The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the "Report") and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008. The following discussion includes forward-looking statements. Please see "Risk Factors" in Item 1A of Part II of this Report for important information to consider when evaluating these statements.

Overview

During the second quarter of 2009, we sold our Enterprise Business to Consona Corporation. This business had accounted for a substantial majority of our revenue in 2009 and 2008. As a result of the sale of the Enterprise segment, our unaudited condensed consolidated financial statements, accompanying notes and other information provided in this Form 10-Q reflect the Enterprise segment as a discontinued operation for all periods presented. Detailed information regarding the operating results of the Enterprise Business is presented in Note 2. After reclassifying the Enterprise segment to discontinued operations, our continuing operations consist solely of our remaining segment, the Consumer Business.

Following the sale of the Enterprise Business, we now operate purely in the consumer technology services market, in which we provide technology-enabled services that assist consumers in managing technology. We deliver our services remotely, using work-from-home agents who utilize our proprietary technology to deliver our services. We reach consumers through channel partners (which include brick and mortar and online retailers and anti-virus providers) and directly via our website (www.support.com). We offer incident-based services, service cards/gift cards and subscriptions.

We launched the Consumer Business in 2007 and recorded approximately $1.1 million in revenue. We recorded approximately $6.8 million in revenue in 2008, and expect to grow our revenues substantially in 2009. The growth we have experienced in our Consumer Business is due primarily to growth in of our channel partnerships. Currently, our key channel partners include Office Depot, Staples, Systemax (operating under the TigerDirect, CompUSA and Circuit City brands) and the anti-virus provider AVG.

Our key financial goals are to continue to grow and diversify revenue and to improve gross margin. To achieve growth in revenues, we seek to expand existing programs, add new partners and grow our direct support.com business. We aim to diversify revenue by developing partnerships with additional channel partners and by growing our direct support.com business through referral partnerships and marketing activities. We are also expanding our service offerings. We recently introduced subscription offerings and plan to continue to expand our offerings to include new services and support for additional devices and platforms.

We aim to improve gross margin by optimizing our service delivery operations through increased automation and process improvement. We are focusing a substantial part of our research and development activities on technology that increases the efficiency and improves the effectiveness of our technology support agents. To date, these activities have been focused on our Solutions Toolkit, an integrated set of tools for delivery of premium technology services, which has resulted in substantial efficiency gains through reductions in the average handle time for calls to our support agents. In addition, we have introduced significant process improvements into our service delivery operations and augmented our call center management team to drive efficiency gains and productivity increases, and we expect to continue these efforts. We also expect improved

forecasting and revenue scale to enable resource optimization. Due to efficiency gains driven by technology and process improvement, we believe we can grow revenue substantially from current levels with only modest increases in our agent population, which should produce gross margin improvement. This progress is not evident in the second fiscal quarter results because we retained the same agent population with a modest revenue decline, but we believe that it will become evident in the second half of 2009 as revenue increases.

In April 2009, we announced a reduction in force of our Consumer Business to reduce our go-forward cost structure. In conjunction with the sale of our Enterprise Business in June 2009, we reduced our staffing to align our cost structure with the size of the on-going business. In addition, we have adopted a new compensation philosophy to match our transformation into a small, technology-enabled services business aimed at long-term growth. As part of that philosophy, we determined that short-term cash incentives should play a smaller role and long-term equity incentives, in the form of stock options, should play a more prominent role in our compensation program. Accordingly, we reduced cash compensation for executive officers. We also initiated a stock option exchange tender offer on July 24, 2009 in which eligible stock options held by employees may be exchanged for new options at current market values, and we have made additional option grants to key contributors. To ensure employee retention, stock options held by employees are being exchanged at current market values and subjected to new 3 year vesting schedules. Notwithstanding these equity-related actions, we expect the total number of options outstanding at the end of this year to be down materially from the number outstanding at the beginning of the year due to cancellation of options held by employees of the Enterprise Business and employees included in our 2009 reductions in force.

Achieving the revenue scale and positive gross margin will take time, and we expect to continue to consume cash in operations until we reach certain revenue levels. We ended the second quarter of 2009 with approximately $103.1 million in cash and cash equivalents, investments and the ARS put option. Based on current plans, we expect to consume additional cash before reaching profitability.

We expect to continue to explore both organic and inorganic growth opportunities. In particular, we may acquire complementary companies that can contribute to the strategic, operational and financial performance of our Consumer Business. In the event that we are unable to identify suitable acquisition targets that are appropriately valued, we will evaluate other possible uses of our available cash consistent with the best interests of our stockholders.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States, we make assumptions, judgments and estimates that can have a significant impact on our net revenue, and operating results, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, allowance for doubtful accounts, business combinations - purchase accounting, fair value measurements, fair value estimates, accounting for income taxes, accounting for goodwill and other intangible assets, and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. For further information on the critical accounting policies, see Note 1 to our Condensed Consolidated Financial Statements.

Revenue Recognition

Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules which require us to make judgments. In applying our revenue recognition policy we must determine whether revenue is to be recognized on a gross or net basis in accordance with the provisions of EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," which portions of our revenue are to be recognized, and which portions must be deferred and recognized in subsequent periods. We do not record revenue on sales transactions when the collection of cash is in doubt at the time of sale, and we use management judgment in determining collectability. From time to time, we may enter into agreements which involve us making payments to our channel partners. We evaluate the agreements based on EITF Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products," and use judgment in evaluating the treatment of such payments and in determining which portions of these payments should be recorded against revenue and which should be recorded as an expense. We generally provide a refund period on services, and we employ judgment in determining whether a customer is eligible for a refund based on that customer's specific facts and circumstances.

Allowances for Doubtful Accounts

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

Business Combinations - Purchase Accounting

Under the purchase method of accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of purchase price over the aggregate fair values as goodwill. We engage third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. We have estimated the economic lives of certain acquired assets and these live are used to calculate depreciation and amortization expenses. We have estimated the future cash flows to be derived from such assets, and these estimates are used to determine the fair value of the assets. If our estimates of the economic lives or the future cash flows change, depreciation or amortization expenses could be accelerated and the value of our intangible assets could be impaired.

Fair Value Measurements

Effective January 1, 2008, support.com adopted SFAS No. 157, "Fair Value Measurements." SFAS No. 157 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 SFAS No. 157 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 under SFAS No. 157 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. Therefore, determining fair value for Level 1 instruments generally does not require significant management judgment, and the estimation is not difficult.

• 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. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.

Our Level 3 assets consist of auction-rate debt securities with various state student loan authorities and the auction-rate securities put option (discussed below). Beginning in February 2008, all auctions for these securities 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. Based on our ability to exercise the Rights Agreement with UBS beginning June 30, 2010, we have classified our UBS ARS holdings as current assets on our balance sheet. The fair value of the auction-rate securities as of June 30, 2009 was estimated by management.

Fair Value Estimates

In November, 2008, we signed a Rights Agreement with UBS concerning the disposition of our auction-rate securities (ARS). The UBS agreement gives us the right to sell our ARS holdings back to UBS, at par value, beginning June 30, 2010 through July 2, 2012. Prior to June 30, 2010, UBS has the right to sell support.com's ARS holdings at any time, and return par value to us. The rights represent a freestanding financial instrument for accounting purposes. As noted above, we elected

to value this "put" option at fair value as allowed under SFAS No. 159. We recognized the value of the repurchase right as an asset with the corresponding gain recorded in earnings. Fair value was determined using a "with and without" approach, based on a discounted cash flow valuation comparing the value of the ARS with the put option and without it. We took into account the same factors as those used to value the ARS noted above. The value of the rights offer was recorded in interest income and expense, net. As of June 30, 2009, the value of the rights offer was $3.4 million, which substantially off-set the realized loss recorded on the related ARS in our condensed statement of operations. In any period in which a change in value of our ARS put option does not fully offset a change in value of our UBS ARS, or vice versa, our condensed consolidated statement of operations will be impacted.

Our UBS ARS are presented as short-term investments on our balance sheet, and the value of the Rights Agreement is presented separately as an ARS put option. At June 30, 2009, the value of the ARS and the ARS put option was 21.3% of our total assets. This ARS put option is not a traditional put option in that it is non-transferable, non-assignable, and not available for trade in any financial market.

We have made certain estimates in calculating the fair value of the ARS put option for our UBS securities, including estimates for the weighted average remaining term (WART) of the underlying securities in which actual WART from servicing reports was unavailable, the expected return, and the discount rate. In future periods, if our estimates for these assumptions change, the fair value estimate of our ARS holdings as well as the fair value estimate of our ARS put option would change, which would impact our operating results.

Accounting for Income Taxes

We are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves our management's estimation of our actual current tax exposures together with an assessment of temporary differences determined based on the difference between the financial statement and tax basis of certain items. These differences result in net deferred tax assets and liabilities, which are included within our condensed consolidated balance sheets. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We currently have provided a full valuation allowance on our U.S deferred tax assets and a full valuation allowance on certain foreign deferred tax assets.

Accounting for Goodwill and Other Intangible Assets

At June 30, 2009, our recorded goodwill was $2.9 million. We assess the impairment of goodwill annually or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss would be recognized if the fair value of the reporting unit is less than the carrying value of the reporting unit's net assets on the date of the evaluation. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to the business model or changes in operating performance. If we made different estimates, material differences may result in write-downs of net long-lived and intangible assets, which would be reflected by charges to our operating results for any period presented.

At June 30, 2009, our intangible assets, net were $334,000. We assess the impairment of finite lived identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value.

Stock-based Compensation

We account for stock-based compensation in accordance with the provisions of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. We estimate the fair value of stock-based awards on the grant date using the Black-Scholes-Merton option-pricing model. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life. If any of these assumptions used in the option-pricing models changes significantly, stock-based compensation may differ materially in the future from that record.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and six
months ended June 30, 2009 and 2008 expressed as a percentage of total revenue.



                                                    Three Months Ended          Six Months Ended
                                                         June 30,                   June 30,
                                                   2009           2008         2009          2008
Revenue                                              100 %           100 %       100 %         100 %


Costs and expenses:
Cost of revenue                                      125             209         123           195
Amortization of intangible assets                      1               3           1             2
Research and development                              39             156          39           180
Sales and marketing                                   66             280          66           342
General and administrative                            87             410          93           436


Total costs and expenses                             318           1,058         322         1,155


Loss from operations                                (218 )          (958 )      (222 )      (1,055 )

Interest and other income, net                        12              81           2           136


Loss from continuing operations, before income
taxes                                               (206 )          (877 )      (220 )        (919 )

Provision/(benefit) for income taxes                 (83 )             0         (40 )           0


Loss from continuing operations                     (123 )          (877 )      (180 )        (919 )

Income from discontinued operations, after
income taxes                                         188             389         107           418


Net income/(loss)                                     65 %          (488 )%      (73 )%       (501 )%

REVENUE



                                           Three Months Ended                        Six Months Ended
                                                June 30,                                 June 30,
                                                        $        %                                $        %

Revenue consisted primarily of services to consumers, either through our channel partners or directly via our website www.support.com. We also license certain of our consumer software products to partners on a per-use basis. Our business was beginning to generate revenue in 2008 and revenues in the three- and six- month period ended June 30, 2008 were significantly smaller than in the same periods in 2009. The increase in revenue from 2008 to 2009 was due to increased services demand from consumer partners, primarily from Office Depot. We expect revenue to grow this year relative to 2008 as we diversify and grow our channel partnerships and our direct-to-consumer business.

COSTS AND EXPENSES

Costs of Revenue



                                            Three Months Ended                         Six Months Ended
                                                 June 30,                                  June 30,
                                                          $        %                                $        %

Cost of revenue consists primarily of salary and related expenses for operations personnel and technology support agents, technology and telecommunication expenses related to the delivery of services and other employee-related expenses. The increase for 2009 as compared to 2008 resulted primarily from salary and related overhead expenses for our technology support agents. Over time we expect to add technology support agents to support revenue growth, but we expect to continue driving increased efficiencies through technology and call center management, resulting in improved gross margins.

Amortization of Intangible Assets



                                                      Three Months Ended                     Six Months Ended
                                                           June 30,                              June 30,
                                                                  $        %                            $        %

Amortization of intangible assets resulted from acquisition of YourTechOnline.com (YTO), which occurred May 2, 2008.

OPERATING EXPENSES



                                             Three Months Ended                             Six Months Ended
                                                  June 30,                                      June 30,
                                                          $           %                                 $           %
In thousands, except percentages    2009      2008     Change       Change        2009      2008     Change       Change
Research and development           $ 1,342   $ 1,392   $   (50 )        (4 )%    $ 2,748   $ 2,872   $  (124 )        (4 )%
Sales and marketing                $ 2,273   $ 2,492   $  (219 )        (9 )%    $ 4,620   $ 5,448   $  (828 )       (15 )%
General and administrative         $ 2,980   $ 3,654   $  (674 )       (18 )%    $ 6,578   $ 6,953   $  (375 )        (5 )%

Research and development. Research and development costs are expensed as incurred. Research and development expense consists primarily of compensation costs, third-party consulting expenses and related overhead costs for research and development personnel. The decrease in research and development expense from 2008 to 2009 resulted primarily from lower salary and related expenses due to fewer research and development personnel.

Sales and marketing. Sales and marketing expense consists primarily of compensation costs, including salaries and sales commissions for sales, business development and marketing personnel expenses for lead generation activities and promotional expenses, including public relations, advertising and marketing activities. The decrease in sales and marketing expense from 2008 to 2009 resulted primarily from lower salary and related expenses due to fewer personnel and lower advertising expense offset by restructuring costs in 2009.

General and administrative. General and administrative expense consists primarily of compensation costs and related overhead costs for administrative personnel and professional fees for legal, accounting and other professional services. The decrease in general and administrative expense from 2008 to 2009 resulted primarily from lower salary and related expense due to fewer personnel and lower facilities and information technology costs.

INTEREST INCOME AND OTHER, NET


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