The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the "Report") and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. The following discussion includes forward-looking statements. Please see "Risk Factors" in Item 1A of Part II of this Report for important information to consider when evaluating these statements.

Overview

Support.com is a provider of cloud-based technology services and software for consumers and small businesses.

Our technology services and software products help install, set up, connect, secure, repair and optimize personal computers, printers, tablets, smartphones, digital cameras, gaming devices, music players, servers, networks, and other technology. We offer one-time and subscription services, and perpetual as well as subscription period licenses of our software products.

Our Personal Technology Experts ("PTEs") deliver our services to customers online and by telephone, leveraging our proprietary cloud-based technology platform. They generally work from their homes rather than in brick and mortar facilities. Our software products include tools designed to address some of the most common technology issues including computer maintenance, optimization and security.

We market our services through channel partners and directly. Our channel partners include broadband service providers, retailers, technology companies and others. We market our software products directly, principally online, and through channel partners. We offer free trial versions of our software products to encourage customers to experience the products before buying, and to encourage customers to upgrade to premium versions for which we charge license fees. Our sales and marketing efforts principally target North American customers.

Our total revenue for the second quarter of 2012 grew 29% year-over-year. Revenue from services grew 63% year-over-year. The increase in services revenue over the prior year was due to growth in our channel programs, primarily expansion of the Comcast program. Revenue from software and other declined 29% year-over-year due to changes in the online advertising markets in which we participate..

Cost of services for the second quarter of 2012 grew 45% year-over-year as we added delivery agents to support anticipated revenue growth. Services gross margin improved from 22% to 30% year-over-year primarily as a result of improved operational processes and refinements to service delivery methodology. Cost of software and other for the second quarter of 2012 declined 17% year-over-year due to reduced sales of our software products. Gross margin was 43% in the second quarter of 2012 and 48% for the same period in 2011. The decrease in gross margin was driven by lower percentage of revenue from software and other in the revenue mix, offset by improvements in services margin.

Second quarter operating expenses decreased by 6% year-over-year, driven by lower marketing spend related to our software products, offset by the addition of sales agents required to support certain channel programs prior to the reduction in sales agent workforce completed by the end of the second quarter of 2012.

In the second quarter of 2012, we entered into a sublease and master landlord consent agreement for an office facility located in Redwood City, California which will serve as our new corporate headquarters.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 have the greatest potential impact on our condensed consolidated financial statements, so we consider them to be our critical accounting policies and estimates. There have been no significant changes in these critical accounting policies and estimates during the three and six months ending June 30, 2012.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and six
months ended June 30, 2012 and 2011 expressed as a percentage of total revenue.

                                                 Three Months                     Six Months
                                                     Ended                          Ended
                                                   June 30,                        June 30,
                                              2012           2011            2012           2011
Revenue:
Services                                           79 %           63 %            79 %           66 %
Software and other                                 21             37              21             34
Total revenue                                     100            100             100            100

Costs of revenue:
Cost of services                                   55             49              57             51
Cost of software and other                          2              3               2              3
Total cost of revenue                              57             52              59             54

Gross profit                                       43             48              41             46
Operating expenses:
Research and development                           10             11              10             11
Sales and marketing                                29             41              32             39
General and administrative                         16             26              17             24
Amortization of intangible assets and
other                                               2              1               2              1
Total operating expenses                           57             79              61             75

Loss from operations                              (14 )          (31 )           (20 )          (29 )

Interest and other income, net                      0              1               0              1

Loss from continuing operations, before
income taxes                                      (14 )          (30 )           (20 )          (28 )

Income tax provision                                1              0               1              0

Loss from continuing operations, after
income taxes                                      (15 )          (30 )           (21 )          (28 )

Income (loss) from discontinued
operations, after income taxes                     (0 )           (0 )             0             (0 )
Net loss                                          (15 )%         (30 ) %         (21 )%         (28 )%

REVENUE

                                            Three Months Ended June 30,                            Six Months Ended June 30,
                                                              $              %                                      $              %
In thousands, except percentages    2012         2011        Change        Change         2012         2011        Change        Change

Services                           $ 13,744     $  8,442     $  5,302           63 %     $ 27,509     $ 17,592     $  9,917           56 %
Software and other                    3,569        5,012       (1,443 )        (29 ) %      7,392        8,892       (1,500 )        (17 ) %
Total revenue                      $ 17,313     $ 13,454     $  3,859           29 %     $ 34,901     $ 26,484     $  8,417           32 %

Services revenue consists primarily of fees for technology services. We provide these services remotely, generally using work-from-home Personal Technology Experts and contractors who utilize our proprietary technology to deliver the services. Services revenue for the three months ended June 30, 2012 increased by $5.3 million from the same period in 2011. The increase was due to growth in our channel programs, primarily expansion of the Comcast program. For the three months ended June 30, 2012, services revenue generated from our channel partnerships was $12.8 million compared to $7.7 million for the same period in 2011. Direct services revenue was $1.0 million for the three months ended June 30, 2012 compared to $0.8 million for the same period in 2011. Services revenue for the six months ended June 30, 2012 increased by $9.9 million from the same period in 2011. The increase was due to growth in our channel programs, primarily expansion of the Comcast program. For the six months ended June 30, 2012, services revenue generated from our channel partnerships was $25.7 million compared to $16.2 million for the same period in 2011. For the six months ended June 30, 2012, direct services revenue was $1.8 million compared to $1.4 million for the same period in 2011.

Software and other revenue is comprised primarily of fees for software products provided through direct consumer downloads and, to a lesser extent, through the sale of this software via channel partners. Software and other revenue for the three months ended June 30, 2012 decreased by $1.4 million from the same period in 2011 due to changes in the online advertising markets in which we participate. For the three months ended June 30, 2012 and 2011, software revenue generated from our channel partnerships remained relatively consistent at $1.4 million while software revenue from direct sales was $2.1 million for the three months ended June 30, 2012, compared to $3.7 million from the same period in 2011. Software and other revenue for the six months ended June 30, 2012 decreased by $1.5 million compared to same period in 2011 due to changes in the online advertising markets in which we participate. For the six months ended June 30, 2012, software and other revenue generated from our channel partnerships was $2.9 million compared to $2.3 million from the same period in 2011 while software revenue from direct sales was $4.5 million compared to $6.6 million for the same period in 2011.

COSTS AND EXPENSES

Costs of Revenue

                                       Three Months Ended June 30,           Six Months Ended June 30,
                                                        $         %                            $       %
In thousands, except percentages    2012      2011    Change    Change    2012       2011     Change Change

Cost of services                   $ 9,591   $6,601   $ 2,990       45 % $19,881   $ 13,418   $6,463     48 %
Cost of software and other             360      433      (73)     (17) %     830        837      (7)    (1) %
Total cost of revenue              $ 9,951   $7,034   $ 2,917       41 % $20,711   $ 14,255   $6,456     45 %

Cost of services consists primarily of salary-related and contractor expenses for personnel providing services, technology and telecommunication expenses related to the delivery of services and other personnel-related expenses in service delivery. The increase of $3.0 million in cost of services for the three months ended June 30, 2012 compared to the same quarter of 2011 was mainly driven by $2.7 million of costs associated with higher number of service delivery personnel added to support the growth of our programs, as well as a corresponding increase of $0.3 million in direct technology costs to support this growing workforce. The increase of $6.5 million in cost of services for the six months ended June 30, 2012 compared to the same period in 2011 was primarily due to $5.8 million of costs associated with higher number of service delivery personnel for growing service revenue, as well as a corresponding increase of $0.6 million in direct technology costs to support this growing workforce.

Cost of software and other consists primarily of third-party royalty fees for our software products. Certain products were developed using third-party research and development resources, and this third-party receives royalty payments on sales of products it developed. The decrease in cost of software and other for the three months ended June 30, 2012 compared to the same period in 2011 was primarily due to reduced sales of our software products. For the six months ended June 30, 2012 and 2011, cost of software and other remained relatively consistent.

Operating Expenses

                                           Three Months Ended June 30,                          Six Months Ended June 30,
                                                             $            %                                       $           %
In thousands, except percentages    2012        2011       Change       Change          2012         2011       Change      Change

Research and development           $ 1,708     $ 1,433     $   275           19 %     $  3,478     $  2,881     $   597          21 %
Sales and marketing                $ 4,989     $ 5,543     $  (554 )        (10 ) %   $ 11,119     $ 10,328     $   791           8 %
General and administrative         $ 2,850     $ 3,439     $  (589 )        (17 ) %   $  5,764     $  6,225     $  (461 )        (7 )%

Research and development. Research and development expense consists primarily of compensation costs, third-party consulting expenses and related overhead costs for research and development personnel. Research and development costs are expensed as they are incurred. The increase of $0.3 million in research and development expense for the three months ended June 30, 2012 compared to the same period in 2011 resulted primarily from an increase of $0.2 million from higher salary and related expenses due to incremental research and development personnel, as well as an increase of $0.1 million in stock-based compensation expenses. The increase of $0.6 million in research and development expense for the six months ended June 30, 2012 compared to the same period in 2011 resulted primarily from an increase of $0.3 million from higher salary and related overhead expense due to increase in headcount, as well as an increase of $0.2 million in stock-based compensation expenses.

Sales and marketing. Sales and marketing expense consists primarily of compensation costs, including salaries and sales commissions for sales agents and business development, program management and marketing personnel, as well as expenses for lead generation and promotional activities, including public relations, advertising and marketing. The decrease of $0.6 million in sales and marketing expense for the three month ended June 30, 2012 compared to the same period in 2011 resulted from a decrease of $1.2 million from lower marketing expense offset by an increase of $0.6 million due to the addition of sales agents required to support certain channel programs prior to the reduction in sales agent workforce completed by the end of the second quarter of 2012. The increase of $0.8 million in sales and marketing expense for the six months ended June 30, 2012 compared to the same period in 2011 primarily resulted from an increase of $2.1 million from higher personnel and related expenses, primarily associated with the addition of sales agents required to support our programs, offset by a decrease of $1.5 million from lower marketing expense associated with lower software revenue.

General and administrative. General and administrative expense consists primarily of compensation costs and related overhead costs for administrative personnel and professional fees for legal, accounting and other professional services. The decrease of $0.6 million in general and administrative expense for the three months ended June 30, 2012 compared to the same period in 2011 was primarily due to decreases of $0.3 million in acquisition related expenses and $0.2 million in stock-based compensation expense. The decrease of $0.5 million in general and administrative expense for the six months ended June 30, 2012 compared to the same period in 2011 was primarily due to decreases of $0.3 million in acquisition related expenses and $0.1 million in stock-based compensation expense.

Amortization of Intangible Assets and Other

                                                  Three Months Ended June 30,                                   Six Months Ended June 30,
                                                                       $              %                                           $               %
In thousands, except percentages      2012             2011          Change         Change          2012           2011          Change         Change

Amortization of intangible
assets and other                   $      391       $      122     $      269            220 %   $      758      $     205     $      553            270 %

The increase in amortization of intangible assets and other for the three and six months ended June 30, 2012 compared to the same quarter of 2011 was primarily due to acquisition of RightHand IT Corporation in January 2012 and SUPERAntiSpyware in June 2011.

INTEREST INCOME AND OTHER, NET

Interest income and other, net $ 59 $ 125 $ (66 ) (53 )% $ 134 $ 275 $ (141 ) (51 ) %

The decrease in interest income and other for the three and six months ended June 30, 2012 compared to the same periods in 2011 was primarily due to lower interest income on our investments as a result of lower yields and lower balances in our portfolio.

INCOME TAX PROVISION

Income tax provision $ 116 $ 29 $ 87 300 % $ 235 $ 31 $ 204 658 %

The provision for income taxes includes estimates of current taxes due in domestic and foreign jurisdictions. Our current period provision consisted of state income tax, foreign taxes, and tax expense related to the recording of a deferred tax liability that results from the amortization for income tax purposes of acquisition-related goodwill.

The increase in the income tax provision from 2011 to 2012 was primarily due to tax expense associated with acquired goodwill and an increase in India income taxes due to the expiration of a tax holiday in 2011.

LIQUIDITY AND CAPITAL RESOURCES

Total cash, cash equivalents and investments at June 30, 2012 was $48.5 million, compared to $53.0 million at December 31, 2011. The balance at December 31, 2011 included approximately $1.4 million of cash use related to the acquisition of RightHand IT Corporation in January 2012.

Operating Activities

Net cash used in operating activities was $3.5 million and $2.5 million for the six months ended June 30, 2012 and 2011, respectively. Net cash used in operating activities for the six months ended June 30, 2012 resulted primarily from a net loss of $7.0 million, offset by non-cash items of $3.4 million, which primarily included depreciation, amortization of premiums and discounts on marketable securities, stock-based compensation expense and amortization of intangible assets and other. Net cash used in operating activities for the six months ended June 30, 2011 resulted primarily from a net loss of $7.2 million, offset by an increase of deferred revenue of $1.1 million, and non-cash items of $3.2 million, which primarily included depreciation, amortization of premiums and discounts on marketable securities, stock-based compensation expenses and amortization of intangible assets and other.

Investing Activities

Net cash provided by (used in) investing activities was $1.0 million and $(8.9) million for the six months ended June 30, 2012 and 2011, respectively. Net cash provided by investing activities for the six months ended June 30, 2012 was primarily due to sales and maturities of $26.6 million of investments offset by the purchases of $23.9 million of investments, $1.3 million for acquisition of RightHand IT Corporation and $318,000 for purchases of property and equipment. Net cash used in investing activities for the six months ended June 30, 2011 was primarily due to the purchases of $34.3 million of investments offset by sales and maturities of $33.9 million of investments, $8.4 million for acquisition of SUPERAntiSpyware and $183,000 for purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was $689,000 and $418,000 for the six months ended June 30, 2012 and 2011, respectively, and was primarily attributable to the exercise of employee stock options.

Working Capital and Capital Expenditure Requirements

At June 30, 2012, stockholders' equity was $67.2 million and working capital was $47.4 million. We believe that our existing cash balances will be sufficient to meet our working capital requirements and our planned capital expenditures for at least the next 12 months.

If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity could result in dilution to our stockholders.

We plan to continue to make investments in our business during 2012. We believe these investments are essential to creating sustainable growth in our business in the future. Because these investments will likely precede any associated revenues, we expect our working capital to decrease in the near term although we expect the decrease to be smaller than it has been in the past. Additionally, we may choose to acquire other businesses or complimentary technologies to enhance our product capabilities and such acquisitions would likely require the use of cash.