UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K10-K/A

(Mark One)

For the fiscal year ended December 31, 2008

OR

For the transition period fromto

Commission File Number: 000-50640

SUMTOTAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

1808 North Shoreline Boulevard

Mountain View, California 94043

(Address of principal executive offices, including zip code)

(650) 934-9500

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act.    ¨  Yes  x  No

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x  Yes  ¨  No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨    (do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes  x  No

The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing price of the common stock on June 30, 2008, on the Nasdaq Stock Market LLC (“Nasdaq”) of $4.67 per share, was approximately $146.9 million. For the purpose of the foregoing computation, only the directors and executive officers of the registrant were deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s common stock, par value $0.001, as of March 1,April 15, 2009 was 31,583,02031,236,602 shares.

Document incorporated by reference

As noted herein, the information called for by Part III of this Annual Report on Form 10-K is incorporated by reference to specified portions of the registrant’s definitive Proxy Statement to be filed in conjunction with the registrant’s 2009 Annual Meeting of Stockholders, scheduled to be held on June 12, 2009, which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2008 (the “2009 Proxy Statement”). Only those portions of the 2009 Proxy Statement which specifically address the items required to be set forth herein are incorporated by reference.None

SUMTOTAL SYSTEMS, INC.

FORM 10–KK/A

EXPLANATORY NOTE

This Amendment to the Annual Report on Form 10-K of SumTotal Systems, Inc. (“SumTotal” or the “Company”) is filed to provide the information required by Part III, Items 10 through 14.

For the Year Ended December 31, 2008

TABLE OF CONTENTS

This Annual Report on Form 10-K includes “forward-looking statements” withinPART III

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is information concerning our directors and executive officers, as of April 15, 2009.

Section 16(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) requires the Company’s directors and executive officers, and persons who own more than ten percent (10%) of a registered class of the Private Securities Litigation Reform ActCompany’s equity securities to file with the SEC initial reports of 1995. This Act providesownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent (10%) stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ fromreview of the projected results. All statements other than statements of historical fact we make in this Annual Report are forward-looking. Such forward-looking statements may be identified by the words “may”, “plans”, “expects”, “anticipates”, “intends”, “targets”, “goals”, “seeks”, “believes”, “potential”, “continue”, “predict”, “could”, “will”, “estimate” and similar language, including variationscopies of such wordsreports furnished to the Company and include, but are not limited to, statements regardingwritten representations that no other reports were required for the following: our belief that our available cash resources, combined with cash flows generated from revenues, will be sufficient to meet our presently anticipated working capital, capital expense and business expansion requirements for at least the next 12 months; our belief that any current disputes will not result in litigation, but if they do, they will not have a material adverse effect on our business, operating results and/or financial condition; statements about future business operations, including future product and solution launches; marketing statements; industry leadership; internal controls and procedures; statements about our products and solutions, SumTotal 8 Series; revenue recognition; continued growth in our revenues from our professional service organization; financial performance including, but not limited to, estimated revenues, bookings, operating expenses, gross margins, and profit, and market conditions that include risks and uncertainties are based on information that is available to us at the date of this Annual Report on Form 10-K and reflects management’s then current expectations, estimates, beliefs, assumptions and goals and objectives, and are subject to uncertainties that are difficult, if not impossible, to predict. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to those discussed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Affect Future Results of Operations.” You are cautioned not to place undue reliance on the forward-looking statements, which speak only asfiscal year ended December 31, 2008, all of the date of this Annual ReportCompany’s executive officers, directors and greater than ten percent (10%) stockholders complied with applicable Section 16(a) filing requirements on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

PART Ia timely basis.

We maintainCOMPENSATION DISCUSSION AND ANALYSIS

Introduction

The Compensation Committee is responsible for overseeing our compensation programs. As part of that responsibility, the Compensation Committee determines all compensation for the Chief Executive Officer and our other executive officers. For executive officers other than the Chief Executive Officer, the Compensation Committee considers the recommendation of the Chief Executive Officer in making its compensation determinations. The Compensation Committee interacts regularly with management regarding our executive officescompensation initiatives and principal facilitiesprograms. The Compensation Committee has the authority to engage its own advisors and has typically engaged a consultant to provide data and information to assist the Compensation Committee in its duties.

For 2008, the Company engaged Radford Surveys + Consulting (“Radford”), an independent consultant, to assist the Compensation Committee in evaluating, analyzing and determining executive compensation at 1808 North Shoreline Boulevard, Mountain View, California 94043. the Company.

Objectives of Compensation Programs

Our telephone numberexecutive compensation programs are designed to attract, retain and motivate our executive officers in a manner that is (650) 934-9500tied to achieving the Company’s business objectives and we maintain a website at www.sumtotalsystems.com. Investors can obtain copiesaligning the interests of our Securities and Exchange Commission (“SEC”) filings from our web site free of charge, as soon as reasonably practicable following such reports being filed or furnishedexecutive officers with the SEC. Investors may also obtain such reports freelong-term interests of charge from the SEC website at www.sec.gov.our stockholders. In addition, we believe it is also important that our charter documents,compensation programs and levels of compensation reflect and account for the changes, integrations and transitions the Company is undergoing at any particular time. For example, in 2004, the Company was formed by the combination of two separate companies, and in each of 2005 and 2006, the Company completed significant acquisitions, all of which required significant integration to function as wellone company. Since 2007, the Company has been increasing its focus on, and is accelerating the transition to, small- and medium-sized enterprises which typically buy subscription licenses, and offering subscription options to our traditional market, thereby increasing the Company’s recurring revenue stream. As the Company undergoes these changes, integrations and transitions, an extra burden is placed on the Company and its management team, and the Company believes that leading the Company through these periods should be recognized and accounted for in the compensation of its executives. With these objectives in mind, our compensation programs for 2008 were designed to provide our executives with the incentive to increase the performance and valuation of the Company based on attaining both Company-wide and other targeted business financial milestones.

Our compensation for our Named Executive Officers in 2008 (which includes Messrs. Chandra, Laird and Villareal and also includes, Mr. Fowler, who was our Chief Executive Officer through November 2008, Mr. Dholakia, who was our Senior Vice President General Manager, Learning and Talent Management Business Unit through November 2008 and Ms. Rottenberg, who was our Senior Vice President, General Counsel and Secretary through July 2008) consisted of three primary elements: base salary, performance bonuses, and equity grants.

In determining target compensation, both quantitative and qualitative factors relating to the Company and individual performance are considered. The determination is not based on any single factor but, rather, a mix of factors, such as our compensation levels relative to those of similarly situated companies, the “CodeCompany’s overall performance, each Named Executive Officer’s individual education, experience, performance and contributions, the desire to maintain internal equity and consistency among our Named Executive Officers and other considerations that we deem to be relevant. In reviewing each element of Ethicscompensation paid to our Named Executive Officers, the Compensation Committee looks at each element individually and as compared to the total compensation paid.

In addition, we have change of control agreements with each of our Named Executive Officers, which provide payments and benefits if their employment with the Company is terminated under certain circumstances following a change of control of the Company. These arrangements are discussed in detail below under “Change of Control Agreements.”

Cash-Based Compensation

Base Salary. We believe that the base salaries paid to our Named Executive Officers are an important element of our executive compensation program in order to attract, retain and motivate individuals, and to provide a steady and predictable income stream. The Compensation Committee reviews base salaries for our Chief Executive Officer Senior Financial Officers, Other Seniorand the other Named Executive Officers to determine if a change is appropriate, typically on an annual basis. For compensation decisions relating to Named Executive Officers (other than our Chief Executive Officer), the Compensation Committee also considers the recommendations of our Chief Executive Officer.

In addition, for 2008, the Compensation Committee also used data from surveys conducted by Radford to provide compensation benchmarks of similarly situated companies. The survey included data from 24 software, internet and similar high technology companies located in Silicon Valley, with annual revenues ranging from $54 million to $325 million, market capitalizations of ranging from $70 million to $2.5 billion and number of employees ranging from 168 to 1,669, which we believe are representative of the companies we compete with for executive talent and other key employees.

Survey Group:
Actuate Corporation		Macrovision Corp.
Ariba, Inc.		Magma Design Automation, Inc.
Borland Software Corp		Omnicell, Inc.
Callidus, Inc.		Openwave Systems, Inc.
CyberSource Corp		Opsware, Inc.
Echelon Corp.		PDF Solutions, Inc.
eHealth, Inc.		Saba Software, Inc.
Equinix, Inc.		Shutterfly
Exponent, Inc.		Taleo Corp.
Informatica Corp.		TiVo, Inc.
Interwoven, Inc.		Tumbleweed Communications Corp.
KANA Software, Inc.		Wind River Systems, Inc.

In determining base salaries, we consider numerous factors, including, among others, level of responsibility, the individual’s education, experience, performance and contributions, expectation of future performance and contributions, the relationship among compensation paid within our company and the Boardcompensation paid at other similar companies. The Company believes that given the competition for executives and employees, especially in the Silicon Valley area where the Company is headquartered, and the transitions and integration of Directors”previous acquisitions the Company has undergone, and “Reporting Hotline Policyis continuing to undergo, base salaries should be targeted above the median of the competitive market to both attract and retain its executives. Using the survey data provided by Radford as a point of comparison, for 2008, the base salary of each of our Named Executive Officers was set at a level between the 50th to 75th percentiles for their respective job responsibilities as compared to the companies in the survey.

Performance Bonus. The Company’s Named Executive Officers are also eligible to earn annual compensation in the form of an incentive bonus under the Company’s 2008 Executive and Management Bonus Plan (the “2008 Executive Bonus Plan”). The 2008 Executive Bonus Plan’s objectives are to enhance and reinforce the goals of the Company, and reward the achievement of such goals, by providing participants under the plan with additional financial incentives and rewards for attainment of these goals. We believe that this helps align our Named Executive Officers’ interests with those of the Company’s stockholders.

As with base salary, the Company believes it is important for the Anonymous Reporting, Receipt, Treatmenttotal cash compensation, base salary plus performance bonus, to be targeted at a level that provides our Named Executive Officers with total cash compensation greater than the median cash compensation for their respective positions at similarly situated companies. Therefore, again using the Radford survey data as a benchmark, the total cash compensation for each of our Named Executive Officers was typically set between the 50th and Retention of Concerns75th percentiles for their respective positions as compared to our SumTotal Systems, Inc. Board of Directors’ Audit Committee Members or Executive Staff” are posted on our website. We intend to post any amendments or waivers to our Code of Ethics on our website.

Background

We were originally incorporated as Asymetrix Corporationthe companies in the State of Washington in 1984, and since our incorporation have developed, marketed and sold a wide range of software solutions. In 1995, we focused our business on the enterprise learning market and created our first learning management system (“LMS”) in 1997. As a result of our decision to focus on the enterprise learning market, we divested several product lines and made a number of acquisitions to strengthen our position in this market. In connection with our initial public offering in June 1998, we reincorporatedsurvey. The target bonus is computed as a Delaware corporationpercentage of base salary and in 2001 we changed our name to Click2learn, Inc. (“Click2learn”).

On March 18, 2004, we merged with Docent, Inc. (“Docent”), a public company listed on Nasdaq, to form SumTotal Systems, Inc. (“SumTotal”, “SumTotal Systems” or “the Company”). For accounting purposes,determined by the merger was treated as an acquisition by Click2learn of Docent. We acquired Pathlore Software Corporation (“Pathlore”), a privately held provider of LMS, on October 4, 2005. Expanding our focus to the broader talent management market, we acquired MindSolve Technologies, Inc. (“MindSolve”), a privately held provider of performance management software, on November 14, 2006.

Company Overview

We are a global provider of learning, performance, and talent development solutions. Our offerings include learning, performance, and compensation management software and services. Our markets are worldwide and include a broad range of industries. Our solutions automate the talent development processes within organizations, including aligning the individual’s goals with business objectives, developing the individual’s skills and competencies, assessing the individual’s performance, providing succession planning, and setting compensation based on performance. We sell our solutions to organizations primarily through our direct sales force, complemented by sales through our domestic and international partners. We offer our solutions on a subscription or perpetual license basis. Our solutions can be provided on an on-demand basis or deployed at the customer’s site. We have more than 1,500 customers and 18 million users worldwide across a variety of industries, including education, energy, financial services, government, healthcare, manufacturing, retail, services, and utilities.

Over the past 12 months, we continued to execute against our growth strategy despite the downturn in the global and domestic economy. HighlightsCompensation Committee. As discussed above with respect to operations include:

We are positionedthe target amount, participants will receive 50% of that component of the bonus, after which, each one percentage point increase in the Leaders Quadrant by Gartner, Inc.target amount achieved results in a five percentage point increase in the “2008 Magic Quadrantbonus paid until 100% of the target amount is achieved, in which case 100% of the bonus would be paid. For example, if the Company achieves 95% of the target amount for Corporate Learning Systems”. Additionally, we are recognized astotal bookings, international bookings, performance management bookings or revenue, participants will receive 75% of that component of the bonus, provided that no bonus will be paid if the Company does not achieve at least 50% of its target operating profit. For operating profit, no bonus is paid if the Company achieves less than 70% of the target amount. At 70% of the target amount, participants will receive 50% of the operating profit component of the bonus, after which the percentage payout of the bonus will increase on a Leader instraight line based on the percentage of the target amount achieved until 100% of the target has been achieved and 100% of the bonus has been paid out. For example, if the Company achieves 85% of the target amount for operating profit, participants will receive 67% of the target amount for the operating profit component.

The Compensation Committee also believes the 2008 Forrester Wave: “Enterprise Learning Management Suites”. We wereExecutive Bonus Plan should provide additional incentives for its executives if the Company’s financial performance exceeds these targets. Therefore, the 2008 Executive Bonus Plan also named to the Deloitte 2008 Technology Fast 500, a rankingallows for higher bonus payments if all five of the 500 fastest growing technology, media, telecommunications, and life sciences companiesindicators exceed 100%, in North America. The Deloitte Technology Fast 500 rankings are based onwhich case the bonus payout for each component would equal the total percentage achieved, provided that such percentage could not exceed the percentage achieved for operating profit. In addition, there would be no payouts in excess of fiscal year revenue growth over five years, from 2003 to 2007,100% of year-to-date targets during which time our revenue grew by 313%.the first three quarters; instead any additional bonus beyond the 100% target would be paid as part of the fourth quarter payment.

Industry Overview

Talent Development Market Drivers

Human capital is critical to the success of any organization. In order to operate and compete effectively, organizations need to increase employee productivity through automated and integrated learning, performance, and compensation management solutions. We define these functions as talent development. The goal of talent development is to ensure that employees have optimum skills and competencies to achieve the organization’s business objectives.

Challenges that impact successful talent development in today’s market include:

senior managers over the next five years. In addition, the publication predicted that Japan, the second largest economy in the world, would face a 14% decrease in the number of its workers aged 15 to 64 by 2025. Because of this demographic shift, talent development solutions are becoming increasingly important to retain workers longer, while simultaneously helping to attract the best new candidates and ensure that knowledge and experience are transferred throughout the organization;

Traditional Approaches

Traditionally, organizations use paper-based systems, desktop applications, spreadsheets, and human resource management systems (“HRMS”) to address their talent development needs. For example, organizations communicate goals through memosif the Company achieved for the full year 110% in each of total bookings and email; they manage performance appraisals using word processing programs; they register studentsmanagement bookings, 120% in each of revenue and international bookings and 115% in operating profit, then the bonus payouts would be 110% in bookings and performance management bookings and 115% for trainingeach of revenue, international bookings and track completions using spreadsheets; they train individuals in a classroom setting; and they use handwritten notes for succession planning. In these examples, it is impossible to obtain a single, integrated view of an employee’s goals, performance appraisals, training, and succession plans.operating profit. In addition, these traditional approaches are inefficient, costly, and lack in the sophistication and specialized functionality required2008 Executive Bonus Plan also grants the Compensation Committee discretion to provide an organization with a competitive advantage in today’s market. Traditional approaches often prevent organizations from realizingmake no bonus payments if the benefitsoverall performance of a holistic view of an individual, from goal-setting through succession planning.

Learning, Performance, and Talent Development Solutions

To meet today’s talent development challenges, organizations can benefit from implementing technology solutions that manage and automate critical talent development processes. Talent development solutions help companies and government agencies around the world achieve measurable improvements in business results acrossCompany does not warrant making such vital areas as sales, operations, manufacturing, support, finance and marketing. Through strategic and effective talent development, we believe that organizations can achieve superior business results by optimizing talent within organizations, as well as within their extended enterprise of partners and channels. Talent development solutions enable organizations to train individuals to perform their jobs more efficiently or develop skills for future job opportunities, incentivize individuals based on performance, retain talent through performance-based promotions, and ensure that compliance requirements are followed.

A Learning Management System (“LMS”) is key to the talent development solution. With an LMS, organizations can work to maximize the productivity of their individuals. An LMS, also known as an eLearning system, is defined as a system that enables the automation and management of activities related to providing classroom-based training and Web-based training, including content creation, facilities and instructor management, student management, and compliance and certification tracking. With LMS solutions, organizations can addresspayments, even if one or more of the following business challenges:financial components are met.

By addressing these challenges, organizations can achieve a substantial return on investment.

An employee performance management system is also centralThe Company’s Named Executive Officers, who were employed during the relevant period, received, approximately 96% to the talent development solution and represents one98% of the fastest growing markets within enterprise software. Organizations now face major demographic changes that affect the workforce. Likewise, they have growing needs for specialized skills,target bonus in 2006, approximately 33% in 2007 and they struggle to recruit and maintain employees. Thus, companies have an increased need to track employee performance. With an employee performance management system in use, organizations gain a centralized platform for maintaining, tracking, and evaluating employee performance data. Additionally, organizations can improve their efficiency and effectiveness and reduce significant risks across many areas affecting their workforces by leveraging the ability to:

Market Opportunity

According to a 2008 report by independent research firm Bersin and Associates, the strategic Human Capital Management (“HCM”) segmentapproximately 52% of the Human Capital Management Systems sector (which includestarget bonus in 2008. Mr. Chandra and Mr. Villareal, per the marketsterms of their offer letters, were each guaranteed a payment of the bonus payable to them under the 2008 Executive Bonus Plan for e-recruitment, learning management,the first six months of their employment.

Supplemental Bonuses. In addition, the Compensation Committee may award special bonuses based on a number of factors, including extraordinary performance, management,market demands, or other factors. No supplemental cash or equity bonuses were paid to our Named Executive Officers in 2008.

Stock-Based Compensation

The Compensation Committee is authorized to grant options and compensation management applications) is estimated at $2 billion for 2007 and is expectedother stock awards to grow by approximately 20% annually.our Named Executive Officers. The most mature markets—learning management and recruitment management—are expectedCompany uses such grants to achieve modest growth at 17% and 15%, respectively. This growth is expected to stem from upgrades and replacement opportunities. The market for compensation management will be fueled by manager-focused, pay-for-performance opportunities and is projected to grow at 18%. The fastest-growing market is performance management, which includes applications for career and succession management, and is increasing by approximately 30% per year.

Our Solutions

As the leader in talent development solutions, we have a proven record in helping companies to align their organizational strategies, engage employees through coaching and development, identifymotivate and retain critical employees, and ultimately improve the performance of the entire workforce. Our experience with 18 million users from more than 1,500 customers of all sizes and from all industries has earned us valuable insight. In turn, that insight helps us consistently deliver flexible and extensible solutions that maximize employee value.

Now, offering the industry’s best-of-breed, unified talent development solution, the SumTotal Unified Talent Development Suite, we help customers focus on making their businesses better by making their employees better. Unlike other solutions, the SumTotal Unified Talent Development Suite scales to match growing business complexity and transactions. Ultimately, customers get a powerful solution that grows seamlessly with them—so they can address their talent development needs today and into the future.

While employees are a business’s single biggest corporate asset, they are also likely to be its single greatest cost. As such, a company’s ability to derive the most value from its workforce is critical to its success. With the help of the SumTotal Unified Talent Development Suite, the task of optimizing employee value has become easier. By combining the power of our learning, performance, and compensation management systems, the SumTotal Unified Talent Development Suite enables customers to not only assess employees, but also translate those assessments into actionable talent development plans. At the same time, customers can ensure fair, merit-based compensation based on employee performance ratings.

The SumTotal Unified Talent Development Suite includes these components:

We offer flexible deployment models that allow customers to choose between our fast growing on-demand, hosted, or on-premise implementations. As a result, they can address their unique business needs while gaining the flexibility to seamlessly migrate between choices to adapt to company growth.

Our talent development solutions provide the following key benefits:

•

Performance-driven culture. Using our unified performance and compensation management solutions, customers are able to align individual and organizational goals, thereby ensuring that all employees are working toward the same objectives. As a result, customers can reduce inefficiencies and improve productivity. They are also able to foster performance-driven cultures by offering fair, equitable, and merit-based compensation, which works to eliminate bias, raise morale, and motivate top performers to stay with the organization.

Our Strengths

The strengths of our business include:

Our Strategy

Our growth strategy is focused on the following objectives:

•

Expand internationally. While we have customers spread geographically across the Americas, Europe, the Middle East and Africa, and Asia/Pacific, we believe the market outside the United States for LMS solutions remains under-penetrated. As a result, we have taken a number of steps to strengthen our international infrastructure, including strategically increasing the number of international employees and partners. We believe this will result in increased sales to international customers; and

Solutions and Services

We are a global provider of talent development solutions comprised of learning, performance, and compensation management systems. With the SumTotal Unified Talent Development Suite, we provide organizations with a single solution for managing all of their talent development needs—from goal setting to employee training and development, to pay-for-performance, to career development. Our unified offering enables employees, managers, and human resources personnel to better manage performance objectives, conduct training, measure progress, and plan and set compensation, tasks which we believe will improve productivity and increase revenue and profitability. Furthermore, organizations can report, measure, and analyze the impact of talent on desired business results while effectively managing performance.

Our customer base is rapidly growing for our on-demand solution, ResultsOnDemand^®, which enables organizations to make a low up-front investment, achieve faster implementation of a solution that grows with the organization, and obtain a low TCO that reduces or eliminates the cost of application management. ResultsOnDemand operates in a segmented multiple-customer, or multi-tenant, environment, with bundled services that reduce the technical and functional administration usually associated with on-premise or hosted applications. With ResultsOnDemand, customers gain a personalized solution that includes their own branded interfaces, configured emails and notifications, and tailored reports. The solutions encompassed within the SumTotal Unified Talent Development Suite are available as hosted, on-demand or premise solutions.

SumTotal Unified Talent Development Suite

With the combined power of our learning, performance, compensation management, and learning content management systems, the SumTotal Unified Talent Development Suite automates and integrates learning and performance management to increase workforce productivity and drive business results on a daily basis. The suite reflects our proven record in helping companies to align their organizational strategies, engage employees through coaching and development, identify and retain critical employees, and ultimately improve the

performance of the entire workforce. Incorporating the best-of-breed functionality of many our solutions, our SumTotal Unified Talent Development Suite enables a company to not only assess employees, but also translate those assessments into actionable talent development plans. At the same time, the company can ensure fair, merit-based compensation based on employee performance ratings.

The SumTotal Unified Talent Development suite is an open, flexible, and scalable Web-based system that is configurable to the unique and changing needs of our customers. It enables competency-based, collaborative development of learning content, so competency gaps become actionable. With easy-to-use, scalable, built-in reports, along with featuresNamed Executive Officers for the rapid creation of customized reports, it delivers powerful analytics capabilities that enable better visibility into business processes. The Unified Talent Development Suite is a global platform and is available in up to 20 languages.

The SumTotal Unified Talent Development Suite can also be integrated with other enterprise applications, including systems for ERP, supply chain and customer relationship management, human resources, e-commerce, and financial management. The suite is comprised of the following key modules:

•

TotalCollaboration™. TotalCollaboration is a collaborative, informal learning module that allows companies to unlock the tacit knowledge within their organizations and augment formal learning methodologies. The module provides an interactive forum where employees can obtain immediate information from experts via threaded discussions, and where organizations can capture information for future reference, thereby enhancing their employee productivity and knowledge base; and

ToolBook Solution

Our ToolBook^® Instructor and ToolBook Assistant enterprise learning content creation solutions are targeted at small teams and individual authors who require a robust, desktop instructional-design capability. These solutions enable customers to create their own media-rich, interactive learning content for deployment on TotalLMS, other standards-compliant learning management systems, or CD-ROMs. ToolBook Instructor, targeted at professional software developers, is a multimedia development system for creating sophisticated applications and simulations. ToolBook Assistant, targeted at learning professionals and content experts, is an easy-to-use authoring product that automates much of the process of developing learning applications. Both solutions are licensed on a per-copy, perpetual basis.

Services

We complement our product solutions with a range of services that enable organizations to implement, evaluate, and maintain their enterprise talent development, learning, and performance management solutions. We typically bill our customers for these services on a time and materials basis or via a fixed fee package. Some services related to set-up, technical support and hosting are bundled as part of our SaaS solutions.

Our service offerings include:

•

Business Process Outsourcers. We offer a limited set of managed services for business process outsourcers (“BPO”) to outsource the administration and support primarily for our performance management software solutions. BPO customers receive end-user support, ongoing system administration, ongoing custom report design and delivery, regular contact with customers to review, analyze and improve operations, post-implementation process design consultation, and end-user training; and

Technology, Research & Development

Our solutions are designed on a standards-based, open, and scalable architecture. In addition, they are Web-based and are accessible to users through standard Web browsers. As a result, our infrastructure supports large numbers of individual users and organizations across the globe. The architecture has been designed to allow content and results from multiple organizations to be aggregated easily and delivered to anyone using a variety of Internet-enabled devices. This functionality allows information to reach a diverse set of internal and external participants with minimal deployment and maintenance costs. The principles of customer success and innovation drive our product roadmap development.

Our efforts and expenditures in research and development are devoted to continually enhancing the functionality and scalability of our current product offerings and the development of new solutions. Our research and development expenditures are expensed as incurred. These expenses were $22.1 million, $21.4 million, and $18.7 million for the years ending on December 31, 2008, 2007, and 2006, respectively, and represented 17.4%, 17.6%, and 17.6%, respectively, of total revenue from operations in those periods.

Our solutions are designed to support leading relational database management systems, including Oracle and Microsoft SQL Server. We support multiple operating systems and hardware configurations to meet the differing needs of our customers. Our software incorporates third-party software in addition to code that we have developed ourselves. Server applications are based on standard Web server technology and are implemented in Java, ASP, C#, or C++ with both native and standards-based connectivity to both the Web server and the database. Key features of our technology include:

system is compatible with the Aviation Industry CBT Committee (“AICC”) AGR-010 Internet-based course management interface standards. We are also in conformance with the U.S. Department of Defense (“DOD”) Advanced Distance Learning (“ADL”) initiative SCORM, version 1.2 and 2004 specifications, and the IMS metadata tagging version 1.0 specification; and

Backlog

As of December 31, 2008, 2007 and 2006, we had firm backlog orders of $78 million, $76 million and $64 million, respectively. Backlog includes all deferred revenue, as well as contractual commitments where the customer has not yet been billed for services performed or the product has not yet been delivered. Backlog consists primarily of support contracts for our license products, hosting contracts, implementation services, work contracted but not performed, the unperformed portion of our on-demand subscriptions, and licenses with unfulfilled product deliverables or acceptances. Although we expect that most of the current backlog will be recognized as revenue over the next 12 months, there is no assurance that all such backlog will be recognized over the next 12 months, or at all.

Sales and Marketing

In the United States and Canada, we sell our solutions primarily through direct sales operations, and our direct sales force is divided by geographic region and vertical industry to provide a higher level of service and understanding of our customer’s specific business requirements. In Europe, we sell through both direct sales operations and resellers. In Latin America, the Middle East, Africa, and Asia/Pacific, we sell through direct sales operations and resellers.

We also have telesales representatives focused on certain product lines and smaller customers. Our sales organization also includes sales engineers who provide technical expertise, architect the technical aspects of our enterprise learning solutions, assist in proposal preparation, and provide ongoing sales support.

We conduct a variety of marketing programs to promote our learning, performance, and talent management solutions, including advertising in national business and technology magazines and trade publications, attending major trade shows, conducting direct mail and e-mail campaigns, public seminars, Web-based seminars, and public relations activities focused on company news and successful applications of our solutions. As a leading provider of talent and learning technologies, we participate as an exhibitor and speaker at numerous trade shows. We also maintain an area on our Web site where potential customers can obtain information about our solutions.

Revenue by geographic region is based on the direct billing location of the customer and is as follows (in thousands, except percentages):

Alliances

Content Partners

Our content partners provide specialized off-the-shelf content specific to industries and subject areas that are certified by us to be compatible with our solutions. Our content certification program provides development licenses and a third-party testing environment to ensure interoperability. Additionally, our content partners may also provide custom development capabilities for our customers.

Solutions Integrators

Our solutions integration partners resell our software and/or services as part of their value-added solutions. We have alliances with large global system integrators and consulting firms in North America, Europe and Asia Pacific.

Human Resource Outsourcers

We also have formed alliances with several HROs that include our learning, performance, and talent solutions as part of a complete HRMS outsourced solution.

Technology Partners

Our technology partners provide complementary technology, such as enterprise application integration, performance management, content management, and synchronous web collaboration technologies, that extend the value of our solution.

Customers

We provide our learning, performance, and talent development solutions to over 1,500 customers, including approximately one half of the Fortune 100 companies. These customers cover 18 million users across a broad range of geographies and industries, such as education, energy, financial services, government, healthcare, manufacturing, retail, services, and utilities. No customer accounted for greater than 10% of our total revenue in 2008, 2007, or 2006.

Competition

We compete primarily in the learning, performance, and talent development markets. The market for our solutions and services is highly competitive and subject to rapid change. Furthermore, it is a dynamic industry in which there has been consolidation, which we expect to continue.

We encounter competition from a variety of sources:

long term. We believe that competitive differentiation is influenced byequity grants provide our Named Executive Officers with a strong link to our long-term performance and closely align the following factors:

We believe our solutions compete favorably with respect to these factors.

Our ToolBook products face competition from other Web authoring products. New competitors may enter this market in the future because there are relatively low barriers.

Intellectual Property Rights

Our success and ability to compete effectively is dependent on our ability to develop and maintain the proprietary aspects of our technology and to operate without infringing on the intellectual property rights of others. We rely on a combination of trade secrets, copyrights, and trademarks, as well as contractual restrictions to protect the proprietary aspects of our technology. In addition, as part of our acquisition of MindSolve, we obtained its patent on “Drag and Drop” technology and, as a result, patent protection may become a more important componenteach of the methods we use to protect proprietary aspects of our technology. However, these legal protections afford only limited protection for our technology. We seek to protectNamed Executive Officers. Lastly, the source code for our software, documentation, and other written materials under trade secret and copyright laws. We license our software pursuant to signed license or “shrink-wrap” agreements, which impose restrictions onCompensation Committee considers the licensee’s ability to use the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultantsexpense associated with access to proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Due to rapid technological change, we believe factors such as the technological and creative skills of our personnel and new product and solution developments and enhancements to existing solutions may be more important to establishing and maintaining a technology leadership position than the various legal protections of our technology.

Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary. Policing unauthorized use of our solutions is difficult, and while we are unable to determine the extent to which software piracy exists, if at all, it can be expected to be a persistent problem. The laws of many countries do not protect our proprietary rights

to as great an extent as do the laws of the United States. Much of our development work is performed in India, where the legal protection of proprietary technology is not as developed as it is in the United States and, thus, to the extent we learn of violations of the law or of breaches of contractual obligations, our remedies are more limited than in the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources. Our means of protecting our intellectual property rights, both here and abroad, may not be adequate to protect us from the infringement or misappropriation of our intellectual property rights by others.

International Operations

In addition to our direct sales efforts, we rely on independent partners in foreign countries to help conduct our international sales and marketing efforts. We intend to continue to expand internationally by establishing additional reseller relationships to expand the geographic reach of our enterprise learning, performance, and talent development solutions. Our success in international markets will consequently depend to a large degree on the success of these independent partners, over which we have little control. If they are unwilling or unable to dedicate sufficient resources to our relationships, our international operations will suffer.

In November 2002, we established an office in Hyderabad, India, to increase our research and development and global services capacities at a lower cost than would be possible by adding these capacities in the United States. We rely on this office to enable us to support our customers and deliver new releases of our solutions on time and within our established budgets. As of December 31, 2008, we had 356 employees in this office, up from 341 and 294 at December 31, 2007 and 2006, respectively.

Employees

As of December 31, 2008, we had 832 employees. Of these employees, 112 were engaged in sales and marketing, 249 in research and development, 346 in services and support and 125 in general and administration. Our future success depends on our ability to attract and retain highly qualified technical, product and solution support, sales and senior management personnel.

None of our employees is represented by a labor union or a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.

ITEM 1A.

RISK FACTORS

Factors That May Affect Future Results of Operations

Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. These risks and uncertainties may not be the only ones facing us. Furthermore, new risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statement.

We have a history of losses and we may not achieve profitability under generally accepted accounting principles on a consistent basis.

We expect to continue to derive substantially all of our revenue from the licensing of our learning, performance and talent development solutions, the recently introduced SumTotal 8 Series, and our predecessor solutions and related services, including without limitation, maintenance, professional services, on-demand subscriptions and hosting. Historically, we have not been profitable under accounting principles generally accepted in the U.S. (“GAAP”) and we may not consistently achieve or sustain GAAP profitability. If we fail to generate adequate revenue from the SumTotal 8 Series, predecessor solutions and related services, we will continue to incur losses.

In the future, we expect to continue to incur additional non-cash expenses relating to the amortization of purchased intangible assets that will contribute to our net losses. In addition, charges related to stock-based compensation awards, including grants of stock options are recordedand restricted stock awards as an expenseset forth in our reported results of operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment, which has “Share-Based Payment” in determining the result of increasing our reported expenses and our GAAP losses. We expect to incur additional GAAP expenses related to stock based compensation awards for the foreseeable future and these future expenses will adversely impact our ability to achieve profitability on a GAAP basis.

We are currently increasing our emphasis on subscription-based, on-demand offerings and accelerating this transition, which could slow our short term revenue growth and affect our revenue derived from perpetual license sales.

While we continue to offer and support our software on a perpetual license model, we have increased, and are continuing to increase, our emphasis on a subscription revenue model by offering our solutions as on-demand subscriptions services, and are in the process of accelerating this transition. We anticipate that our future financial performance and revenue growth will depend upon the acceptance and growth of our on-demand solutions. Offering on-demand subscription solutions represents a significant departure from traditional software delivery strategies. The relatively short history and continued evolution of this business model makes our business operations and prospects difficult to evaluate. As we increase our focus on offering our solutions on-demand, we have incurred, and expect to continue to incur, a reduction in our traditional perpetual software license revenues and associated services revenues, which may not be offset by our on-demand revenues. Moreover, our short term financial results could be affected by upfront investments required to grow our on-demand offerings.

Additionally, we recognize revenue for our on-demand solutions over the termamount of the agreement insteadaward and the type of award.

At the Compensation Committee’s first meeting in February 2008, it approved grants of restricted stock units to Messrs. Laird and Dholakia and Ms. Rottenberg. Mr. Dholakia and Ms. Rottenberg’s grants each vested in two equal parts over two years and Mr. Laird’s grant vested in full after one year. Mr. Villareal, who had recently started his employment with the quarterCompany, did not receive a grant of restricted stock units in whichFebruary 2008; however, in June 2008 he was granted a stock option with the agreement is signed, as is typically the case with our perpetual software licenses. As a result, the sale of our on-demand offerings will result in less revenue recognized in the quarter the agreement was signed as compared to a comparable sale of our perpetual software license and our operating results may not immediately reflect any increases or decreases in sales of our on-demand offerings. Accordingly, our short term financial results could be impacted if customers choose our on-demand solutions instead of our perpetual software offerings. Furthermore, continued revenue from these services requires our customers to renew such subscriptions. Unexpected customer cancelations or low renewal rates of subscriptions could adversely impact our financial results.Company’s

Current adverse economic conditions, including reduced information technology spending or increased unemployment, orstandard four-year vesting. In November 2008, Mr. Chandra received a reductiongrant of stock options with the Company’s standard four-year vesting in corporate confidence inconnection with the economy may adversely impact our business, operating results and financial condition.start of his employment as the Company’s Chief Executive Officer.

Our business depends on the overall demand for learning, performance and talent development systems solutions, and on the economic health of our current and prospective customers. The purchase of our solutions is often discretionary and may involve a significant commitment of capital and other resources. Furthermore, the market for our solutions and services may be disproportionately affected by a weakening or a decline in corporate confidence, in the economy in general or in the broader market for information technology. Moreover, if the unemployment rate increases materially and training and retention of employees becomes less critical, our existing and potential clients may no longer consider improvement of their learning, performance, and talent development systems a priority. As a result, if the current worldwide economic conditions continue, many of our customers may delay or reduce purchases of our solutions or not purchase such solutions at all, which could reduce demand for our solutions and adversely impact our business, operating results and financial condition.

The current economic conditions and market instability and their impact on us and our customers also make it increasingly difficult for us to forecast accurately both future demand for our own solutions and overall demand in the markets in which we compete. In addition, any adverse financial or economic impact on our customers may impact their ability to pay timely, or result in their inability to pay, the amounts owed for work or services contractually agreed to or previously provided to the customer, which may result in a reduction in revenue, accounts receivables and allowance for sales returns and doubtful accounts. Even if economic conditions remain stable, weak economic conditions, reduced corporate confidence in the economy or a reduction in information technology spending would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices, or possible delays or cancelations of purchases, for our solutions and services, reduced sales and possible delays in payment of, or inability to pay, amounts owed to us. If this trend in economic conditions continues or deteriorates further, it could adversely affect our results in future periods.

If we fail to successfully manage our product transition, adapt to rapidly changing technology and evolving industry standards, or deploy upgrades to our solutions successfully and on a timely basis, our business and financial results will be harmed.

The learning, performance and talent development markets are characterized by rapidly changing technologies, frequent new product and service introductions, short development cycles and evolving industry standards. The introduction of new solutions and services embodying new technologies and the emergence of new industry standards may render our solutions and services obsolete. Additionally, although our software solutions can be licensed for use with a variety of popular industry standard relational database management system platforms, specific operating systems, or other combinations of licensed software, there may be existing or future platforms or user interfaces that achieve popularity in the marketplace which may not be architecturally compatible with our software product design. Our success depends on our ability to adapt to a rapidly changing landscape, to offer new solutions and services to address our customers’ changing demands and to develop and maintain consistent software product performance characteristics across different combinations of licensed software. We may also experience difficulties that delay or prevent the successful design, development, introduction or marketing of our solutions and services, which may harm our ability to attract new customers and retain existing customers.

Since the formation of SumTotal Systems in 2004, we have introduced major product upgrades in December 2004, April 2005, June 2006, December 2006, June 2007 and June 2008. We face numerous risks relating to product transitions and introductions, including customers delaying their purchasing decision until they have confidence in our new product and until we have proven we can successfully install and implement new solutions or upgrades. Due to the product transition, we may be unable to forecast revenue from product sales and related services accurately, the number and severity of defects and increased support requirements due

to the complexity of the new product. In order to market and sell the product successfully, we must ensure broad-based cooperation from and coordination between multiple departments, including engineering and marketing, and from multiple geographic regions, including Bellevue, Washington; Mountain View, California; Gainesville, Florida; Hyderabad, India; and Datchet, United Kingdom. In addition, our implementations may be very complicated and require more time and resources than originally forecasted. As a result, we may not be able to complete the requisite work necessary in order to gain customer acceptance, which may delay or prevent us from recognizing revenue on deals we have signed. If we fail to manage the transition to new product and solution offerings successfully, our business and financial results may be adversely affected, which may cause a decline in the price of our common stock.

Further, we have plans to discontinue supporting certain legacy solutions and encourage customers of these solutions to upgrade to a newer version of our software. However, if these customers chose not to upgrade or there are delays or complications in such upgrades causing a decrease in customer satisfaction with our solutions, our financial results may be harmed.

Our operating results may fluctuate significantly from quarter to quarter and year to year and are difficult to predict, which could negatively affect the value of your investment.

We have experienced substantial fluctuations in operating results on a quarterly and annual basis and expect these fluctuations to continue in the future. Our operating results may be affected by a number of other factors, including, but not limited to:

Our limited operating history with performance management and compensation management solutions, and the rapidly evolving nature of our market make prediction of future revenue and expenses difficult. Expense levels are based, in part, on expectations as to future revenue and are essentially fixed in the short-term. To the extent our future revenue is difficult to predict, we may not be able to adjust spending in response to revenue shortfalls. Other expenses, as a result of changes in the law or otherwise, such as expenses related to litigation or compliance with government regulations, may also increase and cause us to fall short of our forecasts. Failure to meet our forecasts would likely cause a decline in the price of our common stock.

We have experienced and may continue to experience turnover of senior management and key personnel, which could harm our business or operations.

Our success depends to a significant degree on the performance of the senior management team and other key employees, and there is no guarantee that such officers or key employees will remain employed with us. We do not have employment agreements other than offer letters with any key employee, and we do not maintain key person life insurance. In October 2008, we announced that Donald E. Fowler, our Chief Executive Officer, would be retiring and that Arun Chandra would be starting as Chief Executive Officer in November 2008. In addition, in January 2009, we announced that Ray Villareal, our Senior Vice President, Field Operations, had left the Company. As a result of the departure of any of our key employees, there is a risk that we would be unable to effectively manage ourselves and successfully meet operational and other challenges, which could harm our business. If our senior management team, including any new hires, fails to work effectively together and execute our plans and strategies, our business could be harmed.

Our success also depends on our ability to attract, integrate, motivate and retain highly skilled technical, sales and marketing and professional services personnel. Competition for qualified personnel in the software industry, particularly engineering and other technical personnel, is intense and is increasing, and there can be no assurance that we will be able to attract and retain highly skilled employees in sufficient numbers to sustain our current business or to support future growth. In addition, we announced a restructuring in the first quarter of 2009 which included the termination of employment of a number of our employees. While most terminated employees signed release agreements, there is no assurance that such employees or any other former employee will not sue us for wrongful termination or other employment related claims. Even if such suits are meritless, such suits may divert management resources and will be costly to defend. The results of such litigation, if any, may be difficult to predict, and a judgment or settlement may adversely affect our operating results, which may result in a lower stock price.

Our sales cycles in our traditional perpetual license business line are lengthy, making the timing of sales difficult to predict and also requiring considerable resources and expense with no assurance that such sales will occur.

For our traditional perpetual license business line, the period between our initial contact with a potential customer and a customer’s purchase of our solutions and services is lengthy and often extends over several fiscal quarters or a fiscal year. To sell our solutions and services successfully, we generally must educate our potential customers regarding the use and benefits of our solutions and services, which typically requires significant time, capital and other resources. Also, as we offer both on-demand solutions and perpetual licenses, this might create customer confusion regarding our offerings, which may delay purchases of our perpetual licensed solutions and lengthen our sales cycle. The delay or failure to complete sales in a particular quarter could reduce our revenue for that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized. If the sales cycle unexpectedly lengthens in general or for one or more large orders, it would negatively affect the timing of a significant portion of our revenue, and our revenue growth would be harmed. Many of our potential customers for perpetual licenses are large organizations which generally take more time to make significant business decisions, and the formation and execution of even a relatively small number of large contracts with these large organizations may have a significant impact on our revenue. In addition, we must expend and allocate resources prior to completing a sales transaction, with no guarantee that such transaction will result in an actual sale. Furthermore, the lengthening of our sales cycles may create increased difficulties in negotiating such sales on terms favorable to us. This may result in a delay or failure to generate revenue from our sales efforts and may adversely affect our stock price.

Undetected product and solution defects may require us to halt sales or shipments of our solutions, delay introduction of new solutions, or account for warranty claims.

Our solutions are highly technical and complex and have contained and may contain undetected errors, bugs, security vulnerabilities or defects, some of which may only be discovered after a product has been installed and used by customers. Our product and solution offerings, both current and future and including our recently introduced SumTotal 8 Series, are complex and often contain undetected errors or bugs, despite internal and

third-party testing. New product and solution offerings, such as the SumTotal 8 Series, contain new features and functionality which result in a greater likelihood of errors, bugs, security vulnerabilities and frequently these are undetected until the period immediately following introduction and initial shipment of new solutions or enhancements to existing solutions. For example in the SumTotal 7 Series, our predecessor product, although we attempted to discover and resolve all such defects in our product line that we believed would be considered serious by our customers before shipment to them, the SumTotal 7 Series was not error-free and some customers notified us that they considered some of the defects to be serious. In addition, our solutions include third-party software, and any defects in third-party software that we incorporate into our solutions may compromise our solutions. It may be difficult for us to determine the source of the problem and correct any errors in third-party software because such software is not within our control.

Any bugs, errors, defects or security vulnerabilities discovered in our solutions after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty costs, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including claims relating to changes to our solutions made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our solutions. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.

We rely on partnerships, alliances and other relationships to conduct our business, including internationally, and our business may be adversely affected if they do not perform as expected.

Our business relies on a variety of partnerships, alliances and other relationships, such as those with content partners, resellers, original equipment manufacturers, solution integrators, human resource outsourcers and technology partners, to develop, market and sell our solutions, including in many foreign countries. We also use independent third parties to provide engineering services, including customer implementation and product development, including customer implementation and product development. As our business grows and evolves, through adding new solutions or possible third party or product acquisitions, we have relied, and in the future, we may rely more heavily, on these types of partnerships globally. As a result, we have had to, and may in the future, have to renegotiate or terminate existing relationships. There can be no assurance that we will be able to enter into new contracts, or amend or terminate our existing contracts on favorable terms, or at all. In addition, if we amend or terminate any of our contracts, our former partners may become our competitors in the future. These former partners may be unhappy with their new relationships, and may, as a result, commence litigation against us, regardless of the merits of such litigation. Litigation is expensive to defend, and even the threat of legal proceedings diverts resources, and management attention from operating our business and causes increases in our expense levels, all of which may negatively affect the price of our common stock.

Moreover, our success in international markets will depend to a large degree on the success of these independent partners, with whom we have a limited working experience and over whom we have little control. If they are unwilling or unable to dedicate sufficient resources to our relationships, our international operations will suffer so our future success will depend in part on our ability to attract, train and motivate new distributors, resellers, alliance partners and systems integrators and expand our relationships with current independent partners.

Our lack of product diversification, and our reliance on the SumTotal 8 Series and its predecessor solutions, means that any decline in price or demand for our solutions and services would seriously harm our business.

We expect the SumTotal 8 Series and predecessor solutions and related services to continue to account for a significant majority of our revenue for the foreseeable future. Consequently, a decline in the price of, or demand for, the SumTotal 8 Series and predecessor solutions or services, or their failure to achieve broad market acceptance, would seriously harm our business and would likely result in a decline in the price of our common stock.

The anticipated benefits of our entry into the Performance Management industry may be delayed or may not be realized as we integrate solutions and employees and adapt to a new market with different competitors.

We expect to continue to enhance our position in the performance management industry through the further integration of our performance and compensation management technologies, solutions, services, partnerships, and customer contacts into our current product and solution offerings. Nevertheless, we may not realize all of the anticipated benefits associated with our entry into the performance management market in a timely manner or at all. Additionally, we had limited experience competing in this space and now face new and different competitors with more experience selling and delivering such software and services. If we are unable to generate greater growth and acceptance of our performance management offering, our business and financial results may be harmed.

Third parties have claimed, and may claim in the future, that we are infringing their intellectual property which could diminish the value of our solutions and services or deter customers from purchasing our solutions regardless of whether these claims are successful.

From time-to-time, we are involved in legal proceedings or threats of legal proceedings. Litigation is expensive to defend and even the threat of legal proceedings, regardless of their merit, diverts management attention from operating our business and causes increases in our expense levels. We have received, and may in the future receive, threatening letters and notice of claims of infringement of other parties’ proprietary rights. In addition, there are patent-holding companies, entities that do not make or sell solutions, which may threaten or bring claims against us alleging that our solutions infringe upon their proprietary rights. Such claims could result in costly litigation and could divert management and technical resources. They could also delay product shipment, deter potential customers from purchasing our solutions and services, or require us to develop non-infringing technology or enter into royalty or licensing agreements, which agreements may not be available on reasonable terms, or at all. In the event of an adverse judgment against us (including a judgment or settlement which may impose adverse conditions on us), we may be required to cease shipping, to pay damages, to license technology on terms that may not be favorable to us or to alter our technology, website or software solutions, any of which may adversely affect our operating results and cause us to miss our forecasts or industry analysts’ forecasts, thereby causing a possible decline in the price of our common stock.

If third parties infringe our intellectual property or if we are unable to secure and protect our intellectual property, we may expend significant resources enforcing our rights or suffer competitive harm.

Our success depends in large part on our proprietary technology. We rely on a combination of copyrights, trade secret and trademark laws, contractual restrictions, restrictions on disclosure and other methods to protect our proprietary technology. In addition, our “Drag and Drop” patent is part of our performance management offering and, as a result, patent protection may become a more important component of the methods we use to protect our proprietary technology. These legal protections afford only limited protection for our technology. Furthermore, effective protection of intellectual property rights is unavailable or limited in certain foreign countries. It may also be possible for third parties to copy or otherwise obtain and use our intellectual property or trade secrets without our authorization and it may be possible for third parties to independently develop substantially equivalent intellectual property. We cannot assure that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our solutions and services or design around any patents or other intellectual property rights we hold. Consequently the value of our solutions and services to our customers could diminish substantially.

Our solutions include third-party technology, the loss of which could materially harm our business.

We use licensed third-party technology components in our solutions. Future licenses to this technology may not be available to us on commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these technology licenses could result in delays in the introduction of new solutions or could force us to discontinue offering portions of our learning, performance, and talent development solutions until equivalent technology, if available, is identified, licensed and integrated.

Any future acquisitions we make, or attempt to make, will need to be integrated into our business and require significant time and effort from our management team, which may disrupt our business and harm our operating results or financial condition.

We have made and may continue to make acquisitions of businesses and technologies to enhance our existing business. Acquisitions involve numerous risks, including problems combining the purchased operations and key employees, technologies or solutions, unanticipated costs, diversion of management’s attention from our core business, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. The integration of businesses that we have acquired or that we may acquire in the future into our business has been and will continue to be a complex, time consuming and expensive process. Failure to operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices could adversely impact the success of any business combination as evidenced in previous combination and acquisition transactions.

Our operating results may suffer because of acquisition-related expenses, amortization of intangible assets and impairment of intangible assets. Furthermore, we may have to incur debt or issue equity securities to pay for any future acquisitions, or to provide for additional working capital requirements, the issuance of which could be dilutive to our existing shareholders.

There can be no assurance that we will be able consummate or expand future business combinations, if any, on favorable terms or on a timely basis, or that we will be able to integrate successfully businesses, solutions, technologies or personnel that we might acquire. Failure to do so may negatively affect our financial results, customer, employee and investor confidence, and ultimately, the price of our common stock. Further, we might be required to invest significant additional resources in order to expand these relationships, and the cost of this investment may exceed the revenue generated from this investment.

Security and privacy breaches could subject us to litigation and liability.

We host certain of our customers’ learning, performance, and talent development software implementations and provide access to that software using the Internet, and also use the Internet to deliver our on-demand subscription services to our customers. Computer viruses could be introduced into our systems or those of our customers which could disrupt the operation of our hosting systems or make them inaccessible to users. We also depend on third parties to provide key components of our networks and systems and Internet service providers and telecommunications companies and the efficient operation of their computer networks and other computer equipment to enable customers to access and use hosted software implementations.

We could become subject to litigation and liability if third parties penetrate security for our hosting systems or otherwise misappropriate our users’ confidential information or personal data, or if customers are unable to access and use hosted software implementations. Advances in computer capabilities, new discoveries in the field of cryptography or other technological events or developments could result in compromises or breaches of our security systems. Anyone who circumvents our security measures could misappropriate proprietary information or personal data, or could cause interruptions in our services or operations. We may be required to expend significant capital and other resources to protect against the threat of security breaches or service interruptions or to alleviate problems caused by breaches or service interruptions. Each of our key third-party networks and systems component providers, Internet service providers and telecommunications companies partners have experienced significant outages in the past and could, in the future, experience outages, delays and other difficulties due to system failures unrelated to our systems, which could require us to pay service level credits to our customers or cause our customers to believe we were at fault and withhold payments due to us or sue us for breach of contract, which would result in decreased revenue and a possible decline in the price of our common stock.

Our disaster recovery plan might be insufficient if a major interruption occurs, and a disaster could severely damage our operations.

Our disaster recovery plan only covers redundant back-up computer systems and data at an alternate site for our primary business applications systems hosted in our Mountain View headquarters. A disaster could severely harm our business because our computer systems could be interrupted for an indeterminate length of time. Our operations, including software solutions we host for some of our customers, depend on our ability to maintain and protect the computer systems needed for our day-to-day operations. For instance, a number of these computer systems are located in Mountain View, California on or near known earthquake fault zones and flood plains, or in Hyderabad, India where the infrastructure is not as robust as in the United States. Although these systems are designed to be fault tolerant, they are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and other events. Any damage to our facility could lead to interruptions in the services we provide to our customers and loss of customer information, and could impair our ability to operate our business, leading us to pay service level credits or customers to withhold payments due to us and decreased revenue. The business interruption insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions, which would result in increased expenses and a possible decline in the price of our common stock.

The learning, performance and talent development systems market is highly competitive, and we may be unable to compete successfully.

The market for our solutions and services is intensely competitive, dynamic and subject to rapid technology change. Our competitors vary in size, scope and the breadth of solutions and services offered. We face competition from:

Additionally, companies may choose to develop their own learning, performance, and talent development software internally rather than acquiring it from third parties.

There are relatively low barriers to entry in the learning, performance and talent development systems market, and we expect the intensity of competition to increase in the future. Additionally, some of our existing and potential competitors, such as Oracle Corporation and SAP AG, have longer operating histories and significantly greater financial, technical, marketing and other resources. These companies not only have more resources to develop their own solutions and technologies internally but can also use such resources to acquire competing solutions and technologies through acquisitions or other strategic transactions and quickly enter the learning, performance and talent development market and compete with us on both solutions offerings and pricing. Increased competition may result in price reductions, reduced gross margins or loss of market share, any of which would seriously harm our business and financial results.

Our core offering, the SumTotal 8 Series and predecessor solutions, integrates solutions addressing the learning management, performance management and compensation management segments of our market; however, our performance management solution was acquired in our acquisition of MindSolve and has only recently been integrated into our offering. Additionally, we had limited experience competing in the performance management space prior to our acquisition of MindSolve and now face new and different competitors with more experience selling and delivering performance management software and services. Furthermore, our compensation

management offering is not as fully developed and does not have the same market acceptance as the other modules of the SumTotal 8 Series and predecessor solutions. As a result, we may have difficulty competing against companies which focus on these segments rather than the entire learning, performance, and talent development market, or selling to customers who only need solutions in a specific segment.

The learning, performance and talent development systems software markets may not grow to a sufficient size or at a sufficient rate to sustain our business.

Corporate training and education historically have been conducted primarily through classroom instruction and performance management solutions have traditionally been done using paper-based systems, desktop applications, spreadsheets, classroom settings, and human resource management systems. Although technology-based training applications have been available for many years, they currently account for only a small portion of the overall corporate learning market. Accordingly, our success depends on the extent to which companies implement learning, performance and talent development software solutions for the design, development, delivery and management of their corporate learning needs and performance management solutions for rating, reviewing, evaluating, developing and compensating individuals.

Many companies that have already invested substantial resources in traditional training methods may be reluctant to adopt a new strategy that may limit or compete with their existing investments. Even if companies implement learning, performance and talent development software solutions or performance management solutions, they may still choose to develop such solutions internally. If the use of learning, performance and talent development software does not become widespread, or if companies choose to develop such software or solutions internally rather than acquiring them from third parties, then our learning, performance and talent development software and solutions will not be commercially successful.

Our operating results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.

We, as well as our customers and our partners, are increasingly doing business outside of the United States. Accordingly, our business is subject to a number of risks inherent in international operations, including:

While we sell our solutions worldwide and we have experienced international partners, we have limited experience with sales and marketing in some countries. There can be no assurance that we will be able to market and sell our solutions in all of our targeted international markets. If our international efforts are not successful, our business and results of operations could be harmed.

Due to our significant operations in India, which has a rapidly growing technology market, our business is subject to certain risks that are not typically experienced to the same degree in the United States or elsewhere abroad.

We rely significantly on our research and development, professional services and technical support operations in Hyderabad, India to enable us to develop new solutions, complete customer implementation projects and new releases of our solutions on time and within established budgets and provide technical support. In recent years, increased growth and development of the technology market in general, and in Hyderabad specifically, has made it more difficult for us to hire and retain qualified technical employees and other personnel. In addition, it may be difficult to acquire additional space to support future growth.

Our efforts in Hyderabad are subject to a number of risks inherent in international operations. However, certain risks are particularly acute in India, such as:

If our India operations fail, for any reason, to provide adequate and timely product enhancements, updates and fixes to us or customer implementations, our ability to fix defects in our SumTotal 8 Series, our ability to develop new versions of our SumTotal 8 Series and successor solutions, and our ability to respond to customer or competitive demands would be harmed and we would lose sales opportunities and customers and might negatively impact our customer satisfaction.

In addition, our engineering efforts are based primarily out of three offices: Bellevue, Washington; Gainesville, Florida and Hyderabad, India. If the offices fail to work together successfully, we may experience delays in fixing defects in our solutions, customer implementations, or in developing and releasing future versions of our product.

Our stock price has been and may continue to be volatile.

The trading price of our common stock has been and is likely to continue to be highly volatile. Our stock price is subject to continued fluctuations in response to a number of factors, including:

Fluctuations in the price and trading volume of our common stock may prevent stockholders from selling their shares above the price at which they purchased their shares.

In addition, companies that have experienced volatility in the market price of theirthe Company’s common stock on the date of grant. All stock grants have been, whether in the form of options or restricted stock, subject to securities class action litigation,vesting provisions to encourage Named Executive Officers to remain employed with the Company. The Company does not attempt to time the award of stock option grants in advance of material announcements to achieve lower exercise prices. In addition, in 2008 the Company engaged Radford to provide competitive data regarding stock based compensation to assist the Compensation Committee in its review and weto establish guidelines for future option grants.

Change of Control Agreements

The occurrence or possibility of a change of control of the Company may be a distraction to our Named Executive Officers and may cause them to consider other employment opportunities or be influenced by the impact of a change of control. Therefore, to ensure the continued dedication and objectivity of our Named Executive Officers, the Company believes that it is in its best interests to enter into change of control agreements with its current Named Executive Officers. These agreements provide that, if the individual’s employment with the Company and its subsidiaries is involuntarily terminated without cause within twelve months following the occurrence of a change of control of the Company or if the individual voluntarily terminates his employment within three months of the occurrence of an event constituting good reason and on account of an event constituting good reason within twelve months following the occurrence of a change of control, the individual will be entitled to (i) 12 months base salary, paid in equal semi-monthly installments over the one year period following termination, (ii) 100% of the individual’s annual target bonus, (iii) continued health insurance coverage for twelve months following the date of this typetermination and (iv) full vesting of litigation inany outstanding options and, if applicable, restricted stock held by the future. Securities litigation, like other litigation against us could result in substantial costs, negative publicity and divert our management’s attention, which could seriously harm our business and stock price.

We may need additional financing inindividual at the future, which we may be unabletime of termination. As a condition of receipt of benefits, the individual must comply with all of the terms of the change of control agreement, including an agreement not to obtain on favorable termssolicit employees of the Company or at all.

If our business does not generateperform services for a competitor of the cash needed to finance our operations or growth, including potential business acquisitions, we may need to obtain additional financing or take steps to restrict our operations in order to conserve existing cash.Company for one year following the individual’s termination of employment. In addition, poor financial results or unanticipated expenses could give rise to additional financing requirements. We may be unable to obtain financing on terms favorable to us or at all. If we need to obtain financing and adequate funds are not available or are not available on acceptable terms, we maythe individual will be required to make further expense reductions, which could significantly restrict our operationsexecute a release of claims, releasing all rights and limit our abilityclaims against the Company relating to enhance our solutions, fund expansion, respondthe individual’s employment with the Company.

The following table describes the potential payments and benefits that would have been paid to competitive pressures or take advantage of business opportunities, thereby resulting in a decrease in our revenue and stock price.

Our internal controls and procedures may not be adequate to prevent or detect misstatements or errors.

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our management does not expect that our internal controls and procedures will prevent all errors and all fraud, if any, because, in addition to resource constraints, there are inherent limitations of all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control or procedure. The design of any system of controls and procedures is also based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected. In such event, we may not be able to recognize revenue we expected to recognize; we may not be able to meet our forecasts or industry analysts’ projections; or we may be the subject of litigation, each of which would likely harm our financial results and may result in a decline inNamed Executive Officers who were employed by us on December 31, 2008(1) under the priceterms of our common stock.

The insolvency or failuretheir respective change of any of the financial institutions which holds our cash, cash equivalents and short-term investments could have a material adverse affect on our financial condition.

Our cash, cash equivalents and short-term investments, which collectively totaled $47.8 millioncontrol agreement, as if their employment terminated as of December 31, 2008, are deposited with several financial institutions, and may, at times, exceed federally insured limits. If any of such financial institutions were to become insolvent or unable to satisfy its obligations to us, such insolvency or failure could materially adversely affect our financial condition.

Standards for compliance with Sarbanes-Oxley Section 404 are burdensome and uncertain, and if we fail to comply in a timely manner, ourthe last business could be harmed and our stock price could decline.

Pursuant to Sarbanes-Oxley Section 404, our management is required to report on, and our independent registered public accounting firm to attest to, the effectivenessday of our internal controls over financial reporting, at least annually. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are new, complex and subject to proposed changes. Currently, the rules require significant documentation, testing and possible remediation of our internal controls over financial reporting. The

process of reviewing, documenting and testing our internal controls over financial reporting will likely continue to result in increased expenses and the devotion of significant management and other internal resources. We may encounter problems or delays in completing the implementation of any changes necessary to retain a favorable assessment of our internal controls over financial reporting duringlast fiscal 2009. If we are unable to remediate effectively any future material weaknesses identified by us or our independent registered public accounting firm, we will be unable to assert that our internal controls are effective, and we may not be able to timely file, or file at all, our periodic financial reports. Even if we are able to file such reports, there may be a loss of stockholder confidence, leading to an adverse effect on the price of our stock.

Future changes in securities laws and regulations may increase our expenses.

Past changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and the listing standards of the Nasdaq Global Market, have increased our expenses as we devote resources to respond to the requirements. Although recent changes to the Sarbanes-Oxley Act of 2002 are intended to reduce the costs of compliance, compliance is costly due to the necessity of hiring additional personnel and external consultants and our independent registered public accounting firm. The securities laws and regulations may also make it more difficult and more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. Further, our directors and executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could adversely affect our business.

We have incurred, and may incur impairment charges which may adversely affect our results of operations and financial condition.

In the fourth quarter of fiscal 2008, we recorded a non-cash, after-tax charge of $68.5 million for impairment of goodwill in accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets, primarily caused by the effects of adverse market conditions that caused a decrease in our stock price and market capitalization, which approximates the fair value of the Company at December 31, 2008. This charge represented the entire balance of our goodwill. As a part of our annual goodwill impairment testing in accordance with the provisions of SFAS No. 142, SumTotal Systems also evaluated possible impairment of our other intangible assets in accordance with the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,based on the future discounted cash flows projections of each intangible asset. There was no impairment of our other intangible assets on the balance sheet at December 31, 2008.

Intangible assets with estimable useful lives are amortized over their respective estimated useful lives using straight-line and accelerated methods designed to match the amortization to the benefits received where applicable. They are reviewed for impairment in accordance with SFAS No. 144. If the carrying amount of an intangible asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the unit exceeds its fair value.

Purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

Any significant adverse changes to the key assumptions about acquired businesses and their prospects or an adverse change in market conditions could result in a change to the estimation of fair value that could result in an impairment charge. Given the significance of the intangible assets, which had a carrying value of $7.1 million on December 31, 2008, as a percentage of our total asset balance, an adverse change to the estimated fair value of intangible assets could result in an impairment charge that would be material to our reported assets and results of operations.

Changes in accounting regulations and related interpretations and policies, particularly those related to revenue recognition and income taxes, could cause us to recognize lower revenue or to report lower earnings per share.

While we believe that we are in compliance with the accounting rules and guidance provided by the American Institute of Certified Public Accountants (“AICPA”), the Financial Accounting Standards Board (“FASB”), the Public Company Accounting Oversight Board (“PCAOB”) and the SEC, these bodies continue to issue implementation guidelines for their standards and the accounting profession continues to discuss a wide range of potential interpretations of such rules and guidance. Additional implementation guidelines, and changes in interpretations of such guidelines, including the possible adoption of international financial reporting standards, could lead to unanticipated changes in our current revenue and accounting practices that could cause us to recognize lower revenue or increased expenses. In addition, policies, guidelines and interpretations related to accounting for acquisitions, income taxes, foreign taxes, allowance for doubtful accounts and other financial reporting matters require different judgments on complex matters that are often subject to multiple sources of authoritative guidance. If our determination of these matters is subsequently changed or updated, such changes or updates could result in an adverse impact on our financial statements.

Adverse litigation, disputes or investigations could affect our business.

We may, from time to time, be subject to various legal or government claims, disputes or investigations. Such matters may include, but not be limited to, claims, disputes or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation or compliance or other matters such as the subpoena we received on April 30, 2008 from the U.S. Department of Defense, as described in Item 3,Legal Proceedings. These matters can be lengthy, expensive, and disruptive to our operations and results cannot be predicted with certainty. An adverse decision could result in monetary damages or injunctive relief that could affect our business, operating results or financial condition. Even if such matters do not result in litigation or such matters are resolved in our favor, such matters and the time and resources necessary to resolve or litigate them, could have a material adverse impact on our financial condition, results of operations, our reputation, or the market value of our common stock.

We may be limited in our use of net operating losses carry forwards.

Our ability to benefit from our deferred tax assets depends on us having sufficient future earnings to utilize our net operating loss (“NOL”) carryforwards before they expire. We have established a valuation allowance against the future tax benefit for our federal and state NOL carryforwards. We could be required to record an additional valuation allowance against our foreign deferred tax assets if market conditions change materially and, as a result, our future earnings are, or are projected to be, significantly less than we currently estimate. Our ability to utilize net operating losses and credits may be subject to a substantial limitation due to the change in ownership, as defined in the Internal Revenue Code Section 382 and similar state provisions and changes to federal and state law with respect to the use of NOLs. Our NOL carryforwards are subject to review and potential disallowance upon audit by the tax authorities of the jurisdictions where the NOLs were incurred.

We may become subject to government regulation and legal uncertainties that could result in liability or increase the cost of doing business, thereby adversely affecting our financial result.

We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, such as export control laws. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may become applicable to us or may be adopted in the future with respect to the Internet covering issues such as taxation, user privacy, content, right to access personal data, copyrights, distribution and characteristics and quality of services.

The applicability of existing laws governing issues such as taxation, property ownership, copyrights, and other intellectual property issues, encryption, libel, export or import matters and personal privacy to the Internet

is uncertain. The vast majority of these laws were adopted prior to the broad commercial use of the Internet and related technologies. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws, including some recently proposed changes, could create uncertainty in the Internet marketplace. Such uncertainty could reduce demand for our services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.

In addition, we could be liable for the misuse or unauthorized disclosure of personal data. The Federal Trade Commission, the European Union and certain state and local authorities have been investigating certain Internet companies regarding their use of personal information. Further, the European Union has adopted various data protection regulations related to the confidentiality of personal data. While we are certified under the European Union Safe Harbor which regulates the collection, disclosure and use of personal data, failure to comply with these various regulations could subject us to fines, and cause customers to lose confidence in our software solutions and related services, thereby negatively affecting our revenue and expense.

Terrorism and United States military actions may adversely affect our business.

As a result of terrorist activity, political and military instability, and existing and possible United States military actions, significant instability and uncertainty in the world may continue to have a material adverse effect on world financial markets, including financial markets in the United States. In addition, such adverse political effects may have an adverse impact on economic conditions in the United States. Unfavorable economic conditions in the United States may have an adverse effect on our business operations including, but not limited to, our ability to expand the market for our solutions, obtain financing as needed, enter into strategic relationships and compete effectively in the learning, performance, and talent development markets. Such consequences may lead to a decrease in demand for our solutions and services and as a result our stock price may suffer.

Anti-takeover provisions in our charter documents could make the sale of the company more difficult.

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, no potential acquirer would be able to call a special meeting of stockholders to remove our board of directors. A potential acquirer would also not be able to act by written consent without a meeting. In addition, our board of directors has staggered terms that make it difficult to remove all directors at once. The acquirer would also be required to provide advance notice of its proposal to remove directors at an annual meeting. The acquirer would not be able to cumulate votes at a meeting, which would require the acquirer to hold more shares to gain representation on our board of directors than if cumulative voting were permitted. In addition, our certificate of incorporation authorizes our Board of Directors, without stockholder approval, to issue up to 5,000,000 shares of undesignated preferred stock, which could be used to dilute the stock ownership of a potential hostile acquirer.

Subject to its fiduciary duties, our board of directors may in the future adopt a stockholder rights plan. If the board adopts a stockholder rights plan, it may discourage a merger or tender offer involving our securities that is not approved by our board of directors by increasing the cost of effecting any such transaction and, accordingly, could have an adverse impact on stockholders who may want to vote in favor of such merger or participate in such tender offer.year.

None.

Our headquarters is located in Mountain View, California where we lease approximately 22,000 square feet of office space with a term expiring in February 2010 and approximately 2,200 square feet of office space with a term expiring in July 2009.

We lease approximately 39,400 square feet of office space for our engineering and sales headquarters in Bellevue, Washington, of which we use approximately 37,900 square feet with a term that expired in December 2008. We sublease the remaining 1,500 square feet to an unrelated party with a term corresponding to our lease. In 2008, we amended our lease for the Bellevue facility which extended the lease term to December 2013, and reduced the existing office space to approximately 38,700 square feet.

Commencing in April 2006, we entered into a lease for approximately 16,000 square feet of office space in Columbus, Ohio with a term expiring in April 2011. This facility is a portion of what was formerly the headquarters of Pathlore.

We lease a total of approximately 9,500 square feet of office space in Gainesville, Florida with terms expiring through June 2009. In September 2008, we entered into a new facility lease located in Gainesville with a term commencing in July 2009 and expiring in June 2014. This facility totals approximately 13,300 square feet and will replace the existing Gainesville office.

We lease approximately 53,300 square feet of office space in Hyderabad, India with terms that will expire in July and December of 2009. As part of the lease agreement, we have the irrevocable right to renew for an additional two terms of three years each.

We also lease offices in Rochester, New York; Tokyo, Japan; Paris, France; Datchet, United Kingdom (“U.K.”); Frankfurt, Germany; and Beijing, People’s Republic of China.

The contractual commitments, estimated sublease income and restructuring charges associated with all these properties are discussed in Note 9,Restructuring,and Note 10,Commitments and Contingencies, in the Notes to the Consolidated Financial Statements.

We believe that our current facilities are and will be, suitable for their respective uses and adequate for our current and prospective needs.

From time-to-time, we are involved in legal proceedings or threats of legal proceedings arising in the ordinary course of business. We are not currently a party to any litigation or other legal proceeding that, in the opinion of management, is reasonably likely to have a material adverse effect on our business, operating results or financial condition.

We may, from time to time, also be subject to various legal or government claims, disputes or investigations. Such matters may include, but not be limited to, claims, disputes or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation or compliance or other matters such as a subpoena we received on April 30, 2008 from the U.S. Department of Defense, Office of the Inspector General. The subpoena requests documents related to our sale of products and services to the Department of Defense as well as other documents related to us. We are cooperating with the government’s request and are in the process of responding to the subpoena.

None.

PART II

Market Information

Our common stock is traded in the Nasdaq Global Market System under the symbol “SUMT.” The table below provides the quarterly high and low prices, as reported by Nasdaq, for the last two fiscal years.

Holders of Record

As of March 1, 2009, there were approximately 169 holders of record of our common stock. Because brokers and other institutions hold many of the shares on behalf of stockholders, we are unable to determine the actual number of stockholders represented by these record holders.

Dividends

We did not pay any dividends in fiscal years 2008, 2007 or 2006 and we do not currently anticipate paying cash dividends to our stockholders in the foreseeable future. We expect that we will retain all of future earnings available for distribution to the holders of our common stock for use in the expansion and operation of our business.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

On August 20, 2007, our Board of Directors authorized the repurchase up to $15.0 million of our outstanding shares of common stock. Stock repurchases will be made in the open market, in block purchase transactions, or in structured Rule 10b5-1 share repurchase plans, and may be made from time to time, in one or more larger repurchases at prices and on terms satisfactory to us. We intend to conduct the repurchase in compliance with the Securities and Exchange Commission’s Rule 10b-18. The program does not obligate us to acquire any particular amount of common stock. It does not have an expiration date and may be modified, suspended or terminated at any time at our discretion. As of December 31, 2008, we have purchased 1,670,272 shares of common stock for an aggregate cost of $7.7 million as follows:

Stock Performance Graph

The graph below compares the cumulative total stockholder return as of December 31 of each year on (1) our common stock with (2) the Nasdaq Stock Market (U.S. companies) Index and (3) the Nasdaq Computer and Data Processing Services Index from December 31, 2003 to December 31, 2008 (assuming the investment of $100 in our common stock and in each of the other indices on December 31, 2003 and reinvestment of all dividends).

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

Our stock price, as reflected in the graph, is the stock price of Click2learn from 2003 through March 18, 2004, and the stock price of SumTotal Systems from March 19, 2004 through December 31, 2008.

The stock price performance shown on the graph above is not necessarily indicative of future price performance. Information used in the graph was obtained from the Nasdaq Global Market, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

ITEM 6.

SELECTED FINANCIAL DATA

Certain prior period amounts have been reclassified to conform to the current period presentation. Refer to Note 2,Summary of Significant Accounting Policies, and in particular,Basis of Presentation, in the Notes to the Consolidated Financial Statements for further explanation.

Historical results of operations are not necessarily indicative of future results. Refer to theFactors that May Affect Future Results of Operation under Item 1A,Risk Factors, for the discussion of factors that may impact future results.

		Salary			Executive Bonus Plan(2)			Health Benefits(3)			Stock/ Options(4)			Total
Arun Chandra		$	475,000		$	475,000		$	16,847		$	0		$	966,847
Neil Laird		$	305,000		$	183,000		$	5,877		$	113,600		$	607,477
Ray Villareal		$	315,000		$	189,000		$	19,551		$	229,300		$	752,881

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONexcess of $2.84.

Overview

We are a global provider of learning, performance, and talent development solutions. Our offerings include learning, performance, and compensation management software and services. Our markets are worldwide and include a broad range of industries. Our solutions automate the talent development processes within organizations, including aligning the individual’s goals with business objectives, developing the individual’s skills and competencies, assessing the individual’s performance, providing succession planning, and setting compensation based on performance. We sell our solutions to organizations primarily through our direct sales force, complemented by sales through our domestic and international partners. We offer our solutions on a subscription or perpetual license basis. Our solutions can be provided on an on-demand basis or deployed at the customer’s site. We have more than 1,500 customers and 18 million users worldwide across a variety of industries, including education, energy, financial services, government, healthcare, manufacturing, retail, services, and utilities.

Executive Summary

During 2008, we continued to implement our growth strategy. Highlights with respect to operations include:

Total revenue increased from $121.9 million to $126.6 million when comparing 2007 to 2008, and our cash flow from operating activities decreased from $12.8 million to $12.2 million when comparing 2007 to 2008. Our net loss increased from $7.7 million to $70.0 million when comparing 2007 to 2008, which primarily resulted from a non-cash, after-tax charge of $68.5 million for the impairment of goodwill in the fourth quarter of 2008.

Sources of Revenue

We generate revenue from three sources: (1) maintenance and support services, subscription fees from clients accessing our on-demand software, which we also refer to as on-demand subscriptions and hosting arrangements, all of which we refer to as subscriptions and support sales, (2) services performed in connection with consulting agreements and (3) sales of software licenses and related solutions.

Costs and Expenses

Our cost of license revenue includes the cost of third party software and content we resell. Our cost of service and maintenance revenue includes salaries and related expenses of our professional services organization, charges related to hosting activities and other third party services and employee stock-based compensation. Our cost of revenue also includes amortization of intangible assets.

Research and development, sales and marketing and general and administrative expense categories include direct costs, such as salaries, employee benefits, travel and entertainment, allocated communication, information technology, rent, depreciation expenses and employee stock-based compensation.

Research and development expenses also include expenditures related to third party development services.

Sales and marketing expenses also include sales commissions and expenditures related to public relations, advertising, trade shows and marketing campaigns.

General and administrative expenses also include legal and financial services fees.

History of Losses

We have incurred significant costs to develop our technology and solutions and to build our engineering, sales, marketing, professional services and administration departments. As a result, we have incurred significant losses since inception and, as of December 31, 2008, had an accumulated deficit of $353.2 million.

Critical Accounting Policies and Estimates

Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments reflect practices, information provided by our customers and other assumptions that we believe are reasonable under the circumstances. Our estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period in which they are determined to be necessary. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates include:

Our senior management has reviewed these critical accounting policies and related disclosures with our Disclosure Committee and the Audit Committee of our Board of Directors. The Notes to the Consolidated Financial Statements, contained elsewhere in this Report, contain additional information regarding our accounting policies and other disclosures required by generally accepted accounting principles.

Revenue Recognition

We recognize revenue from three sources: (1) maintenance and support services and subscription fees from clients accessing our on-demand software and hosting arrangements, all of which we refer to as subscriptions and support sales, (2) services performed in connection with consulting arrangements, and (3) sales of software licenses and related products. Revenue derived from software licenses and related products is subject to the guidance and requirements of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2,Software Revenue Recognition, as amended by SOP No. 98-9,Software Revenue Recognition with Respect to Certain Arrangements. Revenue from on-demand subscriptions is recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition. In the event of a multiple element arrangement, we evaluate the transaction to determine if each element represents a separate unit of accounting taking into account all factors following the guidelines set forth in SOP No. 97-2 and Emerging Issues Task Force (“EITF”) No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables. In accordance with these standards, we recognize revenue when all of the following four conditions are met:

2.

Delivery has occurred. In perpetual licensing arrangements, we consider delivery to have occurred when the software has been delivered to the customer in the manner prescribed in the contractual arrangement and there are no further performance obligations. Services (including professional services, maintenance, and hosting) are typically considered to be delivered as performed and on-demand subscriptions are typically considered delivered once the customer has access to the software;

We sell both perpetual and term-based software licenses. Our customers may or may not purchase with licenses the following: (i) support services that provide for technical support and product updates, generally over renewable annual periods, (ii) professional services including consulting and training, and (iii) hosting. DependingMr. Chandra, upon the elements and the termsstart of the arrangement, we recognize license revenues under the residual method or using contract accounting.

Residual Method.License fees are recognized upon delivery whether sold separately or together with other services, described above, provided that: (i) the revenue recognition above have been met, (ii) payment of the license fees is not dependent on any implementation or performance criteria, (iii) the related services do not contain any acceptance provisions, and (iv) services are not essential to the functionality of the software. In these cases, we recognize license revenue utilizing the residual method. Under the residual method, revenue is recognized when vendor specific objective evidence (“VSOE”) of fair value exists for all of the undelivered elements in the arrangement (i.e.: maintenance, professional services and hosting), but does not exist for one or more of the delivered elements in the arrangement (i.e.: software license). Under the residual method, we defer the fair value of undelivered elements and the remainder of the arrangement fee is then allocated to the delivered elements and is recognized as revenue assuming the other revenue recognition criteria are met. Each license arrangement requires careful analysis to ensure that all of the individual elements in the license transaction have been identified, along with the fair value of each undelivered element.

We allocate revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. If evidence of fair value has not been established and the only undelivered element is maintenance or hosting, then the entire amount of revenue is recognized ratably over the service period.

VSOE is established for service, support and maintenance, and hosting based upon the amounts we charge when service, maintenance and hosting are sold separately. The bell-shaped curve approach is used when doing VSOE analysis. VSOE of fair value is determined by a range of prices which approaches 80% of the total testing population falling within 15% above or below the median price of the range. VSOE of fair value for maintenance in deals over $1 million is determined based upon the stated renewal rate quoted in the arrangement, provided that the renewal rate is considered substantive.

Partner Arrangements.Distributors, resellers and systems integrators purchase solutions for specific projects of the end-user and do not hold inventory. They perform functions that include importation, delivery to the end-customer, installation or integration and post-sales service and support. The agreements with these partners have terms which are generally consistent with the standard terms and conditions for the sale of our software to end-users and do not provide for product rotation or pricing allowances, as are typically found in agreements with stocking distributors. Revenue on shipments to our partners is generally recognized on sell-through after the end user has been identified and the product has been delivered.

Term Licenses.Time-based license sales which always include post-contract support (“PCS”) may or may not include installation services that do not involve significant production, modification, or customization of software and may or may not include hosting services. These time-based license sales are recognized in accordance with paragraph 12 of SOP No. 97-2 because company-specific objective evidence of fair value does not exist for the related post contract support and in cases where we provide hosting for the customer, for the hosting element. As these arrangements are in essence subscriptions, we recognize revenue for the entire arrangement fee ratably over the longest performance period of these elements beginning at the time the customer has been provided access to the time-based license and can utilize the software, and after all other criteria for revenue recognition have been met.

Contract Accounting.When professional services are deemed essential to the functionality of the software element of the arrangement and separate accounting for the services is not permitted, contract accounting is applied to both the software and service elements. For these projects, revenue is recognized in accordance with SOP No. 81-1,Accounting for Performance of Construction Type and Certain Production Type Contracts.

Typically, a percentage-of-completion basis is evidenced by labor costs incurred compared to estimated total labor costs to complete the project. For percentage-of-completion basis contracts which we have the ability to produce reasonably dependable estimates of contract billings and contract costs, we recognize revenue at the lesser of the percentage-of-completion basis or the contractual ability to invoice.

If we are only able to estimate total contract revenue and total contract cost within a range and some level of profit is assured, we recognize revenue at the lowest probable level of profit within the range until the results can be estimated more precisely. If, based on the pertinent information used in estimating the range, we can determine the amounts in the ranges that are most likely to occur, those amounts will be used in accounting for the contract under the percentage-of-completion method. If the most likely amounts cannot be determined, the lowest probable level of profit within the range will be used in accounting for the contract until the results can be estimated more precisely.

We use the zero margin estimate of profit method when it is impractical to estimate the final costs of the project, yet we are certain that no loss will be incurred. Under these circumstances, we recognize equal amounts of revenue and cost until results can be estimated more precisely.

We use the completed-contract method for a single contract or a group of contracts when reasonably dependable estimates cannot be made or when inherent hazards make cost estimates and profit estimates doubtful. Under these circumstances, all costs and revenue are deferred until the project is completed.

Estimated losses on uncompleted contracts are recorded in the period in which it is first determined that a loss is apparent. Amounts billed in excess of revenue recognized are recorded as deferred revenue in the accompanying consolidated balance sheets, net of any direct incremental costs which have been determined to be recoverable. Revenue recognized in accordance with SOP No. 81-1 is allocated for classification purposes in the statement of operations between license and service revenues based on an estimate of the fair value of the service portion of the arrangement as indicated by rates that we separately sell similar services and use of the residual method for the license component.

Professional services from time and materials contracts which have stand-alone value and are not essential to the functionality of the software and training services, along with the related costs, are recognized as these services are performed.

On-Demand Subscriptions

In hosted On-Demand subscription arrangements where we provide our software applications as a service, we considered EITF No. 00-03 and concluded that generally these transactions are considered service arrangements and fall outside of the scope of SOP No. 97-2. Accordingly, we follow the provisions of SAB No. 101, Revenue Recognition in Financial Statements, SAB No. 104 and EITF No. 00-21.Customers typically prepay for these services, amounts which we defer and recognize ratably over the non-cancelable term of the customer contract. In addition to the On-Demand subscription solution, these arrangements may also include set-up fees which are sold at a fixed fee and/or customizations which are billed on a time-and-materials basis. We recognize the revenue from any set-up fees and/or customization services ratably over the term of the expected customer relationship once the customer has access to the software. We recognize the revenue from professional services, which have stand-alone value and are not essential to the functionality of the solution, ratably over the remaining term of the initial contract once the customer has access to the software since we are unable to establish an estimate of fair value for the subscription service in accordance with EITF 00-21. In addition, we defer the direct and incremental costs of the implementation and configuration services and amortize those costs over the same time period as the related revenue is recognized. For arrangements that include significant customization or modification of the software, or where software services are otherwise considered essential to the On-Demand subscriptions, we recognize no revenue until the services are completed. After the completion of the significant customization or modification of the software and the service start date, the entire arrangement fee is recognized ratably over the term of the expected customer relationship. If the direct costs incurred for a contract exceed the non-cancelable contract value, then we recognize a loss for direct costs incurred in excess of the contract value as a period expense.

Hosting Revenue

We provide hosting services to certain customers that own perpetual licenses. Based on the criteria outlined in EITF No. 00-03,Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, we have determined that the vast majority of our hosting arrangements, other than On-Demand subscription contracts, are within the scope of SOP No. 97-2. The applicability of EITF No. 00-03 requires us to recognize the portion of the fee attributable to the license on delivery, while the portion of the fee related to the hosting element is recognized ratably over the term of the contract, assuming all other revenue recognition criteria of SOP No. 97-2 have been met. In cases where the arrangements fall outside of the scope of SOP No. 97-2, we recognize revenue from monthly subscription fees ratably over the term of the contract and any upfront fees ratably over the term of the expected customer relationship under the provisions of SAB No. 104.

Maintenance Revenue

Revenue related to maintenance contracts is recognized ratably over the support term.

Royalty Revenue

We recognize royalty revenues from committed minimum royalty arrangements ratably over the contractual term. For royalty arrangements which do not have minimum royalty criteria, revenue is recognized upon the receipt of usage reports provided by our customers.

Allowance for Sales Returns and Doubtful Accounts

We assess the credit worthiness of our customers based on multiple sources of information and analyze such factors as our historical bad debt experiences, industry and geographic concentrations of credit risk, economic trends and changes in customer payment terms. This assessment requires significant judgment. Because of this assessment, which covers the sales of all our solutions and services, we maintain an allowance for doubtful accounts for potential future estimated losses resulting from the inability of certain customers to make all of their required payments. In making this estimate, we analyze historical payment performance, current economic trends, changes in customer demand of our solutions when evaluating the adequacy of the allowance for sales returns and doubtful accounts. A reserve for future sales returns is also established based on historical trends in product return rates and is recorded as a reduction to our revenue and accounts receivable. Accounts receivable are written-off as a decrease in revenue or to the allowance for doubtful accounts when all collection efforts have been exhausted and it is deemed uncollectible.

Commissions

Commissions are generally expensed as they are earned per the terms of the sales compensation plans. Our commissions on non-cancelable subscriptions are deferred and amortized to sales expense over the non-cancelable term of the related customer contracts, which are typically 12 to 36 months.

Goodwill and Intangible Assets

Goodwill represents the excess of costs over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized, but is instead tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Intangible Assets.

The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value for the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. We consider ourselves to be one reporting unit as the Chief Executive Officer (“CEO”) does not currently use product line or geographical financial performance as a basis for business operating decisions.

SFAS No. 142 dictates that if certain circumstances occur, such as a significant adverse change in legal factors, a change in the business climate or other significant changes were to occur at any time during the year outside of the annual impairment testing date, we are required to evaluate whether a triggering event would indicate that our goodwill had been impaired. Due to market conditions at December 31, 2008, and as a part of our annual impairment testing in the fourth quarter of 2008, we conducted our first step test by computing our fair value based on our number of shares outstanding multiplied by their value, which is based on a 30-day closing average at December 31, 2008. This calculated fair value was compared to the carrying value of the Company. Since the carrying value exceeded the fair value as calculated in the first step, we determined that a triggering event had occurred that caused us to evaluate whether our goodwill had been impaired. We proceeded to the second test, which included estimation of the fair value of our reporting unit’s assets and liabilities, including previously unrecognized intangible assets. The discounted cash flow approach was utilized to value the identified intangible assets of the Company, which included customer relationships, developed technology and trade names. As a result of the step two test, the carrying value of our goodwill was deemed to exceed the

allocated fair value and we recorded a non-cash, after-tax charge of $68.5 million for impairment of goodwill, primarily triggered by the effects of adverse market conditions that caused a decrease in our stock price and market capitalization, which approximates the fair value of our Company at December 31, 2008. This charge represented the entire balance of our goodwill.

Purchased intangible assets subject to amortization are reviewed for impairment in accordance with SFAS No. 144, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. As a part of our annual goodwill impairment testing in accordance with the provisions of SFAS No. 142, we also evaluated possible impairment of our other intangible assets in accordance with the provisions of SFAS No. 144,based on the future discounted cash flows projections of each intangible asset. There was no impairment of our other intangible assets on the balance sheet at December 31, 2008. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values using straight-line and accelerated methods designed to match the amortization to the benefits received where applicable.

Restructuring Reserves

Restructuring costs and accruals for excess facilities are accounted for in accordance with SFAS No. 146, Accounting for Exit or Disposal Activities,as a liability for costs associated with an exit or disposal activity and is recognized and measured initially at fair value only when the liability is incurred. Refer to Note 9,Restructuring, in the Notes to the Consolidated Financial Statements.

Allowance for Deferred Tax Assets

A valuation allowance is recorded to reduce all of the deferred tax assets to the amount that we believe is more likely than not to be realized by us. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, net in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase reported income or reduce loss in the applicable period and increase stockholders’ equity on the balance sheet in the period such determination was made.

Business Combinations

In accordance with SFAS No. 141,Business Combinations, the acquisitions discussed in Note 6,Acquisitions and Intangible Assets, in the Notes to the Consolidated Financial Statements have been accounted for under the purchase method of accounting and include the results of operations of the acquired businesses since the date of acquisition. The net assets of the companies acquired were recorded at their estimated fair value as of the date of acquisition.

Stock-based Compensation Expense

Under SFAS No. 123R,Share Based Payment, we measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. In March 2005, the SEC issued SAB No. 107,Share-Based Payment, relating to SFAS No. 123R. The expected term of options granted prior to June 30, 2008 was derived from the use of the simplified method under SAB No. 107 and the expected term of options granted subsequent to July 1, 2008 was derived based on historical experience.

Results of Operations

The following table presents our results of operations as a percentage of total revenue for the periods indicated:

Comparison of Financial Data for the Years Ended December 31, 2008 and 2007

Revenue

Revenue for the years ended December 31, 2008 and 2007 was as follows (in thousands, except percentages):

Our total revenue increased to $126.6 million in the year ended December 31, 2008 from $121.9 million over the comparable period in 2007. The 3.9% increase was primarily the result of growth in subscriptions and support revenue, which was partially offset by a decrease in license revenue.

We attribute the revenue growth to a number of factors, including the shift in our business focus and strategy to our on-demand solutions and increased investments in our sales and marketing efforts in international markets. Subscriptions and support revenue was also positively affected by the increase in the number of on-demand customers. The decrease in our license revenue and increase in recurring subscriptions and support revenue reflected the shift in our business emphasis and strategy from our perpetual license products to on-demand subscriptions and a sustained decline in the global economy which has decreased the budgets of our customers for large license purchases.

Subscriptions and support revenue.The increase in subscriptions and support revenue in the year ended December 31, 2008 over the comparable period in 2007 was as follows (in thousands, except percentages):

The increase in subscriptions and support revenue in year ended December 31, 2008 over the comparable period in 2007 was the result of increased on-demand subscription sales to customers and from subscription and support contract sales to new and existing customers related to the SumTotal 8 Series and legacy product suites. These results reflected an increase of interest in on-demand solutions as a way for our global customers to manage costs effectively, demonstrated a continued growth within our installed base, and a broad market interest in on-demand solutions for both Learning Management and Performance Management.

Changes to the components of subscriptions and support revenue were as follows:

Price changes in subscription and support had no material effect on our revenue in the year ended December 31, 2008 over the comparative period in 2007.

Service revenue.The increase in service revenue in the year ended December 31, 2008 over the comparable period in 2007 was 1.9%. The increase in service revenue was primarily due to a $1.3 million increase in consulting revenue recognized from one of our global retail customers as we met certain revenue recognition criteria which allowed us to recognize previously deferred revenue. This increase was partially offset by the

continued shift from recognizing professional services revenue as the services were performed under our perpetual license model, to recognizing the services over the subscription service period in our on-demand solution. The subscription services are provided pursuant to customer agreements with terms typically ranging from one to three years. The revenue for professional services associated with our on-demand deals is recognized ratably over the term of the agreement. Additionally, a sustained decline in the global economy has decreased the budgets of our customers for large license and related services purchases.

Price changes in service had no material effect on our revenue in the year ended December 31, 2008 over the comparable period in 2007.

License revenue.The shift in our business focus and strategy from perpetual licenses to our on-demand offering and a sustained decline in the global economy which has decreased the budgets of our customers for large license purchases attributed to the decline of our license revenues compared to the growth in subscription and support revenues as discussed above.

Price changes in license had no material effect on our revenue in the year ended December 31, 2008 over the comparable period in 2007.

Geographic region.We sell our product solutions in three geographic regions: Americas; Europe, Middle East and Africa; and Asia/Pacific. Revenues for each region, which include product and service revenue, are summarized in the following table (in thousands, except percentages):

The $4.7 million increase in total revenue in the year ended December 31, 2008 over the comparable period in 2007 was primarily due to increased sales of our software solutions in Europe, Middle East and Africa. Revenue in the Americas remained relatively unchanged due to lower license and service revenues as our customers shifted to our on-demand solutions, which are recognized ratably over a term, versus our perpetual license products and services which were typically recognized when they were delivered. Revenue in Europe increased as a result of our previous year’s investment to expand the European markets. Revenue in Asia/Pacific decreased $0.8 million primarily due to revenue recognized from three large license sales in Japan and Australia in 2007.

Price changes had no material effect on our revenue in any region or revenue type in the year ended December 31, 2008 over the comparable period in 2007.

No customer accounted for greater than 10% of total revenue in either 2008 or 2007.

Cost of Revenue

The following table is a summary of cost of revenue between subscriptions and support, service, license, and amortization of intangible assets (in thousands, except percentages):

Cost of subscriptions and support.The increase in cost of subscriptions and support in the year ended December 31, 2008 over the comparable period in 2007 was primarily due to a $1.5 million increase in compensation expenses for additional employees in the U.S. and India required for the growth of our subscription revenue. Additionally, $0.5 million of the expense increase can be attributed to an increase in depreciation from the capital investments required to support our growing user base, while the remaining $0.8 million increase was due to an expanded use of remote data center facilities to also support this growth.

Cost of services.The increase in the cost of services in the year ended December 31, 2008 over the comparable period in 2007 was due to a $0.6 million increase in additional service personnel cost throughout the year to support U.S. revenue and a $0.2 million increase in third-party support primarily related to international projects. Additionally, $0.5 million in additional cost was incurred in connection with the completion of large projects where cost was deferred until revenue was recognized.

Cost of license. The decrease in cost of services in the year ended December 31, 2008 over the comparable period in 2007 was due to reduced usage of third party content preparation combined with a decrease in royalty payments.

Amortization of intangible assets. The decrease in amortization of intangible assets in the year ended December 31, 2008 over the comparable period in 2007 was primarily due to a $1.0 million elimination of certain intangible assets recorded from prior acquisitions as they became fully amortized in 2008 and a scheduled $1.6 million decrease in the amortization of other intangible assets from prior acquisitions.

Gross Margin

The following table is the summary of gross margin between subscriptions and support, service, license and amortization of intangible assets (in thousands, except percentages):

Gross margin percentage for subscriptions and support in the year ended December 31, 2008 increased over the comparable period in 2007. The change is attributed to an increase in revenue as prior resource investments made to expand the business were able to yield better margins.

Gross margin percentage for services in the year ended December 31, 2008 decreased over the comparable period in 2007 due to additional services personnel and third party support resources which were partially offset by the increase in service and consulting revenue.

Gross margin percentage for license, exclusive of amortization of intangible assets in the year ended December 31, 2008, improved slightly over the comparable period in 2007, attributable to the reduced usage of third party licenses and content. Gross margin percent for license, inclusive of amortization of intangible assets improved to due to cost reductions in license cost and the decrease in amortization of intangibles as described above.

Operating Expenses

The following table is a summary of research and development, sales and marketing, general and administrative and restructuring expenses (in thousands, except percentages):

Research and development.The increase in research and development expense in the year ended December 31, 2008 over the comparable period in 2007 was primarily due to $0.6 million in additional employee and related costs related to our investment in Performance Management and on-demand subscription projects for future releases and a $0.1 million increase in stock-based compensation offset by a $0.1 million reduction in travel and recruitment expenses.

Sales and marketing. The decrease in sales and marketing expense in the year ended December 31, 2008 over the comparable period in 2007 was primarily due to a decrease of $2.6 million in employee and related costs associated with decreased personnel and commissions, which consisted of $2.4 million in North America and $0.2 million in other regions. The remaining decrease was due to a $0.7 million decrease in travel expense associated with reduced staff, offset by a $0.3 million increase in lead-generation programs and a $0.2 million increase in stock-based compensation.

General and administrative.General and administrative expense in the year ended December 31, 2008 over the comparable period in 2007 was unchanged in aggregate. There was a $0.1 million increase in expenses relating to general and administrative personnel and a $0.2 million increase in stock-based compensation expense, but such increases were offset by a $0.2 million decrease in accounting, legal and consulting fees associated with Sarbanes-Oxley Section 404 compliance and a $0.1 million decrease related to facility and other expenses.

Restructuring.During 2008 and the fourth quarter of 2007, we recorded restructuring charges of $163,000 and $759,000, respectively, in employee severance costs. Employee severance consists of severance and other benefits resulting from a reduction in force in the fourth quarter of 2007.

Goodwill impairment. In the fourth quarter of 2008, we recorded a non-cash, after-tax charge of $68.5 million for the impairment of goodwill, primarily caused by the effects of adverse market conditions that caused a decrease in our stock price and market capitalization, which approximates the fair value of the Company at December 31, 2008. This charge represented the entire balance of our goodwill. For further discussion of our goodwill impairment, refer to Note 2,Summary of Significant Accounting Policies,and in particular,Goodwill and Intangible Assets, in the Notes to the Consolidated Financial Statements.

Stock-based compensation expense. The following table summarizes stock-based compensation expense related to employee stock options, shares issued pursuant to the employee stock purchase plan and restricted stock units under SFAS No. 123R for the year ended December 31, 2008 which was allocated as follows (in thousands):

Non-Operating Expenses, Net

The following table is a summary of interest expense, interest income, other expense, net and provision for income taxes (in thousands, except percentages):