Taleo 10Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2008


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		(I.R.S. Employer
incorporation or organization)		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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filer o	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

On April 30, 2008, the registrant had 26,050,352 shares of Class A common stock and 462,118 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 March 31, 2008 and December 31, 2007			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007			5
Notes To Condensed Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3 Quantitative and Qualitative Disclosures About Market Risk			25
Item 4 Controls and Procedures			26
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			27
Item 1A Risk Factors			27
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3 Defaults Upon Senior Securities			41
Item 4 Submission of Matters to a Vote of Security Holders			41
Item 5 Other Information			41
Item 6 Exhibits			41
Signatures			42
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I

ITEM 1. FINANCIAL INFORMATION

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)


	March 31,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	91,683		$	86,135
Restricted cash		289			288
Accounts receivable, less allowance for doubtful accounts of $255 and $369 at March 31, 2008 and December 31, 2007, respectively		34,415			30,255
Prepaid expenses and other current assets		5,750			5,912
Investment credit receivable		5,214			4,734

Total current assets		137,351			127,324

Property and equipment, net		21,925			23,178
Restricted cash		838			838
Other assets		2,373			2,147
Goodwill		9,749			9,785
Other intangibles, net		1,295			1,404

Total assets	$	173,531		$	164,676

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	21,842		$	20,623
Deferred revenue and customer deposits		39,888			36,752
Capital lease obligation, short-term		25			38

Total current liabilities		61,755			57,413

Non-current liabilities:
Customer deposits and long-term deferred revenue		1,482			273
Other liabilities		3,868			4,535
Capital lease obligation, long-term		14			16
Commitments and contingencies (Note 10)
Class B Redeemable Common Stock, $0.00001 par value, 4,038,287 shares authorized; 462,118 and 655,652 shares outstanding at March 31, 2008 and December 31, 2007		—			—

Total liabilities		67,119			62,237

Exchangeable share obligation		224			331

Stockholders’ equity:
Class A Common Stock; par value, $0.00001 per share; 150,000,000 shares authorized; 25,905,290 and 25,442,373 shares outstanding at March 31, 2008 and December 31, 2007, respectively		—			—
Additional paid-in capital		154,639			151,593
Accumulated deficit		(49,786	)		(51,387	)
Treasury stock, at cost, 15,624 and 6,900 shares outstanding at March 31, 2008 and December 31, 2007, respectively		(448	)		(195	)
Accumulated other comprehensive income		1,783			2,097

Total stockholders’ equity		106,188			102,108

Total liabilities and stockholders’ equity	$	173,531		$	164,676

See accompanying Notes to Condensed Consolidated Financial Statements.

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)


	Three Months Ended
	March 31,
	2008			2007
Revenue:
Application	$	30,201		$	23,655
Consulting		7,038			5,062

Total revenue		37,239			28,717

Cost of revenue:
Application		6,290			5,100
Consulting		5,724			3,789

Total cost of revenue		12,014			8,889

Gross profit		25,225			19,828

Operating expenses:
Sales and marketing		10,670			8,517
Research and development		7,033			5,403
General and administrative		6,567			5,394

Total operating expenses		24,270			19,314

Operating income		955			514

Other income / (expense):
Interest income		778			673
Interest expense		(45	)		(19	)

Total other income, net		733			654

Income before provision for income taxes		1,688			1,168
Provision for income taxes		87			260

Net income attributable to Class A common stockholders	$	1,601		$	908

Net income attributable to Class A common stockholders per share — basic	$	.06		$	.04

Net income attributable to Class A common stockholders per share — diluted	$	.06		$	.03

Weighted average Class A common shares — basic		25,369			22,804

Weighted average Class A common shares — diluted		28,899			26,014

See accompanying Notes to Condensed Consolidated Financial Statements.

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)


	Three Months Ended
	March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	1,601		$	908
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,364			1,268
Amortization of tenant inducements		(38	)		(55	)
Stock-based compensation expense		2,476			1,385
Director fees settled with stock		59			40
Bad debt expense		(86	)		95
Interest earned on restricted cash		—			1
Changes in working capital accounts:
Accounts receivable		(4,163	)		(8,422	)
Prepaid expenses and other assets		(112	)		(596	)
Investment credit receivable		(682	)		1,775
Accounts payable and accrued liabilities		1,129			6,990
Deferred revenues and customer deposits		4,479			10,513

Net cash provided by operating activities		7,027			13,902

Cash flows from investing activities:
Acquisition of property and equipment		(1,902	)		(746	)
Restricted cash decrease		—			2,507
Acquisition of business		—			(3,072	)

Net cash used in investing activities		(1,902	)		(1,311	)

Cash flows from financing activities:
Principal payments on capital lease obligations		(14	)		(142	)
Proceeds from stock options and warrants exercised		414			2,542

Net cash provided by financing activities		400			2,400

Effect of exchange rate changes on cash and cash equivalents		23			157

Increase in cash and cash equivalents		5,548			15,148
Cash and cash equivalents:
Beginning of period		86,135			58,785

End of period	$	91,683		$	73,933

Supplemental cash flow disclosures:
Cash paid for interest	$	1		$	4

Cash paid for income taxes	$	—		$	—

Supplemental disclosure of non-cash financing and investing activities:
Property and equipment purchases included in accounts payable and accrued liabilities	$	2,811		$	229
Book value of Class B common stock exchanged for Class A common stock	$	96		$	219	*
Treasury stock acquired to settle employee withholding liability	$	253		$	166


*		The amount previously reported in noncash activity disclosure of the condensed consolidated statements of cash flows for the quarter ended March 31, 2007 was erroneously based on the fair value (rather than the book value) of such shares exchanged of $8,038, and such error in disclosure has been corrected to reflect the exchange at book value of $219.

See accompanying Notes to Condensed Consolidated Financial Statements.

TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Condensed Consolidated Financial Statements

The condensed consolidated balance sheet of Taleo Corporation and its Subsidiaries (“the Company”) as of March 31, 2008, the condensed consolidated statements of operations for the three months ended March 31, 2008 and 2007 and the condensed consolidated statements of cash flows for the three months ended March 31, 2008 and 2007 have been prepared by the 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. The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

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, 2007. The results of operations for the three months ended March 31, 2008 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 on-demand talent management solutions that enable organizations of all sizes to assess, acquire, develop, and align their workforces for improved business performance. The Company’s software applications are offered to customers primarily on a subscription basis.

The Company was incorporated under the laws of the state of Delaware in May 1999 as Recruitsoft, Inc. and changed its name to Taleo Corporation in March 2004. The Company has principal offices in Dublin, California and conducts its business worldwide, with wholly owned subsidiaries in Canada, France, the Netherlands, the United Kingdom, Singapore, and Australia. The subsidiary in Canada performs the primary product development activities for the Company, and 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 unaudited condensed consolidated financial statements include the accounts of Taleo Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Recent Accounting Pronouncements— In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157 (“SFAS 157”),Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. As of March 31, 2008, the Company did not have any financial instruments subject to SFAS 157 fair value measurements. However, the Company continues to evaluate the impact of SFAS 157 on its non-financial instruments which are not affected by the pronouncement until January 1, 2009.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007) (“SFAS 141R”),Business Combinations. SFAS 141R requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, the Company is required to record and disclose business combinations following existing U.S. GAAP until January 1, 2009. The Company is currently evaluating the requirements of SFAS 141R, and has not yet determined the impact on its consolidated financial statements.

3. 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 and employee stock purchase programs.

Under the provisions of SFAS 123(R), 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 recognizes compensation expense for the stock options, restricted stock awards, performance share awards and Employee Stock Purchase Plan (“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 months ended March 31, 2008. 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. SFAS 123(R) resulted in the Company recording compensation expense of $2.5 million for the three months ended March 31, 2008 and $1.4 million, for the three months ended March 31, 2007. The amount recorded in the three months ended March 31, 2008 and 2007 was recorded in the following expense categories:


	Three Months		Three Months
	Ended		Ended
	March 31, 2008		March 31, 2007
	(In thousands)
Cost of revenue	$	308	$	153
Sales and marketing		635		360
Research and development		299		243
General and administrative		1,234		629

Total	$	2,476	$	1,385

Stock Options

The Company estimates the fair value of options granted using the Black-Scholes option valuation model. The Company estimates the expected volatility of our common stock at the date of grant based on a combination of our historical volatility and the volatility of comparable companies, consistent with SFAS No. 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”). The Company estimates expected term consistent with the simplified method identified in SAB 107 for share-based awards granted during the three months ended March 31, 2008. The Company elected to use the simplified method due to a lack of term data as the Company had recently gone public in October 2005 and our options meet the criteria of the “plain-vanilla” option as defined by SAB 107. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of our employee options. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, it amortizes the fair value on a straight-line basis over the requisite service period of the options that is generally 4 years.

Annualized estimated forfeiture rates based on the Company’s historical turnover rates have been used in calculating the cost of stock options. 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 have been attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Class A Common Stock Option Plans

At March 31, 2008, 803,105 shares were available for future grants under four of the Company’s option plans, excluding the White Amber stock option plan described below.

The following table presents a summary of the Class A Common Stock option activity for the three months ended March 31, 2008, and related information:


				Weighted—Average
	Number of Options			Exercise Price
Outstanding — January 1, 2008		3,523,414		$	13.61
Granted		71,000		$	18.18
Exercised		(49,253	)	$	8.38
Forfeited		(124,656	)	$	14.91

Outstanding — March 31, 2008		3,420,505		$	13.73

The weighted average grant date fair value of options granted during the three months ended March 31, 2008 was $9.91 per option.

The total intrinsic value of options exercised during the three months ended March 31, 2008 was $0.6 million. As of March 31, 2008, the Company had 3,074,398 options vested or expected to vest over four years with an aggregate intrinsic value of $18.5 million and a weighted average exercise price of $13.52.

The total fair value of shares vested during the three months ended March 31, 2008 and 2007 was $8.4 million and $2.7 million, respectively.

The aggregate intrinsic value for options outstanding and exercisable at March 31, 2008 was $12.9 million with a weighted-average remaining contractual life of 6.75 years.

For options, the Company recorded $1.9 million and $1.0 million of compensation expense for the three months ended March 31, 2008 and March 31, 2007, respectively. Unamortized compensation cost was $10.5 million as of March 31, 2008. This cost is expected to be recognized over a weighted-average period of 2.3 years.

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 a new option plan (“the White Amber Stock Option Plan”). As of March 31, 2008, these options were fully vested. The following table presents a summary of the White Amber Stock Option Plan activity for the three months ended March 31, 2008 and related information:


				Average
				Weighted— Exercise
	Number of Options			Price
Outstanding — January 1, 2008		24,545		$	0.78

Exercised		(1,500	)		0.78

Outstanding — March 31, 2008		23,045		$	$0.78

Options exercisable — March 31, 2008		23,045		$	$0.78

For the White Amber Stock Option Plan, the Company recorded no compensation expense for the three months ended March 31, 2008 and March 31, 2007.

Restricted Stock and Performance Shares

The fair value of restricted stock and performance shares is measured based upon the closing Nasdaq Global Market price of the underlying Company stock as of the date of grant. The Company uses historical data to estimate pre-vesting forfeitures and record share-based compensation expense only for those awards that are expected to vest. Restricted stock and performance share awards are amortized over the applicable reacquisition or vesting period using the straight-line method. Upon vesting, restricted stock units will convert into an equivalent number of shares of common stock. Unamortized compensation cost was $6.4 million as of March 31, 2008. This cost is expected to be recognized over a weighted-average period of 2.8 years.

The following table presents a summary of the restricted stock awards and performance share awards for the three months ended March 31, 2008, and related information:


	Performance			Restricted			Weighted—Average
	Share			Stock			Grant-
	Awards			Awards			Date Fair Value
Repurchasable/nonvested balance — January 1, 2008		28,125			200,376		$	13.77
Awarded		20,408			246,850			17.42
Released/vested		(3,004	)		(20,162	)		12.03
Forfeited/cancelled		(215	)		(22,500	)		11.90

Repurchasable/nonvested balance — March 31, 2008		45,314			404,564		$	16.19

For restricted stock and performance share agreements, the Company recorded $0.4 million and $0.3 million of compensation expense for the three months ended March 31, 2008 and March 31, 2007, respectively.

Employee Stock Purchase Plan

At March 31, 2008, there were 291,495 shares reserved for future issuance under the Company’s ESPP. For the ESPP, the Company recorded $0.2 million and $0.1 million of compensation expense for the three months ended March 31, 2008 and March 31, 2007. Unamortized compensation cost was $70,000 as of March 31, 2008. This cost is expected to be recognized over a one month period.

4. Intangible Assets and Goodwill

The Company has recorded the following balances for acquired intangible assets and goodwill at March 31, 2008 and December 31, 2007. Amortization of intangible assets was $0.1 million for both the three months ended March 31, 2008 and 2007. During the three months ended March 31, 2008, the Company reduced goodwill by $36,000 due to capitalized transaction costs associated with the JobFlash and Wetfeet acquisitions being more than actual cost incurred.


			As of March 31, 2008					As of December 31, 2007
	Weighted-
	Average Period of		Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amortization		Amount		Amortization			Amount		Amortization
	(In thousands)
Identifiable intangible assets:
Existing technology	3.9 years		$	3,121	$	(2,241	)	$	3,121	$	(2,170	)
Customer relationships	3.4 years			1,470		(1,055	)		1,470		(1,017	)

Subtotal				4,591		(3,296	)		4,591		(3,187	)
Goodwill		—		9,749		—			9,785		—

Total			$	14,340	$	(3,296	)	$	14,376	$	(3,187	)


Estimated Amortization Expense	(In thousands)
Remainder of 2008	$	327
2009		428
2010		310
2011		200
2012		30

Total	$	1,295

5. Property and Equipment

Property and equipment consists of the following:


	March 31,			December 31,
	2008			2007
	(In thousands)
Computer hardware and software	$	38,700		$	38,206
Furniture and equipment		2,627			2,681
Leasehold improvements		3,112			3,148

		44,439			44,035
Less accumulated depreciation and amortization		(22,514	)		(20,857	)

Total	$	21,925		$	23,178

Property and equipment included capital leases totaling $1.1 million at March 31, 2008 and December 31, 2007, 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 $1.1 million and $1.0 million, at March 31, 2008 and December 31, 2007, respectively. Depreciation and amortization expense, including amortization of assets under capital leases but excluding amortization of intangible assets, was $2.3 million and $1.0 million for the three months ended March 31, 2008 and 2007, respectively.

6. Other Assets

Other assets consist of the following:


	March 31,		December 31,
	2008		2007
	(In thousands)
Deferred tax asset net of valuation allowance	$	2,003	$	1,773
Other		370		374

	$	2.373	$	2,147

7. Accounts Payable and Accrued Liabilities

Accounts payable and accrued expenses consist of the following:


	March 31,		December 31,
	2008		2007
	(In thousands)
Accrued compensation	$	9,318	$	8,706
Accounts payable		2,299		2,170
Accrued professional fees		1,550		1,650
Accrued liability — Taleo Contingent customer payments		355		—
Accrued income taxes		877		468
Accrued liabilities and other		7,443		7,629

Total	$	21,842	$	20,623

8. Common Stock

Reserved Shares of Common Stock

The Company has reserved the following number of shares of Class A common stock as of March 31, 2008 for the exchange of exchangeable shares, awarding of restricted stock awards, release of performance share awards, exercise of stock options and purchases under the employee stock purchase plan:


Exchange of exchangeable shares and redemption of Class B common stock			462,118
Class A Common Stock Plans (excluding the White Amber Stock Option Plan)			4,268,924
White Amber Stock Option Plan			23,045
Employee Stock Purchase Plan			291,495

Total			5,045,582

9. Income Taxes

For the three months ended March 31, 2008, the Company recorded income tax expense of $87,000. This expense was principally due to U.S. Federal and state income taxes and tax generated by the Company’s international subsidiaries. During the three months ended March 31, 2008, the Company reduced its current tax liability by $0.6 million through the utilization of acquired net operating loss carryforwards resulting from previous acquisitions. The Federal and state tax provision for the first quarter of 2008, however, does not reflect a benefit for the utilization of these net operating losses, as they were used to reduce goodwill originally recorded in the acquisition. The Company’s tax expense for the three months ended March 31, 2008 is net of a $262,000 income tax benefit associated with the reversal of the Company’s valuation allowance on its deferred tax assets related to the U.S. minimum tax credit.

In July 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 effective January 1, 2007. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At March 31, 2008, accrued interest related to uncertain tax positions was less than $0.1 million. As the Company has net operating loss carryforwards for federal and state purposes, the statute of limitation remains open for all tax years to the extent the tax attributes are carried forward into future tax years. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for years before 2002.

As of December 31, 2007, the Company had recorded uncertain tax benefits of approximately $4.0 million, which amount reflects an increase of $1.1 million from the amount previously disclosed in the notes to the Company’s 2007 financial statements due to an error in the previous disclosure. There was no material change to the unrecognized uncertain tax benefits balance in the quarter ended March 31, 2008.

The Company’s Canadian subsidiary is under examination by the Canada Revenue Agency (“CRA”) with respect to tax years 2000 and 2001. The Company has settled certain issues raised in the audit and is appealing the CRA’s treatment of Quebec investment tax credits. Final resolution of the CRA’s examination will have bearing on the Company’s tax treatment applied in subsequent periods not currently under examination. The Company has recorded income tax reserves believed to be sufficient to cover the estimated tax assessments for the open tax periods and has estimated the potential range of additional income, as a result of the Quebec investment tax credits, to be between CAD $1.0 million and $18.4 million.

There could be a significant impact to the Company’s uncertain tax positions over the next twelve months depending on the outcome of the on-going CRA audit. In the event the CRA audit results in adjustments that exceed both our income tax reserves and available deferred tax assets, the Company’s Canadian subsidiary may become a tax paying entity in 2008 or in a prior year including potential penalties and interest. Any such penalties cannot be reasonably estimated at this time.

The Company is seeking U.S. tax treaty relief through the appropriate Competent Authority tribunals for the settlements entered into with CRA and will seek treaty relief for all subsequent final settlements. Although the Company believes it has reasonable basis for its tax positions, it is possible an adverse outcome could have a material effect upon its financial condition, operating results or cash flows in a particular quarter or annual period.

10. Commitments and Contingencies

Operating Leases— The Company leases certain equipment, internet access services and office facilities under non-cancelable operating leases or long-term agreements. Rental expense under these agreements for the three months ended March 31, 2008 and 2007 was approximately $1.3 million and $1.8 million, respectively.

The minimum non-cancelable scheduled payments under these agreements at March 31, 2008 are as follows:


	Operating Leases
					Third
					Party		Total
	Equipment		Facility		Hosting		Operating		Software		Capital
	Leases		Leases		Facilities		Leases		Contracts		Leases			Total
	(In thousands)								(In thousands)		(In thousands)			(In thousands)
Remainder of 2008	$	757	$	1,868	$	843	$	3,468	$	2,864	$	23		$	6,355
2009		112		1,180		395		1,687		1,412		12			3,111
2010		36		939		88		1,063		—		5			1,068
2011		14		959		—		973		—		—			973
2012		—		980		—		980		—		—			980
2013		—		451		—		451		—		—			451

Total	$	919	$	6,377	$	1,326	$	8,622	$	4,276	$	40		$	12,938

Less amounts representing interest												(1	)

Present value of minimum lease payments												39
Less current portion												(25	)

Noncurrent portion											$	14

Litigation— Kenexa Brassring, Inc., filed suit against the Company in the United States District Court for the District of Delaware for patent infringement on August 27, 2007. Kenexa asserts that the Company has infringed patent numbers 5999939 and 6996561, and seeks monetary damages and an injunction enjoining the Company from further infringement. Management has reviewed this matter and believes that its software products do not infringe any valid and enforceable claim of these patents. The Company has filed an answer to the complaint filed by Kenexa Brassring, Inc. The Company has engaged in settlement discussions with Kenexa Brassrig, Inc. but as of yet no settlement agreement has been reached.

In addition to the matter described above, the Company is subject to various claims and legal proceedings that arise in the ordinary course of its business from time to time, including claims and legal proceedings that have been asserted against the Company by former employees and advisors. The Company has accrued for estimated losses in the accompanying unaudited condensed consolidated financial statements for matters where the Company believes the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. The adverse resolution of any one or more of those matters or the matter described above, over and above the amount, if any, that has been estimated and accrued in its unaudited condensed consolidated financial statements could have a material adverse effect on the Company’s business, financial condition, results of operations and/or cash flows.

In addition to pending litigation, the Company has received the following notices of potential claims. In February 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. Also, in September 2006, the holder of patent numbers 5537590 and 5701400 wrote the Company to inform the Company of its contention that the Company’s product offerings may infringe these patents. To date, the Company is not aware of any legal claim that has been filed against the Company regarding these matters, but the Company can give no assurance that claims will not be filed.

Income Taxes— The Company and its subsidiaries’ income tax returns are periodically examined by various tax authorities. In connection with such examinations, tax authorities raise issues and propose tax adjustments and the Company reviews and contests certain of the proposed tax adjustments. While the timing and ultimate resolution of these matters is uncertain, the Company anticipates that certain of these matters could be resolved during 2008.

11. Net Income Per Share

For the period ended March 31, 2008 and 2007, the Company had net income of $1.6 million and $0.9 million, respectively. Diluted net income per share is calculated based on outstanding Class A common stock and exchangeable shares. Exchangeable shares are represented by Class B common stock. Each exchangeable share can be converted to one Class A common stock; therefore, exchangeable shares are included in the calculation of fully diluted earnings per share during periods in which the Company had net income.

Antidilutive securities, which consist of exchangeable shares and stock options that are not included in the diluted net income per share calculation, aggregated on a weighted average share basis to 3,530,433 and 3,209,502 for the three months ended March 31, 2008 and March 31, 2007.

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


	Three months ended March 31,
	2008				2007
	Class A		Class B		Class A		Class B
	Common		Common(1)		Common		Common(1)
	(In thousands, except per share data)
Allocation of net income	$	1,601		—	$	908		—

Weighted-average shares outstanding — basic		25,369		562		22,804		1,680

Weighted-average shares outstanding — diluted		28,899		656		26,014		1,874

Net income per share — basic	$	0.06		—	$	0.04		—

Net income per share — diluted	$	0.06		—	$	0.03		—


(1)		Class B common stock is 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.

12. Segment and Geographic Information

The Company follows the provisions of SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information,”which establishes standards for reporting information about operating segments requires selected information about operating segments in interim financial reports issued to stockholders. 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 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
	(In thousands)
Three Months Ended March 31, 2008:
Revenue	$	30,201	$	7,038	$	37,239
Contribution margin(1)		16,878		1,314		18,192
2007:
Revenue	$	23,655	$	5,062	$	28,717
Contribution margin(1)		13,152		1,273		14,425


(1)		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 March 31,
	2008			2007
	(In thousands)
Contribution margin for reportable segments	$	18,192		$	14,425
Sales and marketing		(10,670	)		(8,517	)
General and administrative		(6,567	)		(5,394	)
Interest and other income, net		733			654

Income before provision for income taxes	$	1,688		$	1,168

Geographic Information:

Revenue attributed to a country or region includes sales to multinational organizations and is based on the country of location of the legal entity that is the contracting party for the Company. The Company’s U.S. entity is the contracting party for all sales agreements in the United States and the Company’s Canadian entity is the contracting party for all Taleo Enterprise Edition sales agreements in Canada. Prior to January 1, 2005, certain of the Company’s subsidiaries outside of North America were the contracting parties for sales transactions within their regions. After January 1, 2005, the Company’s U.S. entity has been the contracting party for all new sales agreements and renewals of existing sales agreements entered into with customers outside of North America. Revenues as a percentage of total revenues are as follows:


	Three months Ended
	March 31,
	2008			2007
United States		94	%		92	%
Canada		6	%		5	%
All other		0	%		3	%

		100	%		100	%

During the three months ended March 31, 2008 and 2007, 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.

13. Comprehensive Income

Comprehensive income includes foreign currency translation gains and losses.


	Three Months Ended
	March 31,
	2008			2007
Net income	$	1,601		$	908
Net foreign currency translation gain / (loss)		(315	)		111

Comprehensive income	$	1,286		$	1,019

14. Severance and Exit Costs

During July 2006, the Company moved its corporate offices from San Francisco, California to Dublin, California. As a result of this relocation, the Company has recorded a provision for the exit from the San Francisco facility in accordance with SFAS 146“Accounting for Costs Associated with Exit or Disposal Activities.”As a part of this provision, the Company has taken into account that on October 19, 2006 it entered into an agreement to sublease its San Francisco facility, consisting of approximately 12,000 square feet. As of March 31, 2008, pursuant to the lease for the Company’s San Francisco facility, cash payments totaling $0.5 million remain to be made through July 2009 and the associated remaining unpaid lease costs, net of sublease rental income $0.4 million, as of March 31, 2008 is approximately $0.1 million. The total estimated cost associated with the exit from the San Francisco facility is $0.4 million.

Summary


	Lease			Sublease rental
	payments			income			Net liability
				(In thousands)
Liability for the Remaining Net Lease Payments for the San Francisco Facility
Liability at January 1, 2008	$	609		$	(443	)	$	166
Cash receipts / (payments)		(94	)		67			(27	)

Liability at March 31, 2008		515			(376	)		139

Transition of Time and Expense Services Processing

As a result of the Company’s decision to discontinue the time and expense processing services related to its Taleo Contingent solution, there were approximately 38 full time positions that may be terminated as part of this transition, which is targeted to be completed in 2008. As of March 31, 2008, 22 positions were terminated and 7 were reassigned to other departments. If an employee is terminated and remains employed through the transition date, the terminated employee would be entitled to an exit package. The total estimated liability for exit packages is expected to be $0.7 million, of which $0.4 million has been paid through March 31, 2008. Total expense for the first quarter of 2008 and 2007 was $0.1 million for each period and was recorded as an operating expense.

15. Employee Benefit Plans

The Company maintains a 401(k) profit-sharing plan (the “401(k) Plan”) covering substantially all U.S. employees. Pursuant to the 401(k) Plan, the Company may elect to match employee contributions to the 401(k) Plan, not to exceed 6% of an employee’s compensation. Effective January 1, 2008, the Company has instituted a 401(k) matching program with the following specifics: (i) for employee contributions to the 401(k) Plan of up to 4% of the each employee’s base salary, the Company will match such employee contributions at a rate of $0.50 for every $1.00 contributed by the employee; and (ii) the Company 401(k) matching program has a three year vesting period. The Company recorded $0.1 million in additional employee related costs during the three months ended March 31, 2008 as a result of the adoption of this program.

16. Subsequent Events

On May 5, 2008, Taleo Corporation (“Taleo”) entered into an agreement to purchase Vurv Technology, Inc. (“Vurv”), a private company with headquarters in Florida. Vurv is a provider of on demand talent management software.

Pursuant to the agreement, Taleo will pay consideration consisting of 4.1 million shares of Taleo’s Class A common stock and approximately $36.5 million in cash, subject to adjustment, in exchange for all of the outstanding capital stock of Vurv and the assumption of vested options to acquire shares of Vurv common stock. Twelve and one-half percent (12.5%) of the consideration will be placed into escrow for one year following the closing to be held as security for losses incurred by Taleo in the event of certain breaches of the representations and warranties contained in the Reorganization Agreement or certain other events. The escrowed consideration will consist solely of shares of Taleo Class A common stock. In addition, Taleo will assume unvested options to acquire shares of Vurv common stock. All options to acquire shares of Vurv common stock will be converted into options to acquire shares of Taleo’s Class A common stock. The acquisition has been approved by both companies’ boards of directors and is subject to the approval of Vurv’s stockholders, regulatory approvals and customary closing conditions. The Reorganization Agreement contains certain termination rights for both Taleo and Vurv. There can be no assurance that the acquisition will be completed.

The acquisition has been approved by both companies’ boards of directors and is subject to the approval of Vurv’s stockholders, regulatory approvals and customary closing conditions. The Reorganization Agreement contains certain termination rights for both Taleo and Vurv.

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

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, cost of revenue, tax and accounting estimates, cash, cash equivalents and cash provided by operating activities, the discontinuation of our time and expense processing services related to our Taleo Contingent solution, the opening of additional data centers, 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, and in our Annual Report onForm 10-K for the year ended December 31, 2007. 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, develop, and align their workforces for improved business performance. We were incorporated under the laws of Delaware in May 1999.

We are a leading global provider of talent management software solutions. Our goal is to help our customers improve business results through better talent management. We offer recruiting, performance management, internal mobility and other software solutions that help our customers attract and retain high quality talent, more effectively match workers’ skills to business needs, reduce the time and costs associated with manual and inconsistent processes, ease the burden of regulatory compliance, and increase workforce productivity through better alignment of workers’ goals and career plans with corporate objectives. In addition, our solutions are highly configurable, which allows our customers to implement talent management processes that are tailored to accommodate different employee types, locations, business units and regulatory environments.

We deliver our solutions on-demand as a hosted service that is accessed through an Internet connection and a standard web browser. Our solution delivery model, also called software-as-a-service or SaaS, eliminates the need for our customers to install and maintain hardware and software in order to use our solutions. We believe our SaaS model significantly reduces the time, cost and complexity associated with deployment of traditional, on-premise software solutions, and offers a lower upfront and total cost of ownership than traditional software solutions. We offer our solutions as a subscription-based service for which our customers pay a recurring annual or quarterly fee during the subscription term.

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 of our financial condition 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 purchasing trends for software applications across industries and geographies, input from current and prospective customers relating to product functionality and general economic data. For example, in the first quarter of 2008 we observed a lengthening in the completion of procurement cycles with our customers and potential customers which we believe may be related to the general economic outlook of our customers, and, as we look ahead, these same factors may result in longer and less predicable sales cycles for our solutions. We use the financial and non-financial data described above to assess our historic performance, and also to plan our future strategy. We continue to believe that our strategy and our ability to execute may enable us to improve our relative competitive position in a difficult economic environment and may provide long-term growth opportunities given the cost saving benefits of our solutions and the business requirements our solutions address.

Sources of Revenue

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

Application Revenue

Application revenue is generally comprised of subscription fees from customers accessing our applications, which includes the use of the application, application and data hosting and maintenance of the application. The majority of our application subscription 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. Effective March 2007, we ceased entering into agreements to provide time and expense processing as a component of our Taleo Contingent solution and, accordingly, our revenue model based on a percentage of spend from such processing services will end. We are servicing our current customers to which we provide such time and expense processing services through the expiration of their current agreements with us. We expect revenue from time and expense processing for these customers to continue to decline and ultimately end in 2008. The term of our application agreements for Taleo Enterprise Edition signed with new customers in the first quarter of 2008 and 2007 was typically three or more years. The term of application agreements for Taleo Business Edition is typically one year. Our customer renewals on a dollar basis have historically been greater than 95%.

Application agreements entered into during the first three months of 2008 and 2007 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.

Consulting Revenue

Consulting revenue consists primarily of fees associated with application configuration, integration, business process re-engineering, change management, and education and training services. Our consulting engagements are typically billed on a time and materials basis, although we may sell consulting services under milestone or fixed fee contracts, and in such cases, recognize consulting revenues on a lower of the milestone or percentage-of-completion basis. From time to time, certain of our consulting projects are subcontracted to third parties. 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 employee related costs and 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 of our customers, though we plan to open one or more additional data centers during the remainder of 2008.

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.

Research and Development

Research and development expenses consist primarily of salaries and related expenses and allocated overhead, and third-party consulting fees. 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.

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, board compensation and expenses, expenses related to potential mergers and acquisitions, other corporate expenses, and allocated overhead.

Employee Benefits

Effective January 1, 2008, we instituted a 401(k) matching program with the following specifics: (i) for employee contributions to our 401(k) plan of up to 4% of the each employee’s base salary, we will match such employee contributions at a rate of $0.50 for every $1.00 contributed by the employee; and (ii) our 401(k) matching program has a three year vesting period with one third of the employer contribution match vesting each year over the three year period. We recorded $0.1 million in additional employee related costs during the three months ended March 31, 2008 as a result of the adoption of this program.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these unaudited condensed 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

We derive revenue primarily from fixed subscription fees for access to and use of our on-demand solutions, which fees are collectively reflected as application revenue, and secondarily from professional services, which are reflected as consulting revenue.

In addition to fixed subscription fees arrangements, on limited occasions, we have entered into arrangements including a perpetual license with hosting services to be provided over a fixed term. For hosted arrangements, revenues are recognized under the provisions of Emerging Issues Task Force or EITF No. 00-3,Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware.

Our application revenue is recognized when all of the following conditions have been satisfied:

	•		persuasive evidence of an agreement exists;

	•		delivery has occurred;

	•		fees are fixed or determinable; and

	•		the collection of fees is considered probable.

We utilize the provisions of EITF No. 00-21,“Revenue Arrangements with Multiple Deliverables” to determine whether our arrangements containing multiple deliverables contain more than one unit of accounting. Multiple element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Typically, we measure and allocate the total arrangement fee among each of the elements based on their fair value.

Application Revenue

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 and consists of:

	•		fees paid for subscription services;

	•		amortization of any related set-up fees;

	•		amortization of fees paid for hosting services and software maintenance services under certain software license arrangements; and

	•		amortization of related consulting fees in certain multiple element subscription arrangements where fair value does not exist for an undelivered element.

Our revenue associated with the time and expense processing functionality of 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.

Consulting Revenue

In arrangements that include both subscription and consulting services we recognize consulting services as they are performed if the consulting services qualify as a separate unit of accounting in the multiple element arrangement. Consulting services qualify as a separate unit of accounting when they have stand alone value and when fair value has been established. If the consulting services do not qualify as a separate unit of accounting, the related consulting revenues are combined with the subscription revenues and recognized ratably over the subscription term.

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 months ended March 31, 2008 and 2007.

Stock Based Compensation

We adopted SFAS 123(R)“Share-Based Payment”effective January 1, 2006. Under the provisions of SFAS 123(R), 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 123(R), under which the provisions of SFAS 123(R) 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. Estimates are 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, 2007. We will assess the impairment of goodwill annually on October 1, or sooner if 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 and stock based compensation deductions. 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 or all of the deferred tax assets will not be recognized. In the quarter ended March 31, 2008, we reduced approximately $262,000 of our U.S. valuation allowance on the deferred tax asset relating to the federal minimum tax credits, since it was determined to be more likely than not that these assets would be realized. We continue to maintain a full valuation allowance on our remaining U.S. deferred tax assets. A portion of the remaining valuation allowance pertains to deferred tax assets established in connection with prior acquisitions, and to the extent that this portion of the valuation allowance is reversed in the future, goodwill will be adjusted. 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 calculations of our tax liabilities involve dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. We are 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, we record estimated reserves based on the recognition and measurement criteria governed under the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48. Based on our evaluation of current tax positions, we believe we have appropriately accounted for these uncertainties.

Results of Operations

The following tables set forth certain unaudited condensed 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 March 31,
	2008			2007
Condensed Consolidated Statement of Operations Data:
Revenue:
Application		81	%		82	%
Consulting		19			18

Total revenue		100			100
Cost of revenue (as a percent of related revenue):
Application		21			22
Consulting		81			75


	Three Months Ended March 31,
	2008			2007
Total cost of revenue		32			31

Gross profit		68			69
Operating expenses:
Sales and marketing		29			30
Research and development		19			19
General and administrative		18			19

Total operating expenses		66			68

Operating income					2
Other income (expense):
Interest income		2			2
Interest expense		—			—

Total other income, net		2			2

Income before provision for income taxes		5			4
Provision for income taxes		1			1

Net income		4	%		3	%

Comparison of the Three Months Ended March 31, 2008 and 2007

Revenue


	Three months ended March 31,
	2008		2007		$ change		% change
	(In thousands)
Application revenue	$	30,201	$	23,655	$	6,546		28	%
Consulting revenue		7,038		5,062		1,976		39	%

Total revenue	$	37,239	$	28,717	$	8,522		30	%

The increase in application revenue was attributable to sales of our applications, including sales to new customers and additional sales to our current customers. The increase in consulting revenue was attributable to higher demand for services from new and existing customers. The prices of our solutions and services were relatively consistent on a period-to-period comparative basis. Application revenue as a percentage of total revenue was 81% for the three months ended March 31, 2008 which is consistent with same period in the prior year.

Prior to January 1, 2005, certain of our subsidiaries outside of North America were the contracting parties for sales transactions within their regions. After January 1, 2005, our U.S. company has been the contracting party for all new sales agreements and renewals of existing sales agreements entered into with customers outside of North America. As our customers renew their agreements with us over time, the percentage of total revenue identified to our subsidiaries outside of North America should decline. Accordingly, the geographic mix of total revenue, based on the country of location of the Taleo contracting entity, for the three months ended March 31, 2008 was 94%, 6% and 0% in the United States, Canada and the rest of the world, respectively, as compared to 92%, 5% and 3%, respectively, for the three months ended March 31, 2007. We also track the geographic mix of our revenue on the basis of the location of the contracting entity for our customers. The geographic mix of total revenue, based on the country of location of the customer contracting entity, for the three months ended March 31, 2008 was 89% from North America and 11% from the rest of the world, as compared to 91% from North America and 9% from the rest of the world for the three months ended March 31, 2007.

Cost of Revenue


	Three months ended March 31,
	2008		2007		$ change		% change
	(In thousands)
Cost of revenue — application	$	6,290	$	5,100	$	1,190		23	%
Cost of revenue — consulting		5,724		3,789		1,935		51	%

Cost of revenue — total	$	12,014	$	8,889	$	3,125		35	%

Cost of application revenue increased primarily as a result of a $0.8 million increase in hosting facilities cost, a $0.3 million increase in employee related cost (including $0.1 million in stock based compensation expense) and a $0.1 million increase in overhead allocation costs. Hosting facilities cost increased primarily due to additional software third-party fees and amortization expenses resulting from enhancements to our hosting infrastructure. Employee related cost increased as a result of higher salaries for replacement headcount. Overhead allocation costs increased primarily from an increase in employee benefits. We believe our cost of

application revenue will remain consistent in the near term. We expect the cost of application revenue in dollar terms will increase in the latter part 2008 as revenue increases but we expect cost of application revenue to remain consistent as a percentage of application revenue.

Cost of consulting revenue increased primarily as a result of a $1.1 million increase in employee-related costs (including $0.1 million in stock based compensation expense), a $0.3 million increase in travel expenses, a $0.3 million increase in professional services, and a $0.2 million increase in overhead allocation costs. The increase in employee related cost, travel expenses and overhead allocation costs resulted from an increase in headcount by 25 persons in the first quarter of 2008 compared to the same period in prior year. Headcount increased to meet customer demand for our consulting services. Additionally, professional services expenses increased as a result of subcontracting portions of governmental consulting to third parties. We expect the cost of consulting revenue to increase in dollar terms over the remainder of the year as consulting revenue increases, and to decrease as a percentage of consulting revenue, as we expect the utilization rates for our consultants, which is the percentage of time out of a 2,080 hour work year that each consultant is billable, to improve in the latter part of the year.

Gross Profit and Gross Profit Percentage


	Three months ended March 31,
	2008		2007		$ change		% change
	(In thousands)
*Gross profit*
Gross profit — application	$	23,911	$	18,555	$	5,356		29	%
Gross profit — consulting		1,314		1,273		41		3	%

Gross profit — total	$	25,225	$	19,828	$	5,397		27	%


	Three months ended March 31,
	2008			2007			Change
*Gross profit percentage*
Gross profit percentage — application		79	%		78	%		1	%
Gross profit percentage — consulting		19	%		25	%		(6	)%
Gross profit percentage — total		68	%		69	%		(1	)%

Gross profit on application of $23.9 million represents an increase of $5.4 million or 29% over the same quarter in the prior year. Application revenue grew by 28% over the same period. The higher gross profit percentage on application revenue was driven by increased efficiencies in the use of our production infrastructure. We expect the gross profit percentage on application to be consistent as we build out additional capacity in our production data centers in advance of anticipated growth.

Gross profit on consulting was relatively flat when compared to the same period in 2007, however gross profit percentage on consulting decreased by 6%. Gross profit percentage on consulting was negatively impacted by the deferral of revenue related to certain milestone engagements where revenue is deferred to future periods but expenses are reflected in the current period. Conversely, gross profit percentage on consulting was positively impacted by the recognition of revenue deferred from prior periods for which expenses were recorded in the prior period. The net impact of these factors was a decrease in gross profit percentage on consulting. In addition, in the first quarter of 2008 gross profit percentage on consulting was negatively impacted by our annual services kick-off meeting, which took billable resources out of the field for one week and increased non-billable travel expense.

We expect the total gross profit percentage to increase over the remainder of the year.

Operating expenses


	Three months ended March 31,
	2008		2007		$ change		% change
	(In thousands)
Sales and marketing	$	10,670	$	8,517	$	2,153		25	%
Research and development		7,033		5,403		1,630		30	%
General and administrative		6,567		5,394		1,173		22	%

Sales and marketing expenses for the first quarter of 2008 increased by 25% over the same quarter in the prior year as a result of a $1.3 million increase in employee related cost (including $0.3 million in stock based compensation expense), a $0.2 million increase in marketing expenses, a $0.2 million increase in travel expenses, a $0.2 million increase in professional services and other expenses, a $0.1 million increase in depreciation and amortization and a $0.2 million increase in overhead allocation costs. To support our business growth, our headcount increased by 25 persons compared to the same quarter in the prior year resulting in additional employee related cost and travel expenses. Our increase in marketing expenses resulted primarily from promotional cost related to our small business application. Additionally, depreciation and amortization increased due to the acquisition of JobFlash and Wetfeet and our overhead allocation costs increased due in part to an increase in employee benefits. We expect sales and marketing expense over

the near term will increase in dollar terms as we continue to grow our business; however we expect it to remain consistent as a percentage of revenue.

Research and development expenses for the first quarter of 2008 increased by 30% over the same quarter in the prior year as a result of a $0.6 million increase in employee related cost (including $0.1 million in stock based compensation expense), a $0.6 million increase in product development and maintenance cost, a $0.1 million increase in depreciation and amortization expenses, a $0.1 million increase in travel expenses and a $0.2 million increase in overhead allocation costs. Product development cost increased primarily due to an increase in professional services outside the U.S. while amortization and depreciation expense increased due to our JobFlash acquisition. Employee related cost increased primarily due to 29 additional persons in the first quarter of 2008 compared to the same period in the prior year and an increase in employee benefits. We expect our research and development expenses will increase in terms of dollars and slightly increase as a percentage of revenue in the near term due increased utilization of research and development resources outside the U.S.

General and administrative expenses for the first quarter of 2008 grew by 22% over the same quarter in the prior year as a result of a $1.2 million increase in employee related cost (including $0.6 million in stock based compensation expense), a $0.8 million increase in legal cost, a $0.2 million increase in telecommunications expenses, a $0.1 million increase in travel expenses, partially offset by a $0.7 million increase in the allocation of general and administrative costs to cost of revenue, sales and marketing and research and development expense line items, a $0.3 million increase in foreign exchange gains, and a $0.1 million decrease in building expenses. Employee related cost increased primarily due to 17 additional persons in the first quarter of 2008 compared to same period in the prior year and equity compensation granted to named executive officers. Legal cost increased as a result of a litigation settlement accrual recorded during the period. Overhead costs increased primarily due to increased benefit cost. We expect general and administrative expenses to increase in terms of dollars and decrease modestly as a percentage of revenue over the near term due to cost containment.

Contribution Margin


	Three months ended March 31,
	2008		2007		$ change		% change
	(In thousands)
*Contribution Margin*
Contribution margin — application	$	16,878	$	13,152	$	3,726		28	%
Contribution margin — consulting		1,314		1,273		41		3	%

Contribution margin — total	$	18,192	$	14,425	$	3,767		26	%

Application contribution margin increased quarter over quarter as a result of an application revenue increase of 28% while cost of application revenue only increased by 23%. Additionally, the application revenue increase adequately covered the 30% increase in research and development expenses. We attribute the increase in application contribution margin to the increase in revenue being sufficient to cover increases in hosting expenses. Further, as mentioned in our explanation of gross profit on consulting, we attribute the increase in consulting contribution margin to timing of revenue recognition.

Other income (expense)


	Three months ended March 31,
	2008			2007			$ change			% change
	(In thousands)
Interest income	$	778		$	673		$	105			16	%
Interest expense		(45	)		(19	)		(26	)		137	%

Total other income, net	$	733		$	654		$	79			12	%

Interest income and interest expense

Interest income —The increase in interest income is primarily attributable to higher average daily cash balances during the first quarter of 2008 compared to the same quarter in the prior year even though the average interest rate decreased compared to the prior year.

Interest expense —The increase in interest expense is attributable to higher debt balances related to capitalized software contracts during the first quarter of 2008 compared to the same quarter in the prior year.

Provision for Income Taxes


	Three months ended March 31,
	2008		2007		$ change			% change
	(In thousands)
Provision for income taxes	$	87	$	260		(173	)		(67	)%

The decrease in income tax expense is due principally to a $262,000 reversal of our U.S. valuation allowance on the deferred tax assets relating to federal minimum tax credits. At March 31, 2008, a valuation allowance remained only against our U.S. deferred tax assets, excluding federal minimum tax credits, since it was determined to be more likely than not these assets would not be realized. If, based on the operating results of 2008 and a 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 2008 or that any reduction of our valuation allowance will actually occur.

We provide for income taxes on interim periods based on the estimated effective tax rate for the full year. We record 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.

Liquidity and Capital Resources

At March 31, 2008, our principal source of liquidity was a net working capital balance of $75.6 million, including cash and cash equivalents totaling $91.7 million. Included in the $91.7 million is $0.4 million of funds designated for payment to Taleo Contingent customers.


	Three months ended March 31,
	2008			2007			$ change			% change
	(In thousands)
Cash provided by operating activities	$	7,027		$	13,902		$	(6,875	)		(49	)%
Cash used in investing activities		(1,902	)		(1,311	)		591			(45	)%
Cash provided by financing activities		400			2,400			(2,000	)		(83	)%

Net cash provided by operating activities was $7.0 million for the three months ended March 31, 2008 compared to net cash provided by operating activities of $13.9 million for the three months ended March 31, 2007. Consistent with prior periods, cash provided by operating activities has historically been affected by revenues, changes in working capital accounts, particularly increases in accounts receivable, deferred revenue, customer deposits and add-backs of non-cash expense items such as depreciation and amortization, and the expense associated with stock-based awards. Specifically, stock-based compensation expense for the three months ended March 31, 2008 was $2.5 million versus $1.4 million during the three months ended March 31, 2007. This is a result of more stock options having been granted as well as an increase in average stock price over the last three quarters of 2007. Leading to an increase in expense, depreciation and amortization expense increased $1.1 million in the first quarter of 2008 compared to the same period last year primarily due to the acquisition of software for use in our production environment in 2007. These increases were offset by decreases resulting from the timing of certain cash payments. We received a $2.3 million payment from the Canadian government related to research development credits during the first quarter of 2007 compared to no payments in the first quarter of 2008. Additionally, during the three months ended March 31, 2008, cash provided by operating activities decreased significantly over the same period in the prior year primarily due to a reduction in Taleo Contingent customer funds included in cash from $9.6 million as of March 31, 2007 to $0.4 million as of March 31, 2008.

Net cash used in investing activities was $1.9 million for the three months ended March 31, 2008 compared to net cash used in investing activities of $1.3 million for the three months ended March 31, 2007. This increase between periods was primarily the result of $1.2 million in computers and software purchases during the first three months of 2008 compared to $0.8 million in property and equipment purchases during the same period in 2007. Additionally, during the first quarter of 2007, we acquired JobFlash for $3.1 million and restrictions on $2.5 million in cash were eliminated. Similar activity did not occur in 2008.

Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2008, compared to net cash provided by financing activities of $2.4 million for the three months ended March 31, 2007. This decrease was primarily due to a $2.1 million decline in proceeds received from stock option and warrant exercises during the first quarter of 2008 versus the first the

quarter of 2007. The decrease in stock exercise coincides with a decline in the average stock price during the three months ended March 31, 2008.

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. 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. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies 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 is detailed in Note 10 Commitments and Contingencies of our Unaudited Condensed Consolidated Financial Statements.


			Less Than						More Than
	Total		1 Year		1—2 Years		3—5 Years		5 Years
	(In thousands)
Capital lease obligations	$	39	$	25	$	14	$	—	$	—
Interest payments		1		1		—		—		—
Facility leases		6,377		2,223		2,000		2,154		—
Operating equipment leases		919		832		81		6		—
Third party hosting facilities		1,326		974		352		—		—
Software contracts		4,276		3,819		457		—		—

Total contractual cash obligations	$	12,938	$	7,874	$	2,904	$	2,160	$	—

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 10 Commitments and Contingencies 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.

Income Taxes

Our parent company and its subsidiaries’ income tax returns are periodically examined by various tax authorities. In connection with such examinations, tax authorities raise issues and propose tax adjustments and we review and contest certain of the proposed tax adjustments. While the timing and ultimate resolution of these matters is uncertain, we anticipate that certain of these matters could be resolved during 2007.

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 the three months ended March 31, 2008, 6% and 8% 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 $7,000 of debt denominated in Canadian dollars as of

March 31, 2008. 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 sterling, Euro, Singapore dollar and New Zealand dollar, in which certain of our customer contracts are denominated. For the three months ended March 31, 2008, the Canadian dollar increased in value by 19% over the U.S. dollar on an average basis compared to the same period in the prior year. This change in value had a minimal impact on our earnings for the first quarter of 2008. If the U.S. dollar continues to weaken compared to the Canadian dollar, our operating results may be negatively impacted. 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 $91.7 million at March 31, 2008. This compared to $86.1 million at December 31, 2007. 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 our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective 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 the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Kenexa Brassring, Inc., filed suit against us in the United States District Court for the District of Delaware for patent infringement on August 27, 2007. Kenexa asserts that we have infringed patent numbers 5999939 and 6996561, and seeks monetary damages and an injunction enjoining us from further infringement. We have reviewed this matter and believe that our software products do not infringe any valid and enforceable claim of these patents. We have filed an answer to the complaint filed by Kenexa Brassring, Inc. We have also engaged in settlement discussions with Kenexa Brassring. Inc., but no settlement has been reached.

In addition to pending litigation we have received the following notices of potential claims. In February 2005, the holder of patent number 6701313B1 orally asserted that he believes our software products infringe upon this patent. We reviewed this matter and believe that our software products do not infringe any valid and enforceable claim of this patent. Also, in September 2006, the holder of patent numbers 5537590 and 5701400 wrote us to inform us of its contention that our product offerings may infringe these patents. 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.

In addition to the matters described above, we are subject to various claims and legal proceedings that arise in the ordinary course of our business from time to time, including claims and legal proceedings that have been asserted against us by former employees and advisors. We have accrued for estimated losses in the accompanying unaudited condensed consolidated financial statements for matters where we believe the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. The adverse resolution of any one or more of those matters or the matter described above, over and above the amount, if any, that has been estimated and accrued in our unaudited condensed consolidated financial statements could have a material adverse effect on the our business, financial condition, results of operations and/or cash flows.

ITEM 1A. RISK FACTORS

Becauseof 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 sustain profitability.

Prior to the year ended December 31, 2007, we incurred annual losses since our inception. As of March 31, 2008 we had incurred aggregate net losses of $36.0 million, which is our accumulated deficit of $49.8 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 and requirements of being a public company. As we implement initiatives to grow our business, which include, among other things, acquisitions, international expansion and new product development, any failure to increase revenue or manage our cost structure could prevent us from completing these initiatives and 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 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 fees from our existing customers. As a result, maintaining the renewal rate of our 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 Taleo Enterprise Edition customers enter into software subscription agreements with a duration of three years or more from the initial contract date. Most of our Taleo Business Edition customers enter into annual software subscription agreements. 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.

In addition, we recently announced our signature of a definitive agreement to acquire Vurv Technology, Inc. (“Vurv”), subject to regulatory approval and satisfaction of customary closing conditions. Vurv has historically offered perpetual licenses and customer on-premise hosting for certain of its products. If we are unable to convert such Vurv customers to our Taleo hosted, subscription model, our future revenues may be adversely impacted.

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 three or more years for our Taleo Enterprise Edition customers and one year for our Taleo Business Edition customers. As a result, a substantial majority of our software subscription revenue in each quarter is generated from software subscription agreements entered into during prior 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. 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. 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.

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. 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.

Additionally, some new customers 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. To date, we have completed a limited number of agreements with such terms.

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 economic conditions globally and within the industries in which our customers operate. 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 may fluctuate

with global economic and business conditions. Historically, economic downturns have resulted in overall reductions in corporate information technology spending by large organizations. Accordingly, the current downturn in global economic conditions may weaken demand for our software and services. In addition, an economic decline impacting a particular industry may negatively impact demand for our software and services in the affected industry. Many of the industries we serve, especially financial services and technology, have recently suffered a downturn in economic and business conditions and may continue to do so. A softening of demand for enterprise application software and services, and in particular enterprise talent management solutions, caused by a weakening global economy or economic downturn in a particular sector would adversely effect our business and likely cause a decline in our revenue.

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. Our Taleo Enterprise Edition solution competes with vendors of enterprise resource planning software such as Oracle Corporation and SAP AG, and also with vendors such as ADP, Authoria, Cezane, Cornerstone OnDemand, Halogen Software, HRSmart, Jobpartners, Kenexa, Kronos, Peopleclick, Pilat, Plateau, Salary.com, Stepstone, SuccessFactors, Technomedia, TEDS, Vurv, Workday, and Workstream, that offer products and services that compete with one or more modules in our Taleo Enterprise Edition suite of solutions. Our Taleo Business Edition solution competes primarily with Bullhorn, Hiredesk, iCIMs, Openhire, Monster.com, Virtual Edge from ADP and Vurv Express from Vurv. 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.

Certain of our competitors and potential competitors have significantly greater financial, technical, development, marketing, sales, service and other resources than we have. Some of these companies also have a larger installed base of customers, longer operating histories and greater brand recognition than we have. Certain of our competitors provide products that may incorporate capabilities which are not available in our current suite of solutions, such as automated payroll and benefits, or services that we do not currently offer, such as recruitment process outsourcing services. 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 and such additional services may be viewed by some customers as enhancing the effectiveness of a competitor’s solutions. In addition, our 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.

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

The market in which we operate appears to be in the midst of a period of vendor consolidation. 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. For example, Kronos acquired Unicru in 2006 and recently acquired Deploy Solutions. Kronos itself was acquired in 2007 by the private equity firm Hellman & Friedman. Additionally, Kenexa acquired Brassring in 2006 and ADP acquired VirtualEdge in 2006. Unicru, Brassring, VirtualEdge and Deploy Solutions have been direct competitors of ours in the past and it is unclear what impact these acquisitions will have on our market and our long term ability to compete against the combined companies.

Our competitors may also establish or strengthen cooperative relationships with our current or future BPO partners, HRO 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.

In connection with the December 31, 2005 year-end audit we identified deficiencies in our internal control over financial reporting that led us to restate our unaudited condensed consolidated financial statements and we cannot be certain restatements will not occur again.

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 have adversely affected our ability to record, process, summarize and report financial data consistent with the assertions of management in our financial statements and 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, we restated our consolidated financial statements. We also identified a failure to appropriately apply GAAP to certain aspects of our financial reporting resulting from the lack of a properly designed financial reporting processes and a lack of sufficient technical accounting expertise. Certain of such deficiencies were also deemed to be material weaknesses. We have remediated all known material weaknesses that were identified as part of the December 31, 2005 year end audit; however, we cannot be certain that the measures we have taken will ensure that those or similar deficiencies and a resulting restatement will not occur in the future. Execution of restatements like the one described above could create a significant strain on our internal resources, cause delays in our filing of quarterly financial results, increase our costs and cause management distraction.

Failure to implement and maintain the appropriate internal controls over financial reporting could negatively affect our ability to provide accurate and timely financial information.

During 2006 we completed a review and redesign of our internal controls over financial reporting related to our closing procedures and processes, our calculations of our reported numbers, including depreciation expense and fixed assets, and the need to strengthen our technical accounting expertise. Despite these efforts, we identified a material weakness in connection with the evaluation of the effectiveness of our internal controls as of March 31, 2007 prior to the filing of our financial results for the period ended March 31, 2007, related to the identification of a material adjustment required, which affected cash, accounts receivable and cash flow from operations. As part of our ongoing processes we will continue to focus on improvements in our controls over financial reporting and will continue to do so in 2008. We have discussed deficiencies in our financial reporting and remediation of such deficiencies with the audit committee of our board of directors and will continue to do so as required. However, we cannot be certain that we will be able to remediate all deficiencies in the future. Any current or future deficiencies could materially and adversely affect our ability to provide timely and accurate financial information. In addition, if our acquisition of Vurv is approved and closes, deficiencies may exist in their internal controls which may be difficult to identify and correct.

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 on an aggregate contract value basis 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, sales cycles for our Taleo Enterprise Edition clients are generally between three 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 cycles unexpectedly lengthen, 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, satisfy increasingly sophisticated customer requirements, and achieve market acceptance, we must enhance and improve existing products and continue to introduce new products and services. For instance, in February 2008 our performance management software product became generally available in the market. 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 or if the products we develop or acquire do not meet performance expectations or have a higher than expected cost structure to host and maintain, our business and operating results will be adversely affected. Our efforts to expand our solutions beyond our current offerings or 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 additional expense to develop software products and to integrate acquired software products into existing platforms to maintain our competitive position. For example, if our acquisition of Vurv is approved and closes, it will require significant effort to maintain their products in addition to ours and to integrate the products of both companies over time. In addition, we have invested in software development locations other than the locations where we currently develop our software. Such locations include locations in Eastern Europe, Ukraine, Asia and may include other locations outside of North America. We may engage independent contractors for all or portions of this work. These efforts may not result in commercially viable solutions, may be more expensive or less productive than we anticipate, or may be difficult to manage and result in distraction to our management team. If we do not manage these remote development centers effectively or receive significant revenue from our product development 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 disrupt out ability to maintain a single version of our software releases or cause our customers to choose a competing solution. Vurv has historically allowed customer specific customizations of its software and we may find it difficult to support or migrate such customizations if our acquisition of Vurv is approved and closes.

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. For example, we recently announced the signing of a definitive agreement to acquire Vurv, subject to regulatory approval and customary closing conditions. If consummated, the Vurv acquisition will be our largest to date. We have limited experience in executing acquisitions. Acquisitions and investments involve a number of risks, including the following:

	•		being 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;

	•		difficulty incorporating the acquired technologies or products into our existing code base;

	•		problems arising from differences in the revenue, licensing or support model of the acquired business;

	•		customer confusion regarding the positioning of acquired technologies or products;

	•		difficulty maintaining uniform standards, controls, procedures and policies across locations;

	•		difficulty retaining the acquired business’ customers; and

	•		problems or liabilities associated with product quality, technology and legal contingencies.

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 includes cash, we could be required to use a substantial portion of our available cash to consummate any such acquisition. To the extent that we issue shares of stock or other rights to purchase stock, existing stockholders may be diluted and earnings per share may decrease. Our recently announced acquisition agreement with Vurv provides for consideration of up to $36.5 million of cash consideration, 4.1 million shares of Class A common stock, and up to an additional $9.0 million could be required to repay indebtedness. 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. In addition, 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 incurring expenses that may impact operating results.

We are discontinuing the time and expense processing services of our Taleo Contingent solution and intend to provide time and expense processing services to our current customers only through the expiration of their current agreements. We may have difficulty replacing the revenue from these customers.

During 2007, we continued to generate revenue from our Taleo Contingent solution based on a fixed percentage of the dollar amount invoiced for temporary labor charges processed through our time and expense functionality. Effective March 2007, we ceased entering into agreements to provide time and expense processing services for temporary workers and, accordingly, our revenue from such processing services will end. We are servicing our current customers to which we provide such time and expense processing services through the expiration of their current agreements with us. Fees for time and expense processing through our Taleo Contingent product declined throughout 2007; however, on an annualized basis such fees were still significant in 2007. We expect revenue from time and expense processing for these customers to continue to decline and ultimately end in 2008.

We may find it difficult to replace the revenue we currently receive from the processing of temporary worker time and expense transactions and our results may be negatively impacted.

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

We have partnered with a number of business process outsourcing, or BPO, and human resource outsourcing, or HRO, providers that resell our staffing solutions as a component of their outsourced human resource services and we intended to partner with more in the future. If customers or potential customers begin to outsource their talent management functions to BPOs or HROs that do not resell our solutions, or to BPOs or HROs 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 other consulting 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.

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 on less favorable terms to compete

successfully. Some 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 bundled 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 or services. 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. While we have security measures in place, 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. Unless our customers elect to purchase encryption, we do not encrypt data we store for our customers while such data is at rest in the database. Applicable law may require that a security breach involving certain types of unencrypted data be publicly disclosed. 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.

Our insurance policies may not adequately compensate us for any losses that may occur due to failures in our security measures.

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 in 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 and support 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 relatively new and evolving market for talent management software and services, which increases the difficulty of evaluating the effectiveness of our current business strategy and future prospects.

Our current business model and prospects for increases in revenue should be considered in light of the risks and difficulties we encounter in the evolving talent management market. Because this market is relatively new in comparison to other enterprise software markets, we cannot predict with 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 accurately evaluate our future prospects and to forecast with a high degree of certainty our projected quarterly or annual performance.

If acceptance of the vendor hosted, or on-demand, delivery model does not continue to develop, or develops more slowly than we expect, our business may be harmed.

The market for on-demand, vendor hosted enterprise software, also called software-as-a-service or SaaS, is still relatively new in comparison to the market for client-server based software. 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 require that they 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. 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 further, 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. If we do an acquisition, integrating the hosting infrastructure of the acquired entity may increase these challenges.

In addition, we are in the process of bringing to market a performance management product for which we may not be able to accurately predict the number of users, transactions and infrastructure demands. Such a failure could result in system outages for our customers and higher than expected costs to support and maintain our performance management solution, which could negatively affect our reputation and our financial results.

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. 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 weekly, 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 in the United States with Internap on the east coast and with Equinix on the west coast. In addition we recently entered into an agreement for the hosting of our Taleo Business Edition Service with Opsource, Inc. 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. In the case of Opsource, we also rely upon the third party vendor for hardware associated with our hosting infrastructure. 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 event 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. In the future, we may elect to open computing and communications hardware operations at additional third-party facilities located in the United States, Europe or other regions. We are not experienced at operating such facilities in jurisdictions outside the United States and doing so may pose additional risk to us.

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 required to issue credits pursuant to the terms of our contracts and may also be subject to financial liability or customer losses. Such credits could reduce our revenues below the levels that we have indicated we expect to achieve and adversely affect our margins and operating results.

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 personnel or our future success and business could be harmed

Our success depends on the continued employment of our senior management and other key employees, such as our chief executive officer and our chief financial officer. 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 do not maintain key person life insurance on any of our executive officers. Additionally, our continued success depends, in part, on our ability to attract and retain qualified technical, sales and other personnel. It may be particularly challenging to retain employees as we integrate new acquisitions, like our recently announced planned acquisition of Vurv, due to uncertainty among employees regarding their future and cultural differences.

Further, 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 relatively small labor market to attract and retain qualified engineers. We intend to invest in development centers in other locations but to date our development in operations in locations other than Quebec, Canada is not substantial.

We currently derive a significant portion of our revenue from international operations outside of North America 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 three months ended March 31, 2008, revenue generated outside of North America was 11% of total revenue, based on the location of the legal entity of the customer with which we contracted. We currently have international offices outside of North

America in Australia, France, the Netherlands, Singapore and the United Kingdom, which focus primarily on selling and implementing our solutions in those regions. However, we currently maintain data centers only in the United States. In 2008, we plan to continue our research and development operations in Quebec, Canada and expand our international operations, including opening product development locations and data centers outside of North America. We may also expand our international sales and services locations. These initiatives 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 the European Union 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-U.S. 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-U.S. citizens stored in databases within the United States or other concerns;

	•		greater difficulty in supporting and localizing our products;

	•		greater difficulty in localizing our marketing materials and legal agreements, including translations of these materials into local language;

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

	•		challenges inherent in efficiently managing an increased number of employees or independent contractors 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.

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 Australian dollar, British pound sterling, Canadian dollar, the euro, New Zealand dollar, Singapore dollar 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. For instance, in 2007, the impact of changes in foreign currency exchange rates compared to the average rates in effect during 2006 was a $1.2 million decrease in earnings. In 2008, we expect that the volatility in exchange rates for foreign currencies may continue and we could incur additional losses from the impact of such fluctuations. 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.

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

We are sometimes 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. In addition, legal claims that have not yet been asserted against us may be asserted in the future. See Note 10 — Commitments and Contingencies in our notes to unaudited condensed consolidated financial statements for further information regarding pending and threatened litigation and potential claims. .

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.

Software product developers such as us may continue to receive infringement claims as the number of products and competitors in our space grows and the functionality of products in different industry segments overlaps. For example, Kenexa, a competitor, filed suit against us for patent infringement in August 2007 and other infringement claims have been threatened against us. We can give no assurance that such claims will not be filed in the future. 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 entered into standard indemnification agreements in the ordinary course of business and may be required to indemnify our customers for our own products and third-party products that are incorporated into our products and that infringe the intellectual property rights of others. Although many of the third parties from which we purchase 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 patent 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, and Business Objects for reporting 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.

In order to manage our business effectively, we must continually manage headcount in an efficient manner. In the past we have undergone facilities consolidations and headcount reductions in certain locations and departments, and we may do so again in connection with our planned acquisition of Vurv or for other reasons. In such events we may incur charges for employee severance. As many employees are located in jurisdictions outside of the United States, we are required to pay the severance amounts legally required in such jurisdictions, which may exceed those of the United States. Further, we believe reductions in our workforce 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.

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.

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.

Accounting principles generally accepted in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the 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.

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. The application of GAAP also requires that we accomplish delivery of our solutions to our customers in order to recognize revenue associated with such solutions. In the context of our model, delivery generally requires the creation of an instance of the solution that

may be accessed by the customer via the Internet. We may experience difficulty in making new products available to our customers in this manner. In the event we are not able to make our solutions available to our customer via the Internet in a timely manner, due to resource constraints, implementation difficulties or other reasons, our ability to recognize revenue from the sales of our solutions may be delayed and our financial results may be negatively impacted.

If tax benefits currently available under the tax laws of Canada and the province 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 Agency or other taxing authorities, 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 since 1999, and expect that we will continue to receive these investment tax credits through December 2010. In 2007, we recorded a CAD $2.6 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 application of these credits through 2010. If these investment tax benefits are reduced or eliminated, our financial condition and operating results may be adversely affected.

In addition to the research and development investment credit program described above, our Canadian subsidiary has applied to participate in a scientific research and experimental development, or SRED, program administered by the Canadian federal government that provides income tax credits based upon qualifying research and development expenditures, including capital equipment purchases. In June 2007, we filed our initial SRED credit claims with respect to our 2005 and 2006 tax years and recorded combined credits of CAD $2.1 million and CAD $1.1 million in 2007. Our Canadian subsidiary is eligible to remain in the SRED program for future tax years as long as its development projects continue to qualify. These federal SRED tax credits can only be applied to offset federal taxes payable and are reported as a credit to tax provision to the extent they reduce taxes payable to zero with any residual benefits recorded as a net deferred tax asset. We believe that our Canadian subsidiary is in compliance with these government programs and that all amounts recorded will be fully realized. If these investment credits are reduced or disallowed by the Canada Revenue Agency (“CRA”), our financial condition and operating results may be adversely affected.

Our Canadian subsidiary is under examination by the Canada Revenue Agency (“CRA”) with respect to tax years 2000 and 2001. We have settled certain issues raised in the audit and are appealing the CRA’s treatment of Quebec investment tax credits. Final resolution of the CRA’s examination will have bearing on the tax treatment applied in subsequent periods not currently under examination. We have recorded income tax reserves believed to be sufficient to cover the estimated tax assessments for the open tax periods and have estimated the potential range of additional income, as a result of the Quebec investment tax credit, to be between CAD $1.0 million and $18.4 million.

There could be a significant impact to our uncertain tax position over the next twelve months depending on the outcome of the on-going CRA audit. In the event the CRA audit results in adjustments that exceed both our income tax reserves and available deferred tax assets, our Canadian subsidiary may become a tax paying entity in 2008 or in a prior year including potential penalties and interest. Any such penalties cannot be reasonably estimated at this time.

We are seeking United States tax treaty relief through the appropriate Competent Authority tribunals for the settlements entered into with CRA and will seek treaty relief for all subsequent final settlements. Although we believe we have reasonable basis for our tax positions, it is possible an adverse outcome could have a material effect upon our financial condition, operating results or cash flows in a particular quarter or annual period.

Other Foreign Tax Examinations:

As we continue to expand internationally, we may become subject to review by various foreign taxing authorities which could negatively impact our financial results. While we have reserved for these uncertainties and do not expect the outcomes of these reviews to be material to our operations, our current assessment as to the potential financial impact of these reviews could prove incorrect and we may incur income tax liability in excess of our current

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 may become 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.

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.

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 branding 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.

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;

	•		general economic conditions and data and the impact of such conditions and data on the equity markets;

	•		terrorist acts; and

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

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, 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 a third party from acquiring us.

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 acquirer 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.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit
Number		Description
2.1		Agreement and Plan of Reorganization dated May 5, 2008, by and among Taleo Corporation, Dolphin Acquisition Corp., Porpoise Acquisition LLC, Vurv Technology, Inc. and with respect to Articles VII, VIII and IX only, Derek Mercer as Stockholder Representative and U.S. Bank National Association as Escrow Agent (incorporated by reference to Exhibit 2.1 to the Registrant’s Report on Form 8-K filed on May 7, 2008)

10.1		Summary of the 2008 Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 7, 2008.)

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/ Katy Murray
		Katy Murray
Date: May 12, 2008		Chief Financial Officer

Exhibit Index


Exhibit
Number		Description
2.1		Agreement and Plan of Reorganization dated May 5, 2008, by and among Taleo Corporation, Dolphin Acquisition Corp., Porpoise Acquisition LLC, Vurv Technology, Inc. and with respect to Articles VII, VIII, IX only, Derek Mercer as Stockholder Representative and U.S. Bank National Association as Escrow Agent (incorporated by reference to Exhibit 2.1 to the Registrant's Report on Form 8-K filed on May 7, 2008)

10.1		Summary of the 2008 Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on February 7, 2008.)

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. freshman Good

Taleo (TLEO) Inactive 10-Q2008 Q1 Quarterly report

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