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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2010

OR



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 001-33755





SUCCESSFACTORS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3398453                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                           |  |           
|---------------------------------------------------------- |  | ----------
|1500 Fashion Island Blvd., Suite 300
San Mateo, California |  | 94404     
|(Address of principal executive offices)                   |  | (Zip Code)

(650)
645-2000

(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 (the Exchange Act) 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:    x  Yes     ̈  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   ̈    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. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|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    x  No

As of November 1, 2010, there were approximately 75,954,339 shares of the registrants common stock outstanding.









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SUCCESSFACTORS, INC.

Table of Contents



|                              |  |                                                                                                         |    |          |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                              |  |                                                                                                         |    | Page No. |   
|PART I. FINANCIAL INFORMATION |  |                                                                                                         | 3  |         
|                              |  |                                                                                                        
|Item 1.                       |  | Condensed Consolidated Financial Statements (unaudited):                                                |    |          | 3  | 
|                              |  | Condensed Consolidated Balance Sheets-September 30, 2010 and December 31, 2009                          |    |          | 3  | 
|                              |  | Condensed Consolidated Statements of Operations-Three and nine months ended September 30, 2010 and 2009 |    |          | 4  | 
|                              |  | Condensed Consolidated Statements of Cash Flows-Nine months ended September 30, 2010 and 2009           |    |          | 5  | 
|                              |  | Notes to Condensed Consolidated Financial Statements                                                    |    |          | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   |    |          | 21 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                              |    |          | 31 | 
|Item 4.                       |  | Controls and Procedures                                                                                 |    |          | 31 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                         | 32 |         
|                              |  |                                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                                       |    |          | 32 | 
|Item 1A.                      |  | Risk Factors                                                                                            |    |          | 32 | 
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                             |    |          | 43 | 
|Item 3.                       |  | Defaults Upon Senior Securities                                                                         |    |          | 43 | 
|Item 4.                       |  | (Reserved)                                                                                              |    |          | 43 | 
|Item 5.                       |  | Other Information                                                                                       |    |          | 43 | 
|Item 6.                       |  | Exhibits                                                                                                |    |          | 43 | 
|Signatures                    |  |                                                                                                         | 44 |         



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PART I: FINANCIAL INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
|------- | -------------------------------------------------------

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED
BALANCE SHEETS

(In thousands, except per share data)

(unaudited)



|                                                                                                                         |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                         |  | September 30,2010 |          |   | December 31,2009 |  
|ASSETS:                                                                                                                  |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                          |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                |  | $                 | 66,572   |   |                  | $ | 76,618   |  
|Marketable securities                                                                                                    |  |                   | 267,782  |   |                  |   | 246,629  |  
|Accounts receivable, net of allowance for doubtful accounts of $889 and $1,161, respectively                             |  |                   | 56,118   |   |                  |   | 57,611   |  
|Deferred commissions                                                                                                     |  |                   | 6,329    |   |                  |   | 5,950    |  
|Prepaid expenses and other current assets                                                                                |  |                   | 8,671    |   |                  |   | 5,679    |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                     |  |                   | 405,472  |   |                  |   | 392,487  |  
|Restricted cash                                                                                                          |  |                   | 1,033    |   |                  |   | 931      |  
|Property and equipment, net                                                                                              |  |                   | 6,992    |   |                  |   | 5,787    |  
|Goodwill                                                                                                                 |  |                   | 63,041   |   |                  |   |         |  
|Intangible assets, net                                                                                                   |  |                   | 38,253   |   |                  |   |         |  
|Deferred commissions, less current portion                                                                               |  |                   | 10,968   |   |                  |   | 9,233    |  
|Other assets                                                                                                             |  |                   | 477      |   |                  |   | 259      |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                             |  | $                 | 526,236  |   |                  | $ | 408,697  |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                    |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                     |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                         |  | $                 | 2,328    |   |                  | $ | 794      |  
|Accrued expenses and other current liabilities                                                                           |  |                   | 11,074   |   |                  |   | 7,220    |  
|Accrued employee compensation                                                                                            |  |                   | 16,468   |   |                  |   | 14,546   |  
|Deferred revenue                                                                                                         |  |                   | 190,119  |   |                  |   | 160,356  |  
|Contingent consideration                                                                                                 |  |                   | 5,557    |   |                  |   |         |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                |  |                   | 225,546  |   |                  |   | 182,916  |  
|Deferred revenue, less current portion                                                                                   |  |                   | 15,968   |   |                  |   | 21,268   |  
|Long-term tax payable                                                                                                    |  |                   | 1,678    |   |                  |   | 1,643    |  
|Contingent consideration, less current portion                                                                           |  |                   | 25,209   |   |                  |   |         |  
|Other long-term liabilities                                                                                              |  |                   | 1,054    |   |                  |   | 367      |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                        |  |                   | 269,455  |   |                  |   | 206,194  |  
|Commitments and contingencies (Note 9)                                                                                   |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                    |  |                   |          |   |                  |   |          |  
|Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding                              |  |                   |         |   |                  |   |         |  
|Common stock, $0.001 par value; 200,000 shares authorized; 75,386 and 71,748 shares issued and outstanding,
respectively |  |                   | 76       |   |                  |   | 72       |  
|Additional paid-in capital                                                                                               |  |                   | 480,986  |   |                  |   | 421,419  |  
|Accumulated other comprehensive income (loss)                                                                            |  |                   | 3,017    |   |                  |   | (89      | )
|Accumulated deficit                                                                                                      |  |                   | (227,298 | ) |                  |   | (218,899 | )
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                               |  |                   | 256,781  |   |                  |   | 202,503  |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                               |  | $                 | 526,236  |   |                  | $ | 408,697  |  
|                                                                                                                         |  |                   |          |   |                  |   |          |  

See accompanying notes to unaudited condensed consolidated financial statements.



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SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except
per share data)

(Unaudited)



|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                      |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                      |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Revenue                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Subscription and support                                              |  | $                               | 41,638 |   |                                | $ | 30,595 |      |  | $ | 116,153 |   |  | $ | 87,857  |  
|Professional services and other                                       |  |                                 | 9,898  |   |                                |   | 8,090  |      |  |   | 29,621  |   |  |   | 22,988  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenue                                                         |  |                                 | 51,536 |   |                                |   | 38,685 |      |  |   | 145,774 |   |  |   | 110,845 |  
|Cost of revenue                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Subscription and support                                              |  |                                 | 7,613  |   |                                |   | 4,539  |      |  |   | 18,901  |   |  |   | 12,699  |  
|Professional services and other                                       |  |                                 | 8,861  |   |                                |   | 4,292  |      |  |   | 19,899  |   |  |   | 12,568  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenue                                                 |  |                                 | 16,474 |   |                                |   | 8,831  |      |  |   | 38,800  |   |  |   | 25,267  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total gross profit                                                    |  |                                 | 35,062 |   |                                |   | 29,854 |      |  |   | 106,974 |   |  |   | 85,578  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                                                   |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Sales and marketing                                                   |  |                                 | 25,166 |   |                                |   | 19,573 |      |  |   | 69,585  |   |  |   | 59,125  |  
|Research and development                                              |  |                                 | 11,048 |   |                                |   | 6,343  |      |  |   | 27,699  |   |  |   | 17,967  |  
|General and administrative                                            |  |                                 | 9,180  |   |                                |   | 6,016  |      |  |   | 24,877  |   |  |   | 18,542  |  
|Revaluation of contingent consideration                               |  |                                 | (3,056 | ) |                                |   |       |      |  |   | (3,056  | ) |  |   |        |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                              |  |                                 | 42,338 |   |                                |   | 31,932 |      |  |   | 119,105 |   |  |   | 95,634  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                                  |  |                                 | (7,276 | ) |                                |   | (2,078 | )    |  |   | (12,131 | ) |  |   | (10,056 | )
|Interest income and other, net                                        |  |                                 | 4,754  |   |                                |   | 210    |      |  |   | 4,218   |   |  |   | 823     |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before provision for income taxes                                |  |                                 | (2,522 | ) |                                |   | (1,868 | )    |  |   | (7,913  | ) |  |   | (9,233  | )
|Provision for income taxes                                            |  |                                 | (292   | ) |                                |   | (104   | )    |  |   | (486    | ) |  |   | (742    | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                              |  | $                               | (2,814 | ) |                                | $ | (1,972 | )    |  | $ | (8,399  | ) |  | $ | (9,975  | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss per common share, basic and diluted                          |  | $                               | (0.04  | ) |                                | $ | (0.03  | )    |  | $ | (0.11   | ) |  | $ | (0.18   | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Shares used in computing net loss per common share, basic and diluted |  |                                 | 74,618 |   |                                |   | 57,292 |      |  |   | 73,100  |   |  |   | 56,791  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



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SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                |  |                                |          |   |      |   |          |  
|------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |         
|                                                                                |  | 2010                           |          |   | 2009 |  
|Cash flows from operating activities:                                           |  |                                |          |   |      |   |          |  
|Net loss                                                                        |  | $                              | (8,399   | ) |      | $ | (9,975   | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |          |   |      |   |          |  
|Depreciation and amortization                                                   |  |                                | 4,074    |   |      |   | 2,915    |  
|Amortization of deferred commissions                                            |  |                                | 6,552    |   |      |   | 5,399    |  
|Stock-based compensation expense                                                |  |                                | 15,388   |   |      |   | 7,419    |  
|Gain (loss) on retirement/impairment of fixed assets                            |  |                                | 76       |   |      |   | (63      | )
|Amortization of intangibles                                                     |  |                                | 1,482    |   |      |   |         |  
|Revaluation of contingent consideration                                         |  |                                | (3,056   | ) |      |   |         |  
|Changes in assets and liabilities, excluding acquired assets and liabilities:   |  |                                |          |   |      |   |          |  
|Accounts receivable                                                             |  |                                | 3,278    |   |      |   | 1,584    |  
|Deferred commissions                                                            |  |                                | (8,666   | ) |      |   | (5,837   | )
|Prepaid expenses and other current assets                                       |  |                                | (2,813   | ) |      |   | (3,771   | )
|Other assets                                                                    |  |                                | (218     | ) |      |   | (324     | )
|Accounts payable                                                                |  |                                | 585      |   |      |   | (1,751   | )
|Accrued expenses and other current liabilities                                  |  |                                | 2,470    |   |      |   | (2,135   | )
|Accrued employee compensation                                                   |  |                                | 1,314    |   |      |   | 1,961    |  
|Long-term taxes payable                                                         |  |                                | 36       |   |      |   | 555      |  
|Other liabilities                                                               |  |                                | (8       | ) |      |   | 8        |  
|Deferred revenue                                                                |  |                                | 20,855   |   |      |   | 11,219   |  
|                                                                                |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                       |  |                                | 32,950   |   |      |   | 7,204    |  
|                                                                                |  |                                |          |   |      |   |          |  
|Cash flows from investing activities:                                           |  |                                |          |   |      |   |          |  
|Restricted cash                                                                 |  |                                | (2       | ) |      |   | 197      |  
|Acquisitions, net of cash acquired                                              |  |                                | (26,089  | ) |      |   |         |  
|Capital expenditures                                                            |  |                                | (3,196   | ) |      |   | (1,524   | )
|Proceeds from sale of fixed assets                                              |  |                                | 1        |   |      |   | 88       |  
|Purchases of available-for-sale securities                                      |  |                                | (272,733 | ) |      |   | (112,957 | )
|Proceeds from maturities of available-for-sale securities                       |  |                                | 154,353  |   |      |   | 73,989   |  
|Proceeds from sales of available-for-sale securities                            |  |                                | 96,500   |   |      |   | 546      |  
|                                                                                |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                           |  |                                | (51,166  | ) |      |   | (39,661  | )
|                                                                                |  |                                |          |   |      |   |          |  
|Cash flows from financing activities:                                           |  |                                |          |   |      |   |          |  
|Offering costs                                                                  |  |                                | (111     | ) |      |   |         |  
|Proceeds from exercise of stock options                                         |  |                                | 10,948   |   |      |   | 3,518    |  
|Principal payments on capital lease obligations                                 |  |                                |         |   |      |   | (27      | )
|                                                                                |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                       |  |                                | 10,837   |   |      |   | 3,491    |  
|                                                                                |  |                                |          |   |      |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                    |  |                                | (2,667   | ) |      |   | 145      |  
|                                                                                |  |                                |          |   |      |   |          |  
|Net decrease in cash and cash equivalents                                       |  |                                | (10,046  | ) |      |   | (28,821  | )
|Cash and cash equivalents at beginning of period                                |  |                                | 76,618   |   |      |   | 69,859   |  
|                                                                                |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                      |  | $                              | 66,572   |   |      | $ | 41,038   |  
|                                                                                |  |                                |          |   |      |   |          |  

See accompanying notes to unaudited condensed consolidated financial statements.



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Significant Accounting Policies

Organization

Success Acquisition Corporation was incorporated in
Delaware in 2001. In April 2007, the name was changed to SuccessFactors, Inc. (the Company). The Company provides on-demand business execution software solutions that enable organizations to bridge the execution gap between business strategy and
results. The Companys goal is to enable organizations to substantially increase employee productivity worldwide by enhancing its existing people performance solutions with business alignment solutions to enable customers to achieve business
results. The Companys integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Learning and Development; Recruiting Management;
Analytics and Reporting; Inform; Employee Profile; 360-Degree Review; Execution Survey; Calibration and Stack Ranker; Business Performance Accelerators; Employee Central; Metrics Navigator; Express; Strategy Deployment Solution; CubeTree, and
proprietary and third-party content. The Companys headquarters are located in San Mateo, California. The Company conducts its business worldwide with additional locations in other regions in the United States, Europe, Asia, Canada and Latin
America.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010, for any other interim period or for any other future year.

The unaudited condensed consolidated balance sheet as of December 31, 2009 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. The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 26, 2010. The
Companys accounting policies have changed from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 in the areas of Revenue Recognition, Goodwill, Acquired Intangible Assets and Contingent
Consideration, as discussed further below.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The Companys unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts in the financial statements and accompanying
notes. These estimates form the basis for judgments the Company makes about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company bases its estimates and judgments on historical experience and on
various other assumptions that the Company believes are reasonable under the circumstances. GAAP requires the Company to make estimates and judgments in several areas, including those related to revenue recognition, recoverability of accounts
receivable, provision for income taxes, commission and bonus payments, fair values of marketable securities, fair value of acquired intangible assets, fair value of acquisition related contingent considerations and the determination of the fair
market value of stock options, including the use of forfeiture estimates. These estimates are based on managements knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could
differ materially from those estimates.



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Revenue
Recognition

Revenue consists of subscription fees for the Companys software and support and fees for the
provision of professional services. The Companys customers do not have the contractual right to take possession of software in substantially all of the transactions. Instead, the software is delivered through the cloud from the Companys
hosting facilities. In the infrequent circumstance in which a customer of the Company has the contractual right to take possession of the software, the Company has determined that the customers would incur a significant penalty to take possession of
the software. Therefore, these arrangements are treated as service agreements. The Company commences revenue recognition when all of the following conditions are met:



| |  |  | Persuasive evidence of an arrangement;
| | - |  | --------------------------------------



| |  |  | Subscription or services have been delivered to the customer;
| | - |  | -------------------------------------------------------------



| |  |  | Collection of related fees is reasonably assured; and
| | - |  | -----------------------------------------------------



| |  |  | Related fees are fixed or determinable.
| | - |  | ---------------------------------------

Additionally, if an agreement contains non-standard acceptance or requires non-standard performance criteria to be met, the Company defers revenues until these conditions are satisfied. Signed agreements
are used as evidence of an arrangement. The Company assesses cash collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If the Company determines that collectability is
not reasonably assured, the Company defers the revenue recognition until collectability becomes reasonably assured, generally upon receipt of cash. The Company assesses whether the fee is fixed or determinable based on the payment terms associated
with the transaction and whether the sales price is subject to refund or adjustment. The Companys arrangements are typically noncancelable, though customers typically have the right to terminate their agreement for cause if the Company fails
to perform.

The Company recognizes the total contracted subscription revenue ratably over the contracted term of the
subscription agreement, generally one to three years although terms can extend to as long as five years. Subscription terms commence on the later of the start date specified in the subscription arrangement, the date the customers module is
provisioned or when all of the revenue recognition criteria have been met. The Company generally considers delivery to have occurred upon provisioning of the module, which is the point in time that a customer is provided access to use the
Companys on-demand application suite. Indirect taxes, including sales and use tax amounts and goods and service tax amounts, collected from customers have been recorded on a net basis.

The Companys professional services include forms and workflow configuration, data integration, business process consulting and
training related to the application suite and are short-term in nature. Professional services are generally sold in conjunction with the Companys subscriptions. Historically, the Company recognized professional services revenue together with
subscription fees ratably over the contracted term of the subscription agreement. Upon the adoption of new accounting guidance on multiple-deliverable revenue arrangements (as discussed below), the Company began separately accounting for revenue on
professional services.

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
No. 2009-13 (ASU 2009-13), which amended the accounting guidance for multiple-deliverable revenue arrangements to:



| |  |  | provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration
should be allocated;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of each deliverable if a vendor does not have
vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

The Company early-adopted this accounting guidance and has retrospectively applied its provisions to
arrangements entered into or materially modified after January 1, 2010 (the beginning of the Companys fiscal year).

Prior to the adoption of ASU 2009-13, the Company determined that it did not have objective and reliable evidence of fair value for each
deliverable of its arrangements. As a result, the Company accounted for subscription and professional services revenue



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



as one unit of account and recognized the total arrangement fee ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long
as five years. Upon adoption of ASU 2009-13, the Company accounts for subscriptions and professional services revenue as separate units of account and allocates revenue to each deliverable in an arrangement based on a selling price hierarchy. The
selling price for a deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE is available. Since VSOE and TPE are not available for the Companys subscription or professional services, the
Company uses ESP. The ESP for each deliverable is determined primarily by considering the weighted average sales price as well as other factors, including, but not limited to, gross margin objectives and pricing practices. Revenue allocated to
subscription is recognized over the subscription term. Revenue allocated to professional services is recognized as services are completed.

Subscription and support revenues for the three and nine months ended September 30, 2010 were $41.6 million and $116.2 million, respectively, with the adoption of ASU 2009-13, as compared to revenues
of $41.7 million and $115.3 million for the same periods had the Company not adopted ASU 2009-13. Professional services revenues for the three and nine months ended September 30, 2010 were $9.9 million and $29.6 million, respectively, with the
adoption of ASU 2009-13, as compared to revenues of $7.7 million and $24.7 million for the same periods had the Company not adopted ASU 2009-13. The increase of $0.9 million in the nine months ended September 30, 2010 in subscription and
support revenue was primarily due to earlier commencement of revenue recognition upon delivery (provision) of specific subscription deliverables of an arrangement instead of upon delivery of all deliverables as required under the previous accounting
guidance, and the increase of $2.2 million for the three months and $4.9 million for the nine months on professional services revenue was primarily due to earlier recognition of revenue upon completion of work instead of ratable over the contracted
term of the subscription agreement. The Company will continue to recognize professional services on all contracts entered into prior to January 1, 2010, ratably over the subscription period.

The Company expects that the adoption of ASU 2009-13 will result in an increase in revenue for the remainder of fiscal 2010. The Company
is not able to reasonably estimate the amount of the increase in revenue, as the impact will depend on the nature and size of new or materially modified arrangements.

The Company early adopted this accounting guidance in the third quarter of fiscal 2010, for applicable arrangements entered into or materially modified after January 1, 2010 (the beginning of the
Companys fiscal year). Therefore the previously reported quarterly results have been retrospectively adjusted to reflect the adoption as of the beginning of fiscal year 2010.

Selected Condensed Consolidated Statements of Operations Data

For Three Months Ended March 31, 2010 and June 30, 2010

(dollars and shares in thousands, except per share amounts)

(unaudited)



|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|--------------------------------------------------------------------- |  | --------------------------------- | ------ | - | -------------------------------- | - | ------ | ------------------------------- |  | - | --------------------------- |  |  | --------------------- | ------ | - | ------------------------------- | - | ------ | - |  | - | ----- | 
|                                                                      |  | Three Months Ended March 31, 2010 |        |   | Three Months Ended June 30, 2010 |  
|                                                                      |  | With adoption ofASU 2009-13       |        |   | As previouslyreported            |   |        | Impact ofadoption of ASU2009-13 |  |   | With adoption ofASU 2009-13 |  |  | As previouslyreported |        |   | Impact ofadoption of ASU2009-13 |  
|Revenue:                                                              |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|Subscription and support                                              |  | $                                 | 36,145 |   |                                  | $ | 35,860 |                                 |  | $ | 285                         |  |  | $                     | 38,370 |   |                                 | $ | 37,781 |   |  | $ | 589   | 
|Professional services and other                                       |  |                                   | 8,590  |   |                                  |   | 7,916  |                                 |  |   | 674                         |  |  |                       | 11,133 |   |                                 |   | 9,063  |   |  |   | 2,070 | 
|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|Total revenue                                                         |  |                                   | 44,735 |   |                                  |   | 43,776 |                                 |  |   | 959                         |  |  |                       | 49,503 |   |                                 |   | 46,844 |   |  |   | 2,659 | 
|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|Loss before income taxes                                              |  |                                   | (3,581 | ) |                                  |   | (4,524 | )                               |  |   | 943                         |  |  |                       | (1,809 | ) |                                 |   | (4,408 | ) |  |   | 2,599 | 
|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|Net loss                                                              |  | $                                 | (3,709 | ) |                                  | $ | (4,652 | )                               |  | $ | 943                         |  |  | $                     | (1,876 | ) |                                 | $ | (4,475 | ) |  | $ | 2,599 | 
|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|Net loss per common share, basic and diluted                          |  | $                                 | (0.05  | ) |                                  | $ | (0.06  | )                               |  | $ | 0.01                        |  |  | $                     | (0.03  | ) |                                 | $ | (0.06  | ) |  | $ | 0.03  | 
|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 
|Shares used in computing net loss per common share, basic and diluted |  |                                   | 72,008 |   |                                  |   | 72,008 |                                 |  |   |                            |  |  |                       | 72,645 |   |                                 |   | 72,645 |   |  |   |       | 
|                                                                      |  |                                   |        |   |                                  |   |        |                                 |  |   |                             |  |  |                       |        |   |                                 |   |        |   |  |   |       | 



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Revenue and
deferred revenue as reported as of and for the quarter ended September 30, 2010 and the Companys estimate of revenue and deferred revenue that would have been reported if the transactions entered into or materially modified during the
quarter ended September 30, 2010 were subject to previous accounting guidance, are shown in the following table (in thousands):



|                                |  |                                                        |         |  |                                  |   |         |                                 |  |   |        |  
|------------------------------- |  | ------------------------------------------------------ | ------- |  | -------------------------------- | - | ------- | ------------------------------- |  | - | ------ | -
|                                |  | As of and for the three months
endedSeptember 30, 2010 |        
|                                |  | As reported                                            |         |  | Under previousaccountingguidance |   |         | Impact ofadoption of ASU2009-13 | 
|Revenue:                        |  |                                                        |         |  |                                  |   |         |                                 |  |   |        |  
|Subscription and support        |  | $                                                      | 41,638  |  |                                  | $ | 41,651  |                                 |  | $ | (13    | )
|Professional services and other |  |                                                        | 9,898   |  |                                  |   | 7,694   |                                 |  |   | 2,204  |  
|                                |  |                                                        |         |  |                                  |   |         |                                 |  |   |        |  
|Total revenue                   |  | $                                                      | 51,536  |  |                                  | $ | 49,345  |                                 |  | $ | 2,191  |  
|                                |  |                                                        |         |  |                                  |   |         |                                 |  |   |        |  
|Total deferred revenue          |  | $                                                      | 206,087 |  |                                  | $ | 208,278 |                                 |  | $ | (2,191 | )
|                                |  |                                                        |         |  |                                  |   |         |                                 |  |   |        |  

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of revenue recognition from the Companys subscription and other services described above and is recognized as revenue when all
of the revenue recognition criteria are met. For subscription arrangements with terms of over one year, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total
contract value of these multi-year, noncancelable subscription agreements. The Companys professional services are generally sold in conjunction with the subscriptions. Historically, the Company recognized professional services revenue together
with subscription fees ratably over the contracted term of the subscription agreement. Upon adoption of ASU 2009-13, the Company began separately accounting for subscription and professional services revenues. The portion of deferred revenue that
the Company anticipates will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue. Current deferred revenue also includes subscription
agreements for which the subscription delivery (provision) start date has not yet been determined. Upon determination of the initial access date timing of such arrangements, amounts estimated to be recognized after more than 12 months are
reclassified to non-current deferred revenue.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting the Companys application suite, compensation and related expenses for
data center, professional services staff and customer support staff, payments to outside service providers, allocated overhead and depreciation expenses, license royalties and partner referral fees. Allocated overhead includes rent, information
technology costs and employee benefits costs.

Deferred Commissions

Deferred commissions are the incremental costs that are directly associated with noncancelable subscription agreements and consist of
sales commissions paid to the Companys direct sales force. The commissions are deferred and amortized over the noncancelable terms of the related customer contracts, typically one to three years, with some agreements having durations of up to
five years. The deferred commission amounts are recoverable from the future revenue streams under the noncancelable subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely
related to the revenue from the noncancelable subscription and professional services arrangements that they should be recorded as an asset and charged to expense over the same period that the associated subscription or professional services revenue
is recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying unaudited condensed consolidated statements of operations. Deferred commissions related to subscription agreements for which revenue
recognition has not commenced as of September 30, 2010 are classified as long-term deferred commissions.

During the
three and nine months ended September 30, 2010, the Company capitalized $4.5 million and $8.7 million of deferred commissions, respectively, and amortized $2.2 million and $6.6 million, respectively, to sales and marketing expense. As of
September 30, 2010, deferred commissions on the Companys unaudited condensed consolidated balance sheet totaled $17.3 million. The adoption of ASU 2009-13 resulted in increases in commission expense of $0.1 million and $0.2 million for
the three and nine months ended September 30, 2010, respectively, primarily to due to the matching of commission expenses to the associated revenues under the new accounting guidance, resulting in earlier recognition of deferred commissions in
some arrangements. The impact of ASU 2009-13 on commission expense for the three months ended March 31, 2010 and June 30, 2010 was not material.



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Identified
Intangible Assets

Identified intangible assets primarily consist of acquisition-related developed technology, customer
relationships, tradenames and trademarks which are generally amortized on a straight-line basis over the periods of benefit, ranging from two to ten years. The Company performs a quarterly review of identified intangible assets to determine if facts
and circumstances indicate that the useful life is shorter than it had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of identified
intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the
carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the Company accelerates the rate of amortization and amortizes the remaining carrying value over the new shorter useful life. There were no
impairment charges related to identified intangible assets during the three and nine months ended September 30, 2010.

Goodwill

The Company performs a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment may have occurred. Such
events or circumstances may include significant adverse changes in the general business climate, among other things. The impairment test is performed by determining our fair value based on estimated discounted future cash flows and considering the
market price of our common stock. If the Companys carrying value, as a one reporting unit entity, is less than its fair value, then the fair value is allocated to all of our assets and liabilities (including any unrecognized intangible assets)
as if the fair value was the purchase price to acquire the Company. The excess of the fair value over the amounts assigned to our assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company did not record any charges related to goodwill impairment during the three and nine months ended September 30, 2010.

Contingent Considerations

The Company estimates the fair value of the acquisition-related contingent considerations using various valuation approaches, as well as significant unobservable inputs, reflecting the Companys
assessment of the assumptions market participants would use to value these liabilities. The fair values of the contingent considerations are remeasured at each reporting period, with any changes in the value recorded as income or expense, and such
remeasurments resulted in a gain of approximately $3.0 million for the three and nine months ended September 30, 2010. The potential undiscounted amount of all future cash payments that the Company could be required to make under the contingent
consideration is between $0 and $62.9 million as of September 30, 2010.

Income Taxes

As part of the process of preparing the unaudited condensed consolidated financial statements, the Company is required to estimate its
income taxes in each of the jurisdictions in which it operates. This process involves estimating the current tax liability under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the unaudited condensed consolidated balance sheets.

2. Recent Accounting Pronouncements

In January 2010, the FASB issued
additional guidance on fair value disclosures. The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a gross presentation of activities (purchases, sales, and settlements)
within the Level 3 rollforward reconciliation, which will replace the net presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first
interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for
interim reporting periods thereafter. The Company has adopted the amended fair value disclosures guidance, except for the gross presentation of the Level 3 rollforward information, which it is not required to adopt until January 1, 2011.



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





3. Business Combination

The Company completed the following business combinations during fiscal 2010:



| |  |  | On July 1, 2010, the Company acquired Inform Business Impact (Inform), a leader in business analytics and workforce planning software,
for $25.6 million in cash and 906,892 shares of common stock valued at approximately $12.9 million, of which 371,372 shares are held in escrow, plus performance related earn-out payments with a fair value of $5.3 million. This acquisition was not
considered material to the Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 13, 2010, the Company acquired Epista Software A/S (YouCalc), a provider of real-time analytics and reporting software for
$3.2 million in cash, plus earn-out payments in shares of common stock with a fair value of $1.5 million. This acquisition was not considered material to the Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 20, 2010, the Company acquired CubeTree, Inc., (CubeTree) a provider of social media and collaboration software, for 903,733
shares of common stock valued at approximately $18.9 million, of which 190,511 shares are held in escrow, plus a future contingent cash payment with a fair value of $27.8 million. This acquisition was deemed to be the acquisition of a
significant business as defined under Regulation S-X.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of these acquisitions was accounted
for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their fair values as of the respective acquisition dates. The total purchase price for each acquisition was comprised of the following (unaudited,
amounts in thousands, except shares):



|         |  |               |           |  |                        |   |        |                                                  |  |   |                            |   |  |          |        |  |  |   |        | 
|-------- |  | ------------- | --------- |  | ---------------------- | - | ------ | ------------------------------------------------ |  | - | -------------------------- | - |  | -------- | ------ |  |  | - | ------ | 
|         |  | Shares Issued |           |  | Purchase Consideration |   |        | Net tangible assetsacquired/(liabilitiesassumed) |  |   | Purchased intangibleassets |   |  | Goodwill |       
|Inform   |  |               | 906,892   |  |                        | $ | 43,838 |                                                  |  | $ | (1,412                     | ) |  | $        | 23,900 |  |  | $ | 21,350 | 
|YouCalc  |  |               |          |  |                        |   | 4,676  |                                                  |  |   | (20                        | ) |  |          | 3,710  |  |  |   | 986    | 
|CubeTree |  |               | 903,733   |  |                        |   | 46,653 |                                                  |  |   | 67                         |   |  |          | 8,120  |  |  |   | 38,466 | 
|         |  |               |           |  |                        |   |        |                                                  |  |   |                            |   |  |          |        |  |  |   |        | 
|Total    |  |               | 1,810,625 |  |                        | $ | 95,167 |                                                  |  | $ | (1,365                     | ) |  | $        | 35,730 |  |  | $ | 60,802 | 
|         |  |               |           |  |                        |   |        |                                                  |  |   |                            |   |  |          |        |  |  |   |        | 

The total purchase consideration for these business combinations included one, or both, of cash
consideration and shares of the Companys common stock. Transaction costs associated with the business combinations completed in fiscal 2010 were expensed as incurred, and such transaction costs were $0.5 million and $2.1 million for the three
and nine months ended September 30, 2010 and are included general and administrative expenses on the unaudited condensed consolidated statement of operations.

The initial purchase price allocation is preliminary. Changes to amounts recorded as assets or liabilities, such as tax assets and liabilities, may result in a corresponding adjustment to goodwill. The
goodwill recorded in connection with the Companys business combinations is primarily related to the ability of the acquired companies to develop new products and technologies in the future and expected synergies to be achieved in connection
with the acquisitions. The goodwill recognized is not expected to be deductible for income tax purposes, except for approximately $1.0 million of goodwill related to the YouCalc acquisition.

In connection with the business combinations, the Company agreed to pay certain amounts contingent upon the achievement of agreed-upon
milestones, as follows:



| |  |  | The Company agreed to pay additional cash consideration on a sliding scale of up to $15.0 million to the former shareholders of Inform to incent
overachievement during the first two twelve month periods subsequent to the acquisition date. As of the acquisition date, the Company estimated the fair value of the contingent consideration to be approximately $5.3 million, estimated based on the
present value of the expected payments over each of the two twelve month periods. The valuation method used to estimate the fair value of the contingent consideration arrangement was based on significant inputs that are not observable in the market
(Level 3 inputs), with key assumptions including (i) varying probability of achieving different levels of invoiced amounts, and (ii) discount rate based on the prime lending rate as of the acquisition date. The potential undiscounted
amount of all future payments that the Company could be required to make under the contingent consideration is between $0 and $15.0 million and this will be measured on a quarterly basis and any changes in contingent consideration will be recorded
as an adjustment to contingent consideration and an offsetting increase or decrease to expense. As of September 30, 2010, there were no changes to the estimated fair value of the contingent consideration, to the assumptions used to the estimate
the fair
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



| | value and to the range of outcomes. In addition, the Company agreed to make additional cash payments of up to $5.0 million to the former shareholders of Inform based upon their continued
employment with the Company for two years, as of the close of the transaction. The Company did not record any acquisition-related liabilities in connection with this arrangement, as it is considered compensatory in nature, and therefore, it is being
recognized as compensation expense over the requisite two-year service period. The Company recognized $0.6 million of compensation expense related to this arrangement for both the three and nine months ended September 30, 2010.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company agreed to issue up to 98,290 shares of common stock to the former shareholders of YouCalc upon the achievement of certain product
development and performance milestones. As of the acquisition date, the Company estimated the fair value of the common stock on a publicly-traded basis to be approximately $2.0 million, based on $20.35 per share. The shares issued under the
contingent consideration will be locked-up from trading for a period of 18 months following the issuance date. As a result, the fair value of the contingent consideration arrangement of $1.5 million, as of the acquisition date, reflects an
appropriate discount for lack of marketability, which was estimated using a Finnerty option model. The valuation method used to estimate the fair value of the contingent consideration arrangement was based on significant inputs that are not
observable in the market (Level 3 inputs), with key assumptions including (i) expected lock-up period, (ii) volatility based on the Companys historical volatility and the volatility implied by traded options on the Companys
common stock, (ii) probability of achieving the milestones, and (iv) a likely issuance date of 9 months after the date of acquisition. The potential shares that the Company could be required to issue under the contingent consideration
arrangement is between zero and 98,290 shares. The fair value of the contingent consideration of $1.5 million is included in equity on the Companys consolidated condensed balance sheet as of September 30, 2010.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company agreed to pay additional cash consideration of up to approximately $47.9 million to the former shareholders of CubeTree on the three-year
anniversary of the closing or at such earlier time as a change of control of the Company occurs (the Top-Up Payment Date). If, on the Top-Up Payment Date, the value of the consideration issued at the closing (the Market
Value) is less than approximately $47.9 million or $53.01 per share (the Guaranteed Value), subject to adjustments, the Company shall make a payment to such holders in an aggregate amount equal to the difference between the
Guaranteed Value and the Market Value (the Top-Up Payment). The aggregate Top-Up Payment will be reduced to the extent of any sale, transfer or other disposition of any of the consideration (subject to certain limited exceptions). Such
right to receive the Top-Up Payment will terminate in the event the value of the shares of the consideration paid at closing equals or exceeds approximately $47.9 million or $53.01 per share at any time prior to the Top-Up Payment Date. As of the
acquisition date, the Company estimated the fair value of the contingent consideration to be $27.7 million, using the Monte Carlo Simulation approach. This valuation method was based on significant inputs that are not observable in the market (Level
3 inputs), with key assumptions including (i) expected term of three years, (ii) rate of return based on the yield on the three year U.S. Treasury bill (iii) volatility based on the Companys historical stock price volatility and
the volatility implied by traded options in the companys common stock, and (iv) strike price of $53.01. As of September 30, 2010, the potential undiscounted amount of the payment that the Company could be required to make on the
Top-Up Payment Date is between $0 and approximately $47.9 million. On a quarterly basis the Company will determine the value of the stock and any changes in contingent consideration will be recorded as an adjustment to contingent consideration. For
both the three and nine months ended September 30, 2010, the Company recorded income of approximately $3.1 million related to change in the fair value of the contingent consideration. The business combinations in 2010 contributed $2.1 million
of the Companys revenue for both the three and nine months ended September 30, 2010 and contributed $3.4 million of net loss for both the three and nine months ended September 30, 2010
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and CubeTree, which was considered a significant (as defined in
Regulation SX) acquisition for the purposes of unaudited pro forma financial information disclosure, as though the companies were combined as of the beginning of each period presented. The pro forma financial information for all periods presented
also includes the business combination accounting effects resulting from the CubeTree acquisition including amortization charges from acquired intangible assets and stock-based compensation charges for unvested restricted stock-based awards, as
though the Company and CubeTree were combined as of January 1, 2010. The related tax effect was insignificant. 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 CubeTree had taken place as of the beginning of each period presented.

The unaudited pro forma financial information combines the historical results of the Company and CubeTree for the three and nine months ended September 30, 2010 and 2009, adjusted for the pro forma
items discussed above.



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





|                                      |  |                    |        |   |                   |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                      |  | Three Months Ended |        |   | Nine Months Ended |  
|                                      |  | September 30,      |        |   | September 30,     |  
|                                      |  | 2010               |        |   | 2009              |   |        | 2010 |  |   | 2009    |  
|Revenue                               |  | $                  | 51,536 |   |                   | $ | 38,685 |      |  | $ | 145,870 |   |  | $ | 110,845 |  
|Net loss                              |  | $                  | (2,814 | ) |                   | $ | (3,266 | )    |  | $ | (12,417 | ) |  | $ | (13,526 | )
|Net loss per common share and diluted |  | $                  | (0.04  | ) |                   | $ | (0.05  | )    |  | $ | (0.15   | ) |  | $ | (0.21   | )

4. Cash, Cash Equivalents and
Marketable Securities

Cash, cash equivalents and marketable securities consisted of the following (unaudited, in thousands):



|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|------------------------------------------------------ |  | ------------------------ | ------- |  | -------------------- | - | --- | --------------------- |  | - | ------------------- | - |  | - | ------- | 
|                                                       |  | As of September 30, 2010 |        
|                                                       |  | Cost                     |         |  | GrossUnrealizedGains |   |     | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Cash                                                   |  | $                        | 18,965  |  |                      | $ |    |                       |  | $ |                    |   |  | $ | 18,965  | 
|Cash Equivalents:                                      |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|Money market funds                                     |  |                          | 19,029  |  |                      |   |    |                       |  |   |                    |   |  |   | 19,029  | 
|Commercial paper                                       |  |                          | 28,578  |  |                      |   |    |                       |  |   |                    |   |  |   | 28,578  | 
|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|Total cash equivalents                                 |  |                          | 47,607  |  |                      |   |    |                       |  |   |                    |   |  |   | 47,607  | 
|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|Total cash and cash equivalents                        |  |                          | 66,572  |  |                      |   |    |                       |  |   |                    |   |  |   | 66,572  | 
|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|Marketable securities:                                 |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|U.S. Treasury bills and bonds                          |  |                          | 7,998   |  |                      |   | 1   |                       |  |   |                    |   |  |   | 7,999   | 
|U.S. Government and Agency securities                  |  |                          | 210,431 |  |                      |   | 222 |                       |  |   | (9                  | ) |  |   | 210,644 | 
|Foreign government securities                          |  |                          | 5,084   |  |                      |   | 12  |                       |  |   |                    |   |  |   | 5,096   | 
|Commercial paper                                       |  |                          | 11,994  |  |                      |   |    |                       |  |   |                    |   |  |   | 11,994  | 
|Corporate debt securities                              |  |                          | 31,966  |  |                      |   | 22  |                       |  |   | (9                  | ) |  |   | 31,979  | 
|Marketable equity securities                           |  |                          | 50      |  |                      |   | 20  |                       |  |   |                    |   |  |   | 70      | 
|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|Total marketable securities                            |  |                          | 267,523 |  |                      |   | 277 |                       |  |   | (18                 | ) |  |   | 267,782 | 
|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 
|Total cash, cash equivalents and marketable securities |  | $                        | 334,095 |  |                      | $ | 277 |                       |  | $ | (18                 | ) |  | $ | 334,354 | 
|                                                       |  |                          |         |  |                      |   |     |                       |  |   |                     |   |  |   |         | 

The Company did not realize any significant gains or losses during the three and nine months ended
September 30, 2010. As of September 30, 2010, the stated maturities of the Companys marketable debt securities were (unaudited, in thousands):



|                                    |  |                        |         | 
|----------------------------------- |  | ---------------------- | ------- | 
|                                    |  | As ofSeptember 30,2010 |        
|Due within 1 year                   |  | $                      | 173,508 | 
|Due within 1 year through 5 years   |  |                        | 94,204  | 
|Due within 5 years through 10 years |  |                        |        | 
|Due after 10 years                  |  |                        |        | 
|                                    |  |                        |         | 
|Total marketable debt securities    |  | $                      | 267,712 | 
|                                    |  |                        |         | 

The Company did not recognize any other-than-temporary impairments during the three and nine months ended
September 30, 2010. The Company did not have any marketable securities that were in an unrealized loss position for 12 months or greater as of September 30, 2010. Investments in unrealized loss positions for less than 12 months and their
related fair value as of September 30, 2010 were as follows (unaudited, in thousands):



|                                      |  |                          |        |  |                |   |     |            |  |   |                |  |  |   |     |  
|------------------------------------- |  | ------------------------ | ------ |  | -------------- | - | --- | ---------- |  | - | -------------- |  |  | - | --- | -
|                                      |  | As of September 30, 2010 |       
|                                      |  | Less than 12 Months      |        |  | Total          |  
|Security Description                  |  | Fair Value               |        |  | UnrealizedLoss |   |     | Fair Value |  |   | UnrealizedLoss | 
|U.S. Government and Agency securities |  | $                        | 16,582 |  |                | $ | (9  | )          |  | $ | 16,582         |  |  | $ | (9  | )
|Corporate debt securities             |  |                          | 13,079 |  |                |   | (9  | )          |  |   | 13,079         |  |  |   | (9  | )
|                                      |  |                          |        |  |                |   |     |            |  |   |                |  |  |   |     |  
|Total                                 |  | $                        | 29,661 |  |                | $ | (18 | )          |  | $ | 29,661         |  |  | $ | (18 | )
|                                      |  |                          |        |  |                |   |     |            |  |   |                |  |  |   |     |  



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Cash, cash equivalents and
marketable securities as of December 31, 2009, consisted of the following (in thousands):



|                                                       |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|------------------------------------------------------ |  | ----------------------- | ------- |  | -------------------- | - | -- | --------------------- |  | - | ------------------- | - |  | - | ------- | 
|                                                       |  | As of December 31, 2009 |        
|                                                       |  | Cost                    |         |  | GrossUnrealizedGains |   |    | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Cash                                                   |  | $                       | 8,914   |  |                      | $ |   |                       |  | $ |                    |   |  | $ | 8,914   | 
|Cash equivalents:                                      |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|Money market funds                                     |  |                         | 67,704  |  |                      |   |   |                       |  |   |                    |   |  |   | 67,704  | 
|                                                       |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|Total cash equivalents                                 |  |                         | 67,704  |  |                      |   |   |                       |  |   |                    |   |  |   | 67,704  | 
|                                                       |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|Total cash and cash equivalents                        |  |                         | 76,618  |  |                      |   |   |                       |  |   |                    |   |  |   | 76,618  | 
|Marketable securities:                                 |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|U.S. Treasury bills and bonds                          |  |                         | 115,478 |  |                      |   |   |                       |  |   |                    |   |  |   | 115,478 | 
|U.S. government and agency securities                  |  |                         | 131,248 |  |                      |   |   |                       |  |   | (158                | ) |  |   | 131,090 | 
|Marketable equity securities                           |  |                         | 50      |  |                      |   | 11 |                       |  |   |                    |   |  |   | 61      | 
|                                                       |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|Total marketable securities                            |  |                         | 246,776 |  |                      |   | 11 |                       |  |   | (158                | ) |  |   | 246,629 | 
|                                                       |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 
|Total cash, cash equivalents and marketable securities |  | $                       | 323,394 |  |                      | $ | 11 |                       |  | $ | (158                | ) |  | $ | 323,247 | 
|                                                       |  |                         |         |  |                      |   |    |                       |  |   |                     |   |  |   |         | 

The Company did not have any marketable securities that were in an unrealized loss position for 12 months or
greater as of December 31, 2009. Investments in unrealized loss positions for less than 12 months and their related fair value as of December 31, 2009 were as follows (in thousands):



|                                      |  |                         |         |  |                |   |      |            |  |   |                |  |  |   |      |  
|------------------------------------- |  | ----------------------- | ------- |  | -------------- | - | ---- | ---------- |  | - | -------------- |  |  | - | ---- | -
|                                      |  | As of December 31, 2009 |        
|                                      |  | Less than 12 Months     |         |  | Total          |  
|Security Description                  |  | Fair Value              |         |  | UnrealizedLoss |   |      | Fair Value |  |   | UnrealizedLoss | 
|U.S. Government and Agency securities |  | $                       | 131,090 |  |                | $ | (158 | )          |  | $ | 131,090        |  |  | $ | (158 | )
|                                      |  |                         |         |  |                |   |      |            |  |   |                |  |  |   |      |  
|Total                                 |  | $                       | 131,090 |  |                | $ | (158 | )          |  | $ | 131,090        |  |  | $ | (158 | )
|                                      |  |                         |         |  |                |   |      |            |  |   |                |  |  |   |      |  

As of December 31, 2009, the stated maturities of the Companys marketable debt securities were
(in thousands):



|                                    |  |                       |         | 
|----------------------------------- |  | --------------------- | ------- | 
|                                    |  | As ofDecember 31,2009 |        
|Due within 1 year                   |  | $                     | 201,863 | 
|Due within 1 year through 5 years   |  |                       | 44,705  | 
|Due within 5 years through 10 years |  |                       |        | 
|Due after 10 years                  |  |                       |        | 
|                                    |  |                       |         | 
|Total marketable debt securities    |  | $                     | 246,568 | 
|                                    |  |                       |         | 

5. Fair Value Measurements

The Company accounts for certain financial assets and liabilities at fair value. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level
hierarchy, as follows:



|         |  |                                                                                                                                                                                           
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs.
|         | 
|Level 2: |  | Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.                                                                                 
|         | 
|Level 3: |  | Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.                                            



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##### Table of Contents

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The following
table presents cash equivalents, marketable securities, and acquisition-related contingent consideration carried at fair value, as of September 30, 2010 (unaudited, in thousands):



|                                      |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|------------------------------------- |  | ---------------------- | ------- |  | ---------------------------------------------------------- | - | ------ | ------------------------------------------- |  | - | ---------------------------------------- |  |  | - | ------ | 
|                                      |  |                        |         |  | Fair Value Measurements Using                              |  
|                                      |  | As ofSeptember 30,2010 |         |  | Quoted Prices inActive Market forIdentical Assets(Level 1) |   |        | Significant OtherObservable Inputs(Level 2) |  |   | SignificantUnobservable 
Inputs(Level 3) | 
|Assets:                               |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Cash Equivalents:                     |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Money market funds                    |  | $                      | 19,029  |  |                                                            | $ | 19,029 |                                             |  | $ |                                         |  |  | $ |       | 
|Commercial paper                      |  |                        | 28,578  |  |                                                            |   |       |                                             |  |   | 28,578                                   |  |  |   |       | 
|                                      |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Total cash and cash equivalents       |  | $                      | 47,607  |  |                                                            | $ | 19,029 |                                             |  | $ | 28,578                                   |  |  | $ |       | 
|                                      |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Marketable securities:                |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|U.S. Treasury bills and bonds         |  | $                      | 7,999   |  |                                                            | $ | 7,999  |                                             |  | $ |                                         |  |  | $ |       | 
|U.S. Government and Agency securities |  |                        | 210,644 |  |                                                            |   |       |                                             |  |   | 210,644                                  |  |  |   |       | 
|Foreign government securities         |  |                        | 5,096   |  |                                                            |   |       |                                             |  |   | 5,096                                    |  |  |   |       | 
|Commercial paper                      |  |                        | 11,994  |  |                                                            |   |       |                                             |  |   | 11,994                                   |  |  |   |       | 
|Corporate debt securities             |  |                        | 31,979  |  |                                                            |   |       |                                             |  |   | 31,979                                   |  |  |   |       | 
|Marketable equity securities          |  |                        | 70      |  |                                                            |   | 70     |                                             |  |   |                                         |  |  |   |       | 
|                                      |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Total marketable securities           |  | $                      | 267,782 |  |                                                            | $ | 8,069  |                                             |  | $ | 259,713                                  |  |  | $ |       | 
|                                      |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Liabilities:                          |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 
|Contingent consideration              |  | $                      | 30,766  |  |                                                            | $ |       |                                             |  | $ |                                         |  |  | $ | 30,766 | 
|                                      |  |                        |         |  |                                                            |   |        |                                             |  |   |                                          |  |  |   |        | 

In March 2010, the Company reclassified $34.8 million of money market funds from Level 2 to Level 1, as the
instruments were priced using quoted market prices.

The following table presents cash equivalents and marketable securities,
carried at fair value, as of December 31, 2009 (in thousands):



|                                      |  |                       |         |  |                                                            |   |         |                                             |  |   |         | 
|------------------------------------- |  | --------------------- | ------- |  | ---------------------------------------------------------- | - | ------- | ------------------------------------------- |  | - | ------- | 
|                                      |  |                       |         |  | Fair Value Measurements Using                              |  
|Assets:                               |  | As ofDecember 31,2009 |         |  | Quoted Prices inActive Market forIdentical Assets(Level 1) |   |         | Significant OtherObservable Inputs(Level 2) | 
|Cash Equivalents:                     |  |                       |         |  |                                                            |   |         |                                             |  |   |         | 
|Money market funds                    |  | $                     | 67,704  |  |                                                            | $ | 6       |                                             |  | $ | 67,698  | 
|                                      |  |                       |         |  |                                                            |   |         |                                             |  |   |         | 
|Marketable securities:                |  |                       |         |  |                                                            |   |         |                                             |  |   |         | 
|U.S. Treasury bills and bonds         |  | $                     | 115,478 |  |                                                            | $ | 115,478 |                                             |  | $ |        | 
|U.S. Government and Agency securities |  |                       | 131,090 |  |                                                            |   |        |                                             |  |   | 131,090 | 
|Marketable equity securities          |  |                       | 61      |  |                                                            |   | 61      |                                             |  |   |        | 
|                                      |  |                       |         |  |                                                            |   |         |                                             |  |   |         | 
|Total marketable securities           |  | $                     | 246,629 |  |                                                            | $ | 115,539 |                                             |  | $ | 131,090 | 
|                                      |  |                       |         |  |                                                            |   |         |                                             |  |   |         | 

Cash Equivalents and Marketable Securities

Cash equivalents consist primarily of highly liquid investments in money market mutual funds, and commercial paper and bonds with original
maturities of three months or less. The carrying value of cash equivalents as of September 30, 2010 and December 31, 2009 was $47.6 million and $67.7 million, respectively. The carrying value approximates fair value as of
September 30, 2010 and December 31, 2009.

Marketable securities, which are classified as available for sale as of
September 30, 2010, are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders equity.



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





Acquisition-related Contingent Consideration

The Company estimates the fair value of the acquisition-related contingent considerations using various valuation approaches including; the Monte Carlo Simulation approach, Finnerty option model and
discounted cash flow model. The contingent consideration liabilities are classified as Level 3 liabilities, because the Company uses unobservable inputs to value them, reflecting the Companys assessment of the assumptions market participants
would use to value these liabilities. The unrealized gains and losses related to the contingent considerations were included in operating expenses on the unaudited condensed consolidated statement of operations.

The following tables present a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) as of September 30, 2010 (unaudited, in thousands):



|                                                          |  |                                          |        |  
|--------------------------------------------------------- |  | ---------------------------------------- | ------ | -
|                                                          |  | Fair Value 
MeasurementsUsing            |       
|                                                          |  | Significant UnobservableInputs (Level 3) |       
|Balance as of December 31, 2009                           |  | $                                        |       |  
|Contingent considerations issued in business combinations |  |                                          | 33,822 |  
|Total change in fair value(1)                             |  |                                          | (3,056 | )
|                                                          |  |                                          |        |  
|Balance as of September 30, 2010                          |  | $                                        | 30,766 |  
|                                                          |  |                                          |        |  



|(1) | Amount includes the effects of foreign currency translation of approximately $0.7 million at
September 30, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------

6. Goodwill

Goodwill consisted of the following (unaudited, in thousands):



|                              |  |   |        | 
|----------------------------- |  | - | ------ | 
|Balance at December 31, 2009  |  |   |       | 
|Additions                     |  | $ | 60,802 | 
|Other adjustments             |  |   | 2,239  | 
|                              |  |   |        | 
|Balance at September 30, 2010 |  | $ | 63,041 | 
|                              |  |   |        | 

Other adjustments represent foreign currency translation, as the functional currencies of the Companys
foreign subsidiaries, where goodwill is recorded, are their respective local currencies. Accordingly, the foreign currencies are translated into U.S. dollars using exchange rates in effect at period end. Adjustments are included in other
comprehensive income (loss).

7. Purchased Intangible Assets

The following tables present details of the intangible assets acquired through business combinations during fiscal 2010 (unaudited, in thousands, except years):



|                                                    |  |                                        |   |  |           |   |        |                         |  |   |         |   |  |   |        | 
|--------------------------------------------------- |  | -------------------------------------- | - |  | --------- | - | ------ | ----------------------- |  | - | ------- | - |  | - | ------ | 
|                                                    |  | Weighted-Average UsefulLife (in Years) |   |  | Gross (1) |   |        | AccumulatedAmortization |  |   | Net (1) |  
|Technology                                          |  |                                        | 7 |  |           | $ | 37,428 |                         |  | $ | (1,382  | ) |  | $ | 36,046 | 
|Customer relationships                              |  |                                        | 5 |  |           |   | 1,154  |                         |  |   | (50     | ) |  |   | 1,104  | 
|Trademark and tradename                             |  |                                        | 5 |  |           |   | 1,153  |                         |  |   | (50     | ) |  |   | 1,103  | 
|                                                    |  |                                        |   |  |           |   |        |                         |  |   |         |   |  |   |        | 
|Total purchased intangible assets with finite lives |  |                                        |   |  |           | $ | 39,735 |                         |  | $ | (1,482  | ) |  | $ | 38,253 | 
|                                                    |  |                                        |   |  |           |   |        |                         |  |   |         |   |  |   |        | 



|(1) | Amounts include the effects of foreign currency translation of approximately $4.0 million at
September 30, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





As of
September 30, 2010, the Company expects amortization expense in future periods to be as follows (unaudited, in thousands):



|           |  |   |        | 
|---------- |  | - | ------ | 
|2010       |  | $ | 1,792  | 
|2011       |  |   | 7,168  | 
|2012       |  |   | 7,091  | 
|2013       |  |   | 6,823  | 
|2014       |  |   | 5,087  | 
|thereafter |  |   | 10,292 | 
|           |  |   |        | 
|Total      |  | $ | 38,253 | 
|           |  |   |        | 

The following table presents the amortization of purchased intangible assets (unaudited, in thousands):



|                        |  |                    |       |  |                   |   |   |               |  |   |               |  |  |   |   | 
|----------------------- |  | ------------------ | ----- |  | ----------------- | - | - | ------------- |  | - | ------------- |  |  | - | - | 
|                        |  | Three Months Ended |       |  | Nine Months Ended |  
|                        |  | September 30,      |       |  | September 30,     |   |   | September 30, |  |   | September 30, | 
|                        |  | 2010               |       |  | 2009              |   |   | 2010          |  |   | 2009          | 
|Technology              |  | $                  | 1,382 |  |                   | $ |  |               |  | $ | 1,382         |  |  | $ |  | 
|Customer relationships  |  |                    | 50    |  |                   |   |  |               |  |   | 50            |  |  |   |  | 
|Trademark and Tradename |  |                    | 50    |  |                   |   |  |               |  |   | 50            |  |  |   |  | 
|                        |  |                    |       |  |                   |   |   |               |  |   |               |  |  |   |   | 
|                        |  | $                  | 1,482 |  |                   | $ |  |               |  | $ | 1,482         |  |  | $ |  | 
|                        |  |                    |       |  |                   |   |   |               |  |   |               |  |  |   |   | 

Of these amounts, $1.4 million and $0.1 million were included in cost of revenue (subscription and support)
and sales and marketing expenses for both the three and nine months ended September 30, 2010, respectively. There was no amortization of purchased intangibles recorded for the three and nine months ended September 30, 2009.

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of September 30, 2010 and December 31, 2009 consisted of (unaudited, in thousands):



|                          |  |                        |        |  |                       |   |       | 
|------------------------- |  | ---------------------- | ------ |  | --------------------- | - | ----- | 
|                          |  | As ofSeptember 30,2010 |        |  | As ofDecember 31,2009 |  
|Accrued royalties         |  | $                      | 1,572  |  |                       | $ | 1,136 | 
|Accrued taxes             |  |                        | 1,915  |  |                       |   | 2,091 | 
|Accrued other liabilities |  |                        | 7,587  |  |                       |   | 3,993 | 
|                          |  |                        |        |  |                       |   |       | 
|                          |  | $                      | 11,074 |  |                       | $ | 7,220 | 
|                          |  |                        |        |  |                       |   |       | 

Accrued employee compensation as of September 30, 2010 and December 31, 2009 consisted of
(unaudited, in thousands):



|                                                |  |                        |        |  |                       |   |        | 
|----------------------------------------------- |  | ---------------------- | ------ |  | --------------------- | - | ------ | 
|                                                |  | As ofSeptember 30,2010 |        |  | As ofDecember 31,2009 |  
|Accrued bonuses payable                         |  | $                      | 5,170  |  |                       | $ | 5,356  | 
|Accrued commissions payable                     |  |                        | 7,872  |  |                       |   | 7,356  | 
|Accrued vacation                                |  |                        | 1,733  |  |                       |   | 875    | 
|All other accrued employee compensation payable |  |                        | 1,693  |  |                       |   | 959    | 
|                                                |  |                        |        |  |                       |   |        | 
|                                                |  | $                      | 16,468 |  |                       | $ | 14,546 | 
|                                                |  |                        |        |  |                       |   |        | 

9. Commitments and Contingencies

The Company from time to time is involved in various legal proceedings arising in the normal course of its business activities. In managements opinion, resolution of these matters is not expected to
have a material adverse effect on the Companys results of



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Companys
future results of operations, cash flows or financial position in a future period.

10. Stock-Based Compensation

Stock Plans

In June 2001, the Companys Board of Directors adopted and its stockholders approved the 2001 Stock Option Plan, and in November 2007 the Companys Board of Directors adopted and its
stockholders approved the 2007 Equity Incentive Plan (collectively, the Plans). The Plans provide for the issuance of incentive and nonstatutory stock options to employees and non-employees of the Company, and the 2007 Equity Incentive
Plan additionally provides for the issuance of restricted stock awards, stock bonus awards, stock appreciation rights and restricted stock units. Options issued under the Plans are generally for periods not to exceed ten years and must be issued at
prices not less than 85% of the estimated fair value of the shares of common stock on the date of grant as determined by the Board of Directors. The Plans provide for grants of immediately exercisable options. Options become vested and exercisable
at such times and under such conditions as determined by the Board of Directors at the date of grant. Options or shares issued upon early exercise of options, generally vest over four years, with 25% vesting after one year and the balance vesting
monthly over the remaining period. Any shares exercised prior to vesting may be repurchased by the Company at the original option exercise price in the event of the employees termination. The right to repurchase unvested shares lapses at the
rate of the vesting schedule.

Common Stock Options

Stock-based compensation cost is measured at grant date, based on the fair value of the award on that date, and recognized on a straight
line basis over the requisite service period, which, for the Company, is generally the vesting period. The following table presents stock-based compensation included in the Companys unaudited condensed consolidated statements of operations for
the three and nine months ended September 30, 2010 and 2009 (unaudited, in thousands):



|                           |  |                                 |       |  |                                |   |       |      |  |   |        |  |  |   |       | 
|-------------------------- |  | ------------------------------- | ----- |  | ------------------------------ | - | ----- | ---- |  | - | ------ |  |  | - | ----- | 
|                           |  | Three Months EndedSeptember 30, |       |  | Nine Months EndedSeptember 30, |  
|                           |  | 2010                            |       |  | 2009                           |   |       | 2010 |  |   | 2009   | 
|Cost of revenue            |  | $                               | 783   |  |                                | $ | 291   |      |  | $ | 2,062  |  |  | $ | 989   | 
|Sales and marketing        |  |                                 | 2,153 |  |                                |   | 1,143 |      |  |   | 5,902  |  |  |   | 3,233 | 
|Research and development   |  |                                 | 975   |  |                                |   | 312   |      |  |   | 2,572  |  |  |   | 904   | 
|General and administrative |  |                                 | 1,931 |  |                                |   | 815   |      |  |   | 4,852  |  |  |   | 2,293 | 
|                           |  |                                 |       |  |                                |   |       |      |  |   |        |  |  |   |       | 
|                           |  | $                               | 5,842 |  |                                | $ | 2,561 |      |  | $ | 15,388 |  |  | $ | 7,419 | 
|                           |  |                                 |       |  |                                |   |       |      |  |   |        |  |  |   |       | 

Stock-based compensation expense for the nine months ended September 30, 2010 includes shares of common
stock, with a fair value of $1.6 million, issued to the Companys senior management in lieu of cash bonuses in March 2010 and additional $0.7 million accrued stock-based compensation to be paid in lieu of cash bonuses. Of this amount, $1.1
million was included in general and administrative, $0.8 million was included in sales and marketing, $0.3 million was included in research and development and approximately $0.1 million was included in cost of revenue for the nine months ended
September 30, 2010.

The fair value of options granted to employees during the three and nine months ended
September 30, 2010 and 2009 were determined using the following weighted-average assumptions for employee grants (unaudited):



|                                                                           |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |      |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                                                           |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                                                           |  | 2010                            |       |   | 2009                           |   |      | 2010 |  |   | 2009  |  
|Expected life from grant date (in years)                                   |  |                                 | 4.01  |   |                                |   | 4.36 |      |  |   | 4.16  |   |  |   | 4.24 |  
|Risk-free interest rate                                                    |  |                                 | 1.15  | % |                                |   | 2.22 | %    |  |   | 1.77  | % |  |   | 1.76 | %
|Expected volatility                                                        |  |                                 | 60    | % |                                |   | 72   | %    |  |   | 63    | % |  |   | 70   | %
|Dividend yield                                                             |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Weighted-average estimated fair value of options granted during the period |  | $                               | 10.20 |   |                                | $ | 7.29 |      |  | $ | 10.19 |   |  | $ | 3.71 |  



18



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##### Table of Contents

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





The following
table summarizes the activity for stock options for the nine months ended September 30, 2010 (unaudited):



|                              |  |                                    |        |   |                                         |   |       | 
|----------------------------- |  | ---------------------------------- | ------ | - | --------------------------------------- | - | ----- | 
|                              |  | SharesSubject toOptionsOutstanding |        |   | Weighted-AverageExercise Priceper Share |  
|                              |  | (Shares in thousands)              |       
|Balance at December 31, 2009  |  |                                    | 10,879 |   |                                         | $ | 6.58  | 
|Granted                       |  |                                    | 1,109  |   |                                         |   | 20.69 | 
|Exercised                     |  |                                    | (2,078 | ) |                                         |   | 5.29  | 
|Canceled/forfeited            |  |                                    | (313   | ) |                                         |   | 9.23  | 
|                              |  |                                    |        |   |                                         |   |       | 
|Balance at September 30, 2010 |  |                                    | 9,597  |   |                                         | $ | 8.40  | 
|                              |  |                                    |        |   |                                         |   |       | 

As of September 30, 2010, unrecognized compensation expense under the Companys stock
option plans for employee stock options was $17.5 million, which is expected to be recognized over a weighted-average remaining vesting period of 2.15 years.

The following table summarizes the activity for restricted stock units (RSUs) for the nine months ended September 30, 2010 (unaudited):



|                               |  |                        |       |   |                                      |   |       | 
|------------------------------ |  | ---------------------- | ----- | - | ------------------------------------ | - | ----- | 
|                               |  | Restricted Stock Units |      
|                               |  | Number ofShares        |       |   | Weighted-AverageGrant-DateFair Value |  
|                               |  | (Shares in thousands)  |      
|Unvested at December 31, 2009  |  |                        | 1,390 |   |                                      | $ | 11.52 | 
|Granted                        |  |                        | 1,345 |   |                                      |   | 20.59 | 
|Vested                         |  |                        | (303  | ) |                                      |   | 19.92 | 
|Forfeited                      |  |                        | (107  | ) |                                      |   | 17.92 | 
|                               |  |                        |       |   |                                      |   |       | 
|Unvested at September 30, 2010 |  |                        | 2,325 |   |                                      | $ | 15.38 | 
|                               |  |                        |       |   |                                      |   |       | 

As of September 30, 2010, unrecognized compensation expense under the Companys equity
incentive plans for employee RSUs was $27.8 million, which is expected to be recognized over a weighted-average remaining vesting period of 3.11 years.

11. Comprehensive Income (Loss)

Comprehensive income (loss) consists of
net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments, net of tax, and unrealized gain
(loss) on marketable securities, net of tax, are included in accumulated other comprehensive (loss). The following table sets forth the calculation of comprehensive loss (unaudited, in thousands):



|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                               |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Net loss                                                       |  | $                               | (2,814 | ) |                                | $ | (1,972 | )    |  | $ | (8,399 | ) |  | $ | (9,975 | )
|Change in foreign currency translation, net                    |  |                                 | 3,031  |   |                                |   | 83     |      |  |   | 2,763  |   |  |   | 145    |  
|Change in unrealized gain (loss) on marketable securities, net |  |                                 | 53     |   |                                |   | 4      |      |  |   | 343    |   |  |   | (24    | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Comprehensive income (loss)                                    |  | $                               | 270    |   |                                | $ | (1,885 | )    |  | $ | (5,293 | ) |  | $ | (9,854 | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





12. Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including options and warrants. Basic and diluted net loss per common share was the same for all periods presented
as the impact of all potentially dilutive securities outstanding was anti-dilutive. Securities that could potentially dilute basic earnings per share in the future as of September 30, 2010 and 2009 were 12.5 million and 12.0 million,
respectively.

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



|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                      |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                      |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Net loss                                                              |  | $                               | (2,814 | ) |                                | $ | (1,972 | )    |  | $ | (8,399 | ) |  | $ | (9,975 | )
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Shares used in computing net loss per common share, basic and diluted |  |                                 | 74,618 |   |                                |   | 57,292 |      |  |   | 73,100 |   |  |   | 56,791 |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net loss per common share, basic and diluted                          |  | $                               | (0.04  | ) |                                | $ | (0.03  | )    |  | $ | (0.11  | ) |  | $ | (0.18  | )

13. Income Tax

For the three and nine months ended September 30, 2010, income tax expenses were approximately $0.3 million or 11.6% of pre-tax loss
and $0.5 million, or 6.1% of pre-tax loss, respectively. The effective tax rate for the three and the nine months ended September 30, 2010 differs from the U.S. federal statutory rate of 34% primarily due to stock based compensation, permanent
tax adjustments, foreign withholding taxes partially offset with foreign operational rate benefits and a valuation allowance against most of the Companys deferred tax assets.

14. Related Party Transaction

In connection with the Inform acquisition in
July 2010, the Company assumed a noncancelable operating lease for an office building in Brisbane, Australia, owned by the former owners of Inform and who are now shareholders of the Company. The lease expires in 2015, with future payment
obligations of approximately $5.0 million. The associated rent expense was approximately $0.2 million for both the three and nine months ended September 30, 2010.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the federal securities laws,
including statements referencing our expectations relating to future revenue mix and growth; operating expenses and losses; the sufficiency of our cash balances and cash flows for the next 12 months; investment and potential investments of cash or
stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by
the use of terminology such as may, will, expects, intends, plans, anticipates, estimates, potential, or continue, or the negative thereof,
or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and
actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties,
including but not limited to the factors set forth under Part II, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we assume no obligation to
update any such forward-looking statements or reasons why actual results may differ.

The following discussion should be read
in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Report.

Overview

SuccessFactors provides on-demand business execution
software solutions that enable organizations to bridge the gap between business strategy and results. Our goal is to enable organizations to substantially increase employee productivity worldwide by enhancing our existing people performance
solutions with business alignment solutions to enable customers to achieve business results. Our integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management;
Succession Management; Learning and Development; Recruiting Management; Analytics and Reporting; Inform; Employee Profile; 360-Degree Review; Execution Survey; Calibration and Stack Ranker; Business Performance Accelerators; Employee Central;
Metrics Navigator; Express; Strategy Deployment Solution; CubeTree, and proprietary and third-party content. We deliver our application suite to organizations of all sizes across all industries and geographies. Our suite, which is delivered through
the cloud, improves business alignment, team execution and people performance to drive results for companies of all sizes. Across 168 countries and 34 languages, more than 8 million users and 3,000 companies leverage our application suite every
day, up from approximately 300,000 users and 100 companies in 2003.

We generate sales primarily through our global direct
sales organization and, to a much lesser extent, indirectly through channel partners, with sales through channel partners constituting approximately 6% of revenue for the first nine months in 2010. However, in the future, we anticipate that
revenue from channel partners will increase. For the first nine months in 2010, we did not have any single customer that accounted for more than 5% of our revenue. We target our sales and marketing efforts at large enterprises as well as small
and mid-sized organizations.

Historically, most of our revenue has been from sales of our application suite to organizations
located in the United States. In the first nine months of fiscal 2010, approximately 79% of our revenue was generated from customers in the United States. We intend to continue to grow our international business, and have recently acquired Inform
Business Impact (Inform), which is based in Australia. Accordingly, we expect the percentage of our revenue generated outside of the United States to continue to increase.

We have historically experienced significant seasonality in sales of subscriptions to our application suite, with a higher percentage of
our customers renewing or entering into new subscription agreements in the fourth quarter of the year. Also, a significant percentage of our customer agreements within a given quarter are generally entered into during the last month of the quarter.
We have derived a substantial portion of our historical revenue from sales of ourPerformance Management andGoal Management modules, but the percentage of revenue from these modules has decreased over time as customers have purchased
additional modules.

We believe the market for business execution software is large and underserved. Accordingly, we might
incur additional operating expenses, particularly for sales and marketing and professional services activities to pursue this opportunity, and in research and development to develop new products. We expect operating losses to continue but at lower
rates as we intend to continue to pursue new customers, develop new products and acquire or invest in businesses, products or technologies that we believe could complement or expand our application suite, enhance our technical capabilities or
otherwise offer growth opportunities.



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While we have
experienced strong growth in revenues in recent periods, the overall global economy recently experienced a severe downturn, with the United States and many other countries experiencing slow overall growth in 2009 and the first three quarters of
2010. This weakening of the overall global economy has affected customers demand for our software and services. In fiscal 2010, we have seen some improvement in customers demand for our software and services and billings has grown in comparison to
what we experienced in 2009. As a result, we expect revenue growth to continue in 2010, but most likely at a slower rate of growth than we experienced in 2009.

Beginning in the third quarter of 2010, we adopted a new accounting standard (Accounting Standards Update No. 2009-13 or ASU 2009-13) for arrangements with multiple
deliverables, which had the effect of increasing revenue by $2.2 million and $5.7 million in the three and nine months ended September 30, 2010, respectively, including the effects of retrospective application of new standard to our revenues
for the first and second quarters of 2010 to conform all arrangements entered into or materially modified after January 1, 2010 to the new accounting standard. Prior to adopting ASU 2009-13, we accounted for subscription and professional
services deliverables of a contract as one unit of accounting with the entire arrangement fee recognized ratably over the noncancelable term of the contract, because historically, we were not able to establish vendor specific objective evidence
(VSOE) of fair value for each deliverable. Upon adoption of ASU 2009-13, we began separately accounting for and allocating revenue to subscription and professional services deliverables of a contract using our best estimated selling price to
recognize revenue when the basic revenue recognition criteria for each deliverable are met. ASU 2009-13 impacted our subscription revenue by allowing earlier commencement of revenue recognition upon delivery of specific subscription deliverables of
a contract instead of upon delivery of all deliverables as required under the previous accounting guidance; and impacted professional services revenue by allowing earlier recognition of revenue upon completion of work instead of ratable over the
contracted term of the subscription agreement, generally one to three years. We, however, continue to recognize revenue on all professional services contracts entered into prior to January 1, 2010, ratably over the associated subscription term.

The acquisitions completed in the third quarter of 2010 did not significantly contribute to our revenues for the quarter
ended September 30, 2010, primarily due to the ratable nature of the revenues.

Critical Accounting Policies and
Estimates

Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this
Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many
instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the
estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial
condition, results of operations and cash flows will be affected.

As discussed in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations section of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, we consider our estimates of the
following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements:



| |  |  | Revenue Recognition
| | - |  | -------------------



| |  |  | Accounting for Commission Payments
| | - |  | ----------------------------------



| |  |  | Accounting for Stock-Based Awards
| | - |  | ---------------------------------



| |  |  | Allowance for Doubtful Accounts
| | - |  | -------------------------------

Material changes to our critical accounting policies since December 31, 2009 are discussed below.

Revenue Recognition

Our revenue consists of subscription fees for
our cloud-based software and support and fees for the provision of other services. Our customers do not have the contractual right to take possession of software in substantially all of the transactions. Instead, the software is delivered through
the cloud from our hosting facilities. Therefore, these arrangements are treated as service agreements. We commence revenue recognition when all of the following conditions are met:



| |  |  | Persuasive evidence of an arrangement;
| | - |  | --------------------------------------



| |  |  | Subscription or services have been delivered to the customer;
| | - |  | -------------------------------------------------------------



| |  |  | Collection of related fees is reasonably assured; and
| | - |  | -----------------------------------------------------



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| |  |  | Related fees are fixed or determinable.
| | - |  | ---------------------------------------

Additionally, if an agreement contains non-standard acceptance or requires non-standard performance criteria to be met, we defer revenues until the satisfaction of these conditions.

In the third quarter of fiscal 2010, we adopted ASU 2009-13, which amended the accounting guidance for multiple-deliverable revenue
arrangements to:



| |  |  | provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration
should be allocated;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of each deliverable if a vendor does not have
vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

We early-adopted this accounting guidance in the third quarter of fiscal 2010 and has retrospectively
applied its provisions to applicable arrangements entered into or materially modified after January 1, 2010 (the beginning of our fiscal year).

Prior to the adoption of ASU 2009-13, we determined that we did not have objective and reliable evidence of fair value for each deliverable of its arrangements. As a result, we accounted for subscription
and professional services revenue as one unit of account and recognized the total arrangement fee ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years. Upon
adoption of ASU 2009-13, we began accounting for subscriptions and professional services revenue as separate units of account and allocating revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a
deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE is available. Since VSOE and TPE are not available for our subscription or professional services, we use ESP. The ESP for each deliverable
is determined primarily by considering the weighted average sales price as well as other factors, including, but not limited to, gross margin objectives and pricing practices.

The adoption of ASU 2009-13 resulted in an increase in revenue for fiscal 2010 as discussed above.

Identified Intangible Assets

Identified intangible assets primarily
consist of acquisition-related developed technology, customer relationships, tradenames and trademarks which are generally amortized on a straight-line basis over the periods of benefit, ranging from two to ten years. We perform a quarterly review
of identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we
assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments,
if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new
shorter useful life. There were no impairment charges related to identified intangible assets during the three and nine months ended September 30, 2010.

Goodwill

We perform a goodwill impairment test annually during the
fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among other
things. The impairment test is performed by determining our fair value based on estimated discounted future cash flows and considering the market price of our common stock. If our carrying value, as a one reporting unit entity, is less than our fair
value, then the fair value is allocated to all of our assets and liabilities (including any unrecognized intangible assets) as if our fair value was the purchase price to acquire us. The excess of our fair value over the amounts assigned to our
assets and liabilities is the implied fair value of the goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We did not record any charges
related to goodwill impairment during the three and nine months ended September 30, 2010.

Contingent Consideration

We estimate the fair value of the contingent consideration related to the Inform and CubeTree acquisitions using
various valuation approaches, as well as significant unobservable inputs reflecting our own assumptions in measuring fair value. The fair values of the contingent consideration are remeasured at each reporting period, with any changes in the value
recorded as income or expense. Such remeasurments resulted in a gain of approximately $3.1 million for the three and nine months ended September 30, 2010. The potential undiscounted amount of all future cash payments that we could be required
to make under the contingent consideration is between $0 and $62.9 million as of September 30, 2010.



23



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Results of
Operations

The following table presents certain consolidated financial data for the three and nine months ended
September 30, 2010 and 2009 as a percentage of total revenue (unaudited):



|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|--------------------------------------- |  | ------------------------------- | --- | -- | ------------------------------ |  | --- | ---- |  |  | ---- | -- |  |  | --- | --
|                                        |  | Three Months EndedSeptember 30, |     |    | Nine Months EndedSeptember 30, | 
|                                        |  | 2010                            |     |    | 2009                           |  |     | 2010 |  |  | 2009 |   
|Revenue                                 |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Subscription and support                |  |                                 | 81  | %  |                                |  | 79  | %    |  |  | 80   | %  |  |  | 79  | % 
|Professional services and other         |  |                                 | 19  |    |                                |  | 21  |      |  |  | 20   |    |  |  | 21  |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Total revenue                           |  |                                 | 100 |    |                                |  | 100 |      |  |  | 100  |    |  |  | 100 |   
|Cost of revenue                         |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Subscription and support                |  |                                 | 15  |    |                                |  | 12  |      |  |  | 13   |    |  |  | 12  |   
|Professional services and other         |  |                                 | 17  |    |                                |  | 11  |      |  |  | 14   |    |  |  | 11  |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Total cost of revenue                   |  |                                 | 32  |    |                                |  | 23  |      |  |  | 27   |    |  |  | 23  |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Total gross margin                      |  |                                 | 68  |    |                                |  | 77  |      |  |  | 73   |    |  |  | 77  |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Operating expenses:                     |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Sales and marketing                     |  |                                 | 49  |    |                                |  | 51  |      |  |  | 48   |    |  |  | 53  |   
|Research and development                |  |                                 | 21  |    |                                |  | 16  |      |  |  | 19   |    |  |  | 16  |   
|General and administrative              |  |                                 | 18  |    |                                |  | 15  |      |  |  | 17   |    |  |  | 17  |   
|Revaluation of contingent consideration |  |                                 | (6  | )  |                                |  |    |      |  |  | (2   | )  |  |  |    |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Total operating expenses                |  |                                 | 82  |    |                                |  | 83  |      |  |  | 82   |    |  |  | 86  |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Loss from operations                    |  |                                 | (14 | )  |                                |  | (5  | )    |  |  | (8   | )  |  |  | (9  | ) 
|Interest income and other, net          |  |                                 | 9   |    |                                |  | 1   |      |  |  | 3    |    |  |  | 1   |   
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Loss before provision for income taxes  |  |                                 | (5  | )  |                                |  | (5  | )    |  |  | (5   | )  |  |  | (8  | ) 
|Provision for income taxes              |  |                                 |    |    |                                |  |    |      |  |  | (1   | )  |  |  | (1  | ) 
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   
|Net loss                                |  |                                 | (5  | )% |                                |  | (5  | )%   |  |  | (6   | )% |  |  | (9  | )%
|                                        |  |                                 |     |    |                                |  |     |      |  |  |      |    |  |  |     |   

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Revenue

The following table presents our components of total revenue for the periods presented (unaudited):



|                                |  |                                 |        |  |                                |   |        |        |  |  |      |   |  |      |         |  |        |   |         |  |  |  |    |  
|------------------------------- |  | ------------------------------- | ------ |  | ------------------------------ | - | ------ | ------ |  |  | ---- | - |  | ---- | ------- |  | ------ | - | ------- |  |  |  | -- | -
|                                |  | Three Months EndedSeptember 30, |        |  | Nine Months EndedSeptember 30, |  
|                                |  | 2010                            |        |  | 2009                           |   |        | Change |  |  | 2010 |   |  | 2009 |         |  | Change |  
|                                |  | (Dollars in thousands)          |       
|Revenue:                        |  |                                 |        |  |                                |   |        |        |  |  |      |   |  |      |         |  |        |   |         |  |  |  |    |  
|Subscription and support        |  | $                               | 41,638 |  |                                | $ | 30,595 |        |  |  | 36   | % |  | $    | 116,153 |  |        | $ | 87,857  |  |  |  | 32 | %
|Professional services and other |  |                                 | 9,898  |  |                                |   | 8,090  |        |  |  | 23   |   |  |      | 29,621  |  |        |   | 22,988  |  |  |  | 29 |  
|                                |  |                                 |        |  |                                |   |        |        |  |  |      |   |  |      |         |  |        |   |         |  |  |  |    |  
|Total revenue                   |  | $                               | 51,536 |  |                                | $ | 38,685 |        |  |  | 33   | % |  | $    | 145,774 |  |        | $ | 110,845 |  |  |  | 32 | %
|                                |  |                                 |        |  |                                |   |        |        |  |  |      |   |  |      |         |  |        |   |         |  |  |  |    |  

Total revenue increased by $12.9 million or 33% for the three months ended September 30, 2010 and
increased by $34.9 million, or 32%, for the nine months ended September 30, 2010, compared to the corresponding periods of fiscal 2009, primarily due to increase in the level of renewals and sale of additional subscription modules to our
existing customers, offset by a slight decrease in



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sales to new customers. We define existing customers as companies that we have sold to before and are either renewing their subscriptions, purchasing additional modules and/or adding new users,
and we define new customers as companies that have never purchased from us before. The companies acquired in the third quarter of 2010 contributed $2.1 million to revenue for both the three and nine months ended September 30, 2010, and we
recognized additional revenues of $2.2 million and $5.8 million for the three and nine months ended September 30, 2010, respectively, due to the adoption of ASU 2009-13.

Revenue from customers in the United States accounted for approximately 77% and 79% of total revenue for the three and nine months ended September 30, 2010, respectively.

Subscription and support revenue

Subscription and support revenue for the three months ended September 30, 2010 increased by $11.0 million, or 36%, and increased by $28.3 million or 32% for the nine months ended September 30,
2010 compared to the corresponding periods of fiscal 2009. Substantially all of the increase in subscription and support revenue for the quarter ended and the three months ended September 30, 2010 came from increase in revenue from existing
customers. The adoption of ASU 2009-13 contributed approximately $0 and $0.9 million of the increase in subscription and support revenue in the three and nine months ended September 30, 2010, respectively; and the companies acquired in the
third quarter of 2010 contributed $2.0 million of the increase in subscription and support revenue for both the quarter ended and three months ended September 30, 2010.

Professional services and other revenue

Professional services and other
revenue for the three months ended September 30, 2010 increased by $1.8 million, or 23%, and increased by $6.6 million, or 29%, for the nine months ended September 30, 2010, as compared to the corresponding periods of fiscal 2009. The
increase in professional services and other primarily came from the adoption of ASU 2009-13, which contributed $2.2 million and $4.9 million of the increase in professional services revenues in the three and nine months September 30, 2010.

Cost of Revenue and Gross Margin

The following table presents our revenue, cost of revenue, gross profit and gross margin for the periods presented (unaudited):



|                                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ------ |  |  | ---- | - |  | ---- | ------- | - | ------ | - | ------- | - |  |  | -- | -
|                                |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                |  | 2010                            |        |   | 2009                           |   |        | Change |  |  | 2010 |   |  | 2009 |         |   | Change |  
|                                |  | (Dollars in thousands)          |       
|Revenue:                        |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Subscription and support        |  | $                               | 41,638 |   |                                | $ | 30,595 |        |  |  | 36   | % |  | $    | 116,153 |   |        | $ | 87,857  |   |  |  | 32 | %
|Professional services and other |  |                                 | 9,898  |   |                                |   | 8,090  |        |  |  | 23   |   |  |      | 29,621  |   |        |   | 22,988  |   |  |  | 29 |  
|                                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Total revenue                   |  |                                 | 51,536 |   |                                |   | 38,685 |        |  |  | 33   |   |  |      | 145,774 |   |        |   | 110,845 |   |  |  | 32 |  
|                                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Cost of revenue:                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Subscription and support        |  |                                 | 7,613  |   |                                |   | 4,539  |        |  |  | 68   |   |  |      | 18,901  |   |        |   | 12,699  |   |  |  | 49 |  
|Professional services and other |  |                                 | 8,861  |   |                                |   | 4,292  |        |  |  | 106  |   |  |      | 19,899  |   |        |   | 12,568  |   |  |  | 58 |  
|                                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Total cost of revenue           |  |                                 | 16,474 |   |                                |   | 8,831  |        |  |  | 87   |   |  |      | 38,800  |   |        |   | 25,267  |   |  |  | 54 |  
|                                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Total gross profit              |  | $                               | 35,062 |   |                                | $ | 29,854 |        |  |  | 17   | % |  | $    | 106,974 |   |        | $ | 85,578  |   |  |  | 25 | %
|                                |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |         |   |        |   |         |   |  |  |    |  
|Total gross margin              |  |                                 | 68     | % |                                |   | 77     | %      |  |  |      |   |  |      | 73      | % |        |   | 77      | % |  |  |    |  

Subscription and support cost of revenue

Subscription and support cost of revenue for the three months ended September 30, 2010 increased by $3.0 million, or 68%, when
compared to the three months ended September 30, 2009. The increase was primarily due to a $1.6 million increase in personnel costs largely due to the companies acquired in the third quarter of 2010, and a $1.4 million increase in amortization
expenses related to purchased intangible assets in connection with the acquisitions.

Subscription and support cost of revenue
for the nine months ended September 30, 2010 increased by $6.2 million, or 49%, compared to the nine months ended September 30, 2009. The increase was primarily due to a $3.4 million increase in personnel costs, partly attributable to
increased headcount from acquisitions, a $1.4 million increase in amortization expenses related to purchased-intangible assets in connection with acquisitions, $0.6 million increase in data center costs primarily due to increased capacity, and a
combined $0.7 million in depreciation and allocated overhead expenses.



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Professional
services and other cost of revenue

Professional services and other cost of revenue for the three months ended
September 30, 2010 increased by $4.6 million, or 106%, when compared to the three months ended September 30, 2009. The increase was primarily due to a $2.5 million increase in personnel costs, largely due to headcount additions from
acquisitions, a $1.3 million increase in outsourced services and a combined $0.7 million increase in outside services, overhead allocation and travel-related expenses.

Professional services and other cost of revenue for the nine months ended September 30, 2010 increased by $7.3 million, or 58%, when compared to the nine months ended September 30, 2009. The
increase primarily came from a $3.6 million increase in personnel costs, partly attributable to increased headcount from acquisitions, a $2.3 million increase in outsourced services, $0.3 million increase in training-related expenses, and a combined
$1.0 million increase in travel-related costs, outside services expenses and allocated overhead costs.

Gross margin for the
three months ended September 30, 2010 was 68% compared to 77% for the corresponding period of fiscal 2009, and was 73% for the nine months ended September 30, 2010 compared to 77% for the corresponding period of fiscal 2009. The decreases
in gross margin were primarily due to increases in personnel costs due to headcount additions, amortization expense of purchased intangible assets attributable to acquisitions completed in the third quarter of 2010 as well as the costs incurred on
significant contracts for which the associated revenue recognition has not begun or is being recognized ratably, offset by an increase in revenue associated with the adoption of ASU 2009-13. The increase in revenue from the adoption of ASU 2009-13
impacted our margins positively, as our revenue increased without corresponding increase in our costs of revenue since our cost of revenue is recognized as incurred and would have been same without the increase in revenue.

We expect that in the future, subscription and support cost of revenue and professional services and other cost of revenue may increase
depending on the growth rate of our new bookings and our need to support the implementation, hosting and support of those new bookings. We also expect that subscription and support cost of revenue and professional services and other cost of revenues
as a percentage of revenue could fluctuate from period to period depending on growth of our professional services business and any associated costs relating to the delivery of professional services, the timing of sales of products that have royalty
and referrals associated with them and the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our application suite and other
services. The timing of these additional expenses could affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenue, in any particular quarterly or annual period.

Operating Expenses

Sales and Marketing

The following table presents our sales and marketing
expenses for the periods presented (unaudited):



|                         |  |                                 |        |   |                                |   |        |        |  |  |      |   |  |      |        |   |        |   |        |   |  |  |    |  
|------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ------ |  |  | ---- | - |  | ---- | ------ | - | ------ | - | ------ | - |  |  | -- | -
|                         |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                         |  | 2010                            |        |   | 2009                           |   |        | Change |  |  | 2010 |   |  | 2009 |        |   | Change |  
|                         |  | (Dollars in thousands)          |       
|Sales and marketing      |  | $                               | 25,166 |   |                                | $ | 19,573 |        |  |  | 29   | % |  | $    | 69,585 |   |        | $ | 59,125 |   |  |  | 18 | %
|Percent of total revenue |  |                                 | 49     | % |                                |   | 51     | %      |  |  |      |   |  |      | 48     | % |        |   | 53     | % |  |  |    |  

Sales and marketing expenses for the three months ended September 30, 2010 increased by $5.6
million, or 29%, compared to the three months ended September 30, 2009. The increase was primarily driven by our continuing efforts to expand our sales and marketing activities as well as additional expenses attributable to the companies
acquired in the third quarter of 2010. The increase in sales and marketing expenses was primarily comprised of a $5.0 million increase in personnel costs, of which $1.2 million was an increase in commission expense; an increase of $0.3 million in
travel-related costs, $0.3 million in outside services expenses and $0.3 million in facility-related costs, partially offset by a $0.3 million decrease in marketing and promotional spending. $1.1 million of the overall increase in sales and
marketing expenses in the three months ended September 30, 2010 was attributable to the companies acquired in the third quarter of 2010. In addition, the adoption of ASU 2009-13 resulted in approximately $0.1 million increase in commission
expense in the third quarter of 2010 due to the matching of commission expenses to the associated revenues under the new accounting guidance, resulting in earlier recognition of deferred commissions in some arrangements.

Sales and marketing expenses for the nine months ended September 30, 2010 increased by $10.5 million, or 18%, compared to the nine
months ended September 30, 2009. The increase was primarily comprised of an increase of $10.4 million in personnel costs, of which $3.0 million was an increase in commission expense; an increase of $1.2 million in outside services expenses and
an increase of $1.0 million in travel-related costs, partially offset by a $2.3 million decrease in marketing and promotional spending. $1.1 million of the overall increase in sales and marketing expenses in the nine months ended September 30,
2010 was attributable to the companies acquired in the third quarter of 2010. The adoption of ASU 2009-13 resulted in an increase in commissions expense of approximately $0.2 million in the nine months ended September 30, 2010.



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We expect our
sales and marketing expenses to increase in absolute dollars throughout the remainder of fiscal 2010, as we integrate the operations of our recently acquired companies and continue our efforts to grow our business

Research and Development

The following table presents our research and development expenses for the periods presented (unaudited):



|                         |  |                                 |        |   |                                |   |       |        |  |  |      |   |  |      |        |   |        |   |        |   |  |  |    |  
|------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ------ |  |  | ---- | - |  | ---- | ------ | - | ------ | - | ------ | - |  |  | -- | -
|                         |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                         |  | 2010                            |        |   | 2009                           |   |       | Change |  |  | 2010 |   |  | 2009 |        |   | Change |  
|                         |  | (Dollars in thousands)          |       
|Research and development |  | $                               | 11,048 |   |                                | $ | 6,343 |        |  |  | 74   | % |  | $    | 27,699 |   |        | $ | 17,967 |   |  |  | 54 | %
|Percent of total revenue |  |                                 | 21     | % |                                |   | 16    | %      |  |  |      |   |  |      | 19     | % |        |   | 16     | % |  |  |    |  

Research and development expenses for the three months ended September 30, 2010 increased by
$4.7 million, or 74%, compared to the three months ended September 30, 2009. The increase was primarily due to a $3.6 million increase in personnel costs mainly attributable to our continuing efforts to expand our offshore development and
acquisitions, and $0.5 million increase each in outside service expenses and allocated overhead costs. $1.0 million of the overall increase in research and development expenses for the three months ended September 30, 2010 was attributable to
the increase in headcount from companies acquired in the third quarter of 2010.

Research and development expenses for the
nine months ended September 30, 2010 increased by $9.7 million, or 54%, compared to the nine months ended September 30, 2009. The majority of the increase in research and development expenses came from a $6.7 million increase in
personnel costs, $1.8 million increase in spending on outside service providers, $1.0 million increase in allocated overhead costs, and $0.3 million increase in travel-related costs. $1.0 million of the overall increase in research and development
expenses in the nine months ended September 30, 2010 was attributable to the increase in headcount from companies acquired in the third quarter of 2010.

We expect our research and development expenses to increase in absolute dollars throughout the remainder of fiscal 2010, as we integrate the operations of our recently acquired companies and continue our
efforts to expand our development activities.

General and Administrative

The following table presents our general and administrative expenses for the periods presented (unaudited):



|                           |  |                                 |       |   |                                |   |       |        |  |  |      |   |  |      |        |   |        |   |        |   |  |  |    |  
|-------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ------ |  |  | ---- | - |  | ---- | ------ | - | ------ | - | ------ | - |  |  | -- | -
|                           |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                           |  | 2010                            |       |   | 2009                           |   |       | Change |  |  | 2010 |   |  | 2009 |        |   | Change |  
|                           |  | (Dollars in thousands)          |      
|General and administrative |  | $                               | 9,180 |   |                                | $ | 6,016 |        |  |  | 53   | % |  | $    | 24,877 |   |        | $ | 18,542 |   |  |  | 34 | %
|Percent of total revenue   |  |                                 | 18    | % |                                |   | 15    | %      |  |  |      |   |  |      | 17     | % |        |   | 17     | % |  |  |    |  

General and administrative expenses for the three months ended September 30, 2010 increased
by $3.2 million, or 53%, compared to the three months ended September 30, 2009. The increase was primarily due to a $2.3 million increase in personnel costs resulting from headcount growth in our general and administrative function to support
the Companys growth; a $0.7 million increase in professional and outside services expenses, of which $0.5 million were acquisition-related costs; partially offset by decreases of $0.3 million in bad debt expense and $0.1 million in facilities
and overhead costs. $0.8 million of the overall increase in general and administrative expenses in the three months ended September 30, 2010 was attributable to the companies acquired in the third quarter of 2010.

General and administrative expenses for the nine months ended September 30, 2010 increased by $6.3 million or 34%, compared to the
nine months ended September 30, 2009. The increase was primarily due to a $4.0 million increase in personnel costs; a combined increase of $0.9 million in telecommunication and travel-related costs; and an increase of $3.6 million in
professional and outside services expenses, of which $2.2 million were acquisition-related costs; partially offset by a decrease of $1.7 million in facilities and allocated overhead headcount expenses; and a combined decrease of $0.7 million in bad
debt and depreciation expenses. $0.8 million of the overall increase in general and administrative expenses in the nine months ended September 30, 2010 was attributable to the increased headcount from companies acquired in the third quarter of
2010.

We expect our general and administrative expenses to increase in absolute dollars throughout the remainder of fiscal
2010, as we integrate the operations of our recently acquired companies.



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Revaluation of
contingent consideration

The following table presents our revaluation of contingent considerations for the periods presented
(unaudited):



|                                         |  |                                 |       |    |                                |   |     |        |  |  |      |  |  |      |       |    |        |   |     |  |  |  |     | 
|---------------------------------------- |  | ------------------------------- | ----- | -- | ------------------------------ | - | --- | ------ |  |  | ---- |  |  | ---- | ----- | -- | ------ | - | --- |  |  |  | --- | 
|                                         |  | Three Months EndedSeptember 30, |       |    | Nine Months EndedSeptember 30, |  
|                                         |  | 2010                            |       |    | 2009                           |   |     | Change |  |  | 2010 |  |  | 2009 |       |    | Change |  
|                                         |  | (Dollars in thousands)          |      
|Revaluation of contingent considerations |  | ($                              | 3,056 | )  |                                | $ |    |        |  |  | n/a  |  |  | ($   | 3,056 | )  |        | $ |    |  |  |  | n/a | 
|Percent of total revenue                 |  |                                 | (6    | %) |                                |   | n/a |        |  |  |      |  |  |      | (2    | %) |        |   | n/a |  |  |  |     | 

Revaluation of contingent consideration consisted of a gain of approximately $3.1 million
primarily related to a contingent consideration associated with the CubeTree acquisition. Each quarter we will be revaluing the contingent consideration for the following contingency periods: CubeTree is based on our stock price over three-year
period, and Inform is based on achievement of bookings for a period of 2 years following closing.

Interest Income and
Other, Net

The following table presents our interest and other income, net for the periods presented (unaudited):



|                               |  |                                 |       |   |                                |   |     |        |  |  |       |   |  |      |       |   |        |   |     |   |  |  |     |  
|------------------------------ |  | ------------------------------- | ----- | - | ------------------------------ | - | --- | ------ |  |  | ----- | - |  | ---- | ----- | - | ------ | - | --- | - |  |  | --- | -
|                               |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                               |  | 2010                            |       |   | 2009                           |   |     | Change |  |  | 2010  |   |  | 2009 |       |   | Change |  
|                               |  | (Dollars in thousands)          |      
|Interest income and other, net |  | $                               | 4,754 |   |                                | $ | 210 |        |  |  | 2,164 | % |  | $    | 4,218 |   |        | $ | 823 |   |  |  | 413 | %
|Percent of total revenue       |  |                                 | 9     | % |                                |   | 0   | %      |  |  |       |   |  |      | 3     | % |        |   | 1   | % |  |  |     |  

Interest income and other, net increased by $4.5 million for the three months ended
September 30, 2009 and by $3.3 million for the nine months ended September 30, 2009, as compared to the corresponding periods of 2009. The increases were primarily due to an unrealized foreign exchange gain of $3.5 million related to an
intercompany acquisition loan denominated in United States dollars but held on a subsidiarys books in its local currency as well as the effects of net favorable movements in certain of the foreign currencies in which our accounts receivables
were denominated.

Provision for Income Taxes

We account for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the
tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities, and for net operating loss and tax credit carryforwards.

Further, compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between each of its legal entities that are located in several
countries. Our determinations include many decisions based on managements knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third parties.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. We may be periodically reviewed by domestic and foreign tax authorities regarding the amount of
taxes due. These reviews may include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated
reserves when it is not probable that an uncertain tax position will be sustained upon examination by a taxing authority. These estimates are subject to change.

Income tax expense for the nine months ended September 30, 2010 was $0.5 million, or (6%) of pre-tax income, compared to $0.7 million, or (9%) of pre-tax income for the nine months ended
September 30, 2009. The effective tax rate for the nine months ended September 30, 2010 differs from the U.S. federal statutory rate of 34% primarily due to stock based compensation, other permanent tax adjustments and foreign withholding
taxes partially offset with foreign operational rate benefits. The effective tax rate for the nine months ended September 30, 2010 differs from the U.S. federal statutory rate of primarily due to stock based compensation, other permanent tax
adjustments, unbenefited domestic losses which had a full valuation allowance as of September 30, 2010 and foreign withholding taxes, partially offset with foreign operational tax benefits.



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Liquidity and
Capital Resources

To date, substantially all of our operations have been financed through the sale of equity
securities, including net cash proceeds in connection with our initial public offering of common stock completed in the fourth quarter of 2007 of approximately $104.6 million, after deducting underwriting discounts and commissions and offering
costs. In June 2008, we completed a public offering raising approximately $27.4 million in net proceeds after deducting underwriting discounts and commissions of $1.5 million and other offering expenses of approximately $0.6 million.
In October 2009, we completed a follow-on public offering raising approximately $203.0 million in net proceeds, after deducting underwriting discounts and commissions of $10.4 million and other offering expenses of approximately $0.6 million. In
addition, we have been generating cash flow from operations since the fourth quarter of 2008.

The following table sets forth
a summary of our cash flows for the periods indicated (in thousands):



|                                                  |  |                                |         |   |      |   |         |  
|------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                  |  | Nine Months EndedSeptember 30, |        
|                                                  |  | 2010                           |         |   | 2009 |  
|                                                  |  | (Unaudited)                    |        
|Net cash provided by operating activities         |  | $                              | 32,950  |   |      | $ | 7,204   |  
|Net cash provided by used in investing activities |  |                                | (51,166 | ) |      |   | (39,661 | )
|Net cash provided by financing activities         |  |                                | 10,837  |   |      |   | 3,491   |  

Net Cash Provided
By Operating Activities

Our cash flows from operating activities are significantly influenced by the amount of cash we
invest in personnel and infrastructure to support the anticipated future growth of our business, increases in the number of customers using our subscription services and the amount and timing of customer payments. Cash provided by operating
activities has historically resulted from losses from operations, changes in working capital accounts, offset by the add back of non-cash expense items such as depreciation, amortization and expense associated with stock-based compensation awards
and revaluation of contingent consideration.

Cash provided by operating activities for the nine months ended
September 30, 2010 was $32.9 million and consisted of net loss of $8.4 million, adjusted by non-cash items of $24.5 million and cash provided by changes in assets and liabilities of $16.8 million. Non-cash items included a $3.1 million gain
from the change in the fair value of an acquisition-related contingent consideration. The increase in cash flow from changes in assets and liabilities of $16.8 million was primarily comprised of (i) a decrease of $3.3 million in accounts
receivable primarily resulting from our cash collection efforts; (ii) an increase of $20.9 million in deferred revenue primarily due to increase in billings; (iii) a combined increase of $3.1 million in accounts payable and accrued
expenses, partly attributable to the companies acquired in third quarter of 2010; and (iv) an increase of $1.3 million in accrued compensation mainly comprised of accrued bonuses and commissions as of September 30, 2010; offset by
(v) an increase of $8.7 million in capitalized (deferred) commissions; and (vi) an increase of $3.1 million in prepaid expenses and other current assets.

Net Cash Used in Investing Activities

Cash used in investing activities in
the nine months ended September 30, 2010 was $51.2 million, primarily consisted of $272.7 million used in purchases of available-for-sale securities, $26.1 million used in acquisitions, net of cash acquired, and $3.2 million of capital
expenditures, offset by proceeds of $250.9 million from sales and maturities of available-for-sale securities.

Net Cash
Provided by Financing Activities

Cash provided by financing activities in the nine months ended September 30, 2010
was $10.8 million, primarily consisted of proceeds from the exercise of stock options of $10.9 million.



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Capital Resources

We believe our existing cash, cash equivalents and marketable securities and currently available resources will be
sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue and bookings growth, future acquisitions, the level 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 services and enhancements to existing services, the timing of general and
administrative expenses as we grow our administrative infrastructure and integrate Inform, CubeTree and YouCalc, and the continuing market acceptance of our application suite. Our capital expenditures for the rest of 2010 are expected to grow in
line with business activities. To the extent that existing cash and cash from operations are not sufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing.

Commitments

On July 1, 2010, we completed the acquisition of Inform. The earn-out provides for the payment of up to approximately $15.0 million in shares of common stock upon the achievement of certain bookings
revenue targets.

On July 13, 2010, we completed the acquisition of YouCalc. The earn-out provides for the issuance of
$98,290 shares of common stock, valued at approximately $2.0 million or $20.35 per share, upon the achievement of certain product development and performance milestones.

On July 20, 2010, we completed the acquisition of CubeTree. We agreed to make a future contingent cash payment based on the value of our common stock. Specifically, the contingent cash payment
provides for the former stockholders of CubeTree to receive a cash payment on the three-year anniversary of the closing or at such earlier time as a change of control of us occurs. This time is referred to as the Top-Up Payment Date. If,
on the Top-Up Payment Date, the value of the consideration issued at the closing, or the Market Value, is less than approximately $47.9 million or $53.01 per share, or the Guaranteed Value, subject to adjustments, we would be
obligated to make a payment to such holders in an aggregate amount equal to the difference between the Guaranteed Value and the Market Value, or the Top-Up Payment. The aggregate Top-Up Payment will be reduced to the extent of any sale,
transfer or other disposition of any of the consideration, subject to limited exceptions. This right to receive the Top-Up Payment will terminate in the event the value of the shares of the consideration paid at closing equals or exceeds
approximately $47.9 million or $53.01 per share at any time prior to the Top-Up Payment Date. The contingent considerations are recorded at fair value on our consolidated balance sheet as of the acquisition dates, and those related to Inform and
CubeTree are remeasured to fair value each reporting period, with any changes in the value recorded as income or expense.

Off-Balance Sheet Arrangements

We do not have any special purpose entities and, other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Currency Fluctuations

As we expand internationally our
results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is generally denominated in the local currency of the contracting party. The substantial majority of
our revenue are denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. Our expenses are incurred primarily in the United States, with a lesser portion of our expenses incurred where
our other international sales and operations offices are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm
our business in the future. The effect of an immediate 10% adverse change in exchange rates on foreign denominated receivables as of September 30, 2010 would result in a loss of approximately $1.3 million. To date, we have not entered into any
foreign currency hedging contracts although we may do so in the future.

Interest Rate Sensitivity

We had cash and cash equivalents of $66.6 million and marketable securities of $267.8 million as of September 30, 2010. Cash, cash
equivalents and marketable securities are held for working capital purposes and restricted cash amounts are held as security against credit card deposits and various lease obligations. Our exposure to market rate risk for changes in interest rates
relates to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We placed our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect
and preserve our investment funds by limiting default, market and reinvestment risks. Our investments in marketable securities consist of high-grade government securities, corporate debt securities and equity securities. Investments purchased with
the original maturity of three months or less are considered to be cash equivalents. We classify all of our investments as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax
reported in a separate component of stockholders equity. As of September 30, 2010, the average maturity of our investment portfolio was approximately 326 days; therefore we believe the movement of interest rates should not have a material
impact on our unaudited condensed consolidated balance sheet or statement of operations.

At any time, a significant
increase/decrease in interest rates will have an impact on the fair market value and interest earnings of our investment portfolio. We do not currently hedge this interest exposure. We have performed a sensitivity analysis as of September 30,
2010 using a modeling technique that measures the change in the fair values arising from a hypothetical 50 basis points and 100 basis points adverse movements in the levels of interest rates across the entire yield curve, which are representative of
historical movements in the Federal Funds rate with all other variables held constant. The analysis is based on the weighted-average maturity of our investments as of September 30, 2010. The sensitivity analysis indicated that a hypothetical
100 basis points adverse movement in interest rates would not result in a material loss in the fair values of our investment instruments.

Fair Value of Financial Instruments

We do not have material
exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments that approximate their fair values due to their short period of time to maturity. We do not have any cash invested in auction rate
securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific
hedging strategies in the future.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Disclosure Controls and Procedures

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None.



|Item 1A. | Risk Factors
|-------- | ------------

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described
below, together with all of the other information in this Report, our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and our other public filings. If any of the following risks actually occurs, our business, financial
condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or even all of your investment.

The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that
we currently deem immaterial also may affect our results of operations and financial condition.

We have a history
of losses and we may not achieve or sustain profitability in the future.

We have incurred losses in each fiscal period
since our inception in 2001. We experienced a net loss of $2.8 million for the quarter ended September 30, 2010. At September 30, 2010 we had an accumulated deficit of $227.3 million. The losses and accumulated deficit were due to the
substantial investments we made to grow our business and acquire customers. We still expect to incur significant operating expenses in the future due to our investment in sales and marketing, research and development expenses, operations costs,
expenses related to stock-based compensation and acquisition-related charges arising from our acquisitions of Inform and CubeTree, and other future acquisitions we may undertake. Therefore, we may continue to incur losses for the foreseeable future.
In pursuing acquisitions, it is also likely that our operating expenses will increase. Furthermore, to the extent we are successful in increasing our customer base we could also incur increased losses because costs associated with generating
customer agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. You should not consider our historic revenue growth as indicative of our future performance. Accordingly, we cannot
assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability.

Continued uncertainty in global economic conditions may reduce demand for our application suite and harm our business.

Our operations and performance depend on global economic conditions. These conditions make it difficult for our
customers and potential customers to accurately forecast and plan future business activities, and may cause our customers and potential customers to slow or reduce spending on our application suite. Furthermore, during challenging economic times,
our customers may face difficulties gaining timely access to sufficient credit and experience decreasing cash flow, which are impacting their willingness to make purchases and their ability to make timely payments to us. We cannot predict the
timing, strength or duration of the economic slowdown or any subsequent economic recovery, worldwide, in the United States, or in our industry. These and other economic factors could continue to have an adverse effect on demand for our application
suite, including new bookings and renewal and upsell rates, on our ability to predict future operating results, and on our financial condition and operating results.

Because we recognize subscription and support revenue from our customers over the term of their agreements, downturns or upturns in sales may not be immediately reflected in our operating results.

We recognize subscription and support revenue over the terms of our customer agreements, which typically range from
one to three years, with some up to five years. As a result, most of our quarterly revenue results from agreements entered into during previous quarters. Consequently, a shortfall in demand for our application suite in any quarter may not
significantly reduce our subscription and support revenue for that quarter, but could negatively affect subscription and support revenue in future quarters. In particular, if such a shortfall were to occur in our fourth quarter, it may be more
difficult for us to increase our customer sales to recover from such a shortfall as we have historically entered into a significant portion of our customer agreements during the fourth quarter. In addition, we may be unable to adjust our cost
structure to reflect this potential reduction in subscription and support revenue. Accordingly, the effect of significant downturns in sales of our application suite may not be fully reflected in our results of operations until future periods. Our
subscription model also makes it difficult for us to rapidly increase our subscription and support revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.



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Because we
recognizesubscription and supportrevenue from our customers over the term of their agreements but incur most costs associated with generating customer agreements up front, rapid growth in our customer base will result in increased
losses.

Because the expenses associated with generating customer agreements are generally incurred up front, but the
resulting subscription and support revenue is recognized over the life of the customer agreement, increased growth in the number of customers will result in our recognition of more costs than subscription and support revenue in the earlier periods
of the terms of our agreements even though the customer is expected to be profitable for us over the term of the agreement.

Our business depends substantially on customers renewing their agreements and purchasing additional modules or users from us. Any
decline in our customer renewals would harm our future operating results.

In order for us to improve our operating
results, it is important that our customers renew their agreements with us when the initial contract term expires and also purchase additional modules or additional users. Our customers have no obligation to renew their subscriptions after the
initial subscription period, and we cannot assure you that customers will renew subscriptions at the same or higher level of service, if at all. Although our renewal rates have been historically high, some of our customers have elected not to renew
their agreements with us, and some are declining to renew as a result of global economic conditions. Moreover, under some circumstances, some of our customers have the right to cancel their agreements prior to the expiration of the term.

Our customers renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or
dissatisfaction with our application suite, our customer support, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our
customers spending levels. If our customers do not renew their subscriptions, renew on less favorable terms or fail to purchase additional modules or users, our revenue may decline, and we may not realize significantly improved operating
results from our customer base.

We launched our business execution strategy and this strategy may not result in
additional customers or revenues.

We launched our business execution product and marketing strategy in order to expand
our reach. We did this in part, because we believe that the market for business execution software presents a significantly larger potential market opportunity than the market for people performance solutions. This belief is based on a number of
assumptions that may vary materially from actual future results. These assumptions include user adoption by a substantial majority of the estimated current worldwide work force, with estimated long-term per user rates that are significantly higher
than the current average per user rates. The business execution solutions market is an emerging market, and therefore, its ultimate size and any share of this new market that we might obtain is inherently unpredictable and will likely be impacted
by, among other factors, the breadth and depth of our solutions, the productivity enhancements realized by customers using these solutions and emergence of competitive solutions. Our assumptions and estimates as to market size could be incorrect and
inaccurate or otherwise not come to fruition, in which case we may not realize the benefits of this anticipated market opportunity. Accordingly, you should not place undue reliance on these estimates.

We are still developing a full suite of business execution solutions, and we will need to develop or acquire additional software
solutions as well as content and best practices knowledge. Accordingly, we intend to continue to invest heavily in sales and marketing and product development and intend to pursue acquisitions to implement and execute on this strategy. These
activities have required significant time and attention from our management and employees. We expect to incur significant expenses to pursue this strategy. We cannot assure you that these efforts will result in significant additional customers,
revenues or profitability. Moreover, these efforts may adversely impact our existing business by diverting management attention and other resources. If we are not successful in these efforts, or if the market does not develop as we anticipate, our
business will not grow as we expect and our future operating results could be negatively affected.

The market in which
we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The emerging market for business execution applications is fragmented, rapidly evolving and highly competitive, with relatively low
barriers to entry in some segments. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do, and with
the introduction of new technologies and market entrants, we expect to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price,
which has resulted in pricing pressures. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales,
reduced margins, losses or the failure of our application suite to achieve or maintain more widespread market acceptance, any of which could harm our business.



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We face competition
from paper-based processes and desktop software tools. We also face competition from custom-built software that is designed to support the needs of a single organization, and from third-party human resources application providers. These software
vendors include, without limitation, Cornerstone OnDemand, Inc., Halogen Software Inc., Kenexa Corporation, Oracle Corporation, PeopleClick Authoria, Plateau Systems, Ltd., Salary.com, Inc., SAP AG, Softscape, Inc., StepStone Solutions, SumTotal
Systems Inc., Taleo Corporation and Workday, Inc. With our recent acquisitions, we have expanded our product and feature offerings. These additional products and features compete with those offered by additional companies, including large public
companies such as Google, IBMs Cognos, Microsofts SharePoint Solutions and Salesforce.com. These additional products and features also compete with smaller private companies such as Jive Software and Socialtext. Competitive pressures may
also increase with the consolidation of competitors within our market, such as the acquisition of Salary.com by Kenexa and Softscape by SumTotal.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing
relationships, access to larger customer bases and major distribution agreements with consultants, system integrators and resellers. Moreover, many software vendors could bundle human resources products or offer them at a low price as part of a
larger product sale. In addition, some competitors may offer software that addresses one or a limited number of strategic human resource functions at lower prices or with greater depth than our application suite. As a result, our competitors might
be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Further, some potential customers, particularly large enterprises, may elect to develop their own
internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

We recently made several acquisitions and expect to acquire other companies or technologies, which could divert our managements attention, result in additional dilution to our stockholders,
increase expenses, and otherwise disrupt our operations and harm our operating results.

We recently acquired several
companies, and we expect to acquire or invest in other businesses, products or technologies that we believe could complement or expand our application suite, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of
potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We cannot assure you that we will realize the
anticipated benefits of these acquisitions.

There are inherent risks in integrating and managing corporate acquisitions, and
the Company has limited experience with acquisitions. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the
acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:



| |  |  | unanticipated costs or liabilities associated with the acquisition;
| | - |  | -------------------------------------------------------------------



| |  |  | incurrence of acquisition-related costs, which would be recognized as a current period expense under FASB Accounting Standards Codification
(ASC) 805-20, Business Combinations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from other business concerns;
| | - |  | -----------------------------------------------------------------



| |  |  | harm to our existing business relationships with business partners and customers as a result of the acquisition;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the potential loss of key employees;
| | - |  | ------------------------------------



| |  |  | use of resources that are needed in other parts of our business; and
| | - |  | --------------------------------------------------------------------



| |  |  | use of substantial portions of our available cash to consummate the acquisition.
| | - |  | --------------------------------------------------------------------------------

In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other indefinite lived
intangible assets, which must be assessed for impairment at least annually. Also, contingent considerations related to the acquisitions will be remeasured to fair value at each reporting period, with any changes in the value recorded as income or
expense. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our
operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our application suite may be perceived as not being secure, customers may curtail or stop using
our application suite, and we may incur significant liabilities.



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Our operations involve
the storage and transmission of our customers confidential information, and security breaches could expose us to a risk of loss of this information, litigation, indemnity obligations and other liability. 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 our security measures are breached as a result of third-party action, employee error,
malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our customers data, including personally identifiable information regarding users, our reputation could be damaged, our business may suffer and we could incur
significant liability. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers data
or our data, including our intellectual property and other confidential business information, or our information technology systems. We may be exposed to a greater risk of security breaches as a result of our recent acquisitions because the acquired
businesses may use security measures and other systems that are different and less secure than ours. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be
harmed and we could lose potential sales and existing customers.

Because our application suite collects, stores and
reports personal information of job applicants and employees, privacy concerns could result in liability to us or inhibit sales of our application suite.

Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In
addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that apply to us. Because many of the features of our application suite collect, store and report on personal
information, any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm
our business.

Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies
that are applicable to the businesses of our customers may limit the use and adoption of our application suite and reduce overall demand for it. Privacy concerns, whether or not valid, may inhibit market adoption of our application suite
particularly in certain industries and foreign countries.

Our organization continues to experience rapid changes. If we
fail to manage these changes effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We continue to experience rapid changes in headcount and operations. We grew from 188 employees at December 31, 2005 to 967 employees at September 30, 2010. We increased the size of our customer
base from 341 customers at December 31, 2005 to approximately 3,000 customers at September 30, 2010. The growth in our customer base has placed, and any future growth will place, a significant strain on our management, administrative,
operational, legal and financial compliance infrastructure. Our success will depend in part on our ability to manage these changes effectively. We will need to continue to improve our operational, financial and management controls and our reporting
systems and procedures. Failure to effectively manage organizational changes could result in difficulty in implementing customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other
operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

Failure to adequately expand and ramp our direct sales force and develop and expand our indirect sales channel will impede our growth.

We will need to invest in our sales and marketing infrastructure in order to grow our customer base and our business. We plan to continue
to expand and ramp our direct sales force and engage additional third-party channel partners, both domestically and internationally. Identifying and recruiting these people and entities and training them in the use of our application suite requires
significant time, expense and attention. This expansion will require us to invest significant financial and other resources. We typically have no long-term agreements or minimum purchase commitments with any of our channel partners, and our
agreements with these channel partners do not prohibit them from offering products or services that compete with ours. Our business will be seriously harmed if our efforts to expand and ramp our direct sales force and expand our indirect sales
channels do not generate a corresponding significant increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a
reasonable period of time, we may not be able to significantly increase our revenue and grow our business. In addition, if our channel partners increasingly offer products or services that compete with ours, or fail to become knowledgeable of our
products or to provide adequate customer support, this could impair our ability to sell our products and harm our customer relationships and reputation.



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The market for
our application suite depends on widespread adoption of business execution.

Widespread adoption of our solution
depends on the widespread adoption of business execution by organizations. It is uncertain whether they will purchase software or on-demand applications for this function. Accordingly, we cannot assure you that an on-demand model for business
execution will achieve and sustain the high level of market acceptance that is critical for the success of our business.

We have historically derived a significant portion of our subscription revenue from sales of our performance management and goal
management modules. If these modules are not widely accepted by new customers, our operating results may be harmed.

We
have historically derived a significant portion of our historical subscription revenue from sales of ourPerformance Management andGoal Management modules. If these modules do not remain competitive, or if we experience pricing
pressure or reduced demand for these modules, our future subscription and other revenue could be negatively affected, which would harm our future operating results.

The market for on-demand applications is at a relatively early stage of development, and if it does not develop or develops more slowly than we expect, our business will be harmed.

The market for on-demand applications is at a relatively early stage relative to on-premise solutions, and these
applications may not achieve and sustain high levels of demand and market acceptance. Our success will depend on the willingness of organizations to increase their use of on-demand applications. Many companies have invested substantial personnel and
financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand applications. We have encountered customers in the past that have been unwilling to subscribe
to our application suite because they could not install it on their premises. Other factors that may affect the market acceptance of on-demand applications include:



| |  |  | perceived security capabilities and reliability;
| | - |  | ------------------------------------------------



| |  |  | perceived concerns about ability to scale operations for large enterprise customers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | concerns with entrusting a third party to store and manage critical employee data; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the level of configurability or customizability of on-demand applications.
| | - |  | --------------------------------------------------------------------------

If organizations do not perceive the benefits of on-demand applications, then the market for these applications may not develop further,
or it may develop more slowly than we expect, either of which would adversely affect our business.

Our quarterly
results can fluctuate and, if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or
any securities analysts who follow our stock, the price of our common stock could decline substantially. Fluctuations in our quarterly financial results may be caused by a number of factors, including, but not limited to, those listed below:



| |  |  | our ability to attract new customers;
| | - |  | -------------------------------------



| |  |  | customer renewal rates;
| | - |  | -----------------------



| |  |  | the size and timing of customer orders;
| | - |  | ---------------------------------------



| |  |  | the extent to which customers increase or decrease the number of modules or users upon any renewal of their agreements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of changes in global economic conditions and announcements of economic data and government initiatives to address the global economic
downturn;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of new customers as compared to renewal customers in a particular period;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the addition or loss of large customers, including through acquisitions or consolidations;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the mix of customers between small, mid-sized and large enterprise customers;
| | - |  | -----------------------------------------------------------------------------



| |  |  | changes in our pricing policies or those of our competitors;
| | - |  | ------------------------------------------------------------



| |  |  | changes in currency exchange rates;
| | - |  | -----------------------------------



| |  |  | seasonal variations in the demand for our application suite, which has historically been highest in the fourth quarter of the year;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the amount and timing of operating expenses, particularly sales and marketing, related to the maintenance and expansion of our business, operations and
infrastructure;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and success of new product and service introductions by us or our competitors or any other change in the competitive dynamics of our
industry, including consolidation among competitors, customers or strategic partners;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | network outages or security breaches;
| | - |  | -------------------------------------



| |  |  | the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill
from acquired companies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other general economic, industry and market conditions.
| | - |  | -------------------------------------------------------

We believe that our quarterly results of operations, including the levels of our revenue and changes in deferred revenue, may vary significantly in the future and that period-to-period comparisons of our
operating results may not be meaningful. You should not rely on the results of any one quarter as an indication of future performance. In addition, an increased emphasis on quarterly results may not result in our achievement of long-term business
strategies.

The market for our application suite among large enterprise customers may be limited if they require
customized features or functions that we do not intend to provide.

Prospective large enterprise customers may require
customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, then the market for our application suite will be more limited among these types of
customers and our business could suffer. In addition, supporting large enterprise customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. If we are unable to
address the needs of these customers in a timely fashion or further develop and enhance our application suite, these customers may not renew their subscriptions, seek to terminate their relationship, renew on less favorable terms, fail to purchase
additional modules or for additional users or assert legal claims against us. If any of these were to occur, our revenue may decline and we may not realize significantly improved operating results from our customer base.

As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and
expensive, we may encounter pricing pressure and implementation challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business and operating results.

As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less
predictability in completing some of our sales. Our quarterly results of operations also may vary significantly depending on when we complete sales to these larger enterprise customers. For large enterprises, a purchase decision may be an
enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding privacy and data protection laws and regulations to
prospective customers with international operations. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time
required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or
implementation requirements have been met.

We depend on our management team, particularly our Chief Executive Officer
and our key sales and development personnel, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our executive officers, particularly our Chief Executive Officer, and other key
employees, including key sales and development personnel. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We are also substantially
dependent on the continued service of our existing development personnel because of the complexity of our application suite and technologies.

Many of our personnel do not have employment arrangements that require these personnel to continue to work for us for any specified period and, therefore, they could terminate their employment with us at
any time. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees or groups could seriously harm our business.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that
we believe contribute to our success, and our business may be harmed.



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We believe that a
critical contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for customers and focus on execution. As we grow and change, we may find it difficult to maintain these important aspects of
our corporate culture. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or otherwise adversely affect our future success.

Our growth depends in part on the success of our strategic relationships with third parties.

We anticipate that we will continue to depend on various third-party relationships in order to grow our business. In addition to growing
our indirect sales channels, we intend to pursue additional relationships with other third parties, such as technology and content providers and implementation partners. Identifying partners, negotiating and documenting relationships with them
require significant time and resources as does integrating third-party content and technology. Our agreements with technology and content providers are typically non-exclusive and do not prohibit them from working with our competitors or from
offering competing services. Our competitors may be effective in providing incentives to third parties, including our partners, to favor their products or services or to prevent or reduce subscriptions to our application suite either by disrupting
our relationship with existing customers or by limiting our ability to win new customers. In addition, global economic conditions could adversely affect the businesses of our partners, and it is possible that they may not be able to devote the
additional resources we expect to the relationship. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our
operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our application suite or revenue.

We rely on a small number of third-party service providers to host and deliver our application suite and any interruptions or
delays in services from these third parties could impair the delivery of our application suite and harm our business.

We currently host our application suite from eight data centers worldwide. We do not control the operation of these facilities. These
facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other
misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions, which would have a serious adverse impact on
our business. Additionally, our data center agreements are of limited duration and are subject to early termination rights in certain circumstances, and the providers of our data centers have no obligation to renew their agreements with us on
commercially reasonable terms, or at all.

As we continue to add data centers and add capacity in our existing data centers,
we may transfer data to other locations. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Interruptions in our service or data loss or corruption may cause customers to terminate
their agreements and adversely affect our renewal rates and our ability to attract new customers. Data transfers may also subject us to regional privacy and data protection laws that apply to the transmission of customer data across international
borders.

We also depend on access to the Internet through third-party bandwidth providers to operate our business. If we lose
the services of one or more of our bandwidth providers for any reason, we could experience disruption in delivering our application suite or we could be required to retain the services of a replacement bandwidth provider.

Our operations also rely heavily on the availability of electricity, which also comes from third-party providers. If we or the
third-party data center facilities that we use to deliver our services were to experience a major power outage or if the cost of electricity were to increase significantly, our operations and financial results could be harmed. If we or our
third-party data centers were to experience a major power outage, we would have to rely on back-up generators, which might not work properly or might not provide an adequate supply during a major power outage. Such a power outage could result in a
significant disruption of our business.

If our application suite becomes unavailable or otherwise fails to perform
properly, our reputation and customer relationships could be harmed, our market share could decline and we could be subject to liability claims.

The software used in our application suite is inherently complex and may contain material defects or errors. Any defects in product functionality or that cause interruptions in the availability of our
application suite could result in:



| |  |  | lost or delayed market acceptance and sales;
| | - |  | --------------------------------------------



| |  |  | breach of warranty or other contract breach or misrepresentation claims;
| | - |  | ------------------------------------------------------------------------



| |  |  | sales credits or refunds to our customers;
| | - |  | ------------------------------------------



| |  |  | loss of customers;
| | - |  | ------------------



| |  |  | diversion of development and customer service resources; and
| | - |  | ------------------------------------------------------------



| |  |  | injury to our reputation.
| | - |  | -------------------------



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The costs incurred in
correcting any material defects or errors might be substantial and could adversely affect our operating results.

Because of
the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our
customers regard as significant. Furthermore, the availability of our application suite could be interrupted by a number of factors, including customers inability to access the Internet, the failure of our network or software systems due to
human or other error, security breaches or variability in user traffic for our application suite. We may be required to issue credits or refunds or indemnify or otherwise be liable to our customers or third parties for damages they may incur
resulting from certain of these events. In addition to potential liability, if we experience interruptions in the availability of our application suite, our reputation could be harmed and we could lose customers.

Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition,
our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert managements attention.

We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of
our service.

We rely on computer hardware, purchased or leased, and software licensed from third parties in order to
deliver our application suite. This hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in our ability to provide
our application suite until equivalent technology is either developed by us or, if available, identified, obtained and integrated, which could harm our business. In addition, errors or defects in third-party hardware or software used in our
application suite could result in errors or a failure of our application suite, which could harm our business.

If we
are not able to develop enhancements and new features that achieve market acceptance or that keep pace with technological developments, our business could be harmed.

Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing application suite and to introduce new features.
The success of any enhancement or new product depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any new feature or module that we develop or acquire may not be introduced in a
timely or cost-effective manner, contain defects or may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to successfully develop or acquire new features or modules or to enhance our existing
application suite to meet customer requirements, our business and operating results will be adversely affected.

Because we
designed our application suite to operate on a variety of network, hardware and software platforms using standard Internet tools and protocols, we will need to continuously modify and enhance our application suite to keep pace with changes in
Internet-related hardware, software, communication, browser and database technologies. If we are unable to respond in a timely manner to these rapid technological developments in a cost-effective manner, our application suite may become less
marketable and less competitive or obsolete and our operating results may be negatively impacted.

If we fail to develop
widespread brand awareness cost-effectively, our business may suffer.

We believe that developing and maintaining
widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our application suite and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue,
and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary
to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our application suite.

Because our long-term success depends, in part, on our ability to expand the sales of our application suite to customers located
outside of the United States, our business will be susceptible to risks associated with international operations.

A
key element of our growth strategy is to expand our international operations and develop a worldwide customer base. We have added employees, offices and customers internationally, particularly in Europe, Asia and Australia. Operating in
international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks and competition that are different from those in the United States. Because of our limited experience with
international operations, we cannot assure that our international expansion efforts will be successful or that returns on such investments will be achieved in the future.



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In addition, our
international operations may fail to succeed due to other risks inherent in operating businesses internationally, including:



| |  |  | our lack of familiarity with commercial and social norms and customs in international countries which may adversely affect our ability to recruit,
retain and manage employees in these countries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties and costs associated with staffing and managing foreign operations;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the potential diversion of managements attention to oversee and direct operations that are geographically distant from our U.S. headquarters;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and
regulations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | legal systems in which our ability to enforce and protect our rights may be different or less effective than in the United States and in which the
ultimate result of dispute resolution is more difficult to predict;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | greater difficulty collecting accounts receivable and longer payment cycles;
| | - |  | ----------------------------------------------------------------------------



| |  |  | higher employee costs and difficulty in terminating non-performing employees;
| | - |  | -----------------------------------------------------------------------------



| |  |  | differences in work place cultures;
| | - |  | -----------------------------------



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | the need to adapt our application suite for specific countries;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability to comply with differing technical and certification requirements outside the United States;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | tariffs, export controls and other non-tariff barriers such as quotas and local content rules;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | more limited protection for intellectual property rights in some countries;
| | - |  | ---------------------------------------------------------------------------



| |  |  | adverse tax consequences;
| | - |  | -------------------------



| |  |  | fluctuations in currency exchange rates;
| | - |  | ----------------------------------------



| |  |  | restrictions on the transfer of funds; and
| | - |  | ------------------------------------------



| |  |  | new and different sources of competition.
| | - |  | -----------------------------------------

Our failure to manage any of these risks successfully could harm our existing and future international operations and seriously impair our overall business.

Because competition for our target employees is intense, we may not be able to attract and retain the quality employees we need to
support our planned growth.

Our future success will depend, to a significant extent, on our ability to attract and
retain high quality personnel. Despite the economic downturn, competition for qualified management, technical and other personnel is intense, and we may not be successful in attracting and retaining such personnel. If we fail to attract and retain
qualified employees, our ability to grow our business could be harmed.

Any failure to protect our intellectual property
rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to
compete depend in part upon our intellectual property. We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect
our intellectual property rights, and, to a lesser extent, patents. However, the steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for all of our products and
services.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor
and protect these rights. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property.
Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce
our intellectual property rights could seriously harm our brand and adversely impact our business.



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We may be sued
by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other
intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own
intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may receive claims
that our application suite and underlying technology infringe or violate the claimants intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or
application suite. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or
require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify products, or refund fees, which could further exhaust
our resources. In addition, we may pay substantial settlement costs to resolve claims or litigation, whether or not legitimately or successfully asserted against us, which could include royalty payments in connection with any such litigation and to
obtain licenses, modify products, or refund fees, which could further exhaust our resources. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and
time-consuming and divert the attention of our management and key personnel from our business operations.

Our use of
open source and third-party technology could impose limitations on our ability to commercialize our application suite.

We use open source software in our application suite. Although we try to monitor our use of open source software, the terms of many open
source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our application suite. In such
event, we could be required to seek licenses from third parties in order to continue offering our application suite, to re-engineer our technology or to discontinue offering our application suite in the event re-engineering cannot be accomplished on
a timely basis, any of which could cause us to breach contracts, harm our reputation, result in customer losses or claims, increase our costs or otherwise adversely affect our business, operating results and financial condition. We also incorporate
certain third-party technologies into our application suite and may desire to incorporate additional third-party technologies in the future. Licenses to new third-party technology may not be available to us on commercially reasonable terms, or at
all.

Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may
cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a
primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the use of the
Internet as a commercial medium. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the
growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications such as ours and reduce the demand for our application suite.

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused
user frustration with slow access and download times. If the Internet infrastructure is unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.

Our business is subject to changing regulations regarding corporate governance and public disclosure that will increase both our
costs and the risk of noncompliance.

As a public company, we incur significant legal, accounting and other expenses.
In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules subsequently implemented by the SEC and The NASDAQ Stock Market have imposed a variety of requirements and restrictions on public companies,
including requiring changes in corporate governance practices. In addition, the SEC and Congress are proposing additional significant corporate governance-related rules. Our management and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Our failure to adequately comply could subject us to
liability, costly regulatory or other investigations, claims or litigation.



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Changes in
financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New
accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or
the way we conduct our business.

If there are substantial sales of shares of our common stock, the price of our common
stock could decline.

As of September 30, 2010 we had approximately 75.4 million shares of common stock
outstanding. Substantially all of our outstanding shares of common stock are now freely tradable, subject to volume and other limitations under Rule 144 under the Securities Act in the case of stockholders who are our affiliates. The
price of our common stock could decline if there are substantial sales of our common stock or if there is a large number of shares of our common stock available for sale.



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If securities or
industry analysts publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. In the event one or more of the analysts who
cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand
for our stock could decrease, which might cause our stock price and trading volume to decline.

The market price of our
common stock is likely to be volatile and could decline.

Stock markets 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.

Delaware law and provisions in our restated certificate of
incorporation and restated bylaws could make a merger, tender offer or proxy contest difficult, which could depress the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of Delaware law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an
interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated
bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:



| |  |  | our Board of Directors is classified into three classes of directors with staggered three-year terms;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | only our Chairperson of the Board of Directors, our Chief Executive Officer, our President or a majority of our Board of Directors are authorized to
call a special meeting of stockholders;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our stockholders can only take action at a meeting of stockholders and not by written consent;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | vacancies on our Board of Directors can be filled only by our Board of Directors and not by our stockholders;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be
issued without stockholder approval; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of
stockholders.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The Form S-1 Registration Statement (Registration No. 333-144758) relating to our IPO was declared effective by the SEC on November 19, 2007, and the offering commenced November 19, 2007.
As of September 30, 2010, we used approximately $40.5 million of the proceeds from this offering for working capital. We expect to use the remaining net proceeds of this offering for general corporate purposes, including working capital,
potential capital expenditures, acquisitions and investing in available-for-sale securities.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



|Item 4. | Reserved
|------- | --------



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------

The exhibits
listed on the Exhibit Index (following the Signatures section of this report) are incorporated by reference into this Item 6.



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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.



|                     |  |                                                                     
|-------------------- |  | --------------------------------------------------------------------
|SuccessFactors, Inc.
|                     | 
|By:                  |  | /s/    BRUCE
FELT                                                   
|                     |  | Bruce Felt                                                          
|                     |  | Chief Financial Officer (Principal Financial and Accounting Officer)

Date:
November 9, 2010



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Exhibit Index



|       |  |                                                                                                                                                                       
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Document                                                                                                                                                              
|       | 
|10.1   |  | Description of 2010 Corporate Bonus Plan, as amended(1)                                                                                                               
|       | 
|10.2   |  | Form of Irrevocable Election Form to 2010 Corporate Bonus Plan(1)                                                                                                     
|       | 
|10.3   |  | SuccessFactors, Inc. Change in Control Plan, adopted July 27, 2010(2)                                                                                                 
|       | 
|10.4   |  | Form of Notice of Participation under Change in Control Plan(2)                                                                                                       
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-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 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|       | 
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                    
|       | 
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                    





|1 | Previously filed as Exhibit 99.1 and 99.2 to the Registrants Current Report on Form 8-K on August 30, 2010
|- | -----------------------------------------------------------------------------------------------------------

|2 | Previously filed as Exhibit 99.1 and 99.2 to the Registrants Current Report on Form 8-K on July 28, 2010
|- | ---------------------------------------------------------------------------------------------------------



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