Taleo 10Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006


o		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: 000-51299

TALEO CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		52-2190418
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4140 Dublin Boulevard, Suite 400
Dublin, California 94568
(Address of principal executive offices, including zip code)

(925) 452-3000
(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. Yesþ Noo

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.

Large accelerated filero Accelerated filero Non-accelerated filerþ

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

On July 31, 2006, the registrant had 20,583,901 shares of Class A common stock and 2,957,211 shares of Class B common stock outstanding.

TALEO CORPORATION
FORM 10-Q
TABLE OF CONTENTS


	PART I – FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005 (Restated)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005	5
	Notes To Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	28
	PART II – OTHER INFORMATION
Item 1	Legal Proceedings	30
Item 1A	Risk Factors	30
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3	Defaults Upon Senior Securities	44
Item 4	Submission of Matters to a Vote of Security Holders	44
Item 5	Other Information	45
Item 6	Exhibits	45
Signatures		46
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

TALEO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


	June 30,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	63,050		$	59,346
Restricted cash		961			1,110
Accounts receivable, less allowance for doubtful accounts of $392 at June 30, 2006 and $350 at December 31, 2005		17,070			15,026
Prepaid expenses and other current assets		3,729			3,010
Investment credit receivable		3,461			4,944

Total current assets		88,271			83,436

Property and equipment, net		12,210			7,129
Restricted cash		1,048			936
Other assets		274			283
Goodwill		6,027			5,947
Other intangibles, net		791			1,289

Total assets	$	108,621		$	99,020

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Capital lease obligation, current	$	602		$	583
Accounts payable and accrued liabilities		14,918			13,063
Contingent shares issuable		80			81
Customer deposits		1,654			342
Deferred revenue		16,415			10,870

Total current liabilities		33,669			24,939

Customer deposits and long term deferred revenue		303			114
Other liabilities		105			155
Capital lease obligation, long term		95			399
Commitments and contingencies (Note 11)
Class B redeemable common stock, $0.00001 par value, 24,229,762 shares authorized; 3,057,211 and 4,038,287 shares outstanding at June 30, 2006 and December 31, 2005, respectively		—			—

Total liabilities		34,172			25,607

Exchangeable share obligation		1,352			1,715

Stockholders’ equity:
Class A common stock; par value, $0.00001 per share; 250,000,000 shares authorized; 20,370,094 and 18,755,071 shares outstanding at June 30, 2006 and December 31, 2005, respectively		—			—
Additional paid-in capital		128,518			124,947
Accumulated deficit		(56,123	)		(53,701	)
Deferred compensation		—			(21	)
Accumulated other comprehensive income		702			473

Total stockholders’ equity		73,097			71,698

Total liabilities and stockholders’ equity	$	108,621		$	99,020

See accompanying notes to condensed consolidated financial statements.

TALEO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
				2005						2005
				(As restated						(As restated
	2006			see Note 3)			2006			see Note 3)
Revenue:
Application	$	19,031		$	15,075		$	37,247		$	30,103
Consulting		4,441			4,232			8,389			7,361

Total revenue		23,472			19,307			45,636			37,464

Cost of revenue:
Application		4,821			4,027			9,307			8,076
Consulting		3,212			2,811			6,533			5,026

Total cost of revenue		8,033			6,838			15,840			13,102

Gross profit		15,439			12,469			29,796			24,362

Operating expenses:
Sales and marketing		7,919			5,764			14,272			11,169
Research and development		4,818			4,171			9,600			8,117
General and administrative		5,287			2,567			9,774			4,981
Restructuring costs and other charges		—			—			—			804

Total operating expenses		18,024			12,502			33,646			25,071

Operating loss		(2,585	)		(33	)		(3,850	)		(709	)

Other income (expense):
Interest income		777			117			1,486			157
Interest expense		(13	)		(501	)		(43	)		(637	)

Total other income (expense)		764			(384	)		1,443			(480	)

Loss before provision for income taxes		(1,821	)		(417	)		(2,407	)		(1,189	)
Provision for income taxes		7			—			15			—

Net loss		(1,828	)		(417	)		(2,422	)		(1,189	)
Accrual of dividends and issuance costs on preferred stock		—			(869	)		—			(1,719	)

Net loss attributable to Class A common stockholders	$	(1,828	)	$	(1,286	)	$	(2,422	)	$	(2,908	)

Net loss attributable to Class A common stockholders per share — basic and diluted	$	(0.10	)	$	(14.45	)	$	(0.13	)	$	(36.81	)

Weighted average Class A common shares — basic and diluted		19,229			89			19,013			79

See accompanying notes to condensed consolidated financial statements.

TALEO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(2,422	)	$	(1,189	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,314			2,440
Loss on disposal of fixed assets		182			87
Amortization of tenant inducements		(52	)		—
Stock-based compensation expense		2,212			376
Changes in working capital accounts:
Accounts receivable		(1,962	)		676
Prepaid expenses and other assets		(664	)		(621	)
Investment credit receivable		1,658			(983	)
Accounts payable and accrued liabilities		(115	)		457
Deferred revenues and customer deposits		6,971			(1,035	)

Net cash provided by operating activities		8,122			208

Cash flows from investing activities:
Acquisition of fixed assets		(5,100	)		(1,152	)
Restricted cash - decrease (increase)		46			(10,242	)
Acquisition of business, net of cash acquired		—			(3,271	)

Net cash used in investing activities		(5,054	)		(14,665	)

Cash flows from financing activities:
Proceeds from long-term debt		—			20,196
Principal payments on long-term debt		—			(5,041	)
Principal payments on capital lease obligations		(293	)		—
Increase in other assets		—			(702	)
Proceeds from stock options exercises		859			106

Net cash provided by financing activities		566			14,559

Effect of exchange rate changes on cash and cash equivalents		70			(46	)

Increase in cash and cash equivalents		3,704			56
Cash and cash equivalents:
Beginning of period		59,346			5,773

End of period	$	63,050		$	5,829

Supplemental cash flow disclosures:
Cash paid for interest	$	25		$	481

Supplemental disclosure of non-cash financing and investing activities:
Fixed asset purchases included in accounts payable and accrued liabilities	$	2,625		$	424
Accrual of dividends on Series C and Series D preferred stock	$	—		$	1,573
Amortization of issuance costs on Series C preferred stock	$	—		$	146

See accompanying notes to condensed consolidated financial statements.

TALEO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands except option, share and per share information)

1.Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of June 30, 2006, the condensed consolidated statements of operations for the three and six months ended June 30, 2006 and 2005 and the condensed consolidated statements of cash flows for six months ended June 30, 2006 and 2005 have been prepared by Taleo Corporation and its subsidiaries (“Company”) without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the Company for the year ended December 31, 2005. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the operating results for the full year.

2. Nature of Business and Basis of Presentation

Nature of Business— The Company provides enterprise on demand talent management solutions that enable organizations of all sizes to establish, automate and manage their worldwide staffing processes for professional, hourly and temporary staff. The Company’s software applications are offered to customers primarily on a subscription basis.

The Company has principal offices in Dublin, California and Quebec City, Quebec, Canada, and conducts its business worldwide, with wholly owned subsidiaries in Canada, France, the Netherlands, the United Kingdom, Singapore, and Australia. The Company moved its headquarters from San Francisco to Dublin, California during the weekend of July 1, 2006. The operating subsidiary in Canada performs the primary product development activities for the Company. The other foreign subsidiaries are generally engaged in providing sales, account management and support activities.

Basis of Presentation— The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules of the Securities and Exchange Commission. The consolidated financial statements include the accounts of Taleo Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

3. Restatement

Subsequent to filing its Quarterly Report on Form 10-Q for the period ended June 30, 2005, the Company determined that there was an error in its accounting with respect to the accrual of dividends on preferred stock. The correction of the error resulted in an increase in the net loss attributable to Class A common stockholders and net loss per share attributable to Class A common stockholders. There was no effect on cash flows. The error was corrected prior to the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2005. The operating results for each of the quarters in the year ended December 31, 2005 were restated and presented in the Selected Quarterly Financial Data (Unaudited) footnote included therein. The Company is now reflecting the impact of the restatement in this Quarterly Report on Form 10-Q.

The significant effects of the adjustment on the statement of operations for the quarter and six months ended June 30, 2005 are summarized below:


	As originally			As
	Reported			Restated			Change
Statement of Operations Data
For the three months ended June 30,2005:
Accrual of dividends and issuance costs on preferred stock	$	(689	)	$	(869	)	$	(180	)
Net loss attributable to common stockholders	$	(1,106	)	$	(1,286	)	$	(180	)
Net loss attributable to common stockholders per share — basic and diluted(1)	$	(12.43	)	$	(14.45	)	$	(2.02	)

For the six months ended June 30,2005:
Accrual of dividends and issuance costs on preferred stock	$	(1,378	)	$	(1,719	)	$	(341	)
Net loss attributable to common stockholders	$	(2,567	)	$	(2,908	)	$	(341	)
Net loss attributable to common stockholders per share — basic and diluted(1)	$	(32.49	)	$	(36.81	)	$	(4.32	)


(1)		Reflects the exclusion of the Company’s Class B redeemable common stock shares as a separate class of stock.

4. Stock–Based Compensation

The Company issues stock options to its employees and outside directors and provides employees the right to purchase stock pursuant to stockholder approved stock option plans and the employee stock purchase program (ESPP). Effective January 1, 2006, the Company adopted the provisions of the Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), using the Statement’s modified prospective application method. Prior to January 1, 2006, the Company applied the intrinsic value method prescribed by Accounting Principles Based Opinion Number 25 “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations. To the extent the exercise price of options granted were equal to the fair market value of the underlying common stock on the measurement date, no stock-based employee compensation was recognized in the results of operations for periods prior to the adoption of SFAS123R.

Under the provisions of SFAS 123R, the Company recognizes the fair value of stock-based compensation in its financial statements over the requisite service period of the individual grants, which generally equals a four year vesting period. All of the Company’s stock awards are of an equity nature and there have been no liability awards granted. The Company has elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards not yet vested at the date of adoption is recognized in the financial statements in the periods after the date of adoption using the same value determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,”for awards granted after becoming a public company. The Company continues to measure and record compensation expense under the intrinsic value method prescribed by APB 25 for awards granted prior to such date. The Company recognizes compensation expense for the stock options, restricted stock awards, performance share awards, and ESPP purchases granted subsequent to December 31, 2005 on a straight line basis over the requisite service period. There was no stock-based compensation expense capitalized during the three and six months ended June 30, 2006. Shares issued as a result of stock option exercises, ESPP purchases, performance shares and restricted stock awards are issued out of common stock reserved for future issuance under our stock plans. The adoption of SFAS 123R resulted in the Company recording additional compensation expense of $1,387, or $0.07 per share, for the three months ended June 30, 2006 and $2,212, or $0.12 per share, for the six months ended June 30, 2006. In total, the amount recorded in the three and six months ended June 30, 2006 was recorded in the following expense categories:


	Three months ended		Six months ended
	June 30, 2006		June 30, 2006
Cost of revenue	$	98	$	179
Sales and marketing		246		463
Research and development		154		277
General and administrative		889		1,293

Total	$	1,387	$	2,212

As of June 30, 2006, the total compensation cost of non-vested options and stock awards not yet recognized was equal to $13,804 and is expected to be recognized over a weighted-average period of 3.04 years

The Company utilized the Black-Scholes-Merton valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123R with the following assumptions:


Average risk-free interest rate		5.02	%
Expected dividend yield	None
Expected life	6.25 years
Expected volatility		55	%

The dividend yield of zero is based upon the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Given the relatively small amount of historical trading data available for the Company, expected volatility considered among other factors, the volatility of comparable companies over the period commensurate with or longer than the

expected life of the options. The risk-free interest rate is the rate on U.S. Treasury securities on the date of grant for the expected term. The expected life was calculated using the simplified method outlined in SEC Staff Accounting Bulletin Topic 14.D.2, “Expected Term.”

Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 17.1% has been used in calculating the cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value based method, as adopted, to all awards, including those previously accounted for under APB 25, for the three and six months ended June 30, 2005.


	Three months ended			Six months ended
	June 30, 2005			June 30, 2005
Net loss attributable to common shareholders—	$	(1,286	)	$	(2,908	)
As reported (1)
Add: Stock-based compensation expense included in reported net income		3			7
Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(662	)		(992	)

Pro forma net loss	$	(1,945	)	$	(3,893	)

Net loss attributable to common shareholders per share—
Basic and diluted As reported	$	(14.45	)	$	(36.81	)

Pro forma	$	(21.85	)	$	(49.28	)

Class A Common Stock Plans

At June 30, 2006, 382,915 shares were available for future grants from our Class A common stock plans.

The following table presents a summary of the Class A common stock option activity for the six months ended June 20, 2006, excluding activity for the White Amber Stock Option Plan:


				Weighted-Average
	Number of Options			Exercise Price
Outstanding — January 1, 2006		4,213,626		$	8.78
Granted		195,557			13.74
Exercised		(29,374	)		3.44
Forfeited		(97,179	)		11.99

Outstanding — March 31, 2006		4,282,630		$	8.97
Granted		566,365			11.87
Exercised		(233,691	)		3.12
Forfeited		(45,976	)		14.03

Outstanding — June 30, 2006		4,569,328		$	9.56

The weighted average grant date fair value of options granted during the three months ended June 30, 2006 was $6.92 per option.

The total intrinsic value of options exercised during the three months ended June 30, 2006 was $2,216.

The following table summarizes stock options outstanding at June 30, 2006:


					Weighted-Average
					Remaining
			Number of Options		Contractual Life		Number of Options
Range of Exercise Prices			Outstanding		(Years)		Exercisable
$	0.12	1.92		221,392		2.78		221,392
	3.00	3.00		1,298,238		5.52		1,255,700
	3.84	11.90		751,397		7.90		333,041
	12.00	12.56		101,025		9.53		270
	13.50	13.50		1,136,697		8.72		387,763
	13.75	13.75		137,330		9.46		781
	13.94	13.94		100,000		9.59		—
	14.00	14.00		515,343		9.21		17,801
	14.10	14.10		31,399		9.85		—
	18.00	18.00		276,507		7.74		178,611

June 30, 2006				4,569,328		7.45		2,395,359

Average exercise price							$	6.21

The total fair value of shares vested during the three months ended June 30, 2006 was $188.

The aggregate intrinsic value for options outstanding and exercisable at June 30, 2006 was $15.2 million with a weighted-average remaining contractual life of 5.92 years.

For options, the Company recorded $1,260 and $2,083 of compensation expense for the three and six months ended June 30, 2006, respectively.

Restricted Stock and Performance Shares

On May 31, 2006, the Compensation Committee of the Board of Directors of the Company approved a form of restricted stock agreement and a form of performance share agreement for use under the Company’s 2004 Stock Plan and granted restricted stock and performance shares. The shares of restricted stock and performance share awards have a per share price of $0.00001 which equals the par value. The Company’s right to repurchase the restricted stock lapses in accordance with a four year schedule and the performance shares vest in accordance with a four year vesting schedule. The fair value is measured based upon the closing NASDAQ market price of the underlying Company stock as of the date of grant. Restricted stock and performance share awards are amortized over the applicable reacquisition period (generally 4 years) using the straight-line method. As of June 30, 2006, the unamortized compensation cost was $2,648 and is expected to be recognized over a weighted-average period of four years. The following table presents a summary of the restricted stock awards and performance share awards for the three months ended June 30, 2006, and related information:


	Performance Share		Restricted Stock		Weighted Average Grant-
	Awards		Awards		Date Fair Value
Repurchasable/nonvested balance — March 31, 2006		—		—		—
Awarded		65,000		255,000	$	11.90
Released/vested		—		—		—
Forfeited/cancelled		—		—		—

Repurchasable/nonvested balance — June 30, 2006		65,000		255,000	$	11.90

For restricted stock and performance share agreements, the Company recorded $71 of compensation expense for the three and six months ended June 30, 2006.

Employee Stock Purchase Plan

At June 30, 2006 there were 500,000 shares reserved for future issuance under the ESPP. Stock purchase rights are granted to eligible employees during six month offering periods with purchase dates at the end of each offering period. The offering periods generally commence each May 1 and November 1. The first enrollment period for the ESPP began in the three month period ended June 30, 2006 and the initial offering period commenced on May 16, 2006 and will end on October 31, 2006. Shares will be purchased through employees’ payroll deductions, up to a maximum of 10% of employees’ compensation, at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the date of the employee’s entrance to the offering period or the purchase date. No participant may purchase more that 10,000 shares per offering or $25 worth of common stock in one calendar year. As of June 30, 2006, no shares are issued under the plan. The expected compensation cost of $198 was determined using the Black-Scholes-Merton method with an interest rate of 5.24%, volatility of 55%, dividend rate of zero, and, a term of 24 weeks divided by 52 weeks, given the May 16 start date. For the ESPP, the Company recorded $54 of compensation expense for the three and six months ended June 30, 2006.

White Amber Stock Option Plan

Pursuant to the October 21, 2003 purchase of White Amber, Inc., the Company issued 206,487 options at $0.78 per share under the White Amber Stock Option Plan. Options under the White Amber Stock Option Plan are subject to the vesting provisions associated with each grant, and generally call for 25% vesting upon issuance, with future vesting over defined periods for the remaining shares. The following table presents a summary of the White Amber Stock Option Plan activity for the six months ended June 30, 2006, and related information:


				Weighted-Average
	Number of Options			Exercise Price
Outstanding — January 1, 2006		180,651		$	0.78
Granted		—			—
Exercised		—			—
Forfeited		(6,015	)		0.78

Outstanding — March 31, 2006		174,636			0.78

Granted		—			—
Exercised		(37,446	)		0.78
Forfeited		—			—

Outstanding — June 30, 2006		137,190		$	0.78


Options exercisable – June 30, 2006		136,121		$	0.78

For the White Amber Stock Option Plan, the Company recorded $2 and $4 of compensation expense for the three and six months ended June 30, 2006, respectively.

As previously discussed in our Annual Report on Form 10-K for the year ended December 31, 2005 and in Note 5 below, based on the forfeiture of options from the White Amber Stock Option Plan, additional shares will be issued to the former White Amber stockholders under the terms of the White Amber acquisition agreement.

5. Intangible Assets and Goodwill

During the six months ended June 30, 2006, the Company’s goodwill increased by $80 as an indirect result of the forfeiture of certain unvested stock options granted to the employees of White Amber in 2003 in connection with the Company’s acquisition of White Amber. Under the terms of the acquisition agreement, the Company was required to issue shares to the sellers of White Amber in the event of forfeitures of Company stock options granted to former White Amber employees. These shares issuable to the seller are accounted for as an increase in the purchase price paid by the Company. The forfeitures are recorded as an adjustment to additional paid-in capital. There were no other additions to the carrying amount of goodwill. Amortization of intangible assets was $249 and $249 for the three months ended June 30, 2006 and 2005, respectively, and $498 and $471 for the six months ended June 30, 2006 and 2005.


			As of June 30, 2006					As of December 31, 2005
	Weighted		Gross
	Average Period		Carrying		Accumulated			Gross Carrying		Accumulated
	of Amortization		Amount		Amortizaton			Amount		Amortizaton
Identifiable intangible assets:
Existing technology	3.5 years		$	2,311	$	(1,679	)	$	2,311	$	(1,335	)
Customer relationships	3.2 years			967		(809	)		967		(654	)

Subtotal				3,278		(2,488	)		3,278		(1,989	)
Goodwill		—		6,027		—			5,947		—

Total			$	9,305	$	(2,488	)	$	9,255	$	(1,989	)


Estimated Amortization Expense
Remainder of 2006	$	333
2007		143
2008		143
2009		143
2010		28

6. Property and Equipment

Property and equipment consists of the following:


	June 30,			December 31,
	2006			2005
Computer hardware and software	$	14,556		$	12,687
Furniture and equipment		2,044			2,324
Leasehold improvements		1,245			1,206
Construction in progress		5,242			—

Subtotal		23,087			16,217
Less accumulated depreciation and amortization		(10,877	)		(9,088	)

Total	$	12,210		$	7,129

Property and equipment included capital leases totaling $1,037 and $1,003 at June 30, 2006 and December 31, 2005, respectively. All of the capital leases are included in computer hardware and software classification above. Accumulated amortization relating to property and equipment under capital leases totaled $726 and $536, at June 30, 2006 and December 31, 2005, respectively. Depreciation and amortization expense, including amortization of assets under capital leases but excluding amortization of intangible assets, was $895 and $977 for the three months ended June 30, 2006 and 2005, respectively, and $1,816 and 1,944 for the six months ended June 30, 2006 and 2005, respectively.

7. Accounts Payable and Accrued Liabilities

Accounts payable and accrued expenses consist of the following:


	June 30,		December 31,
	2006		2005
Accrued compensation	$	4,880	$	5,205
Accounts payable		4,172		3,698
Accrued professional services fees		1,112		387
Other		4,754		3,773

Total	$	14,918	$	13,063

8. Common Stock

Contingently Issuable Shares

During the six months ended June 30, 2006, the Company issued 24,635 shares to former stockholders of White Amber. These shares became issuable, under the terms of the White Amber acquisition agreement, which requires the Company to issue shares to the former stockholders of White Amber in the amount of forfeitures of Company stock options granted to former White Amber employees.

Class A Common Stock Warrants

On March 24, 2006, a warrant to purchase 15,415 shares of Class A common stock was exercised by Comerica in a cashless exercise, resulting in the issuance of 7,260 shares of Class A common stock. On May 23, 2006, warrants to purchase 97,995 shares of Class A common stock were exercised by Comdisco in a cashless exercise, resulting in the issuance of 46,541 shares of Class A common stock.

Reserved Shares of Common Stock

The Company has reserved the following number of shares of Class A common stock as of June 30, 2006 for the exchange of exchangeable shares, awarding of restricted stock awards, release of performance share awards, exercise of stock options, purchases under the employee stock purchase plan and warrants exercises:


Exchange of exchangeable shares and redemption of Class B common stock			3,057,211
Class A Common Stock Plans (excluding the White Amber Stock Plan)			5,017,243
White Amber Stock Plan			137,190
Employee Stock Purchase Plan			500,000
Warrants			523,589

Total			9,235,233

9. Related-Party Transactions

The Company paid approximately $122 and $135 during the three months ended June 30, 2006 and 2005, respectively, and $615 and $168 during the six months ended June 30, 2006 and 2005, respectively, for professional services provided by a law firm in which one of the members of the Company’s Board of Directors is a member of the firm. Amounts payable to this related party were $206 and $600 at June 30, 2006 and December 31, 2005, respectively.

10. Income Taxes

At June 30, 2006, a full valuation allowance has been provided on the Company’s deferred tax assets associated with US and foreign operations, since it was deemed more likely than not that these assets would not be realized. A portion of the valuation allowance pertains to deferred tax assets established in connection with purchase business combinations. To the extent that this portion of the valuation allowance is reversed in the future, goodwill will be adjusted.

The Company provides for income taxes on interim periods based on the estimated effective tax rate for the full year. The Company records cumulative adjustments to tax provisions in the interim period in which a change in the estimated annual effective rate is determined. The effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is reflected in the tax provision for the quarter in which the event occurs and is not considered in the calculation of our annual effective tax rate.

Compliance with income tax regulations requires the Company to make decisions relating to the transfer pricing of revenues and expenses between each of its legal entities that are located in several countries. The Company’s determinations include many decisions based on its knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third-parties. The Company is currently under examination by the Canada Revenue Agency (“CRA”) with respect to its assumptions and historical reporting relating to certain assets and transactions in which the CRA is currently proposing to increase our taxable income by approximately CAD $8,000 in respect of its 1999 tax year. In April 2006, the Company received an additional proposed increase to taxable income of approximately CAD $5,400 in respect of its 2000 and 2001 tax years.

The Company disagrees with the proposed adjustments and intends to contest this matter through applicable CRA and judicial procedures, as appropriate. The Company has provided for the best estimate of the probable tax liability for the 1999 tax year; however, management cannot estimate a probable income tax liability with respect to the 2000 and 2001 tax years. The ultimate outcome of the resolution of these issues may result in tax liabilities which are significantly higher or lower than the reserves established for these tax years. If sufficient evidence becomes available allowing management to estimate a probable income tax liability for the 2000 and 2001 tax years, management will apply available loss carryforwards and carrybacks to the extent available and reserve against any remaining balances due by recording additional income tax expense in the period the liability becomes estimable. An unfavorable resolution could have a material effect on the Company’s results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

11. Commitments and Contingencies

Leases— The Company leases office space, operating leases for computer equipment and for third-party facilities that host our applications. Rental expense under these agreements for the three months ended June 30, 2006 and 2005 was approximately $2,268 and $1,499, respectively, and, $3,990 and $2,938 for the six months ended June 30, 2006 and 2005, respectively.

The minimum non-cancelable scheduled payments under these agreements at June 30, 2006 are as follows (in thousands):


	Operating Leases
					Third
					Party				Total
	Equipment		Facility		Hosting		Other		Operating		Capital
	Leases		Leases		Facilities		Contracts		Leases		Leases			Total
Remainder of 2006	$	2,029	$	1,236	$	624	$	97	$	3,986	$	310		$	4,296
2007		3,030		2,043		916		113		6,102		394			6,496
2008		957		1,318		533		14		2,822		18			2,840
2009		60		1,173		—		—		1,233		—			1,233
2010		—		968		—		—		968		—			968
2011		—		989		—		—		989		—			989
Thereafter		—		1,481		—		—		1,481		—			1,481

Total	$	6,076	$	9,208	$	2,073	$	224	$	17,581	$	722		$	18,303
Less amounts representing interest												(25	)
Present value of minimum lease payments												697
Less current portion												(602	)

Noncurrent portion											$	95

Litigation—The Company is involved in various legal proceedings arising from the normal course of business activities. In the opinion of management, resolution of these proceedings is not expected to have a material adverse impact on the Company’s operating results or financial condition. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect the Company’s future operating results or financial condition in a particular period.

In addition to pending litigation the Company has received the following notices of potential claims. In February of 2005, the holder of patent number 6701313B1 verbally asserted that he believes the Company’s software products infringe upon this patent. Management reviewed this matter and believes that the Company’s software products do not infringe any valid and enforceable claim of this patent. In addition in September of 2005, a competitor wrote the Company to request that the Company enter into licensing discussions or advise them why the Company believes the functionality contained in some of the Company’s product offerings is not covered by their patent number 5999939. In February of 2006, the same competitor informed the Company that it has received an additional patent, patent number 6996561, in related technology. Management has reviewed this matter and believes that the Company’s software products do not infringe any valid and enforceable claim of these patents. The Company believes that these patents would apply, if at all, to an optional feature of the our product offerings used by some of the Company’s customers. To date, we are not aware of any legal claim that has been filed against us regarding these matters, but the Company can give no assurance that claims will not be filed.

12. Net Loss Per Share

Diluted net loss per common share is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive for all periods presented. However, during periods of net income, the earnings per share would be based on outstanding Class A common shares and exchangeable shares, since the latter are participating securities, but have no legal requirement to fund losses. Exchangeable shares are participating securities but are not presented in the table since the Company incurred losses for all reported periods and exchangeable shares have no legal requirement to fund such losses, making them antidilutive for all periods presented. Class B common shares are non-participating in periods of net income or net losses and as a result have no attribution of earnings or losses for the purposes of calculating earnings per share. Antidilutive securities, which consist of exchangeable shares, redeemable convertible preferred stock, stock options, and warrants that are not included in the diluted net loss per share calculation, aggregated on a weighted average share basis to 6,305 and 18,733 for the three months ended June 30, 2006 and 2005, respectively, and 6,473 and 18,764 for the six months ending June 30, 2006 and 2005, respectively. The share counts in 2005 take into account the conversion rights of all preferred stock.

A summary of the loss or earnings applicable to each class of common shares is as follows:


	Three months ended June 30,
	2006								2005
	Class A Common			Class B Common		Total			Class A Common			Class B Common		Total
Allocation of net loss	$	(1,828	)		—	$	(1,828	)	$	(1,286	)		—	$	(1,286	)
Weighted average shares outstanding		19,229			3,755		N/A			89			4,038		N/A
Net loss per share	$	(0.10	)		—		N/A		$	(14.45	)		—		N/A


	Six months ended June 30,
	2006								2005
	Class A Common			Class B Common		Total			Class A Common			Class B Common		Total
Allocation of net loss	$	(2,422	)		—	$	(2,422	)	$	(2,908	)		—	$	(2,908	)
Weighted average shares outstanding		19,013			3,896		N/A			79			4,038		N/A
Net loss per share	$	(0.13	)		—		N/A		$	(36.81	)		—		N/A

13. Segment and Geographic Information

The Company is organized geographically and by line of business. The Company has two operating segments: application and consulting services. The application segment is engaged in the development, marketing, hosting and support of the Company’s software applications. The consulting services segment offers implementation, business process reengineering, change management, and education and training services. The method used for determining what information to report is based on the way that management organizes the operating within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision maker is the chief executive officer. The Company does not allocate or evaluate assets or capital expenditures by operating segments. Consequently, it is not practical to show assets, capital expenditures, depreciation or amortization by operating segment.

The following table presents a summary of operating segments:


	Application		Consulting		Total
Three Months Ended June 30, 2006:
Revenue	$	19,031	$	4,441	$	23,472
Contribution margin		9,392		1,229		10,621
2005:
Revenue	$	15,075	$	4,232	$	19,307
Contribution margin		6,877		1,421		8,298


	Application		Consulting		Total
Six Months Ended June 30, 2006:
Revenue	$	37,247	$	8,389	$	45,636
Contribution margin		18,340		1,856		20,196
2005:
Revenue	$	30,103	$	7,361	$	37,464
Contribution margin		13,910		2,335		16,245

The contribution margins reported reflect only the expenses of the segment and do not represent the actual margins for each operating segment since they do not contain an allocation for selling and marketing, general and administrative, and other corporate expenses incurred in support of the line of business.

Profit Reconciliation:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Contribution margin for operating segments	$	10,621		$	8,298		$	20,196		$	16,245
Sales and marketing		(7,919	)		(5,764	)		(14,272	)		(11,169	)
General and administrative		(5,287	)		(2,567	)		(9,774	)		(4,981	)
Restructuring charges		—			—			—			(804	)
Interest, net		764			(384	)		1,443			(480	)

Loss before provision for income taxes	$	(1,821	)	$	(417	)	$	(2,407	)	$	(1,189	)

Geographic Information:

Revenue attributed to a country or region includes sales to multinational organizations and is based upon the country of location of the contracting party. Revenues as a percentage of total revenues are as follows:


	Three months Ended June 30,						Six months Ended June 30,
	2006			2005			2006			2005
United States		86	%		87	%		86	%		87	%
Canada		7	%		7	%		7	%		7	%
All other		7	%		6	%		7	%		6	%

		100	%		100	%		100	%		100	%

During the three and six months ended June 30, 2006 and 2005, there were no customers that individually represented greater than 10% of the Company’s total revenue. Also as of these dates, no customer represented greater than 10% of the Company’s accounts receivable.

14. Comprehensive loss

Comprehensive loss includes foreign currency translation gains and losses.


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net loss	$	(1,828	)	$	(417	)	$	(2,422	)	$	(1,189	)
Net foreign currency translation gain (loss)		191			(38	)		228			(46	)

Comprehensive loss	$	(1,637	)	$	(455	)	$	(2,194	)	$	(1,235	)

15. Subsequent Events

In July 2006, the Company relocated its corporate headquarters from San Francisco to Dublin, California. All Bay Area staff were working in the San Francisco office up to and including June 30, 2006. During the weekend of July 1, 2006, the Company moved to new premises to Dublin, which were available for employees beginning on July 3, 2006. Therefore, the cease-use date was July 3, 2006, when all Bay Area business activities ceased to be conducted from San Francisco and began to be conducted in Dublin. Consequently, the Company will book a provision for the exit from the San Francisco facilities in July 2006 according to SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities. ” Pursuant to the lease for our San Francisco facilities, cash payments totaling $1,160 remain to be made through July 2009. The associated remaining lease expense is approximately $800.

On August 4, 2006, the Company entered into an employment agreement with Katy Murray, pursuant to which Ms. Murray will assume the position of chief financial officer on or about September 18, 2006.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain information presented below has been restated for the three and six months ended June 30, 2005. See Note 3 to the Notes to our Unaudited Condensed Consolidated Financial Statements. This discussion and analysis gives effect to the restatement.

ThisForm 10-Q including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements identify prospective information, particularly statements referencing our expectations regarding revenue and operating expenses, accounting estimates, the demand and expansion opportunities for our products, our customer base and our competitive position. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “expect,” “forecast,” “predict,” “potential,” “continue,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “is scheduled for,” “targeted,” and variations of such words and similar expressions. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and assumptions made by management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under “Risk Factors” or included elsewhere in this Quarterly Report onForm 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We deliver on demand talent management solutions that enable organizations to assess, acquire and manage their workforces for improved business performance. We were incorporated under the laws of Delaware in May 1999.

We offer two suites of talent management solutions: Taleo Enterprise Edition and Taleo Business Edition. Taleo Enterprise Edition is designed for medium to large-sized, multi-national organizations. Taleo Business Edition is designed for small to medium-sized organizations, stand-alone departments and divisions of larger organizations, and staffing companies. Our revenue is primarily earned through fees charged for accessing these solutions. Our customers generally pay us in advance for their use of our solutions, and we use these cash receipts to fund our operations. These payments for our solutions are generally made on a quarterly or annual basis.

We focus our evaluation of our operating results and financial condition on certain key metrics, as well as certain non-financial aspects of our business. Included in our evaluation are our revenue composition and growth, net income, and our overall liquidity that is primarily comprised of our cash and accounts receivable balances. Non-financial data is also evaluated, including, for example, purchasing trends for software applications across industries and geographies, input from current and prospective customers relating to product functionality and general economic data relating to employment and workforce mix between professional, hourly and contingent workers. We use this aggregated information to assess our historic performance, and also to plan our future strategy.

In July 2006, we relocated our corporate headquarters from San Francisco to Dublin, California. As discussed in Note 15 of the Notes to Condensed Consolidated Financial Statements, we expect to book a provision for the exit from San Francisco facilities in July 2006 according to SFAS 146“Accounting for Costs Associated with Exit or Disposal Activities.” Pursuant to the lease for our San Francisco facilities, cash payments totaling $1,160 remain to be made through July 2009. The associated remaining lease expense is approximately $800.

Sources of Revenue

We derive our revenue from two sources: application revenue and consulting revenue.

Application Revenue

Application revenue is generally comprised of fees from customers accessing our products, including application fees, hosting fees, and maintenance fees. The majority of our application revenue is recognized monthly over the life of the application agreement, based on a stated, fixed-dollar amount. Revenue associated with our Taleo Contingent solution is recognized based on a fixed contract percentage of the dollar amount invoiced for contingent labor through use of the application. The average term of our application agreements for Taleo Enterprise Edition signed with new customers in the three months ended June 30, 2006 and 2005 was approximately three years, although terms for Taleo Enterprise Edition application agreements signed in 2006 and 2005 ranged from one to seven years. Our customer renewal rates have historically been high. The term of application agreements for Taleo Business Edition is typically one year.

Application agreements entered into during the three months ended June 30, 2006 and 2005 are generally non-cancelable, or contain significant penalties for early cancellation, although customers typically have the right to terminate their contracts for cause if we fail to perform our material obligations.

Earlier in our history, we have signed perpetual license agreements for which the application portion of the revenue associated with such agreements was recognized “up-front.” No such agreements were signed in the second quarter and first half of 2006 or in 2005 and we currently do not intend to sign additional application arrangements that result in the up-front recognition for the application license portion of the arrangement.

Consulting Revenue

Consulting revenue consists primarily of fees associated with business process re-engineering, change management, application configuration, and education and training services. Our consulting engagements are typically billed on a time and materials basis, although a number of our engagements are priced on a fixed fee basis. For those contracts structured on a fixed fee basis, we recognize the revenue proportionally to the performance of the services, or the attainment of defined milestones. From time to time, certain of our consulting projects are subcontracted to third parties when our internal resources are insufficient or more effectively deployed elsewhere, although there are no specific functions which require outsourcing. Our customers may also elect to use unrelated third parties for the types of consulting services that we offer. Our typical consulting contract provides for payment within 30 to 60 days of invoice.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of application revenue primarily consists of expenses related to hosting our application and providing support, including depreciation expense associated with computer equipment. We allocate overhead such as rent and occupancy charges, employee benefit costs and depreciation expense to all departments based on employee count. As such, overhead expenses are reflected in each cost of revenue and operating expense category. We currently deliver our solutions from two primary data centers that host the applications for all but one of our customers who has elected to deploy our application on its own infrastructure.

Cost of consulting revenue consists primarily of employee related costs associated with these services and allocated overhead. The cost associated with providing consulting services is significantly higher as a percentage of revenue than for our application revenue, primarily due to labor costs. We also subcontract to third parties for a portion of our consulting business. To the extent that our customer base grows, we intend to continue to invest additional resources in our consulting services. The timing of these additional expenses could affect our cost of revenue, both in dollar amount and as a percentage of revenue, in a particular quarterly or annual period.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses for our sales and marketing staff, including commissions, marketing programs, and allocated overhead. Marketing programs include advertising, events, corporate communications, and other brand building and product marketing expenses. As our business grows, we plan to continue to increase our investment in sales and marketing by adding personnel, building our relationships with partners, expanding our domestic and international selling and marketing activities, building brand awareness, and sponsoring additional marketing events. We expect that our sales and marketing expenses will increase in dollar terms as a result of these investments.

Research and Development

Research and development expenses consist primarily of salaries and related expenses and allocated overhead. Our expenses are net of the tax credits we receive from the government of Quebec. We focus our research and development efforts on increasing the functionality and enhancing the ease of use and quality of our applications, as well as developing new products and enhancing our infrastructure. We expect research and development expenses will increase in dollar terms as we upgrade our existing applications and develop new technologies.

General and Administrative

General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resource, legal, operations and management information systems personnel, professional fees, other corporate expenses, and allocated overhead. We expect that the amount of general and administrative expenses will increase in dollar amount as we add personnel and incur additional professional fees and insurance costs related to the growth of our business and to our operations as a public company. Specifically, we have material weaknesses in internal controls over financial reporting and are currently working to remediate these issues. We believe the costs associated with these remedial measures will be material.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

Revenue Recognition

Our application revenue is recognized when all of the following conditions have been satisfied: (i) there is persuasive evidence of an agreement, (ii) delivery of services or products have been provided to the customer, (iii) the amount of fees payable to us from our customers is fixed or determinable, and (iv) the collection of our fees are probable. The majority of our application revenue is recognized monthly over the life of the application agreement, based on stated, fixed-dollar amount contracts with our customers. We utilize the provisions of Emerging Issues Task Force, or EITF, No. 00-21, “Revenue Arrangements with Multiple Deliverables” to determine whether our arrangements containing multiple deliverables contain more than one unit of accounting. Our revenue associated with our Taleo Contingent solution is recognized based on a fixed, contracted percentage of the dollar amount invoiced for contingent labor through use of the application, and is recorded on a net basis under the provisions of EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” as we are not the primary obligor under the arrangements, the percentage earned by us is typically fixed, and we do not take credit risk. Our management team uses its judgment in assessing the appropriate recognition of application revenue under the provisions of the various authoritative accounting literature.

Consulting revenue is accounted for separately from our application revenue because these consulting services have value to the customer that is independent of our applications. Additionally, we have objective evidence of the fair value of these consulting services. Our consulting engagements are typically billed on a time and materials basis, although a number of our consulting and implementation engagements are priced on a fixed-fee basis. For those contracts structured on a fixed fee basis, we recognize the revenue proportionally to the performance of the services, utilizing milestones if present in the arrangement or hours incurred if milestones are not present. Our management uses its judgment concerning the estimation of the total costs to complete these fixed-fee contracts, considering a number of factors including the complexity of the project, and the experience of the personnel that are performing the services.

Research and Development

We account for software development costs under the provisions of Statement of Financial Accounting Standards, or SFAS, No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Accordingly, we capitalize certain software development costs after technological feasibility of the product has been established. Such costs have been immaterial to date, and accordingly, no costs were capitalized during the three and six months ended June 30, 2006 and 2005.

Stock-based Compensation

We adopted SFAS 123R “Share-Based Payment” effective January 1, 2006. Under the provisions of SFAS 123R, we recognize the fair value of stock-based compensation in financial statements over the requisite service period of the individual grants, which generally equals a four year vesting period. We have elected the modified prospective transition method for adopting SFAS 123R, under which the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards not yet vested at the date of adoption is recognized in our financial statements in the periods after the date of adoption using the same value determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,”as disclosed in previous filings. We recognize compensation expense for the stock option awards granted subsequent to December 31, 2005 on a straight line basis over the requisite service period. Refer to Note 4, Stock-Based Compensation, in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more discussion. There are a variety of estimates used in determining the fair value of such awards. Changes in these estimates could result in changes to our compensation charges.

Goodwill, Other Intangible Assets and Long-Lived Assets

In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” we conduct a test for the impairment of goodwill on at least an annual basis. We adopted October 1 as the date of the annual impairment test and, therefore, we performed our first annual impairment test on October 1, 2004. The impairment test compares the fair value of reporting units to their carrying amount, including goodwill, to assess whether impairment is present. Based on our most recent assessment test, we do not have impairment as of October 1, 2005. We will assess the impairment of goodwill annually on October 1, or sooner if other indicators of impairment arise.

SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires the review of the carrying value of long-lived assets when impairment indicators arise. The review of these long-lived assets is based on factors including estimates of the future operating cash flows of our business. These future estimates are based on historical results, adjusted to reflect our best estimates of future market and operating conditions, and are continuously reviewed. Actual results may vary materially from our estimates, and accordingly may cause a full impairment of our long-lived assets.

Income Taxes

We are subject to income taxes in both the United States and foreign jurisdictions and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Our deferred tax assets consist primarily of net operating loss carry forwards. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is recognized if it is more likely than not that some portion of the deferred tax assets will not be recognized. We provided a full valuation allowance against our net deferred tax assets at June 30, 2006 and December 31, 2005. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the valuation allowance against our deferred tax assets would increase income in the period such determination was made except for $2.4 million associated with the acquisition of White Amber and Recruitforce which will be recorded as a reduction to goodwill. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business.

Compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between each of our legal entities that are located in several countries. Our determinations include many decisions based on our knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third-parties. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. The Company is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves for probable exposures. Such estimates are subject to change.

Results of Operations

The following table sets forth certain consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated. Period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication of future performance.


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Condensed Consolidated Statement of Operations Data:
Revenue:
Application		81	%		78	%		82	%		80	%
Consulting		19			22			18			20

Total revenue		100			100			100			100
Cost of revenue (as a percent of related revenue):
Application		25			27			25			27
Consulting		72			66			78			68

Total cost of revenue		34			35			35			35

Gross profit		66			65			65			65
Operating expenses:
Sales and marketing		34			30			31			30
Research and development		21			22			21			22
General and administrative		22			13			21			13
Restructuring costs and other charges		—			—			—			2

Total operating expenses		77			65			73			67
Operating income (loss)		(11	)		—			(8	)		(2	)
Other income (expense):
Interest income		3			1			3			—
Interest expense		—			(3	)		—			(1	)

Total other income (expense)		3			(2	)		3			(1	)

Loss before provision for income taxes		(8	)		(2	)		(5	)		(3	)
Provision for income taxes		—			—			—			—

Net loss		(8	)%		(2	)%		(5	)%		(3	)%

Comparison of the Three and Six Months Ended June 30, 2006 and 2005

Amounts in tables below are shown in thousands.

Revenue


	Three months ended June 30,
	2006		2005		$ change		% change
Application revenue	$	19,031	$	15,075	$	3,956		26	%
Consulting revenue		4,441		4,232		209		5	%

Total revenue	$	23,472	$	19,307	$	4,165		22	%

Commentary for three months

The increase in application revenue was attributable to increased sales of our applications, including sales to new customers and additional sales to our existing customers, and renewal rates consistent with our historically high rate of existing customer renewals. The increase in consulting revenue was attributable to higher revenue from education services of $0.2 million.


	Six months ended June 30,
	2006		2005		$ change		% change
Application revenue	$	37,247	$	30,103	$	7,144		24	%
Consulting revenue		8,389		7,361		1,028		14	%

Total revenue	$	45,636	$	37,464	$	8,172		22	%

Commentary for six months

Cost of Revenue


	Three months ended June 30,
	2006		2005		$ change		% change
Application	$	4,821	$	4,027	$	794		20	%
Consulting		3,212		2,811		401		14	%

Total cost of revenue	$	8,033	$	6,838	$	1,195		17	%

Commentary for three months


	Six months ended June 30,
	2006		2005		$ change		% change
Application	$	9,307	$	8,076	$	1,231		15	%
Consulting		6,533		5,026		1,507		30	%

Total cost of revenue	$	15,840	$	13,102	$	2,738		21	%

Commentary for six months

Cost of application revenue increased to support our growth in application revenue. The increase was primarily as a result of higher personnel and related costs (including overheads) of $0.5 million and an increase in hosting related costs of $0.7 million. Cost of consulting revenue increased primarily as a result of an increase of $1.1 million in employee related costs, including $0.1 million for the impact of adopting SFAS 123R and $0.4 million for travel expenses. Most of the variance is attributable to the three months ended March 31 whereby the cost of consulting revenue increased for the first quarter 2006 primarily as a result of a $0.6 million increase for employee-related costs for our consulting group resulting from an increase in headcount, a reduction of $0.1 million in consulting costs cross charged to product development, and an increase of $0.4 million for travel expenses, all as compared to the first quarter of 2005.

Gross Profit and Gross Profit Percentage


	Three months ended June 30,
	2006		2005		$ change			% change
*Gross profit*
Applications	$	14,210	$	11,048	$	3,162			29	%
Consulting		1,229		1,421		(192	)		(14	%)

Total gross profit	$	15,439	$	12,469	$	2,970			24	%


	Three months ended June 30,
	2006			2005			change
*Gross profit percentage*
Applications		75	%		73	%		2	%
Consulting		28	%		34	%		(6	%)
Total gross profit percentage		66	%		65	%		1	%

Commentary for three months

Gross profit on applications increased by $3.2 million, with $2.9 million of the increase as a result of higher application revenue and $0.3 million of the increase is a result of higher gross profit percentage on application revenue. The higher gross profit percentage on application revenue was driven by increased scale efficiencies in the use of our production infrastructure. Over the next few quarters, we expect gross profit percentage on applications to decline temporarily as we build out additional capacity in our production data centers in advance of anticipated growth in demand.

Gross profit on consulting decreased by $0.2 million as a result of higher employee related expense which increased cost of revenue by 14% offset by only a 5% revenue increase.

Total gross profit percentage increased by 1% as a result of a higher mix of higher margin application revenue compared to the same period in the prior year.


	Six months ended June 30,
	2006		2005		$ change			% change
*Gross profit*
Applications	$	27,940	$	22,027	$	5,913			27	%
Consulting		1,856		2,335		(479	)		(21	%)

Total gross profit	$	29,796	$	24,362	$	5,434			22	%


	Six months ended June 30,
	2006			2005			change
*Gross profit percentage*
Applications		75	%		73	%		2	%
Consulting		22	%		32	%		(10	%)
Total gross profit percentage		65	%		65	%		—

Commentary for six months

Gross profit on applications increased by $5.9 million, with $5.2 million of the increase as a result of higher application revenue and $0.7 million of the increase as a result of higher gross profit percentage on application revenue. The higher gross profit percentage on application revenue was driven by increased scale efficiencies in the use of our production infrastructure. Over the next few quarters, we expect gross profit percentage on applications to decline temporarily as we build out additional capacity in our production data centers in advance of anticipated growth in demand.

Gross profit on consulting decreased by $0.5 million as a result of higher employee related expense which increased cost of revenue by 30% offset by only a 14% revenue increase.

Total gross profit percentage was unchanged from the same period in the prior year as higher gross margins in applications were offset by lower gross margins in consulting.

Operating expenses


	Three months ended June 30,
	2006		2005		$ change		% change
Sales and marketing	$	7,919	$	5,764	$	2,155		37	%
Research and development		4,818		4,171		647		16	%
General and administrative		5,287		2,567		2,720		106	%

Total operating expenses	$	18,024	$	12,502	$	5,522		44	%

Commentary for three months

Sales and marketing expenses for the second quarter of 2006 increased by 37% over the same quarter in the prior year in order to support our growth. Marketing programs increased by $1.2 million and travel expenses increased $0.5 million. Personnel related costs (including overheads) increased $0.5 million, including $0.2 million for the impact of adopting SFAS 123R.

Research and development expenses for the second quarter of 2006 increased by 16% over the same quarter in the prior year in order to enhance our existing products and develop new products to sell into our installed base. The increase consisted primarily of a $0.5 million increase in employee related costs including overhead and $0.2 million for the impact of adopting SFAS 123R and $0.1 million for travel expenses. The increase in expenses was also affected by the U.S. dollar weakening against the Canadian dollar by approximately 9.7% during 2006 as compared to the prior year, since most of our research and development employees are located in Canada.

General and administrative expenses for the second quarter of 2006 grew by 106% over the same quarter in the prior year as a result of costs associated with building the information and compliance infrastructure of our company. Employee-related costs increased $1.9 million, including an increase of $0.9 million in stock-based compensation in the second quarter of 2006 due to adopting SFAS 123R, whereas there was no such expense in 2005. In addition, we experienced an increase in insurance premiums and accounting, legal and consulting fees associated with operating as a public company of $0.8 million, and an increase in travel expense of $0.1 million.

The total impact of adopting SFAS 123R as a percent of revenue was 5.9%, or $0.07 per share, for the three months ended June 30, 2006.


	Six months ended June 30,
	2006		2005		$ change			% change
Sales and marketing	$	14,272	$	11,169	$	3,103			28	%
Research and development		9,600		8,117		1,483			18	%
General and administrative		9,774		4,981		4,793			96	%
Restructuring costs and other charges		—		804		(804	)		(100	%)

Total operating expenses	$	33,646	$	25,071	$	8,575			34	%

Commentary for six months

Sales and marketing expenses for the six months ended June 30, 2006 increased by 28% over the same period in the prior year in order to support our growth. Marketing programs increased by $1.6 million and travel expenses increased $0.5 million. Personnel related costs increased $1.0 million, including $0.5 million for the impact of adopting SFAS 123R.

Research and development expenses for the six months ended June 30, 2006 increased by 18% over the same period in the prior year in order to enhance our existing products and develop new products to sell into our installed base. The increase consisted primarily of a $1.3 million increase in employee related costs, including $0.3 million for the impact of SFAS 123R and $0.1 million in travel expenses. The increase in expenses was also affected by the U.S. dollar weakening against the Canadian dollar during the first half of 2006 as compared to the same period in the prior year, since most of our research and development employees are located in Canada.

General and administrative expenses for the six months ended June 30, 2006 grew by 96% over the same quarter in the prior year as a result of costs associated with building the information and compliance structure of our company. Employee-related costs increased $3.1 million, including $1.3 million in stock-based compensation charges under SFAS 123R, whereas there was no such expense in 2005. In addition, we experienced an increase in insurance premiums and accounting, legal and consulting fees associated with operating as a public company of $1.4 million, and an increase in travel expense of $0.3 million.

Restructuring costs of $0.8 million were incurred in the six months ending June 30, 2005. There were no restructuring activities during the first half of 2006. All of these amounts were paid in 2005. We do not currently anticipate the need to incur future restructuring costs.

The total impact of adopting SFAS 123R as a percent of revenue was 4.8%, or $0.12 per share, for the six months ended June 30, 2006.

As discussed in Note 15 of the Notes to Condensed Consolidated Financial Statements, we expect to book a provision in July 2006 for the exit from our San Francisco facilities. Pursuant to the lease for our San Francisco facilities, cash payments totaling $1,160 remain to be made through July 2009. The associated remaining lease expense is approximately $800.

Other income (expense)


	Three months ended June 30,
	2006			2005			$ change		% change
Interest income	$	777		$	117		$	660		564	%
Interest expense		(13	)		(501	)		488		(97	%)

Total other income (expense)	$	764		$	(384	)	$	1,148		(299	%)


	Six months ended June 30,
	2006			2005			$ change		% change
Interest income	$	1,486		$	157		$	1,329		846	%
Interest expense		(43	)		(637	)		594		(93	%)

Total other income (expense)	$	1,443		$	(480	)	$	1,923		(401	%)

Commentary for three and six months

Interest income and interest expense

Interest income –The increase in interest income is attributable to higher cash balances during 2006 compared to the same periods in the prior year.

Interest expense –The reduction in interest expense is attributable to lower debt balances during 2006 compared to the same quarter in the prior year. In the second quarter of 2006, long term debt consisted solely of capital lease obligations, whereas in the prior year, we had approximately $19.5 million of debt outstanding with Goldman Sachs Specialty Lending Group at June 30, 2005.

Provision for Income Taxes


	Three months ended June 30,						Six months ended June 30,
	2006		2005		$ change		2006		2005		$change
Provision for income taxes	$	7	$	—	$	7	$	15	$	—	$	15

The income tax expense was generated from non-US operations. At June 30, 2006, a full valuation allowance has been provided on our deferred tax assets associated with both our US and foreign operations, since it was deemed more likely than not these assets would not be realized. If, based on the operating results of 2006 and our review of the realizability of our deferred tax assets, we were to conclude that some or all of our deferred tax asset valuation allowance was not required, this would likely have a material impact on our financial results in the form of reduced tax expense. However, there can be no assurance that we will achieve cumulative profitability during 2006 or that any reduction of our deferred tax asset reserves will actually occur.

Based on the Company’s evaluation of current tax positions, the Company believes it has appropriately accounted for probable exposures.

We are currently under examination by the Canada Revenue Agency (“CRA”) with respect to our assumptions and historical reporting relating to certain assets and transactions the CRA is currently proposing a reassessment of approximately CAD $8.0 million in respect of our 1999 tax year. In April 2006, we received an additional proposed reassessment from CRA of approximately CAD $5.4 million in respect of our 2000 and 2001 tax years.

The Company disagrees with the proposed adjustments and intends to continue contesting this matter through applicable CRA and judicial procedures, as appropriate. The Company has provided for the best estimate of the probable tax liability for the 1999 tax year; however, management cannot estimate a probable income tax liability with respect to the 2000 and 2001 tax years. The ultimate outcome of the resolution of these issues may result in tax liabilities which are significantly higher or lower than the reserves established for these tax years. If sufficient evidence becomes available allowing management to estimate a probable income tax liability for the 2000 and 2001 tax years, management will apply available loss carryforwards and carrybacks to the extent available and reserve against any remaining balances due by recording additional income tax expense in the period the liability becomes estimable. An unfavorable resolution could have a material effect on the Company’s results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

Liquidity and Capital Resources

At June 30, 2006, our principal sources of liquidity was a net working capital balance of $54.7 million, including cash and cash equivalents totaling $63.1 million. In addition, we have $1.0 million in restricted cash that is security for our obligation to the former shareholders of Recruitforce.com, Inc.


	Six months ended June 30,
	2006			2005			$ change			% change
Cash provided by operating activities	$	8,122		$	208		$	7,914			3,805	%
Cash used in investing activities		(5,054	)		(14,665	)		9,611			(66	%)
Cash provided by financing activities		566			14,559			(13,993	)		(96	%)

Net cash provided by operating activities was $8.1 million for the six months ended June 30, 2006 compared to net cash provided by operating activities of $0.2 million for the six months ended June 30, 2005. Cash provided by operating activities has historically been affected by revenues, changes in working capital accounts, particularly increases in accounts receivable, deferred revenue, and customer deposits, add-backs of non-cash expense items such as depreciation and amortization, and the expense associated with stock-based awards.

Net cash used in investing activities was $5.1 million for the six months ended June 30, 2006 compared to net cash used by investing activities of $14.7 million for the six months ended June 30, 2005. This decrease between periods was the result of a $10.2 million decrease in investments in restricted cash, a $3.3 million decrease in cash used associated with the acquisition of Recruitforce in 2005, and a $3.9 million increase in the acquisition of fixed assets.

Net cash provided by financing activities was $0.6 million for the six months ended June 30, 2006, compared to net cash provided by financing activities of $14.6 million for the six months ended June 30, 2005. This decrease was primarily a result of the fact that the company secured a net $15.1 million increase in long term debt in 2005, whereas there was no similar transaction in 2006.

We believe our existing cash and cash equivalents and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. However, given our history of losses, we may be required to raise additional equity or debt financing if we are not able to achieve and sustain profitability. Additionally, our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new applications and enhancements to existing applications, and the continuing market acceptance of our applications. To the extent that existing cash and cash equivalents, and cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Contractual Obligations

Our principal commitments consist of obligations under leases for office space, operating leases for computer equipment and for third-party facilities that host our applications. Our commitments to settle contractual obligations in cash under operating leases and other purchase obligations are detailed in Note 11 of our unaudited condensed consolidated financial statements.


	Operating Leases
					Third
					Party				Total
	Equipment		Facility		Hosting		Other		Operating		Capital
	Leases		Leases		Facilities		Contracts		Leases		Leases		Total
Remainder of 2006	$	2,029	$	1,236	$	624	$	97	$	3,986	$	310	$	4,296
2007		3,030		2,043		916		113		6,102		394		6,496
2008		957		1,318		533		14		2,822		18		2,840
2009		60		1,173		—		—		1,233		—		1,233
2010		—		968		—		—		968		—		968
2011		—		989		—		—		989		—		989
Thereafter		—		1,481		—		—		1,481		—		1,481

Total	$	6,076	$	9,208	$	2,073	$	224	$	17,581	$	722	$	18,303

Legal expenditures could also affect our liquidity. We are regularly subject to legal proceedings and claims that arise in the ordinary course of business. See Note 11 of our unaudited condensed consolidated financial statements. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, financial condition, operating results and cash flows.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

Our revenue is generally denominated in the local currency of the contracting party. The majority of our revenue is denominated in U.S. dollars. In both the three and six months ended June 30, 2006, 10% of our revenue, was denominated in Canadian dollars and currencies other than the U.S. or Canadian dollar, respectively. Our expenses are generally denominated in the currencies in which our operations are located. Our expenses are incurred primarily in the United States and Canada, including the expenses associated with our research and development operations that are maintained in Canada, with a small portion of expenses incurred outside of North America where our other international sales offices are located. We maintained $0.2 million of debt related to capital leases denominated in Canadian dollars as of June 30, 2006. Our results of operations and cash flows are therefore subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Canadian dollar, and to a lesser extent, to the Australian dollar, British pound, euro, Singapore dollar and New Zealand dollar, in which certain of our customer contracts are denominated. For the three months ended June 30, 2006, the U.S. dollar weakened by approximately 9.7% against the Canadian dollar on an average basis compared to the same period in the prior year. This change in value decreased our earnings by $0.5 million which was comprised of increased revenue of $0.1 million, offset by $0.2 million of additional cost of sales, $0.4 million of incremental operating expenses. For the six months ended June 30, 2006, the Canadian dollar increased in value by approximately 8% over the U.S. dollar on an average basis compared to the same period in the prior year. This change in value decreased our earnings by $0.8 million which was comprised of increased revenue of $0.2 million, offset by $0.3 million of additional cost of sales and $0.7 million of increased expenses. If the U.S. dollar continues to weaken compared to the Canadian dollar, our operating results may suffer. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any derivative financial instruments for trading or speculative purposes. In the future, we may consider entering into hedging transactions to help mitigate our foreign currency exchange risk.

Interest Rate Sensitivity

We had cash and cash equivalents of $63.1 million at June 30, 2006. This compares to $59.3 million at December 31, 2005. These amounts were held primarily in cash or money market funds. Cash and cash equivalents are held for working capital purposes, and restricted cash amounts are held as security against various of our debt obligations. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of the chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(f) of the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the chief executive officer and chief financial officer have concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were ineffective as of June 30, 2006 to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the audit of the consolidated financial statements for the year ended December 31, 2005, we identified a failure to properly account for the accrual of dividends on our Series C and D preferred stock in the amount of $1.6 million resulting from a deficiency in the operating effectiveness of controls. Our controls over the accuracy of the original calculation did not detect that such calculation was not in accordance with the preferred stock terms. The financial statement accounts affected were accrued dividends and net loss attributable to common stockholders. The misstatement caused by the deficiency was deemed material to the consolidated financial statements and required financial statement restatement of historical periods. In addition, we also identified a failure to properly record fixed assets and related depreciation expense of approximately $27,000, ($78,000) and ($71,000) for the years ended December 31, 2005, 2004 and 2003, respectively, resulting from a deficiency in the operating effectiveness of controls. Our controls over fixed asset activity did not detect the errors. The financial statement accounts affected were fixed assets, accumulated

depreciation and depreciation expense. The misstatements, although not material to the historical periods, were considered material to the fourth quarter of 2005 and as such required restatement of historical periods.

We also identified failures to appropriately apply GAAP to certain aspects of our financial reporting resulting from the lack of a properly designed financial reporting process and a lack of sufficient amount of technical accounting expertise. Certain of such deficiencies were also deemed to be material weaknesses.

Changes in Internal Control over Financial Reporting

We are in the process of reviewing and redesigning internal controls over financial reporting related to closing procedures and processes. Specifically, we have undertaken the following actions during 2005 and the first six months of 2006:

	•		purchased a new general accounting system which is currently being implemented;

	•		purchased new systems for accounting for revenue and deferred revenue, and for accounting for stock options, both of which went into production during the first six months of 2006;

	•		continued the process of transferring certain of our accounting function to our principal executive offices located in California;

	•		hired personnel with more experience in financial reporting and accounting processes than the incumbent group, and continued to seek additional technical accounting resources;

	•		continued the implementation and documentation for new policies around closing processes;

	•		improved detective controls with greater financial analysis around operational metrics that are key to our performance;

	•		begun the process of benchmarking our internal financial operations and implementing best practices in various business processes.

We believe these steps, when completed and fully implemented, will constitute all of the material steps required to address our material weaknesses. We expect to continue to enhance our internal controls over financial reporting by adding resources in key functional areas and to take steps to bring our documentation, segregation of duties, systems security and transactional control procedures to a level required under Auditing Standard No. 2. We have discussed and disclosed these matters to the audit committee of our board of directors and will continue to do so. We currently expect to complete the majority of these remedial steps by the third quarter of 2006. However, we cannot be certain that the completion of these steps will remediate all of the known weaknesses. We believe the costs associated with these remedial measures will be material, including costs associated with the purchases of new accounting systems and for third party consulting related to improvements over our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

The steps addressed above constitute changes in our internal controls over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in claims, legal proceedings and potential claims that arise in the ordinary course of business. For example, holders of certain patents have asserted that our technology infringes patented technology (see Item 1A. -”Risk Factors”). Based upon currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on our financial position or results of operations. However, litigation is subject to inherent uncertainties and our view of these matters may change in the future. If we should be subject to an unfavorable ruling by a court, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

ITEM 1A. RISK FACTORS

Because of the following factors, as well as other variables affecting our operating results and financial condition, past performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

We have a history of losses, and we cannot be certain that we will achieve or sustain profitability.

We have incurred annual losses since our inception. As of June 30, 2006 we had incurred aggregate net losses of $42.3 million, which is our accumulated deficit of $56.1 million less $13.8 million of dividends and issuance costs on preferred stock. We may incur losses in the future as a result of expenses associated with the continued development and expansion of our business, expensing of stock options, marketing efforts, audit-related professional services and other requirements of being a public company, such as compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Our expenses include those related to sales and marketing, general and administrative, research and development and others related to the development, marketing and sale of products and services that may not generate revenue until later periods, if at all. As we implement initiatives to grow our business, which include, among other things, acquisitions, plans for international expansion and new product development, any failure to increase revenue or manage our cost structure could prevent us from completing these initiatives and achieving or sustaining profitability. As a result, our business could be harmed and our stock price could decline. We cannot be certain that we will be able to achieve or sustain profitability on a quarterly or annual basis.

If our existing customers do not renew their software subscriptions and buy additional solutions from us, our business will suffer.

We expect to continue to derive a significant portion of our revenue from renewal of software subscriptions and, to a lesser extent, service and maintenance fees from our existing customers. As a result, maintaining the renewal rate of our existing software subscriptions is critical to our future success. Factors that may affect the renewal rate for our solutions include:

	•		the price, performance and functionality of our solutions

	•		the availability, price, performance and functionality of competing products and services

	•		the effectiveness of our maintenance and support services

	•		our ability to develop complementary products and services and

	•		the stability, performance and security of our hosting infrastructure and hosting services.

Most of our existing enterprise customers entered into software subscription agreements that expire between two and seven years from the initial contract date. The small to medium-sized customers we obtained through our acquisition of Recruitforce.com, Inc. generally enter into annual contracts. Our customers have no obligation to renew their subscriptions for our solutions after the expiration of the initial term of their agreements. In addition, our customers may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these customers, or may request that we license our software to them on a perpetual basis, which may, after we have ratably recognized the revenue for the perpetual license over the relevant term in accordance with our revenue recognition policies, reduce recurring revenue from these customers. Under certain circumstances, our customers may cancel their subscriptions for our solutions prior to the expiration of the term. Our future success also depends in part on our ability to sell new products and services to our existing customers. If our customers terminate their agreements, fail to renew their agreements,

renew their agreements upon less favorable terms, or fail to buy new products and services from us, our revenue may decline or our future revenue may be constrained.

Because we recognize revenue from software subscriptions over the term of the agreement, a significant downturn in our business may not be reflected immediately in our operating results, which increases the difficulty of evaluating our future financial position.

We generally recognize revenue from software subscription agreements ratably over the terms of these agreements, which are typically between two and seven years for our Taleo Enterprise Edition customers and one year for our Taleo Business Edition customers. As a result, a substantial portion of our software subscription revenue in each quarter is generated from software subscription agreements entered into during previous periods. Consequently, a decline in new software subscription agreements in any one quarter may not affect our results of operations in that quarter but will reduce our revenue in future quarters. Additionally, the timing of renewals or non-renewals of a software subscription agreement during any one quarter may also affect our financial performance in that particular quarter. For example, because we recognize revenue ratably, the non-renewal of a software subscription agreement late in a quarter will have very little impact on revenue for that quarter, but will reduce our revenue in future quarters. By contrast, a non-renewal occurring early in a quarter may have a significant negative impact on revenue for that quarter and we may not be able to offset a decline in revenue due to such non-renewals with revenue from new software subscription agreements entered into in the same quarter. In addition, we may be unable to adjust our costs in response to reduced revenue. Accordingly, the effect of significant declines in sales and market acceptance of our solutions may not be reflected in our short-term results of operations, which would make these reported results less indicative of our future financial results.

If our efforts to attract new customers are not successful, our revenue growth will be adversely affected.

In order to grow our business, we must continually add new customers. Our ability to attract new customers will depend in large part on the success of our sales and marketing efforts. However, our prospective customers may not be familiar with our solutions, or may have traditionally used other products and services for their talent management requirements. In addition, our prospective customers may develop their own solutions to address their talent management requirements, purchase competitive product offerings, or engage third-party providers of outsourced talent management services that do not use our solution to provide their services.

Additionally, some new customers may request that we license our software to them on a perpetual basis or that we allow them the contractual right to convert from a term license to a perpetual license during the contract term, which may, after we have ratably recognized the revenue for the perpetual license over the relevant term in accordance with our revenue recognition policies, reduce recurring revenue from these customers. To date, we have completed a limited number of agreements with such terms. If our prospective customers do not perceive our products and services to be of sufficiently high value and quality, we may not be able to attract new customers.

Failure to implement the appropriate controls and procedures to manage our growth could harm our ability to expand our business, our operating results, and our overall financial condition.

We experienced a period of rapid growth in our operations, which has placed, and will continue to place, a significant strain on our management, administrative, operational, technical and financial infrastructure. For example, in 2005 we completed an acquisition which added a new product line, became an SEC reporting company, completed our initial public offering and increased revenues from $58.7 million to $78.4 million from 2004 to 2005. To manage our growth, we will need to continue to improve our operational, financial, and management processes and controls and our reporting systems and procedures. While the Company is focused on the need for improved processes and controls, to date the Company has had a difficult time hiring sufficient personnel and implementing appropriate procedures to remediate existing deficiencies. For example, the Company had material weaknesses in each of 2005 and 2004.

In addition, we are in the process of moving many of our administrative functions, including much of our finance department, from Quebec City to Dublin, California to support our continued growth and integration with management. This move is disruptive to our core business and has increased strain on our management and employees. These efforts may require us to make significant capital expenditures or incur significant expenses, and divert the attention of our personnel from our core business operations, any of which may adversely affect our financial performance. If we fail to manage our growth successfully, our business, operating results, and overall financial condition will be adversely affected.

We currently have deficiencies in our internal control over financial reporting and have restated our previously issued financial results. If we are unable to improve and maintain the quality of our system of internal control over financial reporting, any deficiencies could materially and adversely affect our ability to provide timely and accurate financial information about our company.

In connection with the December 31, 2005 year end audit of our financial statements, management and our independent registered public accounting firm identified deficiencies in our internal control over financial reporting. These were matters that in our judgment could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in our financial statements. Under Auditing Standard No. 2 issued by the Public Company Accounting Oversight Board (United States) these deficiencies were deemed to be material weaknesses. In particular, we discovered errors in respect to depreciation of fixed assets, and accrual of dividends on preferred stock which required adjustment. As a result, the Company has restated its consolidated financial statements. We also determined a failure to appropriately apply GAAP to certain aspects of our financial reporting resulting from the lack of a properly designed financial reporting process and a lack of sufficient technical accounting expertise. Certain of such deficiencies were also deemed to be material weaknesses. We have begun to remediate all known material weaknesses and significant deficiencies; however, we cannot be certain that the measures we have taken will ensure that we will maintain effective controls over our financial processes and reporting in the future. Any failure to maintain effective controls or to adequately implement required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information.

We are in the process of reviewing and redesigning our internal controls over financial reporting related to our closing procedures and processes, our calculations of our reported numbers, including depreciation expense, fixed assets, and the need to strengthen our technical accounting expertise. Specifically, we have undertaken the following actions:

	•		purchased a new general accounting system which is currently being implemented;

	•		purchased new systems for accounting for revenue and deferred revenue, and for accounting for stock options, both of which went into production during the first six months of 2006;

	•		continued the process of transferring certain of our accounting function to our principal executive offices located in California;

	•		hired personnel with more experience in financial reporting and accounting processes than the incumbent group, and continued to seek additional technical accounting resources;

	•		continued the implementation and documentation for new policies around closing processes;

	•		improved detective controls with greater financial analysis around operational metrics that are key to our perfomance;

	•		begun the process of benchmarking our internal financial operations and implementing best practices in various business processes.

We believe these steps, when completed and fully implemented, will address our material weaknesses and significant deficiencies. We expect to continue to enhance our internal controls over financial reporting by adding resources in key functional areas and to take steps to increase our level of documentation, enhance segregation of duties, and bring systems security and transactional control procedures to a level required under Auditing Standard No. 2. We have discussed and disclosed these matters to the audit committee of our board of directors and will continue to do so. We currently expect to complete these remedial steps by end of the third quarter of 2006. We believe the costs associated with these remedial measures will be material. However, we cannot be certain that the completion of these steps will remediate all of the known weaknesses. We believe the costs associated with these remedial measures will be material, including costs associated with the purchases of new accounting systems and for third party consulting related to improvements over our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

As discussed above, we have restated our financial statements due to the material weaknesses referenced above relating to errors in depreciation of fixed assets and accrual of dividends on preferred stock. In 2004, we restated our consolidated financial statements for 2003. Execution of these restatements has created a significant strain on our internal resources, and has increased our costs and caused management distraction. As a result of these restatements, we filed for extensions for the filing of our 2005 Annual Report on Form10-K and our March 2006 Quarterly Report on Form 10-Q. We believe that any future restatements would likely cause additional strain on our internal resources. In addition, the fact we have had restatements in 2004 and 2005 may cause investors to lose confidence in the accuracy and completeness of our financial reports, which could have an adverse impact on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2006, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal control. If we are unable to assert that our internal controls over financial reporting is effective as of December 31, 2006, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price. In any event, third party professional services and internal management resources required to complete the process for compliance with Section 404 of the Sarbanes – Oxley Act will be significant and remediation, including substantial changes to or new implementation of systems and processes, may be required. We not be able to accurately anticipate and budget for these expenditures and, as a result, our financial performance may be adversely affected.

Our financial performance may be difficult to forecast as a result of our historical focus on large customers and the long sales cycle associated with our solutions.

The majority of our revenue is currently derived from organizations with complex talent management requirements. Accordingly, in a particular quarter the majority of our bookings from new customers are from large sales made to a relatively small number of customers. As such, our failure to close a sale in a particular quarter will impede desired revenue growth unless and until the sale closes. In addition, our sales cycles for our enterprise clients are generally between six months and one year, and in some cases can be longer. As a result, substantial time and cost may be spent attempting to secure a sale that may not be successful. The period between our first sales call on a prospective customer and a contract signing is relatively long due to several factors such as:

	•		the complex nature of our solutions,

	•		the need to educate potential customers about the uses and benefits of our solutions,

	•		the relatively long duration of our contracts,

	•		the discretionary nature of our customers’ purchase and budget cycles,

	•		the competitive evaluation of our solutions,

	•		fluctuations in the staffing management requirements of our prospective customers,

	•		announcements or planned introductions of new products by us or our competitors, and

	•		the lengthy purchasing approval processes of our prospective customers.

If our sales cycle unexpectedly lengthens, our ability to forecast accurately the timing of sales in any given period will be adversely affected and we may not meet our forecasts for that period.

If we fail to develop or acquire new products or enhance our existing products to meet the needs of our existing and future customers, our sales will decline.

To keep pace with technological developments, we must satisfy increasingly sophisticated customer requirements and achieve market acceptance, we must enhance and improve existing products and continue to introduce new products and services. Any new products we develop or acquire may not be introduced in a timely manner and may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to develop or acquire new products that appeal to our target customer base or enhance our existing products or if we fail to price our products to meet market demand, our business and operating results will be adversely affected. To date, we have focused our business on providing solutions for the talent management market, but we may seek to expand into other markets in the future. Our efforts to expand our solutions beyond the talent management market may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, which may harm our existing business.

We expect to incur significant expense to develop software products and to integrate acquired software products into existing platforms to maintain our competitive position. These efforts may not result in commercially viable solutions. If we do not receive significant revenue from these investments, our business will be adversely affected. Additionally, we intend to maintain a single version of each release of our software applications that is configurable to meet the needs of our customers. Customers may require customized solutions or features and functions that we do not yet offer and do not intend to offer in future releases, which may cause them to choose a competing solution.

Acquisitions and investments present many risks, and we may not realize the anticipated financial and strategic goals for any such transactions, which would harm our business, operating results and overall financial condition. In addition, we have limited experience in acquiring and integrating other companies.

We have made, and may continue to make, acquisitions or investments in companies, products, services, and technologies to expand our product offerings, customer base and business. We have limited experience in executing acquisitions. In October 2003, we acquired White Amber, a privately-held company that provided a talent management solution for processing temporary workers, which we introduced as our Taleo Contingent solution, and in March 2005, we acquired Recruitforce.com to enable us to extend our offerings to small and medium-sized organizations. Such acquisitions and investments involve a number of risks, including the following:

	•	learning that we are unable to achieve the anticipated benefits from our acquisitions,

• discovering that we may have difficulty integrating the accounting systems, operations, and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business,

• our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations,

• we may have difficulty incorporating the acquired technologies or products, including our Taleo Contingent solution and the software acquired in the Recruitforce acquisition, into our existing code base,

	•	there may be customer confusion regarding the positioning of acquired technologies or products,

	•	we may have difficulty maintaining uniform standards, controls, procedures and policies across locations,

	•	we may have difficulty retaining the acquired business’ customers, and

	•	we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

For example, with respect to our acquisition of White Amber, we expended significant management time in attending to integration activities relating to employee relations and benefits matters, integration of product pricing, and the consolidation of other infrastructure to common systems. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

The consideration paid in connection with an investment or acquisition also affects our financial results. If we should proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. To the extent that we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, material one-time write-offs, or purchase accounting adjustments and restructuring charges. They may also result in recording goodwill and other intangible assets in our financial statements which may be subject to future impairment charges or ongoing amortization costs, thereby reducing future earnings.

Fluctuation in the processing of temporary workers will affect the revenue associated with our Taleo Contingent solution, which may harm our business and operating results.

We generate revenue from our Taleo Contingent solution based on a fixed percentage of the dollar amount invoiced for temporary labor procured and managed through this solution. We believe that our Taleo Contingent solution will account for a significant portion of our revenue in future periods. If our customers’ demand for temporary workers declines, or if the general wage rates for temporary

workers decline, so will our customers’ associated spending for temporary workers, and, as a result, revenue associated with our Taleo Contingent solution will decrease and our business may suffer. In addition, our contracts for the Taleo Contingent solution do not generally contain minimum revenue or transaction commitments from our customers. Therefore, if we fail to implement the Taleo Contingent solution successfully for new customers or if existing customers elect to decrease the transactions processed via the Taleo Contingent solution, we may not recognize incremental revenue from new customers or our revenues from existing Taleo Contingent customers may decline.

If we do not compete effectively with companies offering talent management solutions, our revenue may not grow and could decline.

We have experienced, and expect to continue to experience, intense competition from a number of companies. We compete with vendors of enterprise resource planning software such as Oracle and SAP. We also compete with niche point solution vendors such as Authoria, BrassRing, Deploy Solutions, Hodes iQ, Kenexa, Peopleclick, Kronos, VirtualEdge, Vurv (formerly Recruitmax), and Workstream that offer products that compete with one or more modules in our suite of solutions. In the area of talent management solutions for temporary employees, we compete primarily with companies such as Beeline, Chimes, Elance, Fieldglass, IQNavigator, and ProcureStaff. Our Taleo Business Edition competes primarily with ICIMS, Bullhorn, Hiredesk.com and others. Our competitors may announce new products, services or enhancements that better meet changing industry standards or the price or performance needs of customers. Increased competition may cause pricing pressure and loss of market share, either of which could have a material adverse effect on our business, results of operations and financial condition.

Many of our competitors and potential competitors, especially vendors of enterprise resource planning software, have significantly greater financial, technical, development, marketing, sales, service and other resources than we have. Many of these companies also have a larger installed base of customers, longer operating histories and greater brand recognition than we have. Our enterprise resource planning software competitors provide products that may incorporate capabilities in addition to talent management, such as automated payroll and benefits. Products with such additional functionalities may be appealing to some customers because they can reduce the number of different types of software or applications used to run their business. Our niche competitors’ products may be more effective than our products at performing particular talent management functions or may be more customized for particular customer needs in a given market. Further, our competitors may be able to respond more quickly than we can to changes in customer requirements.

Our customers often require our products to be integrated with software provided by our existing or potential competitors. These competitors could alter their products in ways that inhibit integration with our products, or they could deny or delay access by us to advance software releases, which would restrict our ability to adapt our products to facilitate integration with these new releases and could result in lost sales opportunities. In addition, many organizations have developed or may develop internal solutions to address talent management requirements that may be competitive with our solutions.

We may lose sales opportunities if we do not successfully develop and maintain strategic relationships to sell and deliver our solutions.

We intend to partner with business process outsourcing, or BPO, providers that resell our staffing solution as a component of their outsourced human resource services. We currently have relationships with several of these companies. If customers or potential customers begin to outsource their talent management functions to BPOs that do not resell our solutions, or to BPOs that choose to develop their own solutions, our business will be harmed. In addition, we have relationships with third-party consulting firms, system integrators and software and service vendors who provide us with customer referrals, integrate their complementary products with ours, cooperate with us in marketing our products and provide our customers with system implementation or maintenance services. If we fail to establish new strategic relationships or expand our existing relationships, or should any of these partners fail to work effectively with us or go out of business, our ability to sell our products into new markets and to increase our penetration into existing markets may be impaired.

The potential mergers of our competitors or other similar strategic alliances could weaken our competitive position or reduce our revenue.

If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative relationships with our current or future business process outsourcing, or BPO, partners, systems integrators, third-party consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote our products and limiting the number of consultants available to implement our solutions. Disruptions in our business caused by these events could reduce our revenue.

If we are required to reduce our prices to compete successfully, our margins and operating results could be adversely affected.

The intensely competitive market in which we do business may require us to reduce our prices. If our competitors offer discounts on certain products or services we may be required to lower prices or offer our solutions at less favorable terms to us to compete successfully. Several of our larger competitors have significantly greater resources than we have and are better able to absorb short-term losses. Any such changes would likely reduce our margins and could adversely affect our operating results. Some of our competitors may provide fixed price implementations or bundle product offerings that compete with ours for promotional purposes or as a long-term pricing strategy. These practices could, over time, limit the prices that we can charge for our products. If we cannot offset price reductions with a corresponding increase in the quantity of applications sold, our margins and operating results would be adversely affected.

If our security measures are breached and unauthorized access is obtained to customer data, customers may curtail or stop their use of our solutions, which would harm our reputation, operating results, and financial condition.

Our solutions involve the storage and transmission of customers’ proprietary information, and security breaches could expose us to loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, criminal acts by an employee, malfeasance, or otherwise, and, as a result, someone obtains unauthorized access to customer data, our reputation will be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of our security measures could be harmed and we could lose sales and customers.

Defects or errors in our products could affect our reputation, result in significant costs to us and impair our ability to sell our products, which would harm our business.

Our products may contain defects or errors, which could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. The costs incurred in correcting any product defects or errors may be substantial and could adversely affect our operating results. While we test our products for defects or errors prior to product release, defects or errors have been identified from time to time by our customers and may continue to be identified in the future.

Any defects that cause interruptions to the availability or functionality of our solutions could result in:

	•		lost or delayed market acceptance and sales of our products,

	•		loss of customers,

	•		product liability suits against us,

	•		diversion of development resources,

	•		injury to our reputation, and

	•		increased maintenance and warranty costs.

While our software subscription agreements typically contain limitations and disclaimers that should limit our liability for damages related to defects in our software, such limitations and disclaimers may not be upheld by a court or other tribunal or otherwise protect us from such claims.

We participate in a new and evolving market, which increases the difficulty of evaluating the effectiveness of our current business strategy and future prospects.

You must consider our current business model and prospects for future increases in revenue in light of the risks and difficulties we encounter in the new, uncertain and rapidly evolving talent management market. Because this market is new and evolving, we cannot predict with any assurance the future growth rate and size of this market, which, in comparison with the market for all enterprise software applications, is relatively small. The rapidly evolving nature of the markets in which we sell our products and services, as well as other factors that are beyond our control, reduce our ability to evaluate accurately our future prospects and to forecast with a high degree of certainty our projected quarterly or annual performance.

Widespread market acceptance of the vendor hosted, or on demand, delivery model is uncertain, and if it does not continue to develop, or develops more slowly than we expect, our business may be harmed.

The market for vendor hosted enterprise software is new and, to a large extent, unproven, and there is uncertainty as to whether vendor hosted software will achieve and sustain high levels of demand and market acceptance. Our customers access and use our software as a web-based solution that is hosted by us. If the preferences of our customers change and our customers elect to host our software themselves, either upon the initiation of a new agreement or upon the renewal of an existing agreement, we would experience a decrease in revenue from hosting fees, and potentially higher costs and greater complexity in providing maintenance and support for our software. Additionally, a very limited number of our customers have the contractual right to elect to host our software themselves prior to the expiration of their subscription agreements with us. If the number of customers purchasing hosting services from us decreases, we might not be able to decrease our expenses related to hosting infrastructure in the short term if the demand for such hosting services decreases. Potential customers may be reluctant or unwilling to allow a vendor to host software or internal data on their behalf for a number of reasons, including security and data privacy concerns. If such organizations do not recognize the benefits of the on demand delivery model, then the market for our solutions may not develop at all, or may develop more slowly than we expect.

If we fail to manage our hosting infrastructure capacity satisfactorily, our existing customers may experience service outages and our new customers may experience delays in the deployment of our solution.

We have experienced significant growth in the number of users, transactions, and data that our hosting infrastructure supports. Failure to address the increasing demands on our hosting infrastructure satisfactorily may result in service outages, delays or disruptions. For example, we have experienced downtimes within our hosting infrastructure, some of which have been significant, which have prevented customers from using our solutions from time to time. We seek to maintain sufficient excess capacity in our hosting infrastructure to meet the needs of all of our customers. We also maintain excess capacity to facilitate the rapid provisioning of new customer deployments and expansion of existing customer deployments. The development of new hosting infrastructure to keep pace with expanding storage and processing requirements could be a significant cost to us that we are not able to predict accurately and for which we are not able to budget significantly in advance. Such outlays could raise our cost of goods sold and be detrimental to our financial results. At the same time, the development of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and the loss of customers. If our hosting infrastructure capacity fails to keep pace with sales, customers may experience delays as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth.

Any significant disruption in our computing and communications infrastructure could harm our reputation, result in a loss of customers and adversely affect our business.

Our computing and communications infrastructure is a critical part of our business operations. The vast majority of our customers access our solutions through a standard web browser. Our customers depend on us for fast and reliable access to our applications. Much of our software is proprietary, and we rely on the expertise of members of our engineering and software development teams for the continued performance of our applications. We have experienced, and may in the future experience, serious disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:

	•		human error,

	•		physical or electronic security breaches,

	•		telecommunications outages from third-party providers,

	•		computer viruses,

	•		acts of terrorism or sabotage,

	•		fire, earthquake, flood and other natural disasters, and

	•		power loss.

Although we back up data stored on our systems at least daily, our infrastructure does not currently include real-time, or near real-time, mirroring of data storage and production capacity in more than one geographically distinct location. Thus, in the event of a physical disaster, or certain other failures of our computing infrastructure, customer data from recent transactions may be permanently lost.

We have computing and communications hardware operations located at third-party facilities with Internap in New York City and with IBM in San Jose, California. We do not control the operation of these facilities and must rely on these vendors to provide the physical security, facilities management and communications infrastructure services to ensure the reliable and consistent delivery of our solutions to our customers. Although we believe we would be able to enter into a similar relationship with another third party should one of these relationships fail or terminate for any reason, we believe our reliance on any third-party vendor exposes us to risks outside of our control. If these third-party vendors encounter financial difficulty such as bankruptcy or other events beyond our control that cause them to fail to secure adequately and maintain their hosting facilities or provide the required data communications capacity, our customers may experience interruptions in our service or the loss or theft of important customer data.

We have experienced system failures in the past. If our customers experience service interruptions or the loss or theft of their data caused by us, we may be subject to financial penalties, financial liability or customer losses.

We are in the process of closing our hosting facility at IBM in San Jose and transitioning the capacity of that facility to our Internap facility in New York City and to a new facility at Equinix in San Jose, California. There are risks inherent in such a transition such as damage to critical hardware and failure of newly installed hardware and software. The transition process may not be successful or may result in service interruptions which may subject us to financial penalties, financial liability or customer losses.

Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.

We must hire and retain key employees and recruit qualified technical and sales personnel or our future success and business could be harmed.

Our chief financial officer tendered his resignation on May 22, 2006, with the effective date of resignation to be not later than December 31, 2006. We have hired a replacement who will assume the responsibilities of chief financial officer on or about September 18, 2006. Issues involved in transitioning the responsibilities of chief financial officer to our new chief financial officer could cause investors or employees to lose confidence in our future prospects and could cause a significant disruption in our operations.

We believe that our success will depend on the continued employment of our senior management and other key employees, such as our chief executive officer and our chief financial officer. A significant number of our senior management were recently hired, including our new chief financial officer, and our continued success will depend on their effective integration into and management of us. There can be no assurance that our management team will be successfully integrated into our business and work together effectively. Our current senior management and employees have worked together for a relatively short period of time as a result of recent changes in senior management. We do not maintain key person life insurance on any of our executive officers. Additionally, our continued success depends, in part, on our ability to retain qualified technical, sales and other personnel. In particular, we have recently hired a significant number of sales personnel who may take some period of time to become fully productive. We generally find it difficult to find qualified personnel with relevant experience in both technology sales and human capital management. Because our future success is dependent on our ability to continue to enhance and introduce new products, we are particularly dependent on our ability to retain qualified engineers with the requisite education, background and industry experience. In particular, because our research and development facilities are primarily located in Quebec, Canada, we are substantially dependent on that labor market to attract qualified engineers. The loss of the services of a significant number of our engineers or sales people could be disruptive to our development efforts or business relationships. If we lose the services of one or more of our senior management or key employees, or if one or more of them decides to join a competitor or otherwise to compete with us, our business could be harmed.

We currently derive a material portion of our revenue from international operations and expect to expand our international operations. However, we do not have substantial experience in international markets, and may not achieve the expected results.

During the six months ended June 30, 2006, revenue generated outside the United States was 14% of total revenue, with Canada accounting for 7% of total revenue. We currently have international offices in Australia, Canada, France, the Netherlands, Singapore and the United Kingdom. We may expand our international operations, which will involve a variety of risks, including:

	•		unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions,

	•		differing regulations in Quebec with regard to maintaining operations, products and public information in both French and English,

	•		differing labor regulations, especially in France and Quebec, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations,

	•		more stringent regulations relating to data privacy and the unauthorized use of, or access to, commercial and personal information, particularly in Europe and Canada,

	•		reluctance to allow personally identifiable data related to non-US citizens to be stored in databases within the United States, due to concerns over the United States government’s right to access personally identifiable data of non-US citizens stored in databases within the United States or other concerns,

	•		greater difficulty in supporting and localizing our products,

	•		changes in a specific country’s or region’s political or economic conditions,

	•		challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs,

	•		limited or unfavorable intellectual property protection, and

	•		restrictions on repatriation of earnings.

We have limited experience in marketing, selling and supporting our products and services abroad. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.

Fluctuations in the exchange rate of foreign currencies could result in currency transaction losses, which could harm our operating results and financial condition.

We currently have foreign sales denominated in foreign currencies, including the Canadian dollar, Australian dollar, Euro, New Zealand dollar, British pound and Swiss franc, and may in the future have sales denominated in the currencies of additional countries in which we establish or have established sales offices. In addition, we incur a substantial portion of our operating expenses in Canadian dollars and, to a much lesser extent, other foreign currencies. Any fluctuation in the exchange rate of these foreign currencies may negatively affect our business, financial condition and operating results. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.

If we fail to defend our proprietary rights aggressively, our competitive advantage could be impaired and we may lose valuable assets, experience reduced revenue, and incur costly litigation fees to protect our rights.

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our proprietary rights in our products and services. We do not have any issued or pending patents and do not rely on patent protection. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed products may be unenforceable under the laws of certain jurisdictions and foreign countries in which we operate. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase. We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business

alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from developing technologies independently that are substantially equivalent or superior to our products. Initiating legal action may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

Our results of operations may be adversely affected if we are subject to a protracted infringement claim or a claim that results in a significant award for damages.

We expect that software product developers such as ourselves will increasingly be subject to infringement claims as the number of products and competitors grows and the functionality of products in different industry segments overlaps. To date, we are not aware of any legal claim that has been filed against us regarding these matters, but we can give no assurance that claims will not be filed. Our competitors or other third parties may also challenge the validity or scope of our intellectual property rights. A claim may also be made relating to technology that we acquire or license from third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:

	•		require costly litigation to resolve and the payment of substantial damages,

	•		require significant management time,

	•		cause us to enter into unfavorable royalty or license agreements,

	•		require us to discontinue the sale of our products,

	•		require us to indemnify our customers or third-party service providers, or

	•		require us to expend additional development resources to redesign our products.

We may also be required to indemnify our customers and third-party service providers for third-party products that are incorporated into our products and that infringe the intellectual property rights of others. Although many of these third parties are obligated to indemnify us if their products infringe the rights of others, this indemnification may not be adequate.

In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products.

Our insurance policies will not compensate us for any losses or liabilities resulting from intellectual property infringement claims.

We employ technology licensed from third parties for use in or with our solutions, and the loss or inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.

We include in the distribution of our solutions certain technology obtained under licenses from other companies, such as Oracle for database software, Business Objects for reporting software and web Methods for integration software. We anticipate that we will continue to license technology and development tools from third parties in the future. Although we believe that there are commercially reasonable software alternatives to the third-party software we currently license, this may not always be the case, or we may license third-party software that is more difficult or costly to replace than the third party software we currently license. In addition, integration of our products with new third-party software may require significant work and require substantial allocation of our time and resources. Also, to the extent that our products depend upon the successful operation of third-party products in conjunction with our products, any undetected errors in these third-party products could prevent the implementation or impair the functionality of our products, delay new product introductions and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which could result in higher costs.

Difficulties that we may encounter in managing changes in the size of our business could affect our operating results adversely.

Our business has experienced rapid growth in employee count since inception through both internal expansion and acquisitions. In 2005, we began taking steps to align our resources with our operating requirements in order to increase our efficiency. Through these steps, we reduced our headcount and incurred charges for employee severance and we may do so again in the future. As many employees are located in Quebec, Canada, we will have to pay the severance amounts legally required in such jurisdiction, which may exceed those of the United States. While we believe that these steps help us achieve greater operating efficiency, we have limited history with such measures and the results of these measures are difficult to predict. Additional restructuring efforts may be required. In order to manage our business effectively, we must continually manage headcount in an efficient manner. Our productivity and the quality of our products may be adversely affected if we do not integrate and train our employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations, and customer support organizations, all of which add to the complexity of our organization. We believe reductions in our workforce, management changes, and facility consolidation create anxiety and uncertainty, and may adversely affect employee morale. These measures could adversely affect our employees that we wish to retain and may also adversely affect our ability to hire new personnel. They may also negatively affect customers. In addition, our revenues may not grow in alignment with our headcount.

Failure to manage our customer deployments effectively could increase our expenses and cause customer dissatisfaction.

Enterprise deployments of our products require a substantial understanding of our customers’ businesses, and the resulting configuration of our solutions to their business processes and integration with their existing systems. We may encounter difficulties in managing the timeliness of these deployments and the allocation of personnel and resources by us or our customers. In certain situations, we also work with third-party service providers in the implementation or software integration-related services of our solutions, and we may experience difficulties in managing such third parties. Failure to manage customer implementation or software integration-related services successfully by us or our third-party service providers could harm our reputation and cause us to lose existing customers, face potential customer disputes or limit the rate at which new customers purchase our solutions.

Unfavorable economic conditions and reductions in information technology spending could limit our ability to grow our business.

Our operating results may vary based on the impact of changes in global economic conditions on our customers. The revenue growth and profitability of our business depends on the overall demand for enterprise application software and services. Most of our revenue is currently derived from large organizations whose businesses fluctuate with general economic and business conditions. As a result, a softening of demand for enterprise application software and services, and in particular enterprise talent management solutions, caused by a weakening global economy may cause a decline in our revenue. Historically, economic downturns have resulted in overall reductions in corporate information technology spending. In the future, potential customers may decide to reduce their information technology budgets by deferring or reconsidering product purchases, which could reduce our future earnings.

Our reported financial results may be adversely affected by changes in generally accepted accounting principles or changes in our operating history that impact the application of generally accepted accounting principles.

Generally Accepted Accounting Principles, or GAAP, in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the Securities and Exchange Commission, or SEC, and various other organizations formed to promulgate and interpret accounting principles. A change in these principles or interpretations could have a significant effect on our projected financial results. For example, beginning January 1, 2006, Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” or SFAS 123R, required us to expense the fair value of employee stock options and similar awards. SFAS 123R addresses accounting for transactions in which we obtain employee services in exchange for share-based payments. SFAS 123R requires us to recognize stock-based compensation costs for awards of equity instruments to employees based on the grant-date fair value of those awards, with limited exceptions. The effect of this pronouncement on our results of operations was material, representing total expenses in our statement of operations of $2,212 for the six months ended June 30, 2006. Pursuant to the application of GAAP we recognize the majority of our application revenue monthly over the life of the application agreement. In certain instances the straight-line revenue recognized on a monthly basis may exceed the amounts invoiced for the same period. If our history of collecting all fees reflected in our application agreements negatively changes, the application of GAAP may mandate that we not recognize revenue in excess of the fees invoiced over the corresponding period for new agreements.

If tax benefits currently available under the tax laws of Quebec are reduced or repealed, or if we have taken an incorrect position with respect to tax matters under discussion with the Canadian Revenue Authority, our business could suffer.

The majority of our research and development activities are conducted through our Canadian subsidiary, Taleo (Canada) Inc. We participate in a government program in Quebec that provides investment credits based upon qualifying research and development expenditures. These expenditures primarily consist of the salaries for the persons conducting research and development activities. We have participated in the program for five years, and expect that we will continue to receive these investment tax credits through September 2008. In 2005, we recorded a $2.1 million reduction in our research and development expenses as a result of this program. We anticipate the continued reduction of our research and development expenses through 2008. If these investment tax benefits are reduced or eliminated, our financial condition and operating results may be adversely affected. In addition, we are in the process of an

audit by the Canada Revenue Agency relating to transfer pricing for the transfer of intellectual property between our subsidiaries, in which the Canada Revenue Agency has proposed a reassessment of approximately CAD $8.0 million in respect of our 1999 taxation year and approximately CAD $5.4 million in respect of our 2000 and 2001 taxation years; we are in the process of disputing the reassessments. In addition, we may receive reassessments for subsequent taxation years. We are currently unable to evaluate the likelihood that we will prevail on our historical treatment of our transfer pricing or the amount we might be required to pay, if any, in the event of an adverse result. If the Canada Revenue Agency disagrees with our interpretation, our financial results may be adversely affected.

Evolving regulation of the Internet may increase our expenditures related to compliance efforts, which may adversely affect our financial condition.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. We are particularly sensitive to these risks because the Internet is a critical component of our business model. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for solutions accessed via the Internet and restricting our ability to store, process and share data with our customers via the Internet. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of internet-based services, which could harm our business.

Current and future litigation against us could be costly and time consuming to defend.

We are regularly subject to legal proceedings and claims that arise in the ordinary course of business. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, overall financial condition, and operating results.

If we fail to develop our brand cost-effectively, our customers may not recognize our brand and we may incur significant expenses, which would harm our business and financial condition.

In March 2004 we changed our name from Recruitsoft, Inc. to Taleo Corporation and we continue our rebranding efforts. For example, we recently adopted a new corporate logo. We may need to incur substantial expense and the rebranding effort may require more time than we anticipate before our brand gains broad recognition within our industry. We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future solutions and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market intensifies. Successful promotion of our brand will depend largely upon the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions at competitive prices. In the past, our efforts to build our brand have involved significant expense, and we expect to increase that expense in connection with our rebranding and marketing processes. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand. If we fail to promote successfully and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

Our stock price is likely to be volatile and could decline, resulting in a substantial loss on your investment.

The stock market in general and the market for technology-related stocks in particular has been highly volatile. As a result, the market price of our Class A common stock is likely to be similarly volatile, and investors in our Class A common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our Class A common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section and others such as:

	•		our operating performance and the performance of other similar companies,

	•		the overall performance of the equity markets,

	•		developments with respect to intellectual property rights,

	•		publication of unfavorable research reports about us or our industry or withdrawal of research,

	•		coverage by securities analysts or lack of coverage by securities analysts,

	•		speculation in the press or investment community,

	•		terrorist acts, and

	•		announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures, or capital commitments.

Our principal stockholders will have a controlling influence over our business affairs and may make business decisions with which you disagree and which may adversely affect the value of your investment.

Our executive officers, directors, major stockholders and their affiliates beneficially own or control, indirectly or directly, a substantial number of shares of our Class A and Class B common stock. As a result, if some of these persons or entities act together, they will have the ability to control matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, and the approval of any business combination. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.

We may need to raise additional capital, which may not be available, thereby adversely affecting our ability to operate our business.

If we need to raise additional funds due to unforeseen circumstances or continued operating losses, we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, and any additional financings could result in additional dilution to our existing stockholders. If we need additional capital and cannot raise it on acceptable terms, we may not be able to meet our business objectives, our stock price may fall and you may lose some or all of your investment.

Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our certificate of incorporation and bylaws contain provisions that could increase the difficulty for a third party to acquire us without the consent of our board of directors. For example, if a potential acquiror were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. The acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and will not be able to cumulate votes at a meeting, which will require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.

Our board of directors also has the ability to issue preferred stock that could significantly dilute the ownership of a hostile acquirer. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% or greater stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders.

The requirements of being a public company has been, and may continue to be, a strain on our resources, which may adversely affect our business and financial condition.

We are subject to a number of requirements, including the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002 and the listing standards of The NASDAQ Stock Market, Inc. These requirements have placed a strain on our systems and resources and will likely continue to do so. The Securities Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We had two restatements of historical financial information in 2005 and believe that we have deficiencies in our internal control over financial reporting that will require significant remediation. In order to maintain and improve the effectiveness of our

disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. As a result, our management’s attention might be diverted from other business concerns, which could have a material adverse effect on our business, financial condition, and operating results. In addition, we might need to hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge, and we might not be able to do so in a timely fashion. The listing standards of the NASDAQ Stock Market require, among other things, that within a year of the date of our proposed initial public offering all of the members of committees of our board of directors, including our audit committee, consist of independent directors. We might not be able to retain our independent directors, or attract new independent directors, for our committees.

Holders of our Class B common stock vote with our Class A common stock, which dilutes the voting power of our Class A common stockholders.

As of Jun 30, 2006, 3,057,211 shares of our Class B common stock are held by holders of our exchangeable shares in order to allow them voting rights in Taleo without having to exchange their shares in 9090-5415 Quebec Inc. and suffer the corresponding Canadian tax consequences. These Class B shares vote as a class with our Class A common stock and, upon exchange of the exchangeable shares for Class A common stock, will be redeemed on the basis of one share of Class B common stock redeemed for each one share of Class A common stock issued. Therefore, approximately 13% of the voting power of our outstanding shares as of June 30, 2006, is held by the Class B common stockholders and will continue to be held by them until they decide to exchange their exchangeable shares. Accordingly, our Class B common stock constitutes, and is expected to continue to constitute, a significant portion of the shares entitled to vote on all matters requiring approval by our stockholders.

We have recently relocated our headquarters. The lease for our new facility is incremental to an existing lease on our former headquarters facility in San Francisco, California. If we are not able to successfully sublease our San Francisco facility or our growth rates slow and we then have excess real estate at our new headquarters facility, it is likely we will need to recognize a loss on our facilities leases.

We leased a 35,000 square foot facility in Dublin, California in March 2006 for a seven year term as our new headquarters. In addition, we have approximately 12,000 square feet of space on our existing headquarters facility in San Francisco, California that we have currently listed for sublease. We have made certain assumptions relating to occupancy, the costs that will be incurred to satisfy our lease payments and operating costs, and the time necessary to sublease our existing headquarters, as well as projected future sublease rental rates and the anticipated durations of future subleases. We have not recognized a loss on our estimated sublease income; however, it is likely we will need to establish a liability, the effect of which could be a material reduction in net income.

Additionally, the relocation of our headquarters facility may result in unexpected attrition and we may have difficulty filling vacated positions in a timely manner.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

In the three months ended June 30, 2006, we issued an aggregate of 31,637 unregistered shares of our Class A common stock to certain employees and officers upon the exercise of options awarded under our 1999 Stock Plan. We received aggregate proceeds of $0.4 million for the three months ended June 30, 2006 as a result of the exercise of options under these plans. We believe these transactions were exempt from the registration requirements of the Securities Act as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701 or under Section 4(2) of the Securities Act and Regulation D promulgated thereunder, with respect to such shares. The transactions for the three months ended June 30, 2006 occurred between, and including April 3 and April 26, 2006. On May 1, 2006 a Form S-8 was filed with the SEC to register shares under all stock plans.

On May 23, 2006, warrants to purchase 97,995 shares of Class A common stock were exercised by an accredited investor in a cashless exercise, resulting in the issuance of 46,541 shares of Class A common stock. We believe this transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, in reliance on Section 4(2) thereof or Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following matters were submitted to the stockholders in our Annual Meeting of Stockholders held on June 15, 2006. Each of the matters was approved by the requisite vote.

(a)

The following individuals were re-elected to the Board of Director for three-year terms as Class I directors:


Name	Votes For		Votes Withheld
Mark A. Bertelsen		12,386,329		3,392,229
Howard Gwin		14,701,852		1,076,706

		Our Board of Directors is currently comprised of eight members that are divided into three classes with overlapping three-year terms. The term of our Class II directors, Michael Gregoire, Eric Herr and Michael Tierney, will expire at the Annual Meeting of Stockholders in 2007. The term of our Class III directors, James Maikranz, Jeffrey Schwartz and Louis Tetu, will expire at the Annual Meeting of Stockholders in 2008.

(b)		To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2006:


	Votes For			15,723,185
	Votes Against			8,173
	Votes Abstain			47,200

ITEM 5. OTHER INFORMATION

See Item 2 above.

ITEM 6. EXHIBITS


Exhibit
Number		Description
10.1		Master Services Agreement dated April 14, 2006, by and between Taleo Corporation and Equinix Operating Co., Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 20, 2006).

10.2		Form of Taleo Corporation 2004 Stock Plan Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 6, 2006).

10.3		Form of Taleo Corporation 2004 Stock Plan Performance Share Agreement (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on June 6, 2006).

31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


	TALEO CORPORATION
	By:	/s/ Divesh Sisodraker
		Divesh Sisodraker
		Chief Financial Officer

Date: August 14, 2006

Exhibit Index


Exhibit
Number		Description
10.1		Master Services Agreement dated April 14, 2006, by and between Taleo Corporation and Equinix Operating Co., Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 20, 2006).

10.2		Form of Taleo Corporation 2004 Stock Plan Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 6, 2006).

10.3		Form of Taleo Corporation 2004 Stock Plan Performance Share Agreement (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on June 6, 2006).

31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

Taleo (TLEO) Inactive 10-Q2006 Q2 Quarterly report

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