The following discussion and analysis of financial condition and results of operations should be read in conjunction with the December 31, 2008 consolidated financial statements and notes thereto, along with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Exhibit 99.1 to the Current Report on Form 8-K, filed separately with the U.S. Securities and Exchange Commission on August 7, 2009.

OVERVIEW

We are principally focused on selling software solutions and telecommunication services to the contact center industry. In 2005, we began the process of transitioning from operating as a telecommunications services provider to operating primarily as a Software-as-a-Service provider focused on the contact center market.

We began as a reseller of telecommunication services. After a series of strategic acquisitions, we emerged with a new product approach combining a national voice over IP (VoIP) network with innovative, on-demand contact handling and agent optimization software technology called inContact®. We use the SaaS model to sell our inContact product suite to the contact center industry. Our inContact product suite is a set of software applications hosted and delivered by us to our customers on a per-seat basis with the ability to scale capacity up or down as business fluctuates.

We continue to derive the majority of our revenue from long distance telecommunication and related services. As a domestic and international long distance reseller and aggregator, we contract with a number of third party long distance service providers for the right to resell telecommunication services to our customers. The variety of traditional telecommunication services we offer enables our customers to: (1) buy most of the telecommunications services they need from one source, (2) combine those services into a customized package including inContact's all-in-one, contact center solution, (3) receive one bill for those services, (4) make one call to inContact if service problems or billing issues arise, and (5) depend on our professional team of employees to manage their network and contact center solution, end-to-end, so our users can focus on their business operations.

We offer our users a set of traditional connectivity products, which include the dedicated voice T1 product, the Intelligent-T™, VoIP connectivity services and our switched 1+ services. In addition to long distance, toll-free, and other traditional telephone services, these connectivity options enable our users to connect to our VoIP Network and the complete set of inContact suite of services we have available. Our users publish toll free and local inbound numbers to their customers enabling inbound calls to be handled directly or through the inContact suite embedded in the VoIP Network.

SOURCES OF REVENUE

We derive our revenues from two major business activities: (1) hosting and support of our inContact software suite of services and associated professional services and (2) reselling telecommunication services. Since 2005, our primary business focus has been on selling and marketing our inContact software suite.

Software

Software hosting and support of our inContact suite of services is provided on a monthly basis. Monthly recurring charges are billed in arrears and recognized for the period in which they are earned. In addition to the monthly recurring revenue, revenue is also received on a non-recurring basis for professional services included in implementing or improving a user's inContact suite experience. Our hosting services provide remote management and maintenance of our software and customers' data. Customers access "hosted" software and data through a secure Internet connection. Support services include technical assistance for our software products and product upgrades and enhancements on a when and if available basis. Our telecommunications and data network is fundamental to our inContact suite and allows us to provide the all-in-one inContact solution.

Telecom

We continue to derive revenue from traditional telecommunications services such as dedicated transport, switched long distance and data services. These services are provided over our network or through third party telecommunications providers. Revenue for the transactional long distance usage is derived based on user specific rate plans and the user's call usage and is recognized in the period the call is initiated. Users are also billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are accrued for incurred usage to date.

COSTS OF REVENUE AND OPERATING EXPENSES

Costs of Revenue

Costs of revenue consist primarily of payments to third party long distance service providers for resold telecommunication services to our customers. Costs of revenue also include salaries (including stock-based compensation) and related expenses for our hosting, support and professional services organizations, equipment depreciation relating to our hosting services, and amortization of acquired intangible assets, amortization of capitalized software development costs, and allocated overhead, such as rent, utilities and depreciation on property and equipment. As a result, overhead expenses are included in costs of revenue and each operating expense category. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our software services due to the labor costs associated with providing professional services.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, expenses, travel costs, and allocated overhead. We intend to continue to invest in sales and marketing. Accordingly, sales and marketing expenses could increase in absolute dollars depending on our investment decisions in line with our ongoing assessment of the market opportunity to support additional growth.

Research and Development

Research and development expenses consist primarily of the non-capitalized portion of salary and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, quality assurance, market research, testing, product management, and allocated overhead. We expect research and development expenses to increase in absolute dollars in the future as we intend to release new features and functionality on a frequent basis, expand our content offerings, upgrade and extend our service offerings, and develop new technologies.

General and Administrative

General and administrative expenses consist primarily of salary and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate expenses, and allocated overhead. We expect general and administrative expenses as a percentage of revenue to decrease as we continue to leverage our existing general and administrative personnel and other expenses to support our anticipated growth. General and administrative expenses in absolute dollars may increase or decrease depending upon investments we make to support the size of our business.

RESULTS OF OPERATIONS

Reclassifications

Beginning in the second quarter of 2009, we made a number of reclassifications to our historical consolidated statements of operations. We added the captions "Software revenue", "Telecom Revenue", "Software costs of revenue", "Telecom costs of revenue" and "Gross profit" to our consolidated statements of operations, which previously included single line items for revenue and costs of revenue (excluding depreciation and amortization) and did not include a gross profit subtotal. Also, we changed our allocation of certain operating expenses within our consolidated statements of operations. Depreciation and amortization expense related to revenue generating assets is included in the captions "Software costs of revenue" and "Telecom costs of revenue." Depreciation and amortization expense not associated with revenue generating assets is allocated to our other operating expense categories. Depreciation and amortization expense was previously reported separately in the caption "Depreciation and amortization." In addition, professional service costs, costs associated with providing customer service, and overhead expenses have been allocated to "Software costs of revenue" and "Telecom costs of revenue". These costs were previously included in "General and administrative" expenses. We believe this presentation provides increased transparency and improved comparability of our costs of revenue and operating expenses and that gross profit is a useful, widely accepted measure of profitability and operating performance. These reclassifications had no effect on any reported measures of profit or loss, including our consolidated loss from operations, net loss or per share amounts.

Three Months Ended September 30, 2009 and 2008

The following is a tabular presentation of our condensed consolidated operating
results for the three months ended September 30, 2009 compared to our condensed
consolidated operating results for the three months ended September 30, 2008, as
adjusted (in thousands):



                                    2009          2008         $ Change       % Change
     Revenue                      $ 20,947      $ 19,803      $    1,144             6 %
     Costs of revenue               12,254        12,827            (573 )          -4 %

     Gross profit                    8,693         6,976           1,717
     Gross margin                       41 %          35 %
     Operating expenses:
     Selling and marketing           4,583         4,404             179             4 %
     Research and development        1,331         1,166             165            14 %
     General and administrative      3,123         3,297            (174 )          -5 %

     Total operating expenses        9,037         8,867             170

     Loss from operations             (344 )      (1,891 )         1,547
     Other expense                    (197 )        (145 )           (52 )          36 %

     Loss before income taxes         (541 )      (2,036 )         1,495
     Income tax expense                 12             3               9

     Net loss                     $   (553 )    $ (2,039 )    $    1,486

Revenue

Total revenues increased $1.1 million or 6% to $20.9 million during the three months ended September 30, 2009 compared to revenues of $19.8 million during the same period in 2008. The increase relates to an increase of $2.3 million in Software segment revenue due to our focus on sales and marketing efforts on our all-in-one hosted inContact suite. This increase is offset by a decrease of $1.2 million in Telecom segment revenue due to expected attrition and a change in the pricing structure for short-duration calls related to certain of our customers.

Costs of revenue

Costs of revenue decreased $573,000 or 4% to $12.2 million during the three months ended September 30, 2009 compared to costs of revenue of $12.8 million during the same period in 2008. Cost of revenue as a percentage of revenue decreased six percentage points to 59% during the three months ended September 30, 2009 compared to 65% during the same period in 2008. This decrease is primarily driven by our transition in sales mix from our lower margin Telecom segment to our higher margin Software segment as a result of increased sales of our hosted inContact suite.

Selling and marketing

Selling and marketing expense increased $179,000 or 4% to $4.6 million during the three months ended September 30, 2009 from $4.4 million during the same period in 2008. This increase is due to increased efforts to create lead generation opportunities for our Software segment.

Research and development

Research and development expense increased $165,000 or 14% to $1.3 million during the three months ended September 30, 2009 from $1.2 million during the same period in 2008. This increase primarily relates to increased headcount to accelerate the development and delivery of new products in our Software segment. During the three months ended September 30, 2009, we capitalized an additional $861,000 of costs related to our internally developed software compared to $258,000 during the same period in 2008 as a result of our increased efforts in research and development activities on behalf of personnel that qualify for capitalization under GAAP.

General and administrative

General and administrative expense decreased $174,000 or 5% to $3.1 million during the three months ended September 30, 2009 from $3.3 million during the same period in 2008. This decrease primarily relates to a decrease of $152,000 in bad debt expense due to less than expected write-offs of uncollectible accounts.

Other expense

Other income (expense) increased $52,000 or 36% to $197,000 during the three months ended September 30, 2009 from $145,000 during the same period in 2008. This increase is primarily due to the adoption of a new accounting pronouncement on January 1, 2009. We recorded a non-cash charge of $54,000 in the third quarter of 2009 representing the change in fair value of warrants during the period. See Note 5 to the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for a more detailed explanation of the accounting for this new accounting pronouncement.

Nine Months Ended September 30, 2009 and 2008

The following is a tabular presentation of our condensed consolidated operating
results for the nine months ended September 30, 2009 compared to our condensed
consolidated operating results for the nine months ended September 30, 2008, as
adjusted (in thousands):



                                    2009          2008         $ Change       % Change
     Revenue                      $ 63,377      $ 58,969      $    4,408             7 %
     Costs of revenue               38,190        39,023            (833 )          -2 %

     Gross profit                   25,187        19,946           5,241
     Gross margin                       40 %          34 %
     Operating expenses:
     Selling and marketing          13,108        13,360            (252 )          -2 %
     Research and development        3,480         3,445              35             1 %
     General and administrative     10,859        10,769              90             1 %

     Total operating expenses       27,447        27,574            (127 )

     Loss from operations           (2,260 )      (7,628 )         5,368
     Other expense                    (955 )        (282 )          (673 )         239 %

     Loss before income taxes       (3,215 )      (7,910 )         4,695
     Income tax expense                 39             9              30

     Net loss                     $ (3,254 )    $ (7,919 )    $    4,665

Revenue

Total revenues increased $4.4 million or 7% to $63.4 million during the nine months ended September 30, 2009 compared to revenues of $59.0 million during the same period in 2008. The increase relates to an increase of $7.2 million in Software segment revenue due to our focus on sales and marketing efforts on our all-in-one hosted inContact suite. This increase is offset by a decrease of $2.8 million in Telecom segment revenue due to expected attrition.

Costs of revenue

Costs of revenue decreased $833,000 or 2% to $38.2 million during the nine months ended September 30, 2009 compared to $39.0 million during the same period in 2008. Costs of revenue as a percentage of revenue decreased six percentage points to 60% during the nine months ended September 30, 2009 compared to 66% during the same period in 2008. This decrease is primarily driven by our transition in sales mix from our lower margin Telecom segment to our higher margin Software segment as a result of increased sales of our hosted inContact suite.

Selling and marketing

Selling and marketing expense decreased $252,000 or 2% to $13.1 million during the nine months ended September 30, 2009 from $13.4 million during the same period in 2008. This decrease is due to reduced commissions expense related to legacy Telecom customers.

Research and development

Research and development expense remained relatively flat at $3.5 million during the nine months ended September 30, 2009 and 2008. During the nine months ended September 30, 2009, we capitalized an additional $2.4 million of costs related to our internally developed software compared to $877,000 during the same period in 2008 as a result of our increased efforts in research and development activities on behalf of personnel that qualify for capitalization under GAAP.

General and administrative

General and administrative remained relatively flat at approximately $10.8 million during the nine months ended September 30, 2009 and 2008.

Other expense

Other expense increased $673,000 to $955,000 during the nine months ended September 30, 2009 from $282,000 during the same period in 2008. Of this increase, net interest expense increased $243,000 due to a higher outstanding balance on our revolving credit facility in the first three quarters of 2009 as compared to the first three quarters of 2008. The remaining $430,000 of the increase is due to the adoption of a new accounting pronouncement on January 1, 2009. This non-cash charge taken in 2009 represents the change in fair value of warrants during the period. See Note 5 to the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for a more detailed explanation of the accounting for this new accounting pronouncement.

SEGMENT REPORTING

We operate under two business segments: Software and Telecom. The Software segment includes all monthly recurring revenue related to the delivery of our software applications plus the associated professional services and setup fees related to the software services product features (referred to as SaaS). The Telecom segment includes all voice and data long distance services provided to customers. During the first three quarters of 2008, we referred to our Software segment as the "SaaS" segment. We subsequently determined in the fourth quarter of 2008 that referring to this segment as the "Software" segment is clearer to our customers, investors and other stakeholders of our business.

We report financial information for our operating segments under the provisions of ASC 280-10, Segment Reporting (formerly Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information). The method described in ASC 280-10 for determining what segment information to report is referred to as the management approach. The management approach is based on the way that management organizes the segments within the business for making operating decisions and assessing performance. Beginning in the second quarter of 2009, in conjunction with the change in our consolidated statements of operations as described above under the heading "Reclassifications," we reevaluated our approach to how we compile segment financial information for purposes of making operating decisions and assessing performance. As a result, we made changes to the manner in which certain indirect expenses are allocated to our two operating segments: Software and Telecom. Due primarily to this change, beginning in the second quarter of 2009, a larger portion of total indirect expenses are allocated to the Software segment than has historically been allocated to the Software segment since we began disclosing segment financial information. To improve comparability, segment information reported for the three and nine months ended September 30, 2008 is reclassified to reflect the impact of changes made in our segmentation on the reporting periods included herein. These reclassifications have no effect on reported consolidated revenue, loss from operations, net loss or per share amounts. These reclassifications also have no effect on reported segment revenues.

For segment reporting, we classify operating expenses as either "direct" or "indirect". Direct expense refers to costs attributable solely to either selling and marketing efforts or research and development efforts. Indirect expense refers to costs that management considers to be overhead in running the business. Management evaluates expenditures for both selling and marketing and research and development efforts at the segment level without the allocation of overhead expenses, such as rent, utilities and depreciation on property and equipment.

Software Segment Results

The following is a tabular presentation and comparison of our Software segment
unaudited condensed consolidated operating results for the three and nine months
ended September 30, 2009 and 2008, as adjusted for 2008 (in thousands):



                                              Three Months Ended September 30,                          Nine Months Ended September 30,
                                        2009          2008         $ Change    % Change        2009          2008          $ Change       % Change
Revenue                               $  7,357      $  5,037      $    2,320         46 %    $ 21,189      $  13,940      $    7,249            52 %
Costs of revenue                         2,430         2,243             187          8 %       6,986          6,650             336             5 %

Gross profit                             4,927         2,794                                   14,203          7,290
Gross margin                                67 %          55 %                                     67 %           52 %

Operating expenses:
Direct selling and marketing             3,116         2,489             627         25 %       8,346          7,925             421             5 %
Direct research and development          1,155         1,046             109         10 %       3,027          3,082             (55 )          -2 %
Indirect                                 2,465         2,356             109          5 %       7,770          7,374             396             5 %

Loss from operations                  $ (1,809 )    $ (3,097 )                               $ (4,940 )    $ (11,091 )

Three Months Ended September 30, 2009 and 2008

The Software segment revenue increased $2.4 million or 46% to $7.4 million during the three months ended September 30, 2009 from $5.0 million during the same period in 2008. The increase is a result of the selling and marketing efforts we have undertaken to expand the inContact suite of services in the market. Software segment revenue includes revenue from professional services of $412,000 for the third quarter of 2009 compared to $243,000 for the third quarter of 2008.

Gross margin increased 12 percentage points to 67% during the three months ended September 30, 2009 compared to 55% during the same period in 2008. At the end of fiscal 2008, certain intangible assets related to previously acquired technology became fully amortized. As a result, we recorded approximately $549,000 less in intangible asset amortization during the three months ended September 30, 2009 than the same period in the previous year. The increase in gross margin is also due to increased Software segment revenues in 2009 resulting from the buildup of our sales and marketing infrastructure in previous periods.

Direct selling and marketing expenses in the Software segment increased $627,000 or 25% to $3.1 million during the three months ended September 30, 2009 compared to $2.5 million during the same period in 2008. This increase is a result of headcount additions for employees focused on managing and enhancing our partner relationships. We also continue to develop the services provided in the Software segment by investing in research and development. During the three months ended September 30, 2009, we incurred $1.2 million in direct research and development costs compared to $1.1 million during the same period in 2008 and have capitalized an additional $861,000 of costs incurred during the three months ended September 30, 2009 related to our internally developed software compared to $258,000 during the same period in 2008. Indirect expenses, which consist of overhead, such as rent, utilities and depreciation on property and equipment, increased $109,000 or 5% to $2.5 million during the three months ended September 30, 2009 compared to $2.4 million during the same period in 2008. This increase is a result of additional expenses resulting from an increase in capital lease obligations and an increase in compensation costs as a result of increased headcount.

Nine Months Ended September 30, 2009 and 2008

The Software segment revenue increased by $7.2 million or 52% to $21.2 million during the nine months ended September 30, 2009 from $13.9 million during the same period in 2008. The increase is a result of the selling and marketing efforts we have undertaken to expand the inContact suite of services in the market. Software segment revenue includes revenue from professional services of $1.1 million for the first three quarters of 2009 compared to $717,000 for the first three quarters of 2008.

Gross margin increased 15 percentage points to 67% during the nine months ended September 30, 2009 compared to 52% during the same period in 2008. At the end of fiscal 2008, certain intangible assets related to previously acquired technology became fully amortized. As a result, we recorded approximately $1.4 million less in intangible asset amortization during the nine months ended September 30, 2009 than the same period in the previous year. The increase in gross margin is also due to increased Software segment revenues in 2009 resulting from the buildup of our sales and marketing infrastructure in previous periods.

Direct selling and marketing expenses in the Software segment increased $421,000 or 5% to $8.3 million during the nine months ended September 30, 2009 compared to $7.9 million during the same period in 2008. This increase is a result of headcount additions for employees focused on managing and enhancing our partner relationships. We also continue to develop the services provided in the Software segment by investing in research and development. During the nine months ended September 30, 2009, we incurred $3.0 million in direct research and development costs compared to $3.1 million during the same period in 2008 and have capitalized an additional $2.4 million of costs incurred during the nine months ended September 30, 2009 related to our internally developed software compared to $877,000 during the same period in 2008. Indirect expenses, which consist of overhead, such as rent, utilities

and depreciation on property and equipment, increased $396,000 or 5% to $7.8 . . .