UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-25661

TenFold Corporation

(Exact name of registrant as specified in its charter)

Delaware

83-0302610

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

698 West 10000 South

South Jordan, Utah 84095

(Address of principal executive offices, including zip code)

(801) 495-1010

(Registrant’s telephone number, including area code)

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. Yes x No ¨

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

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of June 30, 2006, there were 46,502,013 shares of the registrant’s Common Stock outstanding.

INDEX


		Page
	Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements

	Condensed Balance Sheets at June 30, 2006 and December 31, 2005	4

	Condensed Statements of Operations for the three and six months ended June 30, 2006 and June 30, 2005	5

	Condensed Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005	6

	Notes to Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 4.	Submission of Matters to a Vote of Security Holders	30

Item 6.	Exhibits	31

Signatures		32

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those contained 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 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this report, the words “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” “seeks,” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risk factors described in this Quarterly Report, including those in Part II, Item 1A “Risk Factors.” You should also carefully review the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2005, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Financial Statements

TENFOLD CORPORATION

CONDENSED BALANCE SHEETS

(in thousands, except share data)

(unaudited)


	June 30, 2006			December 31, 2005
Assets
Current assets:
Cash and cash equivalents	$	3,244		$	1,344
Accounts receivable, (net of allowances for doubtful accounts of $0 and $9, respectively, includes related party receivable of $6 and $25 respectively),		250			209
Unbilled accounts receivable, (net of allowances for doubtful accounts of $0 and $0, respectively)		3			2
Prepaid expenses and other assets		142			161

Total current assets		3,639			1,716
Restricted cash		74			74
Property and equipment, net		247			352

Total assets	$	3,960		$	2,142

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	199		$	483
Income taxes payable		243			250
Accrued liabilities		1,249			1,492
Deferred revenue		1,820			2,218
Current installments of obligations under capital leases		26			35
Notes payable – related parties		—			600

Total current liabilities		3,537			5,078

Long-term liabilities:
Obligations under capital leases, excluding current installments		1			10

Total long-term liabilities		1			10

Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.001 par value:
Authorized: 2,000,000 shares Issued and outstanding shares: 1,500,000 shares at June 30, 2006 and 0 shares at December 31, 2005		2			—
Common stock, $0.001 par value:
Authorized: 120,000,000 shares Issued and outstanding shares: 46,502,013 shares at June 30, 2006 and 46,445,749 shares at December 31, 2005		46			46
Additional paid-in capital		83,347			76,411
Deferred compensation		—			(6	)
Accumulated deficit		(82,973	)		(79,397	)

Total stockholders’ equity		422			(2,946	)

Total liabilities and stockholders’ equity	$	3,960		$	2,142

The accompanying notes are an integral part of these condensed financial statements.

TENFOLD CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
License	$	54		$	223		$	141		$	316
Services and other		656			1,478			1,168			2,993

Total revenues		710			1,701			1,309			3,309

Operating expenses:
Cost of revenues		634			757			1,220			1,751
Sales and marketing		270			846			461			1,560
Research and development		1,094			876			2,217			1,819
General and administrative		409			592			1,021			1,223

Total operating expenses		2,407			3,071			4,919			6,353

Loss from operations		(1,697	)		(1,370	)		(3,610	)		(3,044	)

Other income (expense):
Interest income		45			17			53			37
Interest expense		(1	)		(2	)		(20	)		(5	)
Other income		1			5			1			87

Total other income, net		45			20			34			119

Loss before income taxes		(1,652	)		(1,350	)		(3,576	)		(2,925	)
Provision for income taxes		—			6			—			7

Net loss		(1,652	)		(1,356	)		(3,576	)		(2,932	)

Deemed dividend related to warrants issued with preferred stock and beneficial conversion feature on preferred stock		—			—			(1,761	)		—

Net loss applicable to common shareholders	$	(1,652	)	$	(1,356	)	$	(5,337	)	$	(2,932	)

Basic loss per common share	$	(0.04	)	$	(0.03	)	$	(0.11	)	$	(0.06	)

Diluted loss per common share	$	(0.04	)	$	(0.03	)	$	(0.11	)	$	(0.06	)

Weighted average common and common equivalent shares used to calculate loss per share:
Basic		46,502			46,412			46,492			46,406

Diluted		46,502			46,412			46,492			46,406

The accompanying notes are an integral part of these condensed financial statements.

TENFOLD CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(3,576	)	$	(2,932	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		120			170
Provision to bad debt reserve		—			(3	)
Amortization of deferred compensation		—			8
Stock-based compensation expense		862			—
Changes in operating assets and liabilities:
Accounts receivable		(41	)		(184	)
Unbilled accounts receivable		(1	)		65
Prepaid expenses and other assets		19			(131	)
Accounts payable		(284	)		53
Income taxes payable		(7	)		(9	)
Accrued liabilities		(243	)		(109	)
Deferred revenues		(398	)		(69	)

Net cash used in operating activities		(3,549	)		(3,141	)

Cash flows from investing activities:
Additions to property and equipment		(15	)		(14	)

Net cash used in investing activities		(15	)		(14	)

Cash flows from financing activities:
Proceeds from employee stock purchase plan stock issuance		10			27
Proceeds from issuance of convertible preferred stock and warrants		6,072			—
Proceeds from issuance of notes payable		500			—
Principal payments on notes payable		(1,100	)		—
Principal payments on obligations under capital leases		(18	)		(16	)

Net cash provided by financing activities		5,464			11

Net increase (decrease) in cash and cash equivalents		1,900			(3,144	)
Cash and cash equivalents at beginning of period		1,344			5,225

Cash and cash equivalents at end of period	$	3,244		$	2,081

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	7		$	16
Cash paid for interest		20			2
Equipment purchased under capital leases		—			16

The accompanying notes are an integral part of these condensed financial statements.

TENFOLD CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.	Basis of Presentation

The accompanying unaudited Condensed Financial Statements included herein have been prepared by TenFold Corporation (“TenFold”) pursuant to the rules and regulations of the Securities and Exchange Commission. As used herein, “TenFold,” the “Company,” “we,” “our” and similar terms refer to TenFold Corporation, unless the context indicates otherwise. In management’s opinion, the interim financial data presented includes all adjustments necessary for a fair presentation. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2006.

This report should be read in conjunction with our audited Financial Statements for the year ended December 31, 2005 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, including for example, estimated project costs and profitability and accounts receivable allowances. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Our financial statements have been prepared under the assumption that we will continue as a going concern. The independent auditors’ opinion on our December 31, 2005 financial statements, however, includes an explanatory paragraph relating to our ability to continue as a going concern.

As of June 30, 2006, our principal source of liquidity was our cash and cash equivalents of $3.2 million. On March 30, 2006 we completed a capital raising transaction for gross proceeds of approximately $6.3 million (before expenses and repayment of $1.1 million of interim financing obligations). We believe that with the proceeds of this capital transaction, and new sales that we believe that we can close during 2006, we will have sufficient liquidity for our operations during 2006. However, significant challenges and risks remain:

•

We have not been able to generate positive cash flow from operations for the three years ended December 31, 2005, or the six months ended June 30, 2006. Our net cash used in operating activities was $4.5 million for the year ended December 31, 2005, and $3.5 million for the six months ended June 30, 2006.

•

For the last several years, we have derived a significant portion of our cash inflows from time-and-materials consulting services performed for a limited number of large customers for whom we were completing enterprise applications development projects. As these customers completed their initial projects and became self-sufficient, they reduced their purchases of time-and-materials consulting services (although some purchase support from us and other services from time to time). We have not replaced these projects with similar sized projects with other customers. These reductions have materially reduced our cash inflows.

•

We have experienced difficulty closing substantial new sales, and it is unclear when or if we can expect to predictably close significant sales to new or existing customers, and to achieve and sustain positive cash flow from operations. Under the leadership of our new Chief Executive Officer, Robert W. Felton, we have recently changed our business model to focus on selling larger consulting projects, instead of the smaller prototype application projects that we primarily sold in 2005. Although we expect to be more successful with this new model, we have limited experience with the new model as we have introduced it only recently. And although we have closed some new sales under this model, the amount of such sales is not sufficient to generate positive cash flow from operations. If we do not close significant sales in 2006, the funds from our recent capital raising alone will not be sufficient to fund our operations through all of 2006.

There can be no assurance that we will be successful closing sufficient new sales and these risks may have a materially adverse affect on our future cash flow and operations.

2.	Revenue Recognition

We derive revenues from license fees, applications development and implementation consulting services, support, and training services. License revenues consist of fees for licensing EnterpriseTenFold (formerly known as Universal Application) as an applications development tool. Service revenues consist of fees for applications development and implementation consulting, support and training. Other revenues include fees for reimbursement of out of pocket expenses incurred for customer projects.

We follow the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2 with Respect to Certain Transactions, and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, in recognizing revenue under each of our contracts.

We generally enter into contracts that involve multiple elements, such as software products, enhancements, post-contract customer support (“PCS”), training, and time-and-material services. For accounting purposes, we allocate a portion of the contract fee to each undelivered element based on the relative fair values of the elements and allocate the fee for delivered software products using the residual method. The fair values of an element must be based on vendor specific objective evidence (“VSOE”). We establish VSOE based on the price charged when the same element is sold separately. VSOE for services is based on standard rates for the individuals providing services. These rates are the same rates charged when the services are sold separately under time-and-materials contracts. We base VSOE for training on standard rates charged for each particular training course. These rates are the rates charged when the training is sold separately for supplemental training courses. For PCS, VSOE is determined by reference to the renewal rate we charge the customer in future periods.

As a result, the amounts allocated to individual contract elements (such as license, consulting, training and support) for accounting purposes may differ from the amounts stated in the contract for those individual elements, but not in total.

For time-and-materials contracts, we generally estimate a profit range and recognize the related revenue using the lowest probable level of profit estimated in the range. Billings in excess of revenue recognized under time-and-material contracts are deferred and recognized upon completion of the time-and-materials contract or when the results can be estimated more precisely.

We recognize support revenue from contracts for ongoing technical support and product updates ratably over the support period. We recognize training revenue as we perform the services.

We recognize license revenues from EnterpriseTenFold licenses that do not include services or where the related services are not considered essential to the functionality of the software, when the following criteria are met: we have signed a noncancellable license agreement with nonrefundable fees; we have shipped the software product; there are no uncertainties surrounding product acceptance; the fees are fixed and determinable; and collection is considered

probable. This policy applies both when the licenses are sold separately or when an EnterpriseTenFold license is sold with an applications development project. Services relating to the licenses typically include post contract customer support services, general time-and-materials consulting, and training; and do not add significant functionality, features, or significantly alter the software. In addition, similar services are available from other vendors; there are no milestones or customer specific acceptance criteria which affect the realizability of the software license fee; and the software license fee is non-cancelable and non-refundable.

For software arrangements that include a service element that is considered essential to the functionality of the software, we recognize license fees related to the application, and the applications development service fees, over time as we perform the services, using the percentage-of-completion method of accounting and following the guidance in Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We make adjustments, if necessary, to the estimates used in the percentage-of-completion method of accounting as work progresses under the contract and as we gain experience. Fixed-price project revenues are split between license and service based upon the relative fair value of the components.

For certain projects, we limit revenue recognition in the period to the amount of project costs incurred in the same period, resulting in zero profit during the period, and postpone recognition of profits until results can be estimated more precisely.

For certain contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates doubtful, we recognize revenue under the completed-contract method of contract accounting.

For license agreements that contain a discount that cannot be determined at the inception of the agreement, we recognize the related license revenue at the end of the estimated economic life of the release of the software version provided to the customer. We use the end of the estimated economic life to recognize the revenue when we do not have VSOE for the related post-contract customer support, due to the discount, and therefore we cannot allocate the revenue until the discount is known at the end of the estimated economic life.

We record billings and cash received in excess of revenue earned as deferred revenue. Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed. We bill customers as payments become due under the terms of the customer’s contract. We consider current information and events regarding our customers and their contracts and establish allowances for doubtful accounts when it is probable that we will be unable to collect amounts due under the terms of existing contracts.

3.	Loss Per Share

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Numerator:
Numerator for basic loss per share – net loss applicable to common shareholders	$	(1,652	)	$	(1,356	)	$	(5,337	)	$	(2,932	)

Numerator for diluted loss per share – net loss applicable to common shareholders	$	(1,652	)	$	(1,356	)	$	(5,337	)	$	(2,932	)

Denominator:
Denominator for basic loss per share – weighted average shares		46,502			46,412			46,492			46,406

Employee stock options		—			—			—			—

Denominator for diluted loss per share		46,502			46,412			46,492			46,406

Loss per common share:
Basic loss per common share	$	(0.04	)	$	(0.03	)	$	(0.11	)	$	(0.06	)

Diluted loss per common share	$	(0.04	)	$	(0.03	)	$	(0.11	)	$	(0.06	)

Employee stock options that could potentially dilute basic earnings (loss) per share in the future, of which there were 17,136,558 and 23,127,333 outstanding on June 30, 2006 and 2005, respectively, that have a weighted average exercise price of $1.64 and $1.87 per share, respectively, were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the periods.

The computation of diluted loss per common share for the three and six months ended June 30, 2006 excludes the assumed conversion of 1,500,000 shares of convertible preferred stock outstanding at June 30, 2006, from our March 2006 capital raising transaction, which are convertible into 20,315,805 shares of common stock, because the impact of the conversion would be anti-dilutive. No convertible preferred stock was outstanding in 2005.

Warrants to purchase 10,157,899 shares of common stock outstanding at June 30, 2006, from our March 2006 capital raising transaction, were also excluded from the computation of diluted loss per common share because to do so would have been anti-dilutive for the period. The warrants have an exercise price of $0.62 per share. No warrants were outstanding in 2005.

4.	Restricted Cash

Restricted cash of $74,000 at June 30, 2006 and at December 31, 2005 is maintained to support various accounts payable activities.

5.	Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. In accordance to this standard, we recognize the compensation cost of all share based awards on a straight-line basis

over the vesting period of the award. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“Statement 123”).

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Our Condensed Financial Statements as of and for the six months ended June 30, 2006, reflect the impact of SFAS 123(R). Under that transition method, compensation cost recognized in the first six months of 2006 includes: (a) amortization related to the compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) amortization related to compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

TenFold has three stock-based employee option plans and an ESPP which are described more fully in Note 12 and Note 13, respectively, in our 2005 Annual Report on Form 10-K. No stock-based employee compensation cost was recognized in the Statement of Operations for the three- or six-month period ended June 30, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The ESPP was deemed noncompensatory under Opinion 25, and, therefore, resulted in no compensation cost. As of June 30, 2006, TenFold had approximately 17.76 million shares of common stock reserved for future issuance under the stock option plans and the ESPP.

The adoption of SFAS 123(R) had a significant impact on our results of operations. Our statement of operations for the three and six months ended June 30, 2006 includes the following stock-based compensation expense from stock options and ESPP:


(in thousands)	Three Months Ended June 30, 2006		Six Months Ended June 30, 2006
Cost of revenues	$	59	$	118
Sales and marketing		6		11
Research and development		257		519
General and administrative		38		214

Stock-based compensation expense included in operating expenses		360		862
Tax benefit		—		—

Stock-based compensation expense included in net loss	$	360	$	862

For the year ended December 31, 2005, we recognized estimated severance related charges related to the departure of our prior CEO, including an estimated option modification charge, based upon the anticipated terms at that time. Upon the execution of the Separation Agreement and Release on May 19, 2006, we calculated the actual option modification charge based upon the final terms, and recognized a resulting reduction in our stock-based compensation expense of $133,000, which reduced our general and administrative expenses for the three months ended June 30, 2006.

Unrecognized stock-based compensation expense expected to be recognized over an estimated weighted-average amortization period of one year was $2.9 million at June 30, 2006.

Our deferred compensation cost at December 31, 2005 of $6,000, which was accounted for under APB 25, was reclassified into additional paid-in capital.

The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of Statement 123 to options granted under our stock option

plans and the employee stock purchase plan in all periods presented. For purposes of this pro-forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and amortized to expense over the options’ vesting periods.


(in thousands, except per share data)	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss applicable to common shareholders – as reported	$	(1,356	)	$	(2,932	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		4			7
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,281	)		(3,734	)

Net loss applicable to common shareholders – pro forma	$	(2,633	)	$	(6,659	)

Loss per common share – as reported:
Basic	$	(0.03	)	$	(0.06	)
Diluted	$	(0.03	)	$	(0.06	)
Loss per common share – pro forma:
Basic	$	(0.06	)	$	(0.14	)
Diluted	$	(0.06	)	$	(0.14	)

Share Option Plans

We currently have three stock option plans that allow us to grant nonqualified stock options, stock purchase rights, stock bonus awards, stock appreciation rights, and other equity based awards to employees, including officers and directors, consultants, and non-employee directors. Historically, we have generally only granted nonqualified stock options. The options generally vest over a four- or five-year period and expire ten years from the date of grant.

Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the three and six months ended June 30, 2006 are shown below:


	Three Months Ended June 30, 2006		Six Months Ended June 30, 2006
Expected volatility	162	%	163	%
Expected dividends	0	%	0	%
Expected term	6.11 Years		6.11 Years
Risk-free interest rate	5.16	%	4.50	%

The expected volatility rate was estimated based on the historical volatility of TenFold common stock. The expected term was calculated using the SEC “simplified” method as provided for in Staff Accounting Bulletin No. 107. The risk-free interest rates are the rates provided by the U.S Treasury for Daily Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury” rates in effect at the time of grant with a remaining term equal to the expected option term.

The pre-vesting forfeiture rate used for the three and six months ended June 30, 2006 was based on historical rates and forward-looking factors. As required under SFAS 123(R), we will adjust the estimated forfeiture rates to our actual experience. Prior to adoption of SFAS 123(R) we accounted for forfeitures as they occurred.

A summary of the time-based stock option awards as of June 30, 2006, and changes during the six months then ended, is as follows:


Stock Option Awards	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (000s)
Outstanding at January 1, 2006	23,450,459		$	1.80
Granted	373,000			0.29
Exercised	—			—
Forfeited or expired	(6,686,901	)		1.51

Outstanding at June 30, 2006	17,136,558		$	1.64	6.58	$	305

Exercisable at June 30, 2006	14,829,152		$	1.67	6.35	$	260

The weighted-average grant-date fair value of stock options granted during the three and six months ended June 30, 2006 was $0.28. Stock-based compensation expense related to stock options recognized under SFAS 123(R) for the three and six months ended June 30, 2006 was $357,000 and $855,000, respectively. At June 30, 2006, there was $2.9 million of unrecognized stock-based compensation expense related to non-vested options, which is expected to be recognized over a weighted-average period of one year.

Employee Stock Purchase Plan

Our 1999 Employee Stock Purchase Plan (“ESPP”) was adopted by our Board of Directors and approved by our stockholders in March 1999. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, has two six-month offering periods each year, with new offering periods commencing on February 1 and August 1 of each year. Eligible full-time employees, through payroll deductions, are allowed to purchase a limited number of shares of our common stock during each offering period at 85% of the fair market value at the lower of either the date of enrollment or the date of purchase. We account for the ESPP as a compensatory plan and recorded compensation expense for the three and six months ended June 30, 2006 of $2,600 and $6,200, respectively, in accordance with SFAS 123(R).

The fair value of issuances under the purchase plan is estimated on the issuance date by applying the principles of FASB Technical Bulletin 97-1, Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option, and using the Black-Scholes valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for our ESPP grants during the six months ended June 30, 2006 are shown below:


	Six Months Ended June 30, 2006
Expected volatility	106	%
Expected dividends	0	%
Expected term	0.5 Years
Risk-free interest rate	4.6	%

The expected volatility rate was estimated based on the historical volatility of TenFold common stock over a six-month period. The expected term is the same as the requisite service period. The risk-free interest rates are the rates provided by the U.S Treasury for Daily Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury” rates in effect at the time of grant with a remaining term equal to the expected term.

During the quarters ended June 30, 2006, and 2005, no shares of common stock were purchased under the ESPP as there is not an ESPP purchase date in our second quarter. As of June 30, 2006, there was $900 of total unrecognized compensation costs related to employee stock plan purchases. These costs are expected to be recognized over a weighted average period of one month.

6.	Income Taxes

No provision for income taxes was required for the three and six months ended June 30, 2006. The provisions for the three and six months ended June 30, 2005 of $6,000 and $7,000, respectively, relates primarily to foreign taxes.

At June 30, 2006, management has recognized a valuation allowance for the net deferred tax assets related to temporary differences, foreign tax credit carryforwards and net operating loss carryforwards. The valuation allowance was recorded in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more likely than not that the net deferred tax assets will not be realized.

7.	Commitments

We lease office space and equipment under non-cancelable lease agreements, which expire at various dates through 2007. Future minimum lease payments under non-cancelable operating and capital lease obligations, in excess of one year, at June 30, 2006 are as follows (in thousands):


	Total		Operating		Capital
2006	$	283	$	265	$	18
2007		337		327		10
Thereafter		—		—		—

Total minimum lease payments	$	620	$	592		28

Less: Amount representing interest						(1	)

Present value of net minimum capital lease payments						27
Less: Current installments of obligations under capital leases						(26	)

Obligations under capital leases, excluding current installments					$	1

8.	Notes Payable – Related Parties

On December 23, 2005, we executed a Promissory Note due to Robert W. Felton, our Chairman, President, and Chief Executive Officer, in the amount of $200,000.

On December 23, 2005, we executed a Promissory Note due to Wasatch Investments LLC, an investment entity associated with TenFold Director Robert E. Parsons, Jr., in the amount of $200,000.

On December 28, 2005, we executed a Promissory Note due to First Media TF Holdings LLC, an investment entity associated with TenFold Director Ralph W. Hardy Jr., in the amount of $200,000.

On February 23, 2006, TenFold executed a Promissory Note due to Mr. Felton, in the amount of $250,000.

On March 15, 2006, TenFold executed a Promissory Note due to Mr. Felton, in the amount of $250,000.

These identical Promissory Notes were intended to provide interim financing to TenFold while we sought to secure equity financing. The Promissory Notes were senior to other TenFold indebtedness and equity, bore interest at 10% and were due upon the earlier to occur of March 31, 2006, the closing of equity financing of $2 million or more, or a liquidation event. We repaid all of these Promissory Notes in full in March 2006, upon completing the equity financing transaction described in Note 13.

All disinterested members of our Board of Directors approved these transactions.

9.	Legal Proceedings and Contingencies

Unresolved Stockholder Matter

On November 6, 2001, a class action complaint alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming as defendants TenFold, certain of our officers and directors, and certain underwriters of our initial public offering. An amended complaint was filed on April 24, 2002. TenFold and certain of our officers and directors are named in the suit pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act 1934 on the basis of an alleged failure to disclose the underwriters’ alleged compensation and manipulative practices. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998. The individual officer and director defendants entered into tolling agreements and, pursuant to a Court Order dated October 9, 2002, were dismissed from the litigation without prejudice. On February 19, 2003, the Court granted a Motion to Dismiss the Rule 10b-5 claims against 116 defendants, including TenFold. On June 27, 2003, our Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of TenFold and of the individual defendants for the alleged wrongful conduct in the Amended Complaint. We agreed to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims we may have against our underwriters. In June 2004, a motion for preliminary approval of the settlement was filed with the Court. The underwriters filed a memorandum with the Court opposing preliminary approval of the settlement. The Court granted preliminary approval of the settlement on February 15, 2005, subject to certain modifications. On August 31, 2005, the Court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The Court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005. A settlement fairness hearing was held on April 24, 2006, however no ruling has been issued yet by the Court. If the Court determines that the settlement is fair to the class members, the settlement will be approved. There can be no assurance that this proposed settlement would be approved and implemented in its current form, or at all. Any direct financial impact of the proposed settlement is expected to be borne by our insurers. At this point, we do not believe that this lawsuit will have a material adverse impact on our business, results of operations, financial position, or liquidity. Accordingly, no related losses have been provided for in our accompanying financial statements.

Assessing litigation

We review litigation claims each quarter to determine the likelihood that the claim will result in a loss. Due to the inherent uncertainties of litigation, predicting the ultimate outcome of litigation is very difficult. Significant management judgment is required to conclude on the likely outcome of outstanding litigation. As part of that review, we consider our available insurance coverage. Such coverage is subject to the particular policy’s total limit, and typically subject to the insurer’s standard reservation of rights regarding conditions or findings that might exclude coverage for a particular matter.

If a loss is considered probable on a litigation claim, management estimates the loss and we accrue the estimated loss. If a loss is considered probable but cannot be reasonably estimated, we

disclose the contingency in these notes to our financial statements. Losses may however result on litigation claims that are not considered probable or are not estimable at the current time, potentially having a material adverse impact on our future business, results of operations, financial position, or liquidity.

Indemnifications, Warranties and Insurance

As permitted under Delaware law, and as provided in agreements with our officers and Directors, we have indemnified officers and Directors for certain claims asserted against them in connection with their service as an officer or Director of TenFold. The maximum potential amount of future payments that we could be required to make under these indemnification provisions is unlimited. However, we have purchased Directors’ and Officers’ insurance policies that reduce our monetary exposure and enable us to recover a portion of any future amounts paid. As a result of this insurance coverage, we believe the estimated fair value of these indemnification agreements is not material.

Our agreements with customers generally require us to indemnify the customer against claims that our software infringes third party patent, copyright, or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including a right to replace an infringing product or cancel the software license and return the fees paid by the customer. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements, and no such claims were outstanding at June 30, 2006. As a result, we have not recorded a liability for infringement costs as of June 30, 2006.

Our agreements with customers also generally provide a warranty that for so long as the customer is paying for support services, our software will materially conform to the related documentation, and that our software has been developed in a workmanlike manner. To date, we have not incurred significant warranty costs. As a result, we have not recorded a liability for warranty costs as of June 30, 2006.

We have an industry-standard, errors and omissions insurance policy. This policy excludes contractual related disputes such as cost and time guarantees, and only covers software errors or omissions that occur after the delivery of software. We believe this policy provides adequate coverage for potential damages related to errors and omissions in our delivered software.

10.

Operating Segments

Our CEO reviews financial information on a consolidated basis, similar in format to the accompanying Statements of Operations. We consolidate revenue and expense information for all business groups for internal and external reporting and for decision-making purposes. We operate in a single operating segment, which is applications products and services.

Revenues from customers outside of North America were approximately 14 percent of total revenues for the three months ended June 30, 2006 as compared to 10 percent of total revenues for the same period in 2005. For the six months ended June 30, 2006, revenues from customers outside of North America were approximately 15 percent of total revenues as compared to 11 percent of total revenues for the same period in 2005. Our long-lived assets are deployed in the United States.

Two customers accounted for a total of 35 percent of our revenues for the three months ended June 30, 2006 (individually 21 percent, and 14 percent of our total revenues, respectively) compared to two customers accounting for a total of 55 percent of our total revenues for the same period in 2005 (individually 39 percent and 16 percent of our total revenues, respectively). Two customers accounted for a total of 32 percent of our revenues for the six months ended June 30, 2006 (individually 20 percent and 12 percent of our total revenues, respectively) compared to three customers accounting for a total of 55 percent of our revenues for the same period in 2005 (individually 24 percent, 21 percent, and 10 percent). No other single customer accounted for

more than 10 percent of our total revenues for the three and six months ended June 30, 2006 or the same period in 2005.

Our customer accounting for 16 percent of our total revenues for the three months ended June 30, 2005, is a related party. See Note 12 for more information.

11.

Recent Accounting Pronouncements

On January 1, 2006, we adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values. See Note 5 above for more information.

On January 1, 2006, we adopted SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 is a replacement of APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and how to report a change in such circumstances. SFAS No. 154 also provides that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate effected by a change in accounting principle, and also provides that correction of errors in previously issued financial statements should be termed a “restatement.” SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in financial years beginning after September 15, 2006. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Additionally, SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, although early adoption is permitted. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, de-recognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact of adopting the provisions of FIN 48.

12.

Related Party Transactions

During 2005, we entered into agreements with a new customer, DevonWay, to provide licenses, consulting services, technical support services, and training. Our Chairman, CEO and President, Robert W. Felton, is the founder and majority shareholder of DevonWay. All disinterested members of our Board of Directors approved of these related party transactions and our general ongoing business relationship with DevonWay.

Our revenues from DevonWay for the three and six months ended June 30, 2006, are $14,600 and $37,900, respectively. For the three and six months ended June 30, 2005 we recognized revenues of $277,000. As of June 30, 2006 and December 31, 2005, we had accounts receivable due from DevonWay of $5,600, and $24,500, respectively. For the three and six months ended June 30, 2006, we received cash inflows from DevonWay of $34,000, and $66,000, respectively. For the three and six months ended June 30, 2005, we received cash inflows from this customer of $202,000.

Although we received a $1 million license payment from DevonWay in August 2005, for accounting purposes we have deferred recognition of this revenue until the end of the estimated economic life of the release of EnterpriseTenFold provided to DevonWay, because the license agreement contains a discount that cannot be determined at inception of the agreement. We are using the end of the estimated economic life to recognize the revenue because we do not have vendor specific objective evidence of fair value (“VSOE”) for the related post-contract customer support, due to the discount, and therefore we cannot allocate the revenue until the discount is known at the end of the estimated economic life. For accounting purposes, management estimates that the economic life is 16 months, and as a result no revenue will be recognized from this license until it is all recognized in a lump sum in the latter part of 2006.

During late 2005 and continuing into 2006, DevonWay provided some marketing services to us. For the three and six months ended June 30, 2006, we made payments to DevonWay of $7,600 and $17,000, respectively, for such services. As of June 30, 2006, we had accounts payable due to DevonWay of $8,800.

See Note 8 for information about Promissory Notes we entered into with members of our Board of Directors (or entities associated with them).

See Note 13 for information about our capital raising transaction completed in March 2006, that included the sale of stock to members of our Board of Directors and Executive Officers (or entities associated with them).

13.

Capital Stock

On March 29, 2006, we entered into a Securities Purchase Agreement for the sale of 1,500,000 shares of unregistered convertible preferred stock and warrants. The preferred shares are convertible into 20,315,805 shares of common stock. The warrants are to purchase 10,157,899 shares of common stock at an exercise price of $0.62 per share, with a 5 year term. The transaction generated gross proceeds of approximately $6.3 million (before expenses and repayment of $1.1 million of interim financing obligations). Several members of our Board of Directors (or investment entities associated with them) and an Executive Officer participated in the transaction, providing a total of approximately $4.7 million of the gross proceeds raised:

•

Robert W. Felton Trust invested $2 million. We repaid $709,000 of interim financing to Mr. Felton, our Chairman, President, and Chief Executive Officer, from the proceeds of the capital raising.

•

First Media TF Holdings LLC, an investment entity associated with TenFold Director Ralph W. Hardy Jr., invested $2 million. We repaid $205,000 of interim financing to First Media TF Holdings LLC from the proceeds of the capital raising.

•

TenFold Director Steven H. Coltrin invested $500,000. We used approximately $206,000 of the

proceeds of the capital raising to pay accounts payable due to his firm, Coltrin & Associates, for marketing and public relations work provided to TenFold in earlier periods.

•

Samer Diab, Vice President, Customer Services, invested $230,000.

We also repaid $205,000 of interim financing to Wasatch Investments LLC, an investment entity associated with TenFold Director Robert E. Parsons, Jr., from the proceeds of the capital raising.

As a result of the warrants sold with the convertible preferred stock and the beneficial conversion feature inherent in the conversion rights and preferences of the convertible preferred stock, we recognized a non-cash deemed dividend of $1,761,000 during the six months ended June 30, 2006. This deemed dividend was calculated based on the conversion price compared to the market price on the dates of issuance of the convertible preferred shares. Because we have an accumulated deficit, the deemed dividend was recorded as additional paid-in-capital and had no affect on that account.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

TenFold provides services and technology for building complex, Service Oriented Architecture (“SOA”)-compliant, mission-critical applications in significantly less time and cost that it would otherwise take using traditional development technologies. We believe that with TenFold’s technology, EnterpriseTenFold, customers will also experience significantly reduced ongoing applications maintenance and enhancement costs compared to what they generally experience with legacy applications.

Our business model focuses on providing applications development services and our EnterpriseTenFold technology, support and training, to customers who can use a TenFold team or their own business teams to build and maintain applications.

At the end of 2005, we replaced our former Chief Executive Officer with long-time TenFold director and shareholder, Robert W. Felton. Under his leadership, we have recently changed our business model to focus on selling larger consulting projects, instead of the smaller prototype application projects that we primarily sold in 2005. We believe that providing larger consulting projects (that include the full breadth of applications consulting from applications design through production implementation) will be a more successful model for both us and our customers. We believe that some of our customers would have been more successful with their projects with more consulting assistance than they chose to purchase under our prior business model. Although we expect to be more successful with this new model, we have limited experience with the new model as we have introduced it only recently. And although we have closed some new sales under this model, the amount of such sales is not sufficient to generate positive cash flow or profitability. As a result, it is unclear if or when we can expect to close significant sales to new or existing customers, and until we do so we are likely to continue to experience negative cash flow from operations and losses.

On March 30, 2006, we completed a capital raising transaction for the sale of 1,500,000 shares of unregistered convertible preferred stock and warrants. The preferred shares are convertible into 20,315,805 shares of common stock. The warrants are to purchase 10,157,899 shares of common stock at an exercise price of $0.62 per share, with a 5 year term. The transaction generated gross proceeds of approximately $6.3 million (before expenses and repayment of $1.1 million of interim financing obligations). Several members of our Board of Directors (or investment entities associated with them) and an Executive Officer participated in the transaction, providing a total of approximately $4.7 million of the gross proceeds raised:

•

Robert W. Felton Trust invested $2 million. We repaid $709,000 of interim financing to Mr. Felton, our Chairman, President, and Chief Executive Officer, from the proceeds of the capital raising.

•

TenFold Director Steven H. Coltrin invested $500,000. We used approximately $206,000 of the proceeds of the capital raising to pay accounts payable due to his firm, Coltrin & Associates, for marketing and public relations work provided to TenFold in earlier periods.

•

Samer Diab, Vice President, Customer Services, invested $230,000.

We also repaid $205,000 of interim financing to Wasatch Investments LLC, an investment entity associated with TenFold Director Robert E. Parsons, Jr., from the proceeds of the capital raising.

For the first half of 2006, we had revenues of $1.3 million, an operating loss of $3.6 million, a net loss of $3.6 million, and a net loss applicable to common shareholders of $5.3 million. This

compares to revenues of $3.3 million, an operating loss of $3.0 million, and a net loss of $2.9 million for the same period of 2005.

Results of Operations

The following table sets forth, for the periods indicated, the percentage relationship of selected items from our statements of operations to total revenues.


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Revenues:
License	8	%	13	%	11	%	10	%
Services and other	92	%	87	%	89	%	90	%

Total revenues	100	%	100	%	100	%	100	%
Operating expenses:
Cost of revenues	89	%	44	%	93	%	53	%
Sales and marketing	38	%	50	%	35	%	47	%
Research and development	154	%	52	%	170	%	55	%
General and administrative	58	%	35	%	78	%	37	%

Total operating expenses	339	%	181	%	376	%	192	%

Loss from operations	(239	%)	(81	%)	(276	%)	(92	%)
Total other income, net	6	%	1	%	3	%	3	%

Loss before income taxes	(233	%)	(80	%)	(273	%)	(89	%)
Provision for income taxes	—		—		—		—

Net loss	(233	%)	(80	%)	(273	% )	(89	%)

Deemed dividend related to warrants issued with Preferred stock and beneficial conversion feature on preferred stock	—		—		(135	%)	—

Net loss applicable to common shareholders	(233	%)	(80	%)	(408	%)	(89	%)

Revenues

Total revenues decreased $1.0 million, or 58 percent, to $710,000 for the three months ended June 30, 2006, as compared to $1.7 million for the same period in 2005. For the six months ended June 30, 2006, total revenues decreased $2.0 million, or 60 percent, to $1.3 million as compared to $3.3 million for the same period in 2005.

Services and other revenues decreased $822,000, or 56 percent, to $656,000 for the three months ended June 30, 2006 as compared to $1.5 million for the same period in 2005. For the six months ended June 30, 2006, services and other revenues decreased $1.8 million, or 61 percent, to $1.2 million as compared to $3.0 million for the same period in 2005. The decrease in services and other revenues is primarily due to decreases in revenues from certain customers who purchased less time-and-materials consulting from us over time as they completed their application development projects and became more self-sufficient. We have not replaced these projects with similar sized projects with other customers.

License revenues decreased $169,000, or 76 percent, to $54,000 for the three months ended June 30, 2006, as compared to $223,000 for the same period in 2005. For the six months ended June 30, 2006, license revenues decreased $175,000, or 55 percent, to $141,000 as compared to $316,000 for the same period in 2005. The decrease in license revenue is due primarily to smaller sized license sales in 2006 than in the same period in 2005.

outside of North America were approximately 15 percent of total revenues as compared to 11 percent of total revenues for the same period in 2005. Our long-lived assets are deployed in the United States.

We continue to actively market to new and existing customers. However, we continue to face a challenging sales environment. As a result, it is unclear if or when we can expect to close significant sales to new or existing customers, and until we do so we are likely to continue to experience negative cash flow from operations and losses.

Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of compensation and other related costs of personnel and contractors to provide applications development and implementation, support, and training services. Cost of revenues decreased $123,000, or 16 percent, to $634,000 for the three months ended June 30, 2006 compared to $757,000 for the same period in 2005. For the six months ended June 30, 2006, cost of revenues decreased $531,000, or 30 percent, to $1.2 million as compared to $1.8 million for the same period in 2005. The decreases in cost of revenues are primarily due to having fewer staff working on customer projects.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation, travel, and other related expenses for sales and marketing personnel; and marketing seminars, public relations, advertising and other marketing expenses. Sales and marketing expenses decreased $576,000, or 68 percent, to $270,000 for the three months ended June 30, 2006 as compared to $846,000 for the same period in 2005. For the six months ended June 30, 2006, sales and marketing expenses decreased $1.1 million, or 70 percent, to $461,000 as compared to $1.6 million for the same period in 2005. The decreases in sales and marketing expenses are due to our discontinuing most discretionary marketing programs in late 2005 in connection with the change in sales focus under our new Chief Executive Officer, Robert W. Felton, and to conserve our financial resources; as well as from a decrease in sales and marketing headcount.

Research and Development. Research and development expenses consist primarily of compensation and other related costs of personnel dedicated to research and development activities. Research and development expenses increased $218,000, or 25 percent, to $1.1 million for the three months ended June 30, 2006, as compared to $876,000 for the same period in 2005. For the six months ended June 30, 2006, research and development increased $398,000, or 22 percent, to $2.2 million as compared to $1.8 million for the same period in 2005. The increases in research and development are primarily due to recognition of stock-based compensation expense in 2006 as a result of SFAS 123(R) (see Note 5 of Notes to Condensed Financial Statements for more information).

General and Administrative. General and administrative expenses consist primarily of the costs of executive management, finance and administrative staff, business insurance, and professional fees. General and administrative expenses decreased $183,000, or 31 percent, to $409,000 for the three months ended June 30, 2006 as compared to $592,000 for the same period in 2005. For the six months ended June 30, 2006, general and administrative expenses decreased $202,000, or 17 percent, to $1.0 million as compared to $1.2 million for the same period in 2005.

The decrease is primarily due to revision of an earlier estimated option modification charge. For the year ended December 31, 2005, we recognized estimated severance related charges related to the departure of our prior CEO, including an estimated option modification charge, based upon the anticipated terms at that time. Upon the execution of the Separation Agreement and Release on May 19, 2006, we calculated the actual option modification charge based upon the final terms, and recognized a resulting reduction in our stock-based compensation expense of $133,000, which reduced our general and administrative expenses for the three months ended June 30, 2006. General and administrative expenses for the three months ended June 30, 2006 also decreased from the reduction in our estimate of costs related to our March 2006 capital raising transaction by approximately $50,000.

Total Other Income, net

Net total other income was income of $45,000 for the three months ended June 30, 2006, as compared to $20,000 of income for the same period in 2005. Net total other income was $34,000 for the six months ended June 30, 2006, as compared to $119,000 for the same period in 2005.

Provision for Income Taxes

No provision for income taxes was required for the three and six months ended June 30, 2006. The provisions for income taxes for the three and six months ended June 30, 2005 of $6,000 and $7,000, respectively, relate to foreign taxes.

At June 30, 2006, management has recognized a valuation allowance for the net deferred tax assets related to temporary differences, foreign tax credit carryforwards and net operating loss carryforwards. The valuation allowance was recorded in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more likely than not that the net deferred tax assets will not be realized.

Deemed dividend related to convertible preferred stock

Critical Accounting Policies

The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, management has identified the “critical accounting policies” below. These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

Revenue Recognition and Project Profitability

We believe risks relating to revenue recognition include the judgment required to determine project profit or loss projections on time-and-material contracts. We recognize time-and-materials revenue at the lowest point in the range of estimated profit margin, which represents our best estimate of the profit to be achieved. Variances may occur if we are unable to collect time-and-materials billings or if we grant concessions to time-and-materials customers in order to sell additional business or collect cash under the contract. As we occasionally provide services on a

fixed price basis, risks relating to revenue recognition also include the judgment and estimation required to determine fixed-price project completion percentages, and fixed-price project profit or loss projections. Variances between management’s estimates and actual results may result in significant adjustments to our results of operations and financial position.

For a license agreement that we executed in August 2005 that contains a discount that cannot be determined at the inception of the agreement, we expect to recognize the related license revenue at the end of the estimated economic life of the release of EnterpriseTenFold provided to the customer. We are using the end of the estimated economic life to recognize the revenue because we do not have vendor specific objective evidence of fair value (“VSOE”) for the related post-contract customer support, due to the discount, and therefore we cannot allocate the revenue until the discount is known at the end of the estimated economic life. For accounting purposes, management estimates that the economic life is 16 months after considering factors such as the rapid pace of technological change in the software industry generally and particularly in TenFold’s market, the pace at which TenFold produces new releases of TenFold technology with substantial technological improvements, and the pace at which TenFold’s customers adopt new releases of TenFold technology.

Stock-Based Compensation

In accordance with SFAS 123(R), we measure compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee roles, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates. See Note 5 of Notes to Condensed Financial Statements for more information.

Litigation Reserves

We review asserted litigation claims each quarter to determine the likelihood that the claim will result in a loss. Significant management judgment is required to conclude on the likely outcome of outstanding litigation. If a loss is probable on a litigation claim, management estimates the loss and we accrue the estimated loss. If a loss is considered probable but cannot be reasonably estimated, we disclose the contingency in the notes to our financial statements. Losses may result on litigation claims that are not considered probable or are not estimable at the current time, potentially having a significant impact on future financial results.

Liquidity and Capital Resources

Net cash used in operating activities was $3.5 million for the six months ended June 30, 2006 as compared to $3.1 million for the same period in 2005.

Net cash used in investing activities was $15,000 for the six months ended June 30, 2006 as compared to $14,000 for the same period in 2005.

Net cash provided by financing activities was $5.5 million for the six months ended June 30, 2006 as compared to $11,000 for the same period in 2005. Net cash provided by financing activities for the six months ended June 30, 2006 included $6.1 million of net proceeds from the sale of convertible preferred stock and warrants, $500,000 from issuance of notes payable, less $1.1 million in principal payments on notes payable which were repaid in full upon closing our capital raising transaction in March 2006.

Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. We had deferred revenue balances of $1.8 million at June 30, 2006 and $2.2 million at December 31, 2005. When over time

we recognize these deferred revenue balances as revenues in the statement of operations, we will not have corresponding increases in cash, as the related cash amounts have previously been received by us. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed.

•

There can be no assurance that we will be successful closing sufficient new sales and these risks may have a materially adverse affect on our future cash flow and operations.

Disclosure about Contractual Obligations

The following table sets forth certain contractual obligations recorded in the condensed financial statements as of June 30, 2006 and summary information is presented in the following table (in thousands):


Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Long-term debt	$	—	$	—	$	—	$	—	$	—
Capital lease obligations		28		27		1		—		—
Operating lease obligations		592		517		75		—		—
Purchase obligations		164		164		—		—		—
Other long term liabilities reflected on the registrant’s Balance Sheet under GAAP		—		—		—		—		—

Total	$	784	$	708	$	76	$	—	$	—

Related Party Transactions

Our revenues from DevonWay for the three and six months ended June 30, 2006, are $14,600 and $37,900, respectively. For the three and six months ended June 30, 2005 we recognized revenues of $277,000. As of June 30, 2006, and December 31, 2005, we had accounts receivable due from DevonWay of $5,600, and $24,500, respectively. For the three and six months ended June 30, 2006, we received cash inflows from DevonWay of $34,000, and $66,000, respectively. For the three and six months ended June 30, 2005, we received cash inflows from this customer of $202,000.

See Note 8 of Notes to Condensed Financial Statements for more information about Promissory Notes we entered into with members of our Board of Directors (or entities associated with them).

See Note 13 of Notes to Condensed Financial Statements for information about our capital raising transaction completed in March 2006, that included the sale of stock to members of our Board of Directors and Executive Officers (or entities associated with them).

Recent Accounting Pronouncements

principle, and also provides that correction of errors in previously issued financial statements should be termed a “restatement.” SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Reference is made to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” appearing on page 40 of TenFold’s 2005 Annual Report on Form 10-K for information relating to TenFold’s interest rate and currency rate risks. There have been no material changes in such risks through June 30, 2006.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Except as listed below, other items in Part II are omitted because the items are inapplicable or require no response.

Item 1.

Legal Proceedings

See Part I, Item 1, Note 9 of Notes to Condensed Financial Statements for a description of legal proceedings.

Item 1A.

Risk Factors

Reference is made to Part I, Item 1A “Risk Factors,” appearing on page 18 of TenFold’s 2005 Annual Report on Form 10-K for information relating to TenFold’s risk factors. There have been no material changes in such risks through June 30, 2006, except that the settlement discussions with our prior CEO described in the Risk Factor on page 21 of TenFold’s 2005 Annual Report on Form 10-K were concluded and the parties executed a Separation Agreement and Release on May 19, 2006, which was reported in a Form 8-K filed by TenFold on May 25, 2006.

The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, results of operations or cash flows.

Item 4.

Submission of Matters to a Vote of Security Holders

We held our Annual Meeting of Stockholders on June 27, 2006, in Sandy, Utah. A total of 55,063,289 shares (approximately 82 percent of all shares entitled to vote at the meeting) were represented by proxy or ballot at the meeting. The matters voted upon at the meeting, and the votes cast with respect to each were:

•

Election of three directors to hold office until the 2008 Annual Meeting of Stockholders: Stephen H. Coltrin – 54,741,071 shares cast for election and 322,218 shares withheld; Robert W. Felton – 54,702,124 shares cast for election and 361,165 shares withheld; and Ralph W. Hardy, Jr. – 54,720,271 shares cast for election and 343,018 shares withheld. The terms of the following other existing directors continued after the meeting: Richard H. Bennett, Jr., Robert E. Parsons, Jr., and Jeffrey L. Walker.

•

Ratification of the selection of Tanner LC as registered independent public accounting firm of TenFold for the fiscal year ended December 31, 2006 – 54,987,749 shares cast for ratification, 53,688 shares cast against ratification, and 21,852 shares abstained.

Item 6.

Exhibits

(a)

Exhibits


Number		Description

10.20		Separation Agreement and Release, dated as of May 19, 2006, between TenFold Corporation and Nancy M. Harvey. (+)

11*		Computation of Shares used in Computing Basic and Diluted Net Loss Per Share.

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Incorporated by reference to “Notes to Financial Statements” herein

+	Incorporated by reference to Exhibit 10.20 to the Current Report on Form 8-K filed by TenFold Corporation on May 25, 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TenFold Corporation

/s/ Robert W. Felton

Robert W. Felton

Chairman of the Board of Directors, President, and

Chief Executive Officer

August 1, 2006

/s/ Robert P. Hughes

Robert P. Hughes

Chief Financial Officer and Chief of Staff

August 1, 2006

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

TENFOLD CORP /UT 10-Q