Taleo (TLEO) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from              to             

Commission File Number: 000-51299

TALEO CORPORATION

(Exact name of registrant as specified in its charter)

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

4140 Dublin Boulevard, Suite 400

Dublin, California 94568

(Address of principal executive offices, including zip code)

(925) 452-3000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

On May 2, 2011, the registrant had 41,064,815 shares of Class A common stock outstanding.

TALEO CORPORATION

INDEX

PART I — FINANCIAL INFORMATION		3
Item 1	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	28
PART II — OTHER INFORMATION		29
Item 1	Legal Proceedings	29
Item 1A	Risk Factors	29
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3	Defaults Upon Senior Securities	43
Item 4	(Removed and Reserved)	43
Item 5	Other Information	43
Item 6	Exhibits	44
Signatures		45

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share and per share data)

	March 31, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	145,781		$	141,588
Accounts receivable, net of allowances of $366 at March 31, 2011 and $354 at December 31, 2010		60,606			58,120
Prepaid expenses and other current assets		17,970			18,065
Investment credits receivable		6,206			6,034
Total current assets		230,563			223,807
Property and equipment, net		24,436			26,552
Restricted cash		11,553			218
Goodwill		206,418			206,418
Intangible assets, net		55,311			59,478
Other assets		7,237			7,363
Total assets	$	535,518		$	523,836
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	37,240		$	36,377
Deferred revenue - subscription and support and customer deposits		86,524			79,704
Deferred revenue - professional services		18,523			19,692
Capital lease obligations, short-term		86			105
Total current liabilities		142,373			135,878
Long-term deferred revenue - subscription and support and customer deposits		1,778			150
Long-term deferred revenue - professional services		8,491			10,006
Other liabilities		9,327			9,241
Capital lease obligations, long-term		33			46
Total liabilities		162,002			155,321
Commitments and contingencies (Note 10)
Stockholders’ equity:
Class A Common Stock; par value, $0.00001 per share; 150,000,000 shares authorized; 40,928,273 and 40,672,092 shares outstanding at March 31, 2011 and December 31, 2010, respectively		1			1
Additional paid-in capital		450,148			442,514
Accumulated deficit		(78,779	)		(76,609	)
Treasury stock, at cost, 73,501 and 34,738 outstanding at March 31, 2011 and December 31, 2010, respectively		(1,889	)		(776	)
Accumulated other comprehensive income		4,035			3,385
Total stockholders’ equity	$	373,516		$	368,515
Total liabilities and stockholders’ equity	$	535,518		$	523,836

See Accompanying Notes to Condensed Consolidated Financial Statements

3

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

	Three Months Ended March 31,
	2011			2010
Revenue:
Subscription and support	$	58,390		$	47,564
Professional services		13,107			7,482
Total revenue		71,497			55,046
Cost of revenue:
Subscription and support		14,046			11,313
Professional services		10,236			6,485
Total cost of revenue		24,282			17,798
Gross profit		47,215			37,248
Operating expenses:
Sales and marketing		23,486			17,060
Research and development		13,807			10,054
General and administrative		12,129			10,298
Total operating expenses		49,422			37,412
Operating loss		(2,207	)		(164	)
Other income (expense):
Interest income		86			127
Interest expense		(26	)		(34	)
Other income		—			885
Total other income (expense), net		60			978
Income (loss) before provision for (benefit from) income taxes		(2,147	)		814
Provision for (benefit from) income taxes		23			(4	)
Net income (loss)	$	(2,170	)	$	818
Net income (loss) per share attributable to Class A common stockholders — basic	$	(0.05	)	$	0.02
Net income (loss) per share attributable to Class A common stockholders — diluted	$	(0.05	)	$	0.02
Weighted-average Class A common shares — basic		40,602			39,156
Weighted-average Class A common shares — diluted		40,602			40,338

See Accompanying Notes to Condensed Consolidated Financial Statements

4

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(2,170	)	$	818
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		7,925			6,321
Loss on disposal of fixed assets and other assets		—			58
Amortization of tenant inducements		(48	)		(44	)
Tenant inducements from landlord		—			114
Stock-based compensation expense		4,093			3,177
Excess tax benefits on the exercise of stock options		(95	)		(16	)
Director fees paid with stock in lieu of cash		64			60
Gain on remeasurement of previously held interest in Worldwide Compensation, Inc.		—			(885	)
Bad debt provision (reduction)		50			(93	)
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(2,477	)		2,360
Prepaid expenses and other assets		509			(2,186	)
Investment credits receivable		—			(714	)
Accounts payable and accrued liabilities		2,117			2,001
Deferred revenues and customer deposits		5,599			438
Net cash provided by operating activities		15,567			11,409
Cash flows from investing activities:
Purchases of property and equipment		(2,344	)		(6,482	)
Deposit for the acquisition of Cytiva Software Inc.		(11,335	)		—
Acquisition of business, net of cash acquired		—			(13,381	)
Cash advance to Cytiva Software Inc.		(78	)		—
Acquisition of trademark intangible		(150	)		—
Net cash used in investing activities		(13,907	)		(19,863	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(282	)		(414	)
Payments for expenses associated with 2009 equity offering		—			(678	)
Excess tax benefits on the exercise of stock options		95			16
Treasury stock acquired to settle employees withholding liability		(1,112	)		(474	)
Proceeds from stock options exercised and ESPP shares		3,382			2,307
Net cash provided by financing activities		2,083			757
Effect of exchange rate changes on cash and cash equivalents		450			169
Increase (decrease) in cash and cash equivalents		4,193			(7,528	)
Cash and cash equivalents:
Beginning of period		141,588			244,229
End of period	$	145,781		$	236,701
Supplemental cash flow disclosures:
Cash paid for interest	$	3		$	7
Cash paid (refunded) for income taxes, net	$	(154	)	$	866
Supplemental disclosure of non-cash financing and investing activities:
Property and equipment purchases included in accounts payable and accrued liabilities	$	1,454		$	4,325
Accrued stock offering cost	$	—		$	3

See Accompanying Notes to Condensed Consolidated Financial Statements

5

TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business— Taleo Corporation and its subsidiaries (“we”, “us”, “our”) provide on-demand talent management solutions that enable organizations of all sizes to assess, acquire, develop, compensate and align their workforces for improved business performance. Our software applications are offered to customers primarily on a subscription basis.

Taleo Corporation 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. Our principal offices are in Dublin, California and we conduct our business worldwide, with wholly owned subsidiaries in Canada, France, the Netherlands, the United Kingdom, Singapore, and Australia. The subsidiary in Canada primarily performs product development, production, and customer support activities, and the other foreign subsidiaries are generally engaged in providing sales, account management and support activities.

Basis of Presentation— The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments necessary for a fair statement have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

The condensed consolidated balance sheet as of December 31, 2010 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. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto filed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on February 28, 2011. For the three months ended March 31, 2011, we recorded adjustments that accumulated to $0.3 million related to prior years that impacted income tax provision (benefit), net income and certain balance sheet accounts. For the three months ended March 31, 2010, we recorded adjustments that accumulated to $0.2 million that impacted revenue, net income and certain balance sheet accounts. Such adjustments were assessed according to the SEC’s Staff Accounting Bulletin 108 and deemed immaterial to previously reported financial statements and to the expected results for the year ended December 31, 2011.

Beginning in the first quarter of 2011, we changed the terminology used to report our revenues, from “Application” to “Subscription and Support” and from “Consulting” to “Professional Services”. This change in terminology did not result in any changes to our previously reported financial statements.

Recent Accounting Pronouncements— There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2011, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K, that are of significance, or potential significance to us.

2. Business Combinations

On January 31, 2011, we entered into a definitive purchase agreement to acquire Cytiva Software Inc. (“Cytiva”), a Canadian based mid-market provider of on-demand recruiting software solutions, for consideration of approximately $11.4 million dollars in cash, subject to adjustments for outstanding debt, third-party expenses and certain other specified items. At March 31, 2011, an $11.3 million deposit held in escrow for the acquisition of Cytiva was classified as ‘Restricted Cash’ on our condensed consolidated balance sheet. The acquisition closed on April 1, 2011, and the associated deposit was applied to the purchase price. Refer to Note 15 – Subsequent Events for a discussion of this acquisition.

Unaudited Pro Forma Financial Information

We acquired Learn.com, Inc. (“Learn.com”) on October 1, 2010. The unaudited pro forma financial information in the table below summarizes the combined results of operations of Taleo and Learn.com to reflect the acquisition as if it occurred on the first date of the three months ended March 31, 2010. The pro forma financial information, as presented below, is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition of Learn.com had taken place as of the beginning of the earliest period presented.

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(In thousands, except per share data)	Three Months Ended March 31, 2010
Revenue	$	61,911
Net loss attributable to Class A common stockholders	$	(6,119	)
Net loss attributable to Class A common stockholders — basic and diluted	$	(0.16	)
Weighted-average Class A common shares — basic and diluted		39,156

Our results of operations for the three months ended March 31, 2011 include $1.7 million in revenues related to Learn.com acquired deferred revenues. It is impractical to determine results of operations for Learn.com on a standalone basis as the entity’s operations have been integrated into our operations.

3. Revenue Recognition

We derive revenue from fixed subscription fees for access to and use of our on-demand subscription and support services and fees from professional services to support the implementation, configuration, education, and optimization of the applications. We present revenue and deferred revenue from each of these sources separately in our condensed consolidated financial statements.

In addition to fixed subscription fees arrangements, we have on limited occasions, entered into, or acquired arrangements which include perpetual licenses with hosting services to be provided over a fixed term. For hosted arrangements, revenues are recognized in accordance with the standards established by the Financial Accounting Standards Board (“FASB”) for hosting arrangements that includes a right of the customer to use the software on another entity’s hardware.

Revenue from subscription and support and professional services 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.

If collection is not considered probable, we recognize revenues when the fees for the services performed are collected. Subscription and support agreements entered into 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. However, if non-standard acceptance periods or non-standard performance criteria, cancellation or right of refund terms are required, we recognize revenue upon the satisfaction of such criteria, as applicable.

Subscription and support revenue

The majority of our subscription and support revenue is recognized monthly over the life of the subscription agreement, based on stated, fixed-dollar amount contracts with our customers and consists of:

• fees paid for subscription and support services;

• amortization of any related set-up fees; and

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

Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the longer of the life of the subscription agreement or the expected lives of customer relationships, which generally range from three to seven years. We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.

Professional services revenue

Professional services revenue consists primarily of fees associated with application configuration, integration, business process re-engineering, change management, and education and training services. Our professional services engagements are typically billed on a time and materials basis. These services are generally performed within six to twelve months after the consummation of the arrangement. From time to time, certain of our professional services projects are subcontracted to third parties. Customers may also elect to use unrelated third parties for the types of professional services that we offer. Our typical professional services contract provides for payment within 30 to 60 days of invoice.

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In October 2009, the FASB amended the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:

• provide updated guidance on how the deliverables of an arrangement should be separated, and how the consideration should be allocated;

• eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and

• require an entity to allocate revenue to an arrangement using the estimated selling prices (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price.

Valuation terms are defined as set forth below:

• VSOE — the price at which we sell the element in a separate stand-alone transaction

• TPE — evidence from us or other companies of the value of a largely interchangeable element in a transaction

• ESP — our best estimate of the selling price of an element in a transaction.

We elected to early adopt this accounting guidance in 2010 on a prospective basis.

We follow accounting guidance for revenue recognition of multiple-element arrangements to determine whether such arrangements 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. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis. Our professional services have standalone value because those services are sold separately by other vendors, and we have VSOE for determining fair value for consulting services based on the consistency in pricing when sold separately. Our subscription and support services have standalone value as such services are often sold separately. However, we use ESP to determine fair value for subscription and support services when sold in a multi-element arrangement as we do not have VSOE for these services and TPE is not a practical alternative due to differences in features and functionality of other companies’ offerings. When new subscription and support services products are acquired or developed that require significant professional services in order to deliver the subscription and support service, and the subscription and support and professional services cannot support standalone value, then such subscription and support and professional services are evaluated as one unit of accounting. We determined our ESP of fair value for our subscription and support services based on the following:

• We have defined processes and controls to ensure our pricing integrity. Such controls include oversight by a pricing committee that includes a cross functional team and members of executive management. Significant factors considered when establishing pricing include market conditions, underlying costs, promotions, and pricing history of similar services. Based on this information, management establishes or modifies pricing that is approved by the pricing committee.

• We analyzed subscription and support services pricing history and stratified the population based on actual pricing trends within certain markets and established ESP for each market.

For multi-element arrangements entered into or materially modified in 2010 and 2011, we allocate consideration in multi-element arrangements based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. The professional services revenue associated with the professional services element of such multi-element arrangements is generally recognized as the professional services are performed, or using a proportional performance model based on services performed for fixed fee professional service engagements.

For multi-element arrangements entered into prior to 2010, the related professional services revenues are recognized ratably over the remaining subscription term, unless the transaction is materially modified. In the event of a material modification to such multi-element arrangements, the transaction is evaluated in accordance with the new accounting guidance which will most likely result in any deferred professional services revenue being recognized at the time of the material modification.

Professional services revenue recognized in the first quarter of 2011 relating to multi-element arrangements entered into prior to 2010 was approximately $2.7 million. Additionally, at March 31, 2011 we deferred revenue of $0.8 million for services performed related to multi-element arrangements entered into prior to 2010.

For professional services sold separately from subscription and support services, we recognize professional services revenues as these services are performed for hourly engagements, or using a proportional performance model based on services performed for fixed fee engagements.

8

Expenses associated with delivering all professional services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of professional services are typically reimbursed by the customer. This is accounted for as both revenue and expense in the period the cost is incurred.

4. Concentration of Credit and Market Risk and Significant Customers and Suppliers

Financial instruments that potentially subject us to credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain substantially all of our cash and cash equivalents in financial institutions that we believe to have good credit ratings and represent minimal risk of loss of principal. Accounts located in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Certain operating cash accounts will exceed the FDIC limits.

Our allowance for doubtful accounts is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with problem accounts. We do not require our customers to provide collateral. Credit risk arising from accounts receivable is mitigated due to the large number of customers comprising our customer base and their dispersion across various industries. During the three months ended March 31, 2011 and 2010, there were no customers that individually represented greater than 10% of total revenue. There were no customers that individually represented greater than 10% of total accounts receivable at March 31, 2011 or December 31, 2010.

A portion of our revenues and expenses are generated in Canadian dollars as well as other foreign currencies and, as a result, we are exposed to market risks from changes in foreign currency exchange rates.

5. Fair Value of Financial Instruments

The carrying amounts of our financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other accrued expenses, approximate their fair values due to their nature, duration and short maturities.

6. Stock-Based Plans

We issue stock options, restricted stock and restricted stock units to our employees and outside directors and provide employees the right to purchase stock pursuant to our stockholder approved Employee Stock Purchase Plan (“ESPP”).

Stock-based compensation expense

We recognize the fair value of stock-based compensation in our condensed consolidated financial statements over the requisite service period of the individual grants, which generally is a four year vesting period. We recognize compensation expense for the stock options, restricted stock awards, restricted stock units, and ESPP purchases 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, 2011 and 2010. Shares issued as a result of stock option exercises, ESPP purchases, restricted stock awards and restricted stock units are issued out of common stock reserved for future issuance under our stock plans.

We recorded stock-based compensation expense in the following expense categories:

	Three Months ended March 31,
	2011		2010
	(In thousands)
Cost of revenue	$	745	$	538
Sales and marketing		1,161		884
Research and development		786		464
General and administrative		1,401		1,291
Total	$	4,093	$	3,177

Stock Options

We estimate the fair value of our stock options granted using the Black-Scholes option valuation model. The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the option’s expected term and the price volatility of the underlying stock. We elected to use the simplified method to determine the expected term of options due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. We estimate the volatility of our common stock by analyzing our historical volatility and considering volatility data of our peer group. We base the risk-free interest rate on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. 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.

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For options granted, we amortize the fair value on a straight-line basis over the requisite service period of the options which is generally four years.

Common Equity Plans

At March 31, 2011, 2,795,360 shares were available for future grants under our 2009 Equity Incentive Plan.

The following table presents a summary of the stock option activity under all stock plans for the three months ended March 31, 2011 and related information:

	Outstanding Options
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2010		2,263,505		$	18.45
Options granted		259,200		$	32.76
Options exercised		(220,448	)	$	15.34
Options forfeited /expired		(22,530	)	$	23.77
Outstanding at March 31, 2011		2,279,727		$	20.33		6.11	$	34,926,588
Vested and expected to vest at March 31, 2011		2,170,046		$	19.93		6.07	$	34,111,604
Exercisable at March 31, 2011		1,230,660		$	15.81		5.49	$	24,412,602

The weighted average grant date fair value of options granted during the three months ended March 31, 2011 was $17.02 per option.

The total intrinsic value of options exercised during the three months ended March 31, 2011 was $3.9 million and the total intrinsic value of options exercised during the three months ended March 31, 2010 was $2.1 million.

We recorded stock-based compensation expense associated with Class A common stock options of $1.1 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, unamortized stock-based compensation cost associated with Class A common stock options was $12.1 million, net of assumed forfeitures. This cost is expected to be recognized over a weighted-average period of 2.9 years.

Restricted Stock and Restricted Stock Units

The fair value of restricted stock and restricted stock units is measured based upon the closing NASDAQ Global Market price of our underlying stock as of the date of grant. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. Restricted stock and restricted stock units are amortized over the vesting period using the straight-line method. Upon vesting, restricted stock units convert into an equivalent number of shares of common stock.

The following table presents a summary of the restricted stock awards and restricted stock units for the three months ended March 31, 2011 and related information:

	Restricted Stock Units			Restricted Stock Awards			Weighted Average Grant Date Fair Value
Repurchasable/nonvested balance at December 31, 2010		1,254,803			212,222		$	23.24
Awarded		174,000			2,233		$	32.70
Released/vested		(72,263	)		(28,540	)	$	19.01
Forfeited/cancelled		(45,060	)		—		$	25.98
Repurchasable/nonvested balance at March 31, 2011		1,311,480			185,915		$	24.55

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We recorded stock-based compensation expense for restricted stock and restricted stock units of $2.5 million and $1.6 million for the three months ended March 31, 2011 and 2010, respectively.

As of March 31, 2011, unamortized compensation cost associated with restricted stock and restricted stock units was $26.0 million, net of assumed forfeitures. This cost is expected to be recognized over a weighted-average period of 3.0 years.

Employee Stock Purchase Plan (“ESPP”)

We recorded stock-based compensation expense in connection with the ESPP of $0.5 million and $0.3 million for the three months ended March 31, 2011 and 2010, respectively. Unamortized compensation cost was $0.2 million as of March 31, 2011. This cost will be recognized over the month ended April 30, 2011.

Reserved Shares of Common Stock

We have reserved the following number of shares of Class A common stock as of March 31, 2011 for the awarding of future stock options and restricted stock awards, release of outstanding restricted stock units, exercise of outstanding stock options and purchases under the ESPP:

	Reserved Shares
Stock Plans		6,912,214
Employee Stock Purchase Plan		1,972,516
Total		8,884,730

7. Property and Equipment

Property and equipment consist of the following at March 31, 2011 and December 31, 2010:

	March 31, 2011			December 31, 2010
	(In thousands)
Computer hardware and software	$	76,315		$	74,303
Furniture and equipment		3,991			3,867
Leasehold improvements		4,988			4,839
		85,294			83,009
Less accumulated depreciation and amortization		(60,858	)		(56,457	)
Total	$	24,436		$	26,552

Computer hardware and software included capital leases totaling $2.7 million at March 31, 2011 and December 31, 2010. Accumulated amortization relating to these capital leases totaled $2.6 million and $2.5 million at March 31, 2011 and December 31, 2010, respectively. Depreciation and amortization expense of property and equipment was $3.6 million for the three months ended March 31, 2011.

8. Intangible Assets and Goodwill

We acquired identifiable intangible assets as a result of the acquisitions of Learn.com and Worldwide Compensation, Inc. (“WWC”) on October 1, 2010 and January 1, 2010, respectively. The fair value of these intangible assets was determined based on the present value of the expected future cash flows from the Learn.com and WWC products acquired. We also capitalized $115.4 million of goodwill, which represents the excess purchase price over the net identifiable assets acquired in connection with these acquisitions. None of the goodwill recognized upon acquisition is deductible for tax purposes.

The allocation of the purchase price for Learn.com was based upon a preliminary valuation and changes to amounts recorded as assets or liabilities, such as tax assets and liabilities, may result in a corresponding adjustment to goodwill. We expect the allocation of the purchase price for Learn.com to be final in the third quarter of 2011.

There was no goodwill impairment in the three months ended March 31, 2011. The gross carrying amount of goodwill was $206.4 million as of March 31, 2011 and December 31, 2010.

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The following schedule presents the details of intangible assets as of March 31, 2011 and December 31, 2010:

	March 31, 2011									December 31, 2010
(Dollars in thousands)	Gross Carrying Amount		Accumulated Amortization			Net		Weighted Average Useful Life (in years)		Gross Carrying Amount		Accumulated Amortization			Net		Weighted Average Useful Life (in years)
Existing technology	$	25,881	$	(12,953	)	$	12,928		3.9	$	25,881	$	(11,475	)	$	14,406		3.9
Customer relationships		66,483		(27,548	)		38,935		5.6		66,483		(25,102	)		41,381		5.6
Trade name and other		1,892		(524	)		1,368		3.9		1,741		(390	)		1,351		4.0
Non-compete agreements		3,030		(950	)		2,080		2.4		3,030		(690	)		2,340		2.4
	$	97,286	$	(41,975	)	$	55,311			$	97,135	$	(37,657	)	$	59,478

Amortization expense associated with intangible assets was $4.3 million and $3.1 million for the three months ended March 31, 2011 and 2010, respectively. The estimated amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands):

Period	Estimated Amortization  Expense
Remainder of 2011	$	11,311
2012		13,514
2013		11,407
2014		10,176
2015		6,458
Thereafter		2,445
Total	$	55,311

9. Income Taxes

We calculate income taxes in interim periods based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual 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 quarter in which the event occurs. We recorded an income tax provision of $23,000 for the three months ended March 31, 2011 based on our estimated annual effective tax rate adjusted for discrete tax events recognized in the period. The estimated annual effective tax rate for the three months ended March 31, 2011 was 13.8%. The difference between the statutory rate of 34% and our estimated annual effective tax rate was due to state and foreign income tax rates, non-deductible expenses (including stock-based compensation, executive compensation, acquisition costs, and other non-deductible expenses), research and development credits in Canada, the utilization of acquired and operating net operating losses not previously benefited, and other changes to our valuation allowance. The discrete tax events during the quarter include tax benefits from stock-based compensation, changes in our uncertain tax benefits, and an increase to our valuation allowance associated with deferred tax liabilities (related to the amortization of tax-deductible goodwill on assets that are not amortized for financial reporting purposes) that are not considered a source of future taxable income for deferred tax asset realization purposes.

We assess the likelihood that our deferred tax assets will be deductible in some future year(s) and a valuation allowance is recorded if it is deemed more likely than not that such benefits will not be realized. As of March 31, 2011 we continue to maintain a valuation allowance against our U.S. deferred tax assets (excluding U.S. federal Alternative Minimum Tax credits). In addition, we expect to provide a valuation allowance on future U.S. tax benefits until significant positive evidence arises that demonstrates that these assets are more likely than not to be deductible in some future year(s). We consider all available evidence, both positive and negative, to determine whether a valuation allowance is needed. In making this determination, we give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in our overall assessment. In addition to considering forecasts of future taxable income, we also evaluate and quantify, when available, other possible sources of taxable income, namely the reversal of existing taxable temporary differences, taxable income in prior carryback years(s) if carryback is permitted under the tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgment. Certain taxable temporary differences that are not expected to reverse during the carryforward periods cannot be considered a source of future taxable income. In determining the valuation allowance we did not include the taxable temporary differences related to (i) certain transaction costs realized during our acquisition of Vurv which were deducted for tax and capitalized for financial reporting purposes and (ii) tax-deductible goodwill acquired during our acquisitions of WetFeet and JobFlash. These differences create deferred tax liabilities which are not expected to reverse in the future (i.e. are considered to have indefinite lives).

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As of March 31, 2011, we had uncertain tax benefits of approximately $6.2 million. We recognize interest and penalties related to uncertain tax positions in income tax expense. At March 31, 2011, cumulative accrued interest related to uncertain tax positions was less than $0.1 million. As we have net operating loss carryovers 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.

In February 2011, we received notice from the IRS closing the income tax audit of Learn.com for tax year 2007 with no assessment. There is no impact to the tax provision as a result of closing this audit. With the exception of Canada, we are no longer subject to foreign income tax examinations by tax authorities for years before 2004.

In December 2008, we were notified by the federal Canada Revenue Agency (CRA) of its intent to audit tax years 2002 through 2007. CRA has issued assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. In December 2010, we received a proposal letter from CRA, detailing their initial proposal of increasing 2004 taxable income by CAD $7.2 million. These adjustments relate principally to the treatment of refundable tax credits connected with the Information Technology Development Centres (CDTI) and income and expense allocations recorded between us and our Canadian subsidiary. We disagree with the CRA’s basis for these adjustments and intend to appeal the assessments through applicable administrative and judicial procedures. We have also sought U.S. tax treaty relief through Competent Authority for assessments received from the CRA. 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.

There could be a significant impact to our uncertain tax positions over the next twelve months depending on the outcome of any audit. We have recorded income tax reserves believed to be sufficient to cover any potential tax assessments for the open tax years. In the event the CRA audit results in adjustments that exceed both our tax reserves and our available deferred tax assets, our Canadian subsidiary may be subject to penalties and interest. Any such penalties and interest cannot be reasonably estimated at this time.

10. Commitments and Contingencies

We generally do not enter into long-term minimum purchase commitments. Our principal commitments consist of obligations under leases for office space, leases for computer equipment and to a lesser extent, leases for third-party facilities that host our applications. Commitments to settle contractual obligations in cash under operating and capital leases and other purchase obligations have not changed significantly from the “Commitments and Contingencies” table included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, except for the following agreements entered into during the current fiscal year 2011:

In February 2011, we entered into an amendment to our facility lease in Dublin, California (“Amendment to Lease”) for additional office space until June 2013. According to the terms of the Amendment to Lease, we will pay aggregate lease rentals of approximately $0.6 million through June 2013.

Litigation

Kenexa Litigations— Kenexa BrassRing, Inc. (“Kenexa”) filed suit against us in the United States District Court for the District of Delaware on August 27, 2007. Kenexa alleges that we infringed Patent Nos. 5,999,939 and 6,996,561, and seeks monetary damages and an order enjoining us from further infringement. We answered Kenexa’s complaint on January 28, 2008. On May 9, 2008, Kenexa filed a similar lawsuit against Vurv Technology, Inc. which we acquired in 2008 (now known as Vurv Technology LLC) (“Vurv”) in the United States District Court for the District of Delaware, alleging that Vurv has infringed Patent Nos. 5,999,939 and 6,996,561, and seeking monetary damages and an order enjoining further infringement. Vurv answered Kenexa’s complaint on May 29, 2008. We acquired Vurv on July 1, 2008. We have reviewed these matters and believe that neither our nor Vurv’s software products infringe any valid and enforceable claim of the asserted patents. We have engaged in settlement discussions with Kenexa, but no settlement agreement has been reached. Litigation is ongoing with respect to these matters, and both parties have filed summary judgment motions. Trial scheduled for the week of December 6, 2010, was postponed and rescheduled to begin June 27, 2011.

On June 30, 2008, we filed a reexamination request with the United States Patent and Trademark Office (“USPTO”), seeking reconsideration of the validity of Patent No. 6,996,561 based on prior art that we presented with our reexamination request. Finding that our reexamination request raised a “substantial new question of patentability,” the USPTO ordered reexamination of Patent No. 6,996,561 on September 5, 2008. On November 13, 2008, the USPTO issued an office action rejecting all of the claims of Patent No. 6,996,561 because they are either anticipated by or unpatentable over the prior art. After comments by both parties to the reexamination, on June 4, 2009 the USPTO issued a subsequent action standing by its determination that certain claims of Patent No. 6,996,561 are unpatentable, but indicating patentability of other claims. Both parties have since provided additional comments on this subsequent action and both parties have since filed appeals to elements of the reexamination to the USPTO’s Board of Patent Appeals and Interferences. The USPTO Board of Patent Appeals and Interferences held an oral hearing for April 6, 2011, but has not yet issued a ruling. Accordingly, the USPTO’s reexamination of Patent No. 6,996,561 is ongoing.

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In a separate action filed on June 25, 2008 in the United States District Court for the District of Delaware, Kenexa’s parent, Kenexa Technology, Inc. (“Kenexa Technology”), asserted claims against us for tortious interference with contract, unfair competition, unfair trade practices, and unjust enrichment arising from our refusal to allow Kenexa Technology employees to access and use our proprietary applications to provide outsourcing services to a customer. Kenexa Technology seeks monetary damages and injunctive relief. We answered Kenexa Technology’s complaint on July 23, 2008. On October 16, 2008, we amended our answer and filed counterclaims against Kenexa Technology, alleging copyright infringement, misappropriation of trade secrets, interference with contractual relations, and unfair competition arising from Kenexa Technology’s unauthorized access and use of our products in the course of providing outsourcing services to its customers. We sought declaratory judgment, monetary damages, and injunctive relief. We filed a motion to dismiss Kenexa Technology’s claims on July 21, 2009 and a motion for preliminary injunction to enjoin Kenexa Technology employees from accessing its solutions deployed at joint customers of both companies on July 22, 2009. These motions are pending before the Court. In addition, Kenexa has joined the litigation, and claims similar to those discussed above have been asserted against and by Kenexa. This matter is ongoing.

On November 7, 2008, Vurv sued Kenexa, Kenexa Technology, and two of Vurv’s former employees (who now work for Kenexa and/or Kenexa Technology) in the United States District Court for the Northern District of Georgia. In this action, Vurv asserts claims for breach of contract, computer theft, misappropriation of trade secrets, tortious interference, computer fraud and abuse, and civil conspiracy. The defendants answered Vurv’s complaint on December 12, 2008 without asserting any counterclaims. This matter is ongoing.

On July 17, 2009, Kenexa and Kenexa Recruiter, Inc. (together, the “Kenexa Plaintiffs”) filed suit against us, a current employee of ours and a former employee of ours in Massachusetts Superior Court (Middlesex County). The Kenexa Plaintiffs amended the complaint on August 27, 2009 and added Vurv, two of our former employees and two of our current employees. The Kenexa Plaintiffs assert claims for breach of contract and the implied covenant of good faith and fair dealing, unfair trade practices, computer theft, misappropriation of trade secrets, tortious interference, unfair competition, unjust enrichment, computer fraud and abuse. Vurv removed the complaint to the United States District Court for the District of Massachusetts and we and Vurv, along with two other defendants, answered the complaint on October 5, 2009. Additionally, four other defendants (our current and former employees) moved to dismiss for lack of jurisdiction on October 5 and October 26, 2009. The Court dismissed the case for lack of personal jurisdiction as to two individual defendants. It denied the motion with respect to the two other individual defendants. The matter is ongoing.

Other Matters— 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 customers, former employees and advisors and competitors. We are also subject to legal proceedings or discussions that may result in litigation, settlements or other liabilities in the future. For instance: (1) we have received and are currently responding to subpoenas from the Department of Homeland Security’s inspector general’s office relating to our commercial pricing for the Transportation Security Administration, a government entity that accessed our services through a third party prime contractor, and as a result of this inquiry, we may be subject to penalties, sanctions, or other damages, including forfeiture or refund of profits or certain fees collected, fines and suspension or prohibition from doing business with the involved government entity; (2) in the first half of 2010, we became aware that certain Taleo customers had been contacted by an intellectual property licensing firm asserting that a usability feature of the Taleo software was subject to patents held by the intellectual property licensing firm, and we are in discussions with the patent holder with respect to these assertions; (3) we were recently notified of a potential collective and/or class action claim under federal and state wage and hour laws with respect to a portion of our employee population, and we are in discussions with the potential claimants with respect to these assertions; and (4) we were recently notified by a former customer that the former customer intends to seek indemnification from us with respect to costs arising from an alleged data privacy breach involving the Vurv product that we acquired in 2008. Taleo is currently awaiting more information about this potential claim from the former customer.

We have accrued for estimated losses in the accompanying condensed consolidated financial statements for matters with respect to which we believe the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. Based on currently available information, we do not believe that the ultimate outcome of these unresolved matters, individually or in the aggregate, is likely to have a material adverse effect on our financial position, results of operations or cash flows. However litigation is subject to inherent uncertainties and our view on these matters may change in the future.

11. Other Income

On January 1, 2010, we completed our acquisition of WWC. In accordance with the acquisition method of accounting for a business combination, our previously owned 16% equity investment was re-measured to its $2.3 million fair value on the acquisition date and the $0.9 million difference between the fair value of equity investment and the $1.4 million carrying value was recorded as a gain in the first quarter of 2010.

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12. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying our outstanding dilutive stock options, restricted stock and restricted stock units had been issued. The dilutive effect of outstanding options, restricted stock, and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that we have not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. The following table sets forth the computation of basic and diluted net income (loss) per share:

	Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands, except per share data)
Numerator:
Net income (loss)	$	(2,170	)	$	818
Denominator:
Weighted-average shares outstanding (1)		40,602			39,156
Effect of dilutive options, restricted shares and restricted stock units		—			1,182
Denominator for dilutive net income (loss) per share		40,602			40,338
Net income (loss) per share — basic	$	(0.05	)	$	0.02
Net income (loss) per share — diluted	$	(0.05	)	$	0.02
Potentially dilutive securities (2)		1,864			619

(1) Outstanding shares do not include unvested restricted stock or unvested restricted stock units.

(2) The potentially dilutive securities are excluded from the computation of diluted net income (loss) per share for the above periods because their effect would have been anti-dilutive.

Effective for interim and annual periods beginning after December 15, 2008, and applied retrospectively, the FASB issued an accounting standard that requires use of the two-class method to calculate earnings per share when non-vested restricted stock awards are eligible to receive dividends (i.e., participating securities), even if we do not intend to declare dividends. Although our unvested restricted stock awards are eligible to receive dividends, they are not significant as compared with total weighted average diluted shares outstanding and there is no impact on our earnings per share calculation in applying the two-class method.

13. Segment and Geographic Information

We have two operating segments: subscription and support, and professional services. The subscription and support segment is engaged in the development, marketing, hosting and support of our software subscriptions. The professional services segment offers implementation, business process reengineering, change management, and education and training services. We do 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:

	Subscription and support		Professional services		Total
	(In thousands)
Three Months Ended March 31, 2011:
Revenue	$	58,390	$	13,107	$	71,497
Contribution margin(1)	$	30,537	$	2,871	$	33,408
Three Months Ended March 31, 2010:
Revenue	$	47,564	$	7,482	$	55,046
Contribution margin(1)	$	26,197	$	997	$	27,194

(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.

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Reconciliation to consolidated interim results:

	Three Months Ended March 31,
	2011			2010
	(In thousands)
Contribution margin for operating segments	$	33,408		$	27,194
Sales and marketing		(23,486	)		(17,060	)
General and administrative		(12,129	)		(10,298	)
Other income (expense), net		60			978
Income (loss) before provision for (benefit from) income taxes	$	(2,147	)	$	814

14. Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and foreign currency translation gains (losses).

	Three Months Ended March 31,
	2011			2010
	(In thousands)
Net income (loss)	$	(2,170	)	$	818
Foreign currency translation adjustments, net		650			(324	)
Comprehensive income (loss)	$	(1,520	)	$	494

15. Subsequent Events

On April 1, 2011, we completed our acquisition of Cytiva, a provider of on-demand recruiting software solutions. We expect the acquisition of Cytiva to improve our position in talent management for small and medium-sized businesses and expand our customer base. The total consideration paid by us to acquire all of the outstanding common stock and vested options of Cytiva was approximately $11.4 million in cash, subject to certain adjustment for outstanding debt, third-party expenses and certain other specified items. No contingent cash payments remain for this transaction. The assets, liabilities and operating results of Cytiva will be reflected in our consolidated financial statements from the beginning of our second quarter of 2011.

On April 22, 2011, we entered into a Credit Agreement (the “Credit Agreement”) which provides for an unsecured revolving credit facility in an amount of up to $125.0 million, with an option for us to request to increase the loan commitments by an aggregate amount of up to $25.0 million with new or additional commitments, for a total credit facility of up to $150.0 million. The revolving credit facility also has sublimits for swingline loans up to $10.0 million and for the issuance of standby letters of credit in a face amount up to $10.0 million. The line of credit is available until April 22, 2016, at which time all amounts borrowed must be repaid. At our option, revolving loans accrue interest at a per annum rate based on either (1) the base rate plus a defined margin depending on our consolidated leverage ratio, or (2) the LIBO rate plus a margin depending on our consolidated leverage ratio. The Credit Agreement contains certain customary affirmative and negative covenants. We are also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. The Credit Agreement includes customary events of default that could result in the acceleration of the obligations under the Credit Agreement.

We received $0.4 million in April 2011 from the settlement of the WWC escrow account for losses incurred by us as a result of certain breaches of the representations and warranties contained in the WWC acquisition agreement. The cash we received will be recorded as other income in the second quarter of 2011.

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

This Form 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 demand and expansion opportunities for our products, our customer base, our competitive position, and the impact of the current economic environment on our business. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “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 on Form 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

Overview

We are a leading global provider of on-demand talent management software solutions. We offer recruiting, performance management, compensation, succession planning, learning management, leadership development and analytics 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, skills and training, career plans and compensation 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 (including professional and hourly), in different locations, business units and regulatory environments.

We offer two suites of talent management solutions: Taleo Enterprise and Taleo Business Edition. Taleo Enterprise is designed for medium and large enterprises with more complex needs. Taleo Business Edition is designed for smaller, more centralized organizations, stand-alone departments and divisions of larger organizations, and staffing companies. Our revenue is primarily earned through subscription fees charged for accessing and using these solutions. Our customers generally are billed in advance for their use of our solutions, and we use these cash receipts to fund our operations. Our customers generally pay us on a quarterly or annual basis.

We focus our evaluation of our operating results and financial condition on certain key metrics, as well as certain non-financial aspects of our business. Included in our evaluation 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. 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 that strategy 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.

On April 1, 2011, we completed our acquisition of Cytiva, a provider of on-demand recruiting software solutions. The total consideration paid by us to acquire all of the outstanding common stock and vested options of Cytiva was approximately $11.4 million in cash. We expect the acquisition of Cytiva to improve our position in talent management for small and medium-sized businesses and expand our customer base.

Sources of Revenue

We derive our revenue from two sources: subscription and support revenue and professional services revenue.

Subscription and Support Revenue

Subscription and support revenue generally consists of subscription fees from customers for the right to access and use our applications, which includes the data hosting and maintenance of the application. The majority of our subscription revenue is recognized ratably on a monthly basis over the life of the subscription and support agreement, based on a stated, fixed-dollar amount. The majority of our subscription and support revenue in any quarter comes from transactions entered into in previous quarters.

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The term of our subscription and support agreements signed with new customers purchasing Taleo Enterprise is typically three or more years. The term of subscription and support agreements for new customers purchasing Taleo Business Edition is typically one year.

Subscription and support agreements entered into during the three months ended March 31, 2011 and 2010 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.

Professional services Revenue

Professional services revenue consists primarily of fees associated with application process definition, configuration, integration, change management, optimization, expansion and education and training services associated with our applications. Our professional services engagements are typically billed on a time and materials basis. These services are generally performed within six to twelve months after the consummation of the arrangement. From time to time, certain of our professional services projects are subcontracted to third parties. Our customers may also elect to use unrelated third parties for the types of professional services that we offer. Our typical professional services contract provides for payment within 30 to 60 days of receipt of the invoice.

For multi-element arrangements entered into or materially modified in the three months ended March 31, 2011 and 2010, we allocate consideration in multi-element arrangements based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. The revenue associated with the professional services element of such multi-element arrangements is generally recognized as the professional services are performed for time and material engagements, or using a proportional performance model based on services performed for fixed fee consulting engagements.

For multi-element arrangements entered into prior to 2010, the related professional services revenues are recognized ratably over the remaining subscription term, unless the transaction is materially modified. In the event of a material modification to such multi-element arrangements, the transaction is evaluated in accordance with the new accounting guidance which will most likely result in any deferred services revenue being recognized at the time of the material modification.

Professional services revenue recognized in the first quarter of 2011 relating to multi-element arrangements entered into prior to 2010 was approximately $2.7 million. Additionally, at March 31, 2011 we deferred revenue of $0.8 million for services performed related to multi-element arrangements entered into prior to 2010.

For professional services sold separately from subscription and support services, we recognize professional services revenues as services are performed for time and materials engagements, or using a proportional performance model based in services performed for fixed fee consulting engagements.

Expenses associated with delivering all professional services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of professional services are typically reimbursed by the customer and are accounted for as both revenue and expense in the period the cost is incurred.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of subscription and support revenue primarily consists of expenses related to hosting our application and providing support, including employee-related costs, depreciation expense associated with computer equipment, third party royalty expense, and amortization of intangibles from acquisitions. We allocate overhead such as rent and occupancy charges, information system cost, 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 Taleo Enterprise solutions from secure datacenters operated by third parties in which we have purchased cage space, electrical power and internet bandwidth. We currently deliver our Taleo Business Edition solutions from datacenters operated via third party managed services arrangements through which the datacenter provider provides electrical power, hardware, and internet bandwidth. We deliver our Talent Grid solutions via a similar managed services arrangement with third parties.

Cost of professional services revenue consists primarily of employee-related costs associated with these services and allocated overhead. The cost associated with providing professional services is significantly higher as a percentage of revenue than for our subscription and support revenue, primarily due to labor costs. We also subcontract to third parties for a portion of our consulting business. We recognize expenses related to our consulting services in the period in which the expenses are incurred.

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Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses for our sales and marketing staff, including commissions, marketing programs, allocated overhead and amortization of intangibles from acquisitions. Marketing programs include advertising, events, corporate communications, and other brand building and product marketing expenses.

Research and Development

Research and development expenses consist primarily of salaries and related expenses and allocated overhead, and third-party consulting fees. For periods prior to January 1, 2011, our research and development expenses are net of the investment tax credits we receive from the province of Quebec.

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, and other corporate expenses.

Critical Accounting Policies and Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. Our critical accounting policies did not materially change during the quarter ended March 31, 2011.

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. In our “Results of Operations” below, we have included two types of tables: period over period changes in income statement line items, and summaries of the key changes in expenses by natural category for each expense line item. 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.

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	Three Months Ended March 31,
	2011			2010
Condensed Consolidated Statement of Operations Data:
Revenue:
Subscription and support		82	%		86	%
Professional services		18	%		14	%
Total revenue		100	%		100	%
Cost of revenue (as a percent of related revenue):
Subscription and support		24	%		24	%
Professional services		78	%		87	%
Total cost of revenue		34	%		33	%
Gross profit		66	%		67	%
Operating expenses:
Sales and marketing		33	%		31	%
Research and development		19	%		18	%
General and administrative		17	%		19	%
Total operating expenses		69	%		68	%
Operating loss		(3	%)		(1	%)
Other income (expense):
Interest income		0	%		0	%
Interest expense		0	%		0	%
Other income		0	%		2	%
Total other income (expense), net		0	%		2	%
Income (loss) before provision for (benefit from) income taxes		(3	%)		1	%
Provision for (benefit from) income taxes		0	%		0	%
Net income (loss)		(3	%)		1	%

Comparison of the Three Months Ended March 31, 2011 and 2010

Revenue

	Three Months Ended March 31,
	2011		2010		$ Change		% Change
			(In thousands)
Subscription and support	$	58,390	$	47,564	$	10,826		23	%
Professional services		13,107		7,482		5,625		75	%
Total revenue	$	71,497	$	55,046	$	16,451		30	%

Subscription and support revenue increased due to sales to new customers, successful renewals of existing customers, sales of additional applications and broader roll out of our applications by existing customers and the addition of customers through our acquisition of Learn.com on October 1, 2010. Subscription and support revenue from our products for medium and larger, more complex organizations increased by $6.1 million for the three months ended March 31, 2011 as compared to the same period of 2010. Subscription and support revenue from our small business product lines increased by $4.7 million for the three months ended March 31, 2011 as compared to the same period of 2010. Our list prices for subscription and support services have remained relatively consistent on a year-over-year basis, and renewals of subscription and support services for medium and larger, more complex organizations, on a dollar-for-dollar basis, remained strong at approximately 94%. For the remainder of 2011, we expect to see renewals in the same percentage range, but unexpected events, such as significant staff reductions within our customer base, may negatively impact our renewal trends. We expect total subscription and support revenue to increase in 2011 as we continue to increase our sales of new and existing applications into our installed customer base, to new customers and to additional customers added through the acquisition of Cytiva on April 1, 2011.

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Our professional services revenue comes primarily from two kinds of engagements: standalone professional services engagements which are not associated with new product implementations and professional services engagements which are associated with new product implementations. Standalone professional services engagement revenue is generally recognized when the services are performed. Professional services revenue for engagements which are associated with new product implementation entered into prior to 2010 is generally recognized ratably over the term of the associated subscription and support services term with a significant portion of revenue deferred to periods beyond the period in which services are performed. Professional services revenue for engagements which are associated with new product implementation entered into since the beginning of 2010 has been generally recognized when the services are performed.

Professional services revenue that is recognized as services are performed increased in the three months ended March 31, 2011 when compared to the same period of 2010 resulting from the higher demand for services from an increased number of customers. This increase was offset in part by a decrease in professional services revenue recognized for professional services that were delivered prior to 2010 but are recognized ratably in later periods. While we expect the recognition of professional services revenue from pre-2010 multi-element arrangements to decline through 2011, we expect total professional services revenue to increase for the remainder of 2011 due to higher anticipated demand for our professional services.

Cost of Revenue

	Three Months Ended March 31,
	2011		2010		$ Change		% Change
			(In thousands)
Cost of revenue - Subscription and support	$	14,046	$	11,313	$	2,733		24	%
Cost of revenue - Professional services		10,236		6,485		3,751		58	%
Total cost of revenue	$	24,282	$	17,798	$	6,484		36	%

Cost of revenue – subscription and support – summary of changes

	Change from 2010 to 2011
	Three Months Ended March 31,
	(In thousands)
Employee-related costs	$	821
Hosting facility costs and software support		417
Depreciation and amortization		564
Third party royalty expense		617
Various other expenses		314
	$	2,733

During the three months ended March 31, 2011, the increase in cost of subscription and support revenue from the same period of the prior year was primarily driven by an increase in employee-related costs, depreciation and amortization expense, royalties, hosting facility costs and software support costs. Employee-related costs increased as a result of the hiring of additional employees primarily in connection with our acquisition of Learn.com in October 2010 and an increase in compensation costs due to merit pay raises. Hosting facility costs increased due to increased costs resulting from infrastructure investments, support costs associated with our production datacenter in Chicago, Illinois, which went into service in the second quarter of 2010, and software support cost increases from additional third-party software purchases used to support our product offerings. Depreciation and amortization expense increased due to amortization of intangible assets obtained in connection with the acquisition of Learn.com. Third party royalty expense increased primarily due to the royalty contracts that we acquired from the acquisition of Learn.com. We expect cost of subscription and support revenue to continue to increase in absolute dollars for the remainder of 2011 in support of increased revenues.

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Cost of revenue – professional services – summary of changes

	Change from 2010 to 2011
	Three Months Ended March 31,
	(In thousands)
Employee-related costs	$	2,127
Professional services		737
Business development and travel		375
Stock-based compensation		162
Various other expenses		350
	$	3,751

Expenses associated with delivering professional services are generally recognized as incurred when the services are performed. For the three months ended March 31, 2011, cost of professional services revenue increased as a result of an increase in employee-related costs, professional services cost, business development and travel cost, stock-based compensation, and other various expenses as compared to the same period of 2010. Employee-related costs increased as a result of increase in headcount due to the hiring of additional employees in connection with the acquisition of Learn.com in October 2010 as well as the hiring of additional employees in order to meet the current and anticipated demand for our consulting and training services. Professional services costs increased due to additional outsourced services corresponding with the increase in professional services revenue. Business development and travel expense increased due to increased headcount and professional service activities. Stock-based compensation costs increased as a result of incremental grants in 2010 and the first quarter of 2011. We expect cost of professional services revenue to increase in absolute dollars for the remainder of 2011 to meet higher anticipated demand for our professional services.

Gross Profit and Gross Profit Percentage

	Three Months Ended March 31,
	2011		2010		$ Change		% Change
			(In thousands)
Gross profit - subscription and support	$	44,344	$	36,251	$	8,093		22	%
Gross profit - professional services		2,871		997		1,874		188	%
Gross profit - total	$	47,215	$	37,248	$	9,967		27	%

Gross Profit percentage

	Three Months Ended March 31,
	2011			2010			% Change
Gross profit - subscription and support		76	%		76	%		0	%
Gross profit - professional services		22	%		13	%		9	%
Gross profit - total		66	%		67	%		(1	%)

Gross profit – subscription and support

The gross profit percentage on subscription and support revenue for the three months ended March 31, 2011 remained unchanged from the same period in 2010 due to the overall increase in subscription and support revenue being offset by an increase in costs associated with hosting facilities which escalated during the second quarter of 2010 when the datacenter in Chicago, Illinois went live. We expect gross profit on subscription and support revenue to increase in absolute dollars for the remainder of 2011 as we continue to support additional customers.

Gross profit – professional services

Historically, a significant percentage of professional services revenue has been recognized ratably over the term of the subscription and support agreement while expenses associated with delivering these services are recognized as incurred when the services are performed. The difference of the timing of revenue recognition compared to the timing of recognizing expenses as performed can cause fluctuations in gross profit for consulting services.

The higher gross profit percentage on professional services revenue in the three months ended March 31, 2011 compared to the same period of 2010 resulted from the combined impact of the revenue from professional services associated with new product implementations delivered before 2010 that are being recognized ratably and an increase in standalone professional services revenue recognized related to services performed during the first quarter of 2011. During the three months ended March 31, 2011, we benefited from recognizing revenue for which the related expense was recorded in the prior periods. We expect gross margins on professional services for the remainder of 2011 to be negatively impacted as revenue from professional services associated with new product implementations delivered before 2010, which is recognized ratably, continues to decline.

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Operating expenses

	Three Months Ended March 31,
	2011		2010		$ Change		% Change
			(In thousands)
Sales and marketing	$	23,486	$	17,060	$	6,426		38	%
Research and development		13,807		10,054		3,753		37	%
General and administrative		12,129		10,298		1,831		18	%
Total operating expenses	$	49,422	$	37,412	$	12,010		32	%

Sales and marketing – summary of changes

	Change from 2010 to 2011
	Three Months Ended March 31
	(In thousands)
Employee-related costs	$	3,293
Business development and travel		861
Depreciation and amortization		721
Marketing programs		476
Stock-based compensation		277
Various other expenses		798
	$	6,426

The increase in sales and marketing expense during the three months ended March 31, 2011 was primarily driven by an increase in employee-related costs, business development and travel costs, depreciation and amortization costs, and costs related to marketing programs. Employee-related costs increased due to an increase in headcount primarily from our acquisition of Learn.com as well as additional sales personnel hired to focus on adding new customers and increasing penetration within our existing customer base, merit pay raises, and an increase in incentive compensation due to an increase in sales. Business development and travel costs increased due to the increase in headcount while marketing program costs increased due to increased marketing activities for all products. Depreciation and amortization expense increased due to the amortization of intangible assets obtained in connection with the acquisitions of Learn.com offset in part by the decrease in amortization expense related to intangible assets acquired in connection with the Vurv acquisition. We amortize the Vurv intangible assets in proportion to our conversion of Vurv customers to Taleo products. There were fewer customers to convert in the first quarter of 2011 than the same period of 2010 resulting in a reduction in amortization expense. Stock-based compensation costs increased as a result of incremental grants in 2010 and the first quarter of 2011 combined with an overall increasing trend in our stock price in 2010 and the first three months of 2011. The increase in other expenses increased primarily as a result of allocated overhead costs due to the increase in headcount. We expect sales and marketing costs to increase in absolute dollars for the remainder of 2011 as we continue our efforts to grow our business.

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Research and development – summary of changes

	Change from 2010 to 2011
	Three Months Ended March 31
	(In thousands)
Employee-related costs	$	2,812
Professional services		390
Stock-based compensation		322
Various other expenses		229
	$	3,753

The increase in research and development expense during the three months ended March 31, 2011 was primarily driven by an increase in employee-related costs, professional services costs, and stock-based compensation costs. Employee-related costs increased primarily due to an increase in headcount resulting from the acquisition of Learn.com in October 2010 as well as hiring of additional employees, an increase in compensation costs due to merit pay raises, as well as the elimination of investment tax credit program for qualifying research and development expenditures. We participated in a provincial government program in Quebec, Canada through 2010 and received refundable investment tax credits based upon qualifying research and development expenditures. We recorded a $0.7 million reduction in our research and development expenses as a result of this program in the first three months of 2010. This particular refundable investment tax credit program in Quebec has been eliminated for 2011 and beyond. Professional services costs increased due to increased consulting and outsourcing efforts. Stock-based compensation costs increased as a result of incremental grants in 2010 and the first quarter of 2011 combined with an overall increasing trend in our stock price per share in 2010.

We expect our research and development expenses to increase in absolute dollars for the remainder of 2011 as we continue to integrate the operations of Learn.com and Cytiva and also continue our efforts to expand our development activities.

General and administrative – summary of changes

	Change from 2010 to 2011
	Three Months Ended March 31
	(In thousands)
Employee-related costs	$	1,591
Legal costs		365
Audit and tax related		554
Professional services		503
Bad debt reserve		143
Stock-based compensation		110
Foreign currency transaction gains		(767	)
Various other expenses		(668	)
	$	1,831

General and administrative expenses increased for the three months ended March 31, 2011 as compared to the same period in 2010 primarily due to an increase in employee-related costs, professional services costs, which included transaction costs associated with the acquisition of Cytiva in April 2011, legal costs associated with on-going litigation, and audit and tax-related costs and other corporate development activity. Employee-related costs increased due to an increase in headcount primarily from our acquisition of Learn.com and severance costs. Stock-based compensation costs increased as a result of incremental grants in 2010 and the first quarter of 2011 combined with an overall increasing trend in our stock price in 2010 as well as the three months ended March 31, 2011. These increases were offset in part by a decrease in foreign exchange transaction losses resulting from the fluctuations in foreign currency exchange rates. We expect our general and administrative expenses to increase in absolute dollars for the remainder of 2011 as we continue to integrate the operations of Learn.com and Cytiva.

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Other income (expense)

	Three Months Ended March 31,
	2011			2010			$ Change			% Change
	(In thousands)
Interest income	$	86		$	127		$	(41	)		(32	%)
Interest expense		(26	)		(34	)		8			(24	%)
Other income		—			885			(885	)		(100	%)
Total other income (expense), net	$	60		$	978		$	(918	)		(94	%)

Interest income — The decrease in interest income during the three months ended March 31, 2011 is attributable to a lower average cash balance during the current quarter compared to the same period in the prior year due to the acquisition of Learn.com in October 2010.

Interest expense — There was no significant change in interest expense during the three months ended March 31, 2011 compared to the same period in the prior year.

Other income — On January 1, 2010, we completed our acquisition of WWC. In accordance with the acquisition method of accounting for a business combination, our 16% previously owned equity investment was re-measured to its $2.3 million fair value on the acquisition date and the $0.9 million difference between the fair value of equity investment and the $1.4 million carrying value was recorded as gain in the first quarter of 2010.

Provision for (benefit from) income taxes

	Three Months Ended March 31,
	2011		2010			$ Change		% Change
	(In thousands)
Provision for (benefit from) income taxes	$	23	$	(4	)	$	27		(675	%)

We estimate our annual effective tax rate at the end of each quarter and recognize the tax effect of discrete tax events, which are unusual or occur infrequently, in the interim period in which they occur. The tax provision for the three months ended March 31, 2011 is $23,000. The effective tax rate for the three months ended March 31, 2011 is -1.1%, which is based on the estimated annual effective tax rate of 13.8% adjusted for discrete items recognized in the quarter.

The difference between the statutory rate of 34% and the estimated annual effective tax rate of 13.8% was primarily due to state and foreign income tax rates, non-deductible stock-based compensation expense, non-deductible executive compensation, non-deductible acquisition costs, other non-deductible expenses, research and development credits in Canada, the utilization of acquired and operating net operating losses not previously benefited and other changes to our valuation allowance. The discrete tax events during the quarter include an increase to our valuation allowance associated with deferred tax liabilities (related to the amortization of tax-deductible goodwill on assets that are not amortized for financial reporting purposes) that are not considered a source of future taxable income for deferred tax asset realization purposes.

The income tax provision for the three months ended March 31, 2011 as compared to the income tax benefit for the three months ended March 31, 2010 was principally due to the changes in permanent book versus tax differences relative to pre-tax book income, the utilization of acquired and operating net operating losses not previously benefited, and an increase to our valuation allowance associated with deferred tax liabilities that are not considered a source of future taxable income for deferred tax asset realization purposes.

Through March 31, 2011 we maintained a valuation allowance against our U.S. deferred tax assets as we determined that it was more likely than not that these assets would not be realized. If we are to conclude that the U.S. deferred tax assets will more likely than not be realized in the future, we will reverse the valuation allowance. Reversing the valuation allowance would likely have a material impact on our financial results in the form of reduced tax expense or increased tax benefit in the period the reversal occurs

To date, the Canada Revenue Agency (CRA) has issued assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. In December of 2010, we received a proposal letter from CRA for 2004, detailing their initial proposal of increasing taxable income of CAD $7.2 million. We disagree with the CRA’s basis for these adjustments and have appealed their decision through applicable administrative and judicial procedures. We have sought U.S. tax treaty relief through Competent Authority for the 2002 and 2003 assessments received by the CRA and have indicated our intent to do so for 2004 when CRA issues their final assessment.

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We recognize interest and penalties related to uncertain tax positions in income tax expense. At March 31, 2011, accrued interest related to uncertain tax positions was less than $0.1 million. As we have net operating loss carryovers 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. We are no longer subject to foreign income tax examinations by tax authorities for years before 2004.

Liquidity and Capital Resources

We have funded our operations primarily through cash flow from operations, the 2005 initial public offering of our common stock as well as the 2009 offering of our common stock. As of March 31, 2011, we had cash and cash equivalents totaling $145.8 million, net accounts receivable of $60.6 million, and investment credits receivable of $6.2 million. In addition, restricted cash totaled $11.5 million which included $11.3 million set aside for the acquisition of Cytiva on April 1, 2011, and $0.2 million in security deposits for property leases.

	Three Months Ended March 31,
	2011			2010			$ Change		% Change
	(In thousands)
Cash provided by operating activities	$	15,567		$	11,409		$	4,158		36	%
Cash used in investing activities		(13,907	)		(19,863	)		5,956		(30	%)
Cash provided by financing activities		2,083			757			1,326		175	%

Net cash provided by operating activities was $15.6 million and $11.4 million for the three months ended March 31, 2011 and 2010, respectively. Consistent with prior periods, cash provided by operating activities has historically been affected by changes in operating assets and liabilities, and net income (loss) adjusted for 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, 2011 was $4.1 million as compared to $3.2 million for the same period of 2010. This increase resulting from the new grants to employees and the increased market price per share of our stock, offset in part by reductions from fully vested, fully amortized stock options, which no longer impact expense in 2011. Additionally, depreciation and amortization expense increased by $1.6 million in the first three months of 2011 compared to the same period of 2010, primarily due to the amortization of intangible assets associated with the acquisition of Learn.com in October 2010 offset in part by the decrease in amortization of the intangible assets associated with the acquisition of Vurv as these become fully amortized.

Changes in operating assets and liabilities contributed $5.7 million to operating cash flows in the three months ended March 31, 2011. Our net accounts receivable balance fluctuates from period to period, depending on the timing of sales and billing activity, cash collections, and changes to our allowance for doubtful accounts. The change in deferred revenues was due to the addition of new customers and fluctuations resulting from the mix of annual and quarterly subscription and support billings combined with the timing of billings and the timing of the subscription and support revenue recognized associated with those contracts. The change in accounts payable and accrued liabilities was due to the timing of additional liabilities and payments in general, and does not reflect any significant change in the nature of accrued liabilities.

Net cash used in investing activities was $13.9 million for the three months ended March 31, 2011. Cash used in investing activities resulted primarily from the deposit of $11.3 million set aside for the acquisition of Cytiva on April 1, 2011 as well as $2.3 million in capital expenditures in the first quarter of 2011.

Net cash provided by financing activities was $2.1 million for the three months ended March 31, 2011 and primarily consisted of the proceeds from stock option exercises offset by treasury stock tax withholdings.

Our primary source of liquidity has been cash generated from operations as well as our stock offering in November 2009. In April 2011, we entered into a Credit Agreement which provides for an unsecured revolving credit facility in an amount of up to $125.0 million. Additionally, we acquired Cytiva on April 1, 2011 for approximately $11.4 million in cash. 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, the continuing market acceptance of our applications, the timing of general and administrative expenses as we grow our administrative infrastructure and the extent to which we acquire or invest in complimentary business products or technologies. In addition, we will likely enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies in the future. These investments could impact our liquidity and in particular our operating cash flows. Although we currently anticipate that cash flows from operations, together with our available funds, will continue to be sufficient to meet our cash needs for the foreseeable future, we may require or choose to obtain additional financing. Our ability to obtain additional financing will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing.

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Off–Balance Sheet Arrangements

We have historically not participated in transactions that involve unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Excluding operating leases for office space, computer equipment, software, and third party facilities that host our applications and our indemnification agreements, we do not engage in off-balance sheet financing arrangements.

Contractual Obligations

We generally do not enter into long-term minimum purchase commitments. Our principal commitments consist of obligations under leases for office space, operating leases for computer equipment and to a lesser extent, leases for third-party facilities that host our applications. Commitments to settle contractual obligations in cash under operating leases and other purchase obligations have not changed significantly from the “Commitments and Contingencies” table included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, except for the following agreements entered into during the current fiscal year 2011:

In February 2011, we entered into an amendment to our facility lease in Dublin, California (“Amendment to Lease”) for additional office space until June 2013. According to the terms of the Amendment to Lease, we will pay aggregate lease rentals of approximately $0.6 million through June 2013.

Legal expenditures could also affect our liquidity. We are subject to legal proceedings and claims that arise in the ordinary course of business. See Note 10 of the Notes to Condensed Consolidated Financial Statements “Commitments and Contingencies” in Part I, Item 1 of this Form 10-Q. 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/or cash flows.

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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. For the three months ended March 31, 2011, 4%, 5% and 6% of our revenue was denominated in Canadian dollars, euros and other foreign currencies, 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 significant 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. 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, in the Australian dollar, British pound sterling, the euro, Singapore dollar and New Zealand dollar, in which certain of our customer contracts are denominated. For the three months ended March 31, 2011, the Canadian dollar strengthened by approximately 6% against the U.S. dollar on an average basis compared to the prior year. Assuming a constant currency rate as the same period last year, the negative impact on our operating results was $0.4 million. If the currencies noted above uniformly fluctuated by plus or minus 500 basis points from our estimated rates, we would expect our net results to change by approximately minus or plus $0.4 million for the remainder of 2011. 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 $145.8 million at March 31, 2011. This compares to $141.6 million at December 31, 2010. These amounts were held primarily in cash or money market funds. Due to the short-term maturities of these money-market funds, we believe that we do not have any material exposure to changes in the fair value of our cash equivalents 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, with the participation of our Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2011, our disclosure controls and procedures were effective at the reasonable assurance level.

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 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 10 of the Notes to Condensed Consolidated Financial Statements “Commitments and Contingencies” in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Because of the following factors, as well as other variables affecting our operating results and financial condition, past performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occurs, our business, financial condition or results of operation could be materially and adversely affected. In that case, the trading price of our stock could decline, and you may lose some or all of your investment.

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

With the exception of the years ended December 31, 2007, 2009 and 2010, we have incurred annual losses in every year since our inception. As of March 31, 2011, our accumulated deficit was $78.8 million, comprised of aggregate net losses of $65.0 million and $13.8 million of dividends and issuance costs for preferred stock. In the three months ended March 31, 2011, we reported a net loss of $2.2 million. We cannot be certain that we will be able to sustain profitability on a quarterly or annual basis in the future. As we continue to incur costs associated with initiatives to grow our business, which may include, among other things, acquisitions, international expansion, significant hiring, and new product development, any failure to increase revenue or manage our cost structure could prevent us from achieving or sustaining profitability. For instance, in the year ended December 31, 2010, our results were negatively impacted by amortization expense associated with acquisitions. In the near term, we expect to continue to incur significant amortization expense associated with our past acquisitions. In addition, we may incur losses as a result of revenue shortfalls or increased expenses associated with our business. As a result, our business could be harmed and our stock price could decline.

Unfavorable economic conditions could limit our ability to grow our business or result in less favorable commercial terms in our customer agreements.

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. Our revenue is derived from organizations whose businesses may fluctuate with global economic and business conditions. Historically, economic downturns have resulted in overall reductions in corporate information technology spending. Accordingly, any downturn in global economic conditions may weaken demand for our software and services generally, or 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, including financial services, manufacturing (including automobile manufacturing), technology and retail, 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 affect our business and likely cause a decline in our revenue.

Unfavorable economic conditions may also cause increased delays in our sales cycles and increased pressure from prospective customers to offer higher discounts or less favorable payment, billing or other commercial terms than our historical practices, and may also cause increased pressure from existing customers to renew expiring software subscriptions agreements at lower rates, delay or cancel consulting or education services engagements, purchase fewer products upon renewal, or demand other less favorable commercial terms. In addition, certain of our customers may attempt to negotiate lower software subscription fees for existing arrangements because of downturns in their businesses. If we accept certain requests for higher discounts, lower fees or less favorable commercial terms, our business may be adversely affected and our revenues may decline.

Additionally, certain of our customers have become or may become bankrupt or insolvent as a result of an economic downturn, and we may lose all future revenue from such customers and payment of receivables may be lower or delayed as a result of bankruptcy proceedings.

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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.

We have made, continue to make and routinely evaluate acquisitions or investments in companies, products, services, and technologies to expand our product offerings, customer base and business. For example, in 2008, we completed our acquisition of Vurv, in January 2010 we completed our acquisition of WWC, in October 2010 we completed our acquisition of Learn.com and on April 1, 2011 we completed our acquisition of Cytiva. We have limited experience in executing acquisitions and investments. Acquisitions and investments involve a number of risks, including the following:

• being unable to achieve the anticipated benefits from our acquisitions;

• difficulty integrating the accounting systems, operations, and personnel of the acquired business;

• 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;

• difficulties and additional expenses associated with integrating or incorporating the acquired technologies or products into our existing code base and hosting infrastructure;

• difficulties and additional expenses associated with supporting the legacy products and hosting infrastructure of the acquired business;

• problems arising from differences in applicable accounting standards or practices of the acquired business (for instance, non-U.S. businesses may not prepare their financial statements in accordance with GAAP) or difficultly identifying and correcting deficiencies in the internal controls over financial reporting of the acquired business;

• problems arising from differences in the revenue, licensing (for instance, an acquired business may offer perpetual licenses), support (for instance, an acquired business may offer customer specific customizations of product code to certain customers) or consulting 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;

• difficulty converting the customers of the acquired business onto Taleo’s technology platform and contract terms; and

• problems or liabilities associated with product quality, data privacy, data security, regulatory compliance, 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. In addition, acquisitions may result in our incurring 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.

Because we recognize software subscription revenue over the term of the agreements for our software subscriptions, 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 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 affect our financial performance in that particular quarter or may not affect our financial performance until the next quarter. For example, because we recognize subscription and support 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.

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Because of the way we are required to recognize our professional services revenue under applicable accounting guidance, professional services revenue reported for a particular period may not be indicative of trends in our consulting business, which increases the difficulty of evaluating our future financial position.

During 2009 and prior years, when we sold software subscriptions and professional services in a single arrangement (sometimes referred to as a multi-element arrangement), we recognized revenue from professional services ratably over the term of the software subscription agreement, which is typically three or more years, rather than as the professional services were delivered, which is typically during the first six to twelve months of a software subscription agreement. Accordingly, a significant portion of the revenue for professional services performed in any quarterly reporting period prior to 2010 was deferred to future periods. However, under accounting guidance which we adopted on January 1, 2010, substantially all of our revenue from professional service arrangements entered into on or after January 1, 2010 is recognized as the consulting services are delivered. In addition, if we materially modify a multi-element arrangement entered into prior to 2010, the revenue associated with consulting services delivered in prior periods that would have been recognized ratably under our pre-2010 policy, will be recognized in the period of the material modification. The application of these revenue recognition methodologies will result in our professional services revenue for the foreseeable future including a mix of revenue from professional services delivered during the reporting period and professional services delivered in previous reporting periods, which may make our results more difficult to understand and less indicative of our current operational trends. Further, since we recognize expenses related to our consulting services in the period in which the expenses are incurred, the consulting margins we report in any quarterly reporting period may not be indicative of the actual gross margin on consulting services delivered during the reporting period.

If our existing customers do not renew their software subscriptions and buy additional solutions from us, or if our customers renew at lower fee levels, 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;

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

• the business environment of our customers and, in particular, headcount reductions by our customers.

Most of our Taleo Enterprise customers enter into software subscription agreements with 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. Factors that are not within our control may contribute to such fee reductions. For instance, many companies reduced their total employee populations during the recent economic downturn. As our software subscriptions are often based on the total number of employees for which our software applications may be used by a customer, a significant employee count reduction by a customer during the term of an agreement may result in a renewal that is based on a lower maximum employee limit for the use of our products and thus a lower renewal fee. 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 at lower fee levels, or fail to buy new products and services from us, our revenue may decline or our future revenue may be constrained.

If our efforts to attract new customers are not successful or we do not compete effectively with other companies offering talent management solutions, our revenue may not grow and could decline.

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 and our ability to compete with other talent management solution providers. Many of our prospective customers have traditionally used other products and services for their talent management requirements or have developed internal solutions to address certain talent management requirements. If our sales and marketing efforts are not successful, our prospective customers may not be familiar with us or our solutions or may not consider our solutions to be of sufficiently high value and quality and, as a result, we may not be considered in such prospective customers’ sale cycles.

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Additionally, in the past we have experienced, and expect to continue to experience, intense competition from a number of companies. Our solutions compete with enterprise resource planning software from vendors such as Oracle Corporation and SAP AG, and also with products and services from vendors such as ADP, Cezanne, Cornerstone OnDemand Inc., Halogen Software Inc., Healthcare Source, HRSmart, iCIMs, Jobpartners, Jobvite, Kenexa Corporation, Kronos, Peopleclick Authoria Inc., Plateau Systems Ltd., Saba Software, SilkRoad Technology, Stepstone Solutions, SuccessFactors Inc., SumTotal Systems Inc., and Workday, Inc. 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 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.

We have had to restate our historical financial statements and have identified internal control weaknesses.

In October 2009, we announced that, after upgrading to a new version of the equity program administration software that we license from a third-party provider, we identified differences in the stock-based compensation expense of prior periods and, after reviewing such differences, identified an error in our accounting for stock-based compensation expense. As a result of identifying the error, in October 2009, we concluded that accounting adjustments were necessary to correct certain previously issued financial statements. Accordingly, we restated those financial statements and recorded total cumulative additional stock-based compensation expense of approximately $2.6 million for the fiscal years ended December 31, 2008, 2007 and 2006 and the quarters ended June 30, 2009 and March 31, 2009. Specifically, we recorded increases in stock-based compensation expense of approximately $1.3 million in fiscal 2007, $1.2 million in fiscal 2006 and $0.3 million in the quarter ended June 30, 2009, and recorded reductions in stock-based compensation expense of approximately $0.1 million in fiscal 2008 and $0.1 million in the quarter ended March 31, 2009. In connection with this restatement, we determined that there was a material weakness in our internal control over financial reporting as of December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009. Specifically, our controls to calculate stock-based compensation expense related to the application of the forfeiture rate were not designed effectively, and a material weakness existed in the design of the controls over the calculation of stock-based compensation expense related to the application of the forfeiture rate as of those periods.

In addition, in March 2009, we announced that we had completed a review of our revenue recognition practices and, as a result of this review, we restated certain financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. The restatement resulted in the deferral to future periods of $18 million of consulting services revenue and approximately $0.2 million in subscription and support revenue previously recognized through June 30, 2008. Amounts in our previously issued consolidated financial statements for the years ended December 31, 2003 through 2007, and the interim condensed consolidated financial statements for each of the periods ended March 31, 2008 and June 30, 2008, have been corrected for the timing of revenue recognition for consulting services revenue during these periods, as well as to correct an error relating to the timing of revenue recognition for set-up fees, an element of our subscription and support services revenue. In connection with such review we identified certain control deficiencies relating to the application of applicable accounting literature related to revenue recognition. These deficiencies constituted a material weakness in internal control over financial reporting as of September 30, 2008, which led to items requiring correction in our historical financial statements and our conclusion to restate such financial statements to correct those items. Specifically, the control deficiencies related to our failure to correctly interpret the multi-element accounting guidance in determining the proper accounting treatment when subscription and support and consulting services are sold together.

We cannot be certain that the measures we have taken since these restatements will ensure that restatements will not occur in the future. Execution of restatements like the ones described above could create a significant strain on our internal resources and cause delays in our filing of quarterly or annual financial results, increase our costs and cause management distraction.

As part of our ongoing processes, we continue to focus on improvements in our internal control over financial reporting. We have discussed deficiencies in our financial reporting and our 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 detect, prevent or remediate all deficiencies which may exist now or in the future, including deficiencies which may constitute a material weakness in our internal control over financial reporting. Any such current or future deficiencies could materially and adversely affect our ability to provide timely and accurate financial information.

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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 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’ purchases;

• the timing of our customers’ 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, the Taleo Talent Grid, a foundation for sharing industry knowledge, technology and candidates, became generally available to our customers in September 2009, and Taleo 10, the newest version of our talent management solutions, became generally available to our customers in February 2010. Additionally, on January 1, 2010, we completed our acquisition of WWC, which allows us to offer a compensation management solution directly to our customers, and on October 1, 2010, we completed our acquisition of Learn.com, which allows us to offer a learning management solution directly to our customers. Any new products we develop or acquire may not be introduced in a timely manner, may not achieve the broad market acceptance necessary to generate significant revenue, and may generate additional development or integration expenses and resulting losses. 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. Additionally, 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 unprofitable business, which may harm our existing business.

If our security measures are breached and unauthorized access is obtained to customer data or personal information, 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 users’ personal information, including the personal information of our customers’ job candidates. As part of our solution, we may also offer third-party proprietary solutions which require us to transmit our customers’ proprietary data and the personal information of job candidates to such third parties. Security breaches could expose us to loss of this information, and we could be required to undertake an investigation, notify affected data subjects and appropriate legal authorities and regulatory agencies, and conduct remediation efforts, which could include modifications to our current security practices and ongoing monitoring for users whose data might have been subject to unauthorized access. Accordingly, security breaches may result in investigation, remediation and notification expenses, litigation, liability, and financial penalties.

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While we have administrative, technical, and physical security measures in place, and we contractually require third parties to whom we transfer data to have appropriate security measures, if any of these 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 or personal information, 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 and our partners to whom we transfer data may be unable to anticipate these techniques or to implement adequate preventative measures. Applicable law may require that a security breach involving certain types of data be disclosed to each data subject or 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 and breach of warranty claims against us;

• diversion of development and support resources;

• injury to our reputation;

• increased billing disputes and customer claims for fee credits; and

• failure to meet our contractual service level commitments and associated contractual liabilities.

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.

If we fail to manage our datacenter operations satisfactorily, our existing customers may experience service outages and data loss, and our new customers may experience delays in the deployment of our solution.

Our hosting infrastructure is a critical part of our business operations. Our customers access our solutions through a standard web browser via the internet and depend on us to enable fast and reliable access to our applications. We have experienced, and may in the future experience, disruptions within our hosting infrastructure, some of which have been significant, which have prevented customers from using our solutions from time to time. Factors that may cause such disruptions include:

• software errors or defects;

• equipment failures or defects;

• human error;

• physical or electronic security breaches;

• telecommunications outages from third-party providers;

• computer viruses or other malicious code;

• acts of terrorism or sabotage;

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

• power loss.

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

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We have also 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. 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.

We currently deliver our Taleo Enterprise solutions from datacenters in which we have purchased cage space, electrical power and internet bandwidth. We currently deliver our Taleo Business Edition solutions from datacenters operated via managed services arrangements through which the datacenter provider provides electrical power, hardware, and internet bandwidth. We deliver our Talent Grid solutions via similar managed services arrangements with third parties. We do not control the operation of any of the datacenter facilities mentioned above and must rely on our vendors to provide the physical security, facilities management and communications infrastructure services to ensure the reliable and consistent delivery of our solutions to our customers. Although we believe we would be able to enter into a similar relationship with another third party should one of these relationships fail or terminate for any reason, we believe our reliance on any third-party vendor exposes us to risks outside of our control. If these third-party vendors encounter financial difficulty such as bankruptcy or other events beyond our control that cause them to fail to secure adequately and maintain their hosting facilities or provide the required data communications capacity, our customers may experience interruptions in our service or the loss or theft of important customer data.

We may in the future consolidate certain of our datacenters with our other existing datacenters, or move certain datacenter operations to new facilities. For example, we recently consolidated our U.S. production datacenter operations for our Taleo Enterprise solution into a new facility in the Chicago, Illinois area. When we consolidated these datacenter operations, we relocated existing hardware, purchased new hardware, and migrated all of our Taleo Enterprise customers’ proprietary information and their users’ personal information. Although we take reasonable precautions designed to mitigate the risks of such a move, such transitions create increased risk of service disruptions, outages and the theft or loss of important customer and user data that could harm our reputation, subject us to financial liability, and adversely affect our revenue and earnings. We may also 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.

If, as a result of our datacenter operations, 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.

The consolidation or acquisition of our competitors or other similar strategic alliances or changes in product offerings could weaken our competitive position or reduce our revenue.

There has been vendor consolidation in the market in which we operate and we believe such consolidation is likely to continue. There may also be consolidation by one or more vendors with respect to the product sets currently offered by distinct talent management and human resource software vendors. Additional consolidation within our industry may change the competitive landscape in ways that adversely affect our ability to compete effectively.

Our competitors may also establish or strengthen cooperative relationships with our current or future Business Process Outsourcing partners, Human Resource Outsourcing 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.

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, and on our ability to attract and hire qualified senior management and executives. 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.

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Additionally, our continued success depends, in part, on our ability to attract and retain qualified personnel in the software design and development, sales, and other functions of the business. In certain of the jurisdictions in which we operate the talent pool for such qualified personnel may be limited and we may find it difficult to attract and retain qualified personnel. For instance, a significant portion of our software development function is conducted in Quebec City, a relatively limited labor market. Additionally, we may find it difficult or more costly to attract and retain qualified personnel in alternative jurisdictions in which the talent pool is less limited, or the personnel we hire in such jurisdictions may be less effective than we expect. It may also be particularly challenging to retain employees as we integrate newly acquired entities due to uncertainty among employees regarding their career options and cultural differences between us and the newly acquired entities.

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 BPO and HRO providers that resell our solutions as a component of their outsourced human resource services and we intend to partner with more BPOs and HROs 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.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency end-customers have accounted for a small portion of our revenue, and we may in the future increase sales to government entities. Sales into government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully sell our products and services to such governmental entity. Government entities may require contract terms that differ from our standard arrangements. In addition, government demand and payment for our products may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Some of our sales to government entities have been made indirectly through third-party prime contractors that resell our solutions. Government entities may have contractual or other legal rights to terminate contracts with our resellers for convenience or due to a default, and any such termination may adversely impact our future results of operations.

Additionally, governments routinely audit and investigate government contractors, and we may be subject to such audits and investigations. For example, we have been subject to government contract audits in the past and we are currently responding to subpoenas from the Department of Homeland Security’s inspector general’s office relating to our commercial pricing for the Transportation Security Administration, a government entity that accessed our services through a third party prime contractor. As a result of an audit or investigation, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture or refund of profits or certain fees collected, suspension of payments, fines, and suspension or prohibition from doing business with the government entity. In addition, we could suffer serious reputational harm if allegations of impropriety are made against us.

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.

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

During the year ended December 31, 2010, subscription and support revenue generated outside of the United States was 17% of total subscription and support revenue, based on the location of the legal entity of the customer with which we contracted. Of the subscription and support revenue generated outside the United States, 5% was generated in Canada. We conduct research and development in Quebec, Canada as well as other international locations. We currently have international offices outside of North America in Australia, France, the Netherlands, and the United Kingdom, which focus primarily on selling and implementing our solutions in those regions. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:

• potentially degrading general economic conditions and credit environments in Europe and elsewhere;

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

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

• differing labor and employment regulations, especially in the European Union and Quebec, Canada 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 and employee termination restrictions or related costs;

• 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 and the euro, and may in the future have sales denominated in the currencies of additional countries. We also 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 positively or negatively affect our business, financial condition and operating results. For instance, in 2010, the impact of changes in foreign currency exchange rates compared to the average rates in effect during 2009 was a $2.1 million gain. In 2011, the volatility in exchange rates for foreign currencies has continued and may continue and, as a result, we may continue to see fluctuations in our revenue and expenses, which may impact our operating results. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.

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

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our proprietary rights in our products and services. We do not significantly rely on patent registrations to protect our intellectual property. 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 has been and may continue to be necessary in the future to enforce our intellectual property rights. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

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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 course of business. For example, we are currently defendant in a suit alleging patent infringement which is described in more detail in Note 10 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. Litigation may result in substantial costs, including lengthened or discontinued sales cycles due to concerns of existing or prospective customers with respect to litigation, 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 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, 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. Additionally, in the first half of 2010, we became aware that Taleo customers had been contacted by an intellectual property licensing firm asserting that a usability feature of the Taleo software was subject to patents held by the intellectual property licensing firm, and we are in discussions with the patent holder with respect to these assertions. 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;

• damage our relationship with existing or prospective customers and disrupt our sales cycles;

• 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.

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

We use open source software in our products, which could subject us to litigation or other actions.

We use open source software in our products and may use more open source software in the future. 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. 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. In addition, if we were to combine our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products or take other remedial actions.

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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.

Our hosted solutions incorporate certain technology obtained under licenses from other companies, such as Oracle for database 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. As a result, we have incurred, and may incur, charges for employee severance. We may experience additional facilities consolidations and headcount reductions in the future. 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 ability to conclude that a control deficiency is not a material weakness or that an accounting error does not require a restatement can be affected by a number of factors, including our level of pre-tax income.

Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative factors, and depending upon that analysis we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness.

One element of our analysis of the significance of any control deficiency is its actual or potential financial impact. This assessment will vary depending on our level of pre-tax income or loss. For example, a smaller pre-tax income or loss will increase the likelihood of a quantitative assessment of a control deficiency as a significant deficiency or material weakness.

Because our pre-tax income (loss) is relatively small, if management or our independent registered public accounting firm identify an error in our interim or annual financial statements, it is more likely that such an error may be determined to be a material weakness or may meet the quantitative threshold established under Staff Accounting Bulletin No. 99, “Materiality”, that could, depending upon the complete quantitative and qualitative analysis, result in our having to restate previously issued financial statements.

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 SEC, the American Institute of Certified Public Accountants, or AICPA, the Public Company Accounting Oversight Board 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 historical or future financial results.

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The application of GAAP to our operations may also require significant judgment and interpretation as to the appropriate treatment of a specific issue. These judgments and interpretations are complicated by the relative newness of the on-demand, vendor-hosted software business model, also called software-as-a-service, or SaaS, and the relative lack of interpretive guidance with respect to the application of GAAP to the SaaS model. For example in October 2009, the FASB issued accounting guidance related to the recognition of multiple element arrangements, which superseded the guidance used during 2009. The new guidance, which we adopted as of January 1, 2010, will generally require us to recognize the majority of consulting services revenue from multiple element arrangements as the consulting services are delivered for arrangements we have entered into after January 1, 2010. We cannot ensure that our interpretations and judgments with respect to the application of GAAP will be correct in the future and any incorrect interpretations and judgments could adversely affect our business.

If benefits currently available under the tax laws of Canada, the province of Quebec and other jurisdictions 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 domestic or foreign 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 provincial government program in Quebec that provides refundable investment tax 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 have continued to receive these refundable investment tax credits through December 2010. In 2009 and 2010, we recorded, respectively, a $2.4 million and $2.8 million reduction in our research and development expenses as a result of this program. This particular refundable investment tax credit program in Quebec has been eliminated for 2011 and beyond. We have applied for an alternative provincial investment tax credit program that will replace the expiring December 2010 Quebec program and our application is under review by the Quebec revenue authorities. It is uncertain whether we will qualify under this new program, and if we do qualify, the total amount of refundable tax credits we will receive is uncertain. If we are unsuccessful in qualifying for this alternative provincial tax credit program our financial condition and operating results may be adversely affected.

In addition to the provincial research and development refundable investment tax credit program described above, our Canadian subsidiary is participating 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. For tax years 2009 and 2010, we recorded an estimated SRED credit claim of approximately $1.0 million and $1.1 million respectively. 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 Canadian federal SRED tax credits can only be applied to offset Canadian federal taxes payable and are reported as a credit to our 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 SRED investment tax credits are reduced or disallowed by the federal Canada Revenue Agency (“CRA”), our financial condition and operating results may be adversely affected.

In December 2008 we were notified by the CRA of their intent to audit tax years 2002 through 2007. To date, CRA has issued assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. In December 2010 we received a proposal letter from CRA for 2004 detailing their initial proposal of increasing taxable income of CAD $7.2 million. These adjustments relate principally to our treatment of Canadian Development Technology Incentives (“CDTI”) tax credits and income and expense allocations recorded between us and our Canadian subsidiary. We disagree with the CRA’s basis for these adjustments and have appealed their decision through applicable administrative and judicial procedures.

There could be significant changes to unrecognized tax benefits over the next twelve months depending on the outcome of any audit. We have recorded income tax reserves believed to be sufficient to cover any potential tax assessments for the open tax years. In the event the CRA audit results in adjustments that exceed our recorded tax reserves, we may have to accrue additional tax expense. To the extent the CRA audit results in adjustments that exceed both our tax reserves and our available deferred tax assets, we may be required to accrue and pay additional tax, penalties and interest, the amount of which cannot be reasonably estimated at this time.

We have sought U.S. tax treaty relief through the Competent Authority for the 2002 and 2003 CRA assessments and have indicated our intent to do so for 2004 when CRA issues their final assessment. Although we believe we have reasonable bases 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.

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As we continue to expand domestically and internationally, we are increasingly subject to reviews by various U.S. and foreign taxing authorities the outcomes of 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 additional income tax expense in the period the uncertainty is resolved.

We are currently under review by the province of Quebec regarding the application of the contribution to the Fonds des services de santé (“FSS”), pursuant to the Act respecting the “Régie de l’assurance maladie du Québec” with respect to the stock option benefits derived by Taleo Canada employees participating in the Taleo Corporation stock option plan. We disagree with the conclusion that we are subject to the contribution requirements. We have received final assessments for tax years 2006 through 2008 that we continue to discuss and reconcile with representatives of the Quebec government. We have formally objected to these assessments and plan to object to any future final assessments. Based upon a recent court ruling in Quebec that was adverse to a taxpayer in a fact scenario similar to ours, we have recorded a reserve for a potential contribution liability. We believe our reserve recorded is sufficient to cover any potential final assessments for the open years. In the event the audit results in adjustments that exceed our recorded reserve, we may have to accrue additional liabilities which could have a material adverse impact on our operating results.

Our reported financial results may be adversely affected by changes in tax laws or changes in the application of tax laws.

Changes in applicable tax laws and regulations, and the related rulings, interpretations, and developments can affect our overall effective income tax rate. For instance, we have historically applied existing and available net operating loss carryovers to reduce our income tax liabilities in various tax jurisdictions. In 2008 and 2009, the State of California suspended the ability of corporations to deduct net operating loss carryovers to reduce taxable income in these years. In October 2010, the State of California suspended the ability of corporations to deduct net operating loss carryovers for California income tax purposes for 2010 and 2011. In addition, Illinois has suspended the use of net operating losses for tax years ending December 31, 2011 through December 31, 2014. If additional states suspend the use of net operating losses, our tax expense may increase. Furthermore, as we expand our international operations, complete acquisitions, develop new products and new distribution models, implement changes to our operating structure or undertake intercompany transactions, changes in tax laws may result in an increase to our tax expense.

An adverse determination with respect to our application of tax laws may negatively impact our tax rates and financial results.

We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, and, in the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain.

Although we believe our tax estimates are reasonable, the estimation process and interpretations of applicable laws are inherently uncertain, and our estimates are not binding on tax authorities. The tax laws’ treatment of software and internet-based transactions is particularly uncertain and in some cases currently applicable tax laws are ill-suited to address these kinds of transactions. For instance, the application of U.S. state and local sales/use tax laws to our business model is not uniform across all state taxing jurisdictions with some jurisdictions addressing the taxability of our revenue streams through statutes, regulations and public rulings, other jurisdictions taking positions through unpublished private rulings, while still others are silent. We believe we have appropriately reserved for any potential uncollected sales/use taxes; however, our interpretations are not binding on tax authorities and the outcome of any future audit is uncertain and could have a material impact on our operations.

In the ordinary course of a global business, there are many intercompany transactions where the ultimate tax determination is uncertain. Although we believe we are in compliance with transfer pricing laws and regulations in all jurisdictions in which we conduct business, there is no assurance that the final determination of any tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations.

Evolving regulation of the Internet or changes in the infrastructure underlying the Internet may adversely affect our financial condition by increasing our expenditures and causing customer dissatisfaction.

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. Legislation has been proposed, from time to time, that may impact the way that internet service providers treat Internet traffic. The outcome of such proposals is uncertain but certain outcomes may negatively impact our business or increase our operating costs. 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.

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The rapid and continual growth of traffic on the Internet has resulted at times in slow connection and download speeds among Internet users. Our business expansion may be harmed if the Internet infrastructure cannot handle our customers’ demands or if hosting capacity becomes insufficient. If our customers become frustrated with the speed at which they can utilize our software over the Internet, our customers may discontinue use of our products and choose not to renew their contract with us.

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 have been highly volatile. As a result, the market price of our stock is likely to be similarly volatile, and investors in our stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our 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;

• 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 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.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

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.

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

Issuer Purchases of Equity Securities (1)

Period	Total Number of Shares Purchased		Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet be Purchased under the Plans or Program
January 1, 2011 through January 31, 2011		38,763	$	28.83			—		—
February 1, 2011 through February 28, 2011		—		—			—		—
March 1, 2011 through March 31, 2011		—		—			—		—
		38,763	$	28.83	(2)		—		—

(1) In connection with our restricted stock and restricted stock units agreements, we repurchase common stock from employees as consideration for the payment of required withholding taxes.

(2) Represents the price per share purchased during the three months ended March 31, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Number	Description
10.1	Credit Agreement, dated as of April 22, 2011, by and among Taleo Corporation, each of the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as Administrative Agent, Comerica Bank, as Syndication Agent, and J.P. Morgan Securities LLC and Comerica Bank, as Joint Bookrunners and Joint Lead Arrangers (incorporated by reference to our Current Report on Form 8-K filed on March 28, 2011, Commission File No. 000-51299)
10.2	Description of 2011 Quarterly and Annual Bonuses Plan to Taleo’s named executive officers, other than the CEO(incorporated by reference to our Current Report on Form 8-K filed on February 4, 2011, Commission File No. 000-51299).
10.3	Description of 2011 CEO Bonus Plan(incorporated by reference to our Current Report on Form 8-K filed on March 8, 2011, Commission File No. 000-51299).
2.1	Acquisition Agreement for Plan of Arrangement dated January 31, 2011, by and among Taleo Corporation, Taleo Acquisition Corp. and Cytiva Software Inc(which is incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 1, 2011, Commission File No. 000-51299).
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.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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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/    Douglas C. Jeffries
	Douglas C. Jeffries
	Executive Vice President and Chief Financial Officer

Date: May 9, 2011

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Exhibit Index

Exhibit Number	Description
10.1	Credit Agreement, dated as of April 22, 2011, by and among Taleo Corporation, each of the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as Administrative Agent, Comerica Bank, as Syndication Agent, and J.P. Morgan Securities LLC and Comerica Bank, as Joint Bookrunners and Joint Lead Arrangers(incorporated by reference to our Current Report on Form 8-K filed on March 28, 2011, Commission File No. 000-51299).
10.2	Description of 2011 Quarterly and Annual Bonuses Plan to Taleo’s named executive officers, other than the CEO(incorporated by reference to our Current Report on Form 8-K filed on February 4, 2011, Commission File No. 000-51299).
10.3	Description of 2011 CEO Bonus Plan(incorporated by reference to our Current Report on Form 8-K filed on March 8, 2011, Commission File No. 000-51299).
2.1	Acquisition Agreement for Plan of Arrangement dated January 31, 2011, by and among Taleo Corporation, Taleo Acquisition Corp. and Cytiva Software Inc(which is incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 1, 2011, Commission File No. 000-51299).
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.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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