	$	(18,067	)	$	(14,577	)
Basic:
Weighted-average shares of common stock outstanding		48,288			46,818			46,378
Shares used in computing basic net loss per share		48,288			46,818			46,378
Basic net loss per share	$	(0.39	)	$	(0.39	)	$	(0.31	)
Diluted:
Weighted-average shares of common stock outstanding		48,288			46,818			46,378
Add: Common equivalent shares outstanding		-			-			-
Shares used in computing diluted net loss per share		48,288			46,818			46,378
Diluted net loss per share	$	(0.39	)	$	(0.39	)	$	(0.31	)

For the years ended December 31, 2011, 2010 and 2009, 2.9 million, 941,000 and 11.4 million outstanding options were excluded from the computation of diluted net loss per share, respectively, since their effect would have been anti-dilutive.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss relate entirely to accumulated foreign currency translation losses and unrealized gains and losses on investments. Accumulated currency translation losses were $1.4 million and $1.2 million as of December 31, 2011 and 2010, respectively, and accumulated unrealized gains (losses) on investments were $(0.3) million and $(0.1) million as of December 31, 2011 and 2010, respectively.

Comprehensive Loss

Comprehensive net income/loss includes the impact of foreign currency translation adjustments and changes in the fair value of available-for-sale securities. The following are the components of comprehensive loss (in thousands):

	For the years ended December 31,
	2011			2010			2009

Net loss	$	(18,640	)	$	(18,067	)	$	(14,577	)
Net unrealized gain/(loss) on available-for-sale securities		(185	)		(66	)		1,518
Foreign currency translation loss		(182	)		(32	)		(210	)
Total comprehensive loss	$	(19,007	)	$	(18,165	)	$	(13,269	)

The amounts noted in the table above are shown before taking into account the related income tax impact. The income tax effect allocated to each component of other comprehensive income for each of the periods presented is not significant.

Stock-Based Compensation

We apply the provisions of ASC 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards, including grants of stock and options to purchase stock, made to employees and directors based on estimated fair values.

Determining Fair Value of Share-Based Payments

Valuation and Attribution Method: We estimate the fair value of stock options granted using the Black-Scholes-Merton option pricing model. Stock options vest on a graded schedule; however we recognize the expense on a straight-line basis over the requisite service period of the entire award, net of estimated forfeitures and subject to the minimum expense requirements of ASC 718. These limitations require that on any date the compensation cost recognized is at least equal to the portion of the grant-date fair value of the award that is vested at that date.

Risk-free Interest Rate: We base our risk-free interest rate on the yield currently available on U.S. Treasury zero coupon issues for the expected term of the stock options.

Expected Term: Our expected term represents the period that our stock options are expected to be outstanding and is determined based on historical experience of similar stock options considering the contractual terms of the stock options, vesting schedules and expectations of future employee behavior.

Expected Volatility: Our expected volatility represents the amount by which the stock price is expected to fluctuate throughout the period that the stock option is outstanding. Historically, we have based our expected volatility on historical company data. However, given the focus and overall nature of our business changed upon the sale of our Enterprise business, we no longer believe our historical volatility to be reflective of our expected volatility going forward. Therefore, in 2010 we adopted a methodology which combines available Company-specific volatility for the period following the sale of our Enterprise business with the volatility of a peer group. The relative weight given to Company-specific volatility increases each reporting period, while the relative weighting for our peer group's volatility decreases. Given the expected life of our stock grants, we expect company-specific volatility to wholly account for our volatility estimates beginning in 2013.

Expected Dividend: We use a dividend yield of zero, as we have never paid cash dividends and do not expect to pay dividends in the future.

The fair value of our stock-based awards was estimated using the following assumptions for the years ended December 31, 2011, 2010 and 2009:

	Stock Option Plan									Employee Stock Purchase Plan
	2011			2010			2009			2011			2010		2009
Risk-free interest rate		1.0	%		1.7	%		2.0	%		0	%		n/a		n/a
Expected term (in years)		3.6			3.6			3.6			0.5			n/a		n/a
Volatility		59.2	%		66.6	%		63.1	%		75.3	%		n/a		n/a
Expected dividend		0	%		0	%		0	%		0	%		n/a		n/a
Weighted average grant-date fair value	$	1.63		$	1.71		$	1.12		$	0.77			n/a		n/a

In the second quarter of 2009 we sold our Enterprise business to Consona. This sale qualified as the sale of “substantially all the assets of the business,” and according to the terms of our Employee Stock Purchase Plan (“ESPP”) plan document, such a sale terminated the ESPP. In the second quarter of 2011, to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward eligible employees and by motivating such persons to contribute to the growth and profitability of the Company, the Company's Board of Directors and stockholders approved a new Employee Stock Purchase Plan and reserved 1,000,000 shares of our common stock for issuance effective as of May 15, 2011.

We recorded the following stock-based compensation expense for the fiscal years ended December 31, 2011, 2010 and 2009 (in thousands):

	For the Year Ended December 31,
	2011		2010		2009
Stock option compensation expense recognized in:
Cost of service	$	222	$	168	$	130
Cost of software and others		28		1		-
Research and development		806		588		465
Sales and marketing		581		693		575
General and administrative		2,088		1,881		1,763
		3,725		3,331		2,933
ESPP compensation expense recognized in:
Cost of service		23		-		3
Cost of software and others		1		-		-
Research and development		10		-		2
Sales and marketing		5		-		2
General and administrative		5		-		2
		44		-		9
Stock-based compensation expense included in total costs and expenses	$	3,769	$	3,331	$	2,942

Net cash proceeds from the exercise of stock options were $450,000, $4.5 million and $358,000 for the years ended December 31, 2011, 2010 and 2009, respectively. No income tax benefit was realized from stock option exercises during the years ended December 31, 2011, 2010 and 2009, respectively. In accordance with ASC 718, we present excess tax benefits from the exercise of stock options, if any, as net cash generated in financing activities.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be reversed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets, if it is more likely than not, that such assets will not be realized.

Warranties and Indemnifications

We generally provide a refund period on sales, during which refunds may be granted to consumers under certain circumstances, including our inability to resolve certain support issues. For our channel sales, the refund period varies by channel partner, but is generally between five and 10 days. For referral programs and direct transactions, the refund period is generally five days. For all sales channels, we recognize revenue net of refunds and cancellations during the period. Refunds and cancellations have not been material.

We generally agree to indemnify our customers against legal claims that our software products infringe certain third-party intellectual property rights. As of December 31, 2011 and 2010, we have not been required to make any payment resulting from infringement claims asserted against our customers and have not recorded any related accruals.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

●

Level 1 - Quoted prices in active markets for identical assets or liabilities.

●

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 820, the following table represents our fair value hierarchy for our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2011 and 2010 (in thousands):

As of December 31, 2011	Level 1		Level 2		Level 3		Total
Money market funds	$	15,698	$	-	$	-	$	15,698
Certificates of deposits		480		-		-		480
Commercial paper		-		6,289		-		6,289
Corporate bonds		-		13,713		-		13,713
Corporate notes		-		1,555		-		1,555
U.S. government agency securities		-		7,706		-		7,706
Auction-rate securities		-		-		1,111		1,111
Total	$	16,178	$	29,263	$	1,111	$	46,552

As of December 31, 2010	Level 1		Level 2		Level 3		Total
Money market funds	$	14,221	$	-	$	-	$	14,221
Commercial paper		-		6,990		-		6,990
Corporate bonds		-		22,012		-		22,012
Corporate notes		-		21,008		-		21,008
Treasuries		-		4,997		-		4,997
Auction-rate securities		-		-		2,667		2,667
Total	$	14,221	$	55,007	$	2,667	$	71,895

For marketable securities, measured at fair value using Level 2 inputs, we review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data.

Level 3 assets consist of non-UBS ARS with various state student loan authorities. Beginning in February 2008, all auctions for the ARS have failed. Based on the continued failure of these auctions and the underlying maturities of the securities, we continue to classify our non-UBS holdings as long-term assets. The fair value of the auction-rate securities as of December 31, 2011 and 2010 was estimated by management. The Company has valued the ARS using a discounted cash flow model based on Level 3 assumptions, including the weighted average remaining term of the underlying securities, the expected return, and the discount rate.

The following table provides a summary of changes in fair value of our Level 3 financial assets as of December 31, 2011 and 2010 (in thousands):

	Year Ended December 31, 2011
	Auction-Rate Securities			Auction-Rate Security Put Option
Beginning balance	$	2,667		$	-
Transfer into Level 3		-			-
Sales		(1,400	)		-
Total gains/(losses):
Included in earnings		-			-
Included in other comprehensive income/loss		(156	)		-
Ending balance	$	1,111		$	-

	Year Ended December 31, 2010
	Auction-Rate Securities			Auction Rate Security Put Option
Beginning balance	$	22,655		$	1,289
Transfer into Level 3		-			-
Sales		(21,300	)		-
Total gains/(losses):
Included in earnings		1,289			(1,289	)
Included in other comprehensive income/loss		23			-
Ending balance	$	2,667		$	-

There were no transfers between Level 1 and Level 2 financial assets in 2011 and 2010.

Segment Information

During the second quarter of 2009, we sold our Enterprise business to Consona. After reclassifying the Enterprise segment to discontinued operations, our continuing operations consist solely of our remaining segment, the Consumer Business. Revenue from customers located outside the United States was approximately $366,000, $302,000, and $274,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

Sales to customers in different geographic areas, expressed as a percentage of revenue, for the years ended December 31, 2011, 2010 and 2009, were:

	Year Ended December 31,
	2011			2010			2009
Americas		99	%		99	%		98	%
Europe and Asia Pacific		1			1			2
Total		100	%		100	%		100	%

For the year ended December 31, 2011, Comcast, Office Depot and Staples accounted for 14%, 23% and 15% of our total revenue, respectively. For the year ended December 31, 2010, Office Depot and Staples accounted for 43% and 17% of our total revenue, respectively. For the year ended December 31, 2009, Office Depot accounted for 82% of our total revenue. There were no other customers that accounted for 10% or more of our total revenue in any of the periods presented.

Long-lived assets are attributed to the geographic location in which they are located. We include in long-lived assets all tangible assets. Long-lived assets regarding geographic areas are as follows (in thousands):

	December 31,
	2011		2010
United States	$	418	$	562
India		43		61
Total	$	461	$	623

Recent Accounting Pronouncements

In October 2009 the Financial Accounting Standards Board (the “FASB”) amended the accounting standards applicable to revenue recognition for multiple-deliverable revenue arrangements that are outside the scope of industry-specific software revenue recognition guidance. This new guidance amends the criteria for allocating consideration in multiple-deliverable revenue arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. The guidance also eliminates the use of the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. We adopted this guidance on a prospective basis on January 1, 2011, and therefore applied it to relevant revenue arrangements originating or materially modified on or after that date. The adoption of this guidance did not have a material impact on our results of operations or financial position.

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This update amends Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurement and Disclosure.” ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning on or after December 15, 2011. The new guidance is to be adopted prospectively and early adoption is not permitted. We do not believe that adoption of ASU 2011-04 will have a material effect on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income”. This update is to improve the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. On October 21, 2011, the FASB decided that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. With the exception of the requirements of the update subject to deferral, ASU No. 2011-05 is effective for public entities for fiscal years and interim periods within those years beginning after December 15, 2011. The Company does not believe that the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Intangible – Goodwill and Other”. This update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company expects to adopt this update for its reporting period ending March 31, 2012. The Company does not expect that the adoption of this guidance will have a material effect on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”. This update is to require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be effective for annual reporting periods beginning on or after January 1, 2013. The Company does not expect this update will have any significant impact on our financial position.