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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

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

For the Quarterly Period Ended: December 31, 2007



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

For the Transition Period from  to

Commission file number 1-33312





SALARY.COM, INC.

(Exact Name of
Registrant as Specified in its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 04-3465241                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

195 West Street, Waltham, Massachusetts 02451

(Address of Principal Executive Offices, Including Zip Code)

(781) 464-7300

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer   ̈    Accelerated Filer   ̈    Non-Accelerated Filer  x

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                         |  |                                
|---------------------------------------- |  | -------------------------------
|Common Stock, par value $.0001 per share |  | 15,534,591 shares              
|Class                                    |  | Outstanding at February 8, 2008









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##### Table of Contents

SALARY.COM, INC.

INDEX



|                                |  |                                                                                                           |  |     
|------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                                |  |                                                                                                           |  | Page
|Part I. - Financial Information |  |                                                                                                          
|                                |  |                                                                                                          
|Item 1.                         |  | Financial Statements                                                                                      |  |     
|                                |  |                                                                                                          
|                                |  | Consolidated Balance Sheets- December 31, 2007 (unaudited) and March 31, 2007                             |  | 3   
|                                |  |                                                                                                          
|                                |  | Consolidated Statements of Operations- Three and Nine Months Ended December 31, 2007 and 2006 (unaudited) |  | 4   
|                                |  |                                                                                                          
|                                |  | Consolidated Statements of Cash Flows  Nine Months Ended December 31, 2007 and 2006 (unaudited)          |  | 5   
|                                |  |                                                                                                          
|                                |  | Notes to Unaudited Consolidated Financial Statements                                                      |  | 6   
|                                |  |                                                                                                          
|Item 2.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 20  
|                                |  |                                                                                                          
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 32  
|                                |  |                                                                                                          
|Item 4.                         |  | Controls and Procedures                                                                                   |  | 32  
|                                | 
|Part II. - Other Information    |  |                                                                                                          
|                                |  |                                                                                                          
|Item 1.                         |  | Legal Proceedings                                                                                         |  | 34  
|                                |  |                                                                                                          
|Item 1A.                        |  | Risk Factors                                                                                              |  | 34  
|                                |  |                                                                                                          
|Item 2.                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                                               |  | 37  
|                                |  |                                                                                                          
|Item 6.                         |  | Exhibits                                                                                                  |  | 38  
|                                | 
|Signatures                      |  | 39                                                                                                       



2



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##### Table of Contents

PART I.

FINANCIAL INFORMATION



|Item 1. | Financial Statements:
|------- | ---------------------

SALARY.COM, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | --------- | - | ----------- | -
|                                                                                                                                                                                                                         |  | December 31, |             |   | March 31, |  
|                                                                                                                                                                                                                         |  | 2007         |             |   | 2007      |  
|                                                                                                                                                                                                                         |  | (unaudited)  |             |   |           |  
|Assets                                                                                                                                                                                                                   |  |              |             |   |           |   |             |  
|Current assets:                                                                                                                                                                                                          |  |              |             |   |           |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                |  | $            | 35,610,193  |   |           | $ | 49,016,389  |  
|Accounts receivable, less allowance for doubtful accounts of $285,688 and $179,712, at December 31, 2007 and March 31, 2007,
respectively                                                                                |  |              | 5,722,287   |   |           |   | 3,364,931   |  
|Prepaid expenses and other current assets                                                                                                                                                                                |  |              | 483,564     |   |           |   | 891,483     |  
|Deferred customer acquisition costs, current portion                                                                                                                                                                     |  |              | 817,795     |   |           |   | 870,224     |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total current assets                                                                                                                                                                                                     |  |              | 42,633,839  |   |           |   | 54,143,027  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Property, equipment and software, net                                                                                                                                                                                    |  |              | 1,678,370   |   |           |   | 1,937,250   |  
|Intangible assets, net:                                                                                                                                                                                                  |  |              |             |   |           |   |             |  
|Non-compete agreements                                                                                                                                                                                                   |  |              | 1,329,627   |   |           |   | 292,002     |  
|Customer relationships                                                                                                                                                                                                   |  |              | 4,441,886   |   |           |   | 96,000      |  
|Other intangible assets                                                                                                                                                                                                  |  |              | 162,821     |   |           |   | 35,630      |  
|Trademarks and tradenames                                                                                                                                                                                                |  |              | 460,000     |   |           |   |            |  
|Data acquisition costs                                                                                                                                                                                                   |  |              | 3,894,767   |   |           |   | 1,500,000   |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total intangible assets, net                                                                                                                                                                                             |  |              | 10,289,101  |   |           |   | 1,923,632   |  
|Goodwill                                                                                                                                                                                                                 |  |              | 9,383,044   |   |           |   | 266,000     |  
|Deferred customer acquisition costs, less current portion                                                                                                                                                                |  |              | 63,708      |   |           |   | 48,856      |  
|Restricted cash                                                                                                                                                                                                          |  |              | 731,323     |   |           |   |            |  
|Security deposits                                                                                                                                                                                                        |  |              | 424,459     |   |           |   | 341,708     |  
|Other assets                                                                                                                                                                                                             |  |              | 414,000     |   |           |   | 15,000      |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|                                                                                                                                                                                                                         |  |              | 22,984,005  |   |           |   | 4,532,446   |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total assets                                                                                                                                                                                                             |  | $            | 65,617,844  |   |           | $ | 58,675,473  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|                                                                                                                                                                                                                         |  |             
|Liabilities and Stockholders Equity                                                                                                                                                                                     |  |              |             |   |           |   |             |  
|Current liabilities:                                                                                                                                                                                                     |  |              |             |   |           |   |             |  
|Accounts payable                                                                                                                                                                                                         |  | $            | 839,938     |   |           | $ | 607,782     |  
|Accrued compensation                                                                                                                                                                                                     |  |              | 2,489,012   |   |           |   | 1,898,529   |  
|Accrued expenses and other current liabilities                                                                                                                                                                           |  |              | 2,973,905   |   |           |   | 1,104,714   |  
|Subscription payable                                                                                                                                                                                                     |  |              | 435,319     |   |           |   | 693,638     |  
|Deferred revenue, current portion                                                                                                                                                                                        |  |              | 19,399,718  |   |           |   | 15,506,966  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total current liabilities                                                                                                                                                                                                |  |              | 26,137,892  |   |           |   | 19,811,629  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Deferred revenue, less current portion                                                                                                                                                                                   |  |              | 1,509,137   |   |           |   | 880,688     |  
|Other long-term liabilities                                                                                                                                                                                              |  |              | 118,900     |   |           |   |            |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total liabilities                                                                                                                                                                                                        |  |              | 27,765,929  |   |           |   | 20,692,317  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Commitments and contingencies (Note 6)                                                                                                                                                                                   |  |              |            |   |           |   |            |  
|                                                                                                                                                                                                                         |  |             
|Stockholders equity:                                                                                                                                                                                                    |  |              |             |   |           |   |             |  
|Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                                                               |  |              |            |   |           |   |            |  
|Common stock, $.0001 par value; 100,000,000 shares authorized at December 31, 2007 and March 31, 2007, respectively; 14,103,002
issued and outstanding at December 31, 2007 and 13,315,580 outstanding at March 31, 2007 |  |              | 1,410       |   |           |   | 1,331       |  
|Additional paid-in capital                                                                                                                                                                                               |  |              | 74,210,222  |   |           |   | 67,378,802  |  
|Accumulated other comprehensive loss                                                                                                                                                                                     |  |              | (3,903      | ) |           |   | (666        | )
|Accumulated deficit                                                                                                                                                                                                      |  |              | (36,355,814 | ) |           |   | (29,396,311 | )
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total stockholders equity                                                                                                                                                                                               |  |              | 37,851,915  |   |           |   | 37,983,156  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                               |  | $            | 65,617,844  |   |           | $ | 58,675,473  |  
|                                                                                                                                                                                                                         |  |              |             |   |           |   |             |  

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



3



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##### Table of Contents

SALARY.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------ |  | ------------------------------ | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                         |  | Three Months EndedDecember 31, |            |   | Nine Months EndedDecember 31, |  
|                                                                         |  | 2007                           |            |   | 2006                          |   |            | 2007 |  |   | 2006       |  
|                                                                         |  | (unaudited)                    |            |   | (unaudited)                   |  
|Revenue:                                                                 |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Subscription revenues                                                    |  | $                              | 8,505,001  |   |                               | $ | 5,483,659  |      |  | $ | 23,044,314 |   |  | $ | 14,764,539 |  
|Advertising revenues                                                     |  |                                | 681,237    |   |                               |   | 553,898    |      |  |   | 2,149,100  |   |  |   | 1,870,272  |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total revenues                                                           |  |                                | 9,186,238  |   |                               |   | 6,037,557  |      |  |   | 25,193,414 |   |  |   | 16,634,811 |  
|Cost of revenues (1)                                                     |  |                                | 2,207,843  |   |                               |   | 1,483,719  |      |  |   | 5,713,555  |   |  |   | 3,657,293  |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                             |  |                                | 6,978,395  |   |                               |   | 4,553,838  |      |  |   | 19,479,859 |   |  |   | 12,977,518 |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                                      |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Research and development (1)                                             |  |                                | 1,368,336  |   |                               |   | 1,181,066  |      |  |   | 3,477,498  |   |  |   | 2,807,174  |  
|Sales and marketing (1)                                                  |  |                                | 5,242,386  |   |                               |   | 3,396,088  |      |  |   | 13,567,991 |   |  |   | 9,047,745  |  
|General and administrative (1)                                           |  |                                | 3,597,532  |   |                               |   | 1,973,933  |      |  |   | 10,144,327 |   |  |   | 4,974,978  |  
|Amortization of intangible assets                                        |  |                                | 320,938    |   |                               |   | 24,250     |      |  |   | 736,489    |   |  |   | 101,748    |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                 |  |                                | 10,529,192 |   |                               |   | 6,575,337  |      |  |   | 27,926,305 |   |  |   | 16,931,645 |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Loss from operations                                                     |  |                                | (3,550,797 | ) |                               |   | (2,021,499 | )    |  |   | (8,446,446 | ) |  |   | (3,954,127 | )
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Other income (expense):                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                          |  |                                | 494,868    |   |                               |   | 348        |      |  |   | 1,569,763  |   |  |   | 6,446      |  
|Interest expense                                                         |  |                                |           |   |                               |   | (26,080    | )    |  |   |           |   |  |   | (77,639    | )
|Other income (expense)                                                   |  |                                | 21,086     |   |                               |   | (114       | )    |  |   | 56,079     |   |  |   | (2,314     | )
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total other income (expense)                                             |  |                                | 515,954    |   |                               |   | (25,846    | )    |  |   | 1,625,842  |   |  |   | (73,507    | )
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Loss before provision for income taxes                                   |  |                                | (3,034,843 | ) |                               |   | (2,047,345 | )    |  |   | (6,820,604 | ) |  |   | (4,027,634 | )
|Provision for income taxes                                               |  |                                | 49,400     |   |                               |   |           |      |  |   | 138,900    |   |  |   |           |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                                 |  |                                | (3,084,243 | ) |                               |   | (2,047,345 | )    |  |   | (6,959,504 | ) |  |   | (4,027,634 | )
|Accretion of preferred stock                                             |  |                                |           |   |                               |   | (128,999   | )    |  |   |           |   |  |   | (386,998   | )
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common stockholders                             |  | $                              | (3,084,243 | ) |                               | $ | (2,176,344 | )    |  | $ | (6,959,504 | ) |  | $ | (4,414,632 | )
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common stockholders per sharebasic and diluted |  | $                              | (0.22      | ) |                               | $ | (0.43      | )    |  | $ | (0.51      | ) |  | $ | (0.90      | )
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Weighted average shares outstandingbasic and diluted                    |  |                                | 13,975,690 |   |                               |   | 5,112,639  |      |  |   | 13,647,881 |   |  |   | 4,915,880  |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                        
|(1) Amounts include stock-based compensation expense, as follows:        | 
|                                                                         |  |                               
|                                                                         |  | Three Months EndedDecember 31, |            |   | Nine Months EndedDecember 31, |  
|                                                                         |  | 2007                           |            |   | 2006                          |   |            | 2007 |  |   | 2006       |  
|                                                                         |  | (unaudited)                    |            |   | (unaudited)                   |  
|Cost of revenues                                                         |  | $                              | 224,549    |   |                               | $ | 177,752    |      |  | $ | 512,589    |   |  | $ | 233,030    |  
|Research and development                                                 |  |                                | 138,821    |   |                               |   | 169,434    |      |  |   | 257,568    |   |  |   | 206,573    |  
|Sales and marketing                                                      |  |                                | 691,648    |   |                               |   | 377,434    |      |  |   | 1,273,498  |   |  |   | 513,575    |  
|General and administrative                                               |  |                                | 588,132    |   |                               |   | 274,438    |      |  |   | 1,432,159  |   |  |   | 533,480    |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                         |  | $                              | 1,643,150  |   |                               | $ | 999,058    |      |  | $ | 3,475,814  |   |  | $ | 1,486,658  |  
|                                                                         |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  

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



4



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SALARY.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                |  |                               |             |   |      |   |            |  
|------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                |  | Nine months endedDecember 31, |            
|                                                                                |  | 2007                          |             |   | 2006 |  
|                                                                                |  | (unaudited)                   |            
|Cash flows from operating activities:                                           |  |                               |             |  
|Net loss                                                                        |  | $                             | (6,959,504  | ) |      | $ | (4,027,634 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                               |             |   |      |   |            |  
|Depreciation and amortization of property, equipment and software               |  |                               | 809,235     |   |      |   | 555,791    |  
|Amortization of intangible assets                                               |  |                               | 1,043,437   |   |      |   | 101,748    |  
|Stock-based compensation                                                        |  |                               | 3,475,814   |   |      |   | 1,486,658  |  
|Legal settlement paid in common stock (Note 6)                                  |  |                               | 237,000     |   |      |   |           |  
|Provision for doubtful accounts                                                 |  |                               | 75,975      |   |      |   | 9,926      |  
|Changes in operating assets and liabilities, net of acquisition:                |  |                               |             |   |      |   |            |  
|(Increase) decrease in:                                                         |  |                               |             |   |      |   |            |  
|Accounts receivable                                                             |  |                               | (1,229,813  | ) |      |   | (2,787,194 | )
|Prepaid expenses and other current assets                                       |  |                               | 416,620     |   |      |   | (195,156   | )
|Deferred customer acquisition costs                                             |  |                               | 37,577      |   |      |   | (393,677   | )
|Security deposits                                                               |  |                               | (82,751     | ) |      |   | 84,663     |  
|Other assets                                                                    |  |                               | 15,000      |   |      |   |           |  
|Increase in:                                                                    |  |                               |             |   |      |   |            |  
|Accounts payable                                                                |  |                               | 232,156     |   |      |   | 1,472,920  |  
|Accrued expense and other current liabilities                                   |  |                               | 2,869,414   |   |      |   | 966,281    |  
|Other long-term liabilities                                                     |  |                               | 118,900     |   |      |   |           |  
|Deferred revenue                                                                |  |                               | 4,353,343   |   |      |   | 4,702,691  |  
|                                                                                |  |                               |             |   |      |   |            |  
|Net cash provided by operating activities                                       |  |                               | 5,412,403   |   |      |   | 1,977,017  |  
|                                                                                |  |                               |             |   |      |   |            |  
|                                                                                |  |                              
|Cash flows from investing activities:                                           |  |                               |             |   |      |   |            |  
|Cash paid for acquisition of businesses                                         |  |                               | (15,666,510 | ) |      |   | (660,000   | )
|Cash paid for acquisition of data                                               |  |                               | (2,350,000  | ) |      |   | (1,500,000 | )
|Cash paid for other intangible assets                                           |  |                               | (32,906     | ) |      |   |           |  
|Increase in restricted cash                                                     |  |                               | (731,323    | ) |      |   |           |  
|Purchases of property and equipment                                             |  |                               | (216,106    | ) |      |   | (948,110   | )
|Capitalization of software development costs                                    |  |                               | (282,513    | ) |      |   | (124,147   | )
|                                                                                |  |                               |             |   |      |   |            |  
|Net cash used in investing activities                                           |  |                               | (19,279,358 | ) |      |   | (3,232,257 | )
|                                                                                |  |                               |             |   |      |   |            |  
|                                                                                |  |                              
|Cash flows from financing activities:                                           |  |                               |             |   |      |   |            |  
|Repayments of revolving line of credit, related party                           |  |                               |            |   |      |   | (800,000   | )
|Proceeds from the issuance of common stock                                      |  |                               | 495,719     |   |      |   | 22,649     |  
|Repurchase of unvested exercised stock options                                  |  |                               | (31,724     | ) |      |   | (18,562    | )
|Proceeds from subscription payable                                              |  |                               |            |   |      |   | 369,133    |  
|Proceeds from subscription receivable                                           |  |                               |            |   |      |   | 262,553    |  
|Net proceeds from revolving line of credit and term loan                        |  |                               |            |   |      |   | 4,327,778  |  
|Stock issuance costs                                                            |  |                               |            |   |      |   | (1,899,825 | )
|                                                                                |  |                               |             |   |      |   |            |  
|Net cash provided by financing activities                                       |  |                               | 463,995     |   |      |   | 2,263,726  |  
|                                                                                |  |                               |             |   |      |   |            |  
|Effect of exchange rate changes on cash and cash equivalents                    |  |                               | (3,236      | ) |      |   |           |  
|                                                                                |  |                               |             |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                            |  |                               | (13,406,196 | ) |      |   | 1,008,486  |  
|Cash and cash equivalents, beginning of period                                  |  |                               | 49,016,389  |   |      |   | 1,813,715  |  
|                                                                                |  |                               |             |   |      |   |            |  
|Cash and cash equivalents, end of period                                        |  | $                             | 35,610,193  |   |      | $ | 2,822,201  |  
|                                                                                |  |                               |             |   |      |   |            |  
|                                                                                |  |                              
|Supplemental disclosure of cash flow information:                               |  |                               |             |   |      |   |            |  
|Cash paid for interest                                                          |  | $                             |            |   |      | $ | 69,996     |  
|                                                                                |  |                               |             |   |      |   |            |  
|                                                                                |  |                              
|Supplemental disclosure of noncash operating activities:                        |  |                               |             |   |      |   |            |  
|Bonus paid in common stock                                                      |  | $                             | 1,896,000   |   |      | $ |           |  
|                                                                                |  |                               |             |   |      |   |            |  
|                                                                                |  |                              
|Supplemental disclosure of noncash investing activities:                        |  |                               |             |   |      |   |            |  
|Liabilities assumed on acquisition of business                                  |  | $                             | 402,000     |   |      | $ | 120,000    |  
|                                                                                |  |                               |             |   |      |   |            |  
|                                                                                |  |                              
|Supplemental disclosure of noncash financing activities:                        |  |                               |             |   |      |   |            |  
|Accretion and dividends on redeemable preferred stock                           |  | $                             |            |   |      | $ | 386,998    |  
|                                                                                |  |                               |             |   |      |   |            |  

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



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##### Table of Contents

SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Salary.com (the Company) is
a leading provider of on-demand compensation and talent management solutions helping businesses and individuals manage pay and performance. The Company provides companies of all sizes comprehensive on-demand software applications that are tightly
integrated with its proprietary data sets to automate the essential elements of its customers compensation management processes. As a result, the Companys solutions can significantly improve the effectiveness of its customers
compensation spending. The Company enables employers of all sizes to replace or supplement inefficient and expensive traditional approaches to compensation management, including paper-based surveys, consultants, internally developed software
applications and spreadsheets. The Company was incorporated in Delaware in 1999 and its principal operations are located in Waltham, Massachusetts. Since December of 2006, the Company has operated a facility in Shanghai, China, primarily for
research and development activities. The Company conducts its business primarily in the United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The
accompanying unaudited consolidated financial statements of the Company include, in the opinion of management, all adjustments (consisting of normal and recurring adjustments) necessary for a fair statement of the Companys financial position,
results of operations and cash flows at the dates and for the periods indicated. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.

Pursuant to accounting requirements of the Securities and Exchange Commission (SEC) applicable to quarterly reports on Form 10-Q, the
accompanying unaudited consolidated financial statements and these notes do not include all disclosures required by generally accepted accounting principles (GAAP) in the United States of America for complete financial statements.
Accordingly, these statements should be read in conjunction with the financial statements included in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue
recognition, valuation of long-lived assets, intangible assets and goodwill, acquisition accounting, income taxes, allowance for doubtful accounts, stock-based compensation and capitalization of software development costs eligible for
capitalization. The Company bases these estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These
estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could
differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, SDC China, Ltd., established December 18, 2006, Salary.com Securities Corporation, established
March 26, 2007, and ICR Limited, L.C. and ICR International Ltd., acquired on May 15, 2007. All significant intercompany transactions and balances have been eliminated.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



For the non-U.S. subsidiary, which operates in a local currency environment, assets and liabilities
are translated at period-end exchange rates, and income statement items are translated at the average exchange rates for the period. The local currency for all foreign subsidiaries is considered to be the functional currency and, accordingly,
translation adjustments are reported as a separate component of stockholders equity under the caption accumulated other comprehensive loss.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with maturities of three
months or less at the time of purchase to be cash equivalents. The Company invests its excess cash in money market accounts and overnight repurchase agreements. These investments are subject to minimal credit and market risks.

Deferred Customer Acquisition Costs

Deferred
customer acquisition costs are the direct incremental costs associated with establishing noncancelable subscription contracts with customers and consist of sales commissions paid to the Companys sales force. The commissions are deferred and
amortized over the related contract period of generally one year. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations.

Goodwill and Intangible Assets

The Company
accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under SFAS No. 142, goodwill and certain
other intangible assets with indefinite lives are no longer amortized, but instead are reviewed for impairment annually or more frequently if impairment indicators arise. The Company reviews the carrying value of its goodwill by comparing the
carrying value of the related business component to its estimated fair value. The fair value is based on managements estimate of the future discounted cash flows to be generated by the respective business component. Changes in the underlying
business could affect these estimates, which in turn could affect the recoverability of goodwill. If goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. No circumstances arose during the nine months
ended December 31, 2007 which would indicate that the carrying value of goodwill has become impaired. Intangible assets subject to amortization are amortized on a straight-line basis over their estimated useful lives or contract periods, as
applicable.

The estimation of the fair values of goodwill and the reporting units to which it pertains requires the use of discounted cash
flow valuation models. Those models require estimates of future revenue, profits, capital expenditures and working capital for each unit. These estimates will be determined by evaluating historical trends, current budgets, operating plans and
industry data. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.

Software Development Costs

The Company capitalizes certain internal software development
costs under the provisions of Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires computer software costs associated with internal
use software to be charged to operations as incurred until certain capitalization criteria are met.

The Company incurs software
development costs related to its applications developed for subscription services and for management information systems. Costs are incurred in three stages of development: the preliminary project stage, the application development stage, and the
post-implementation stage. Costs incurred during the preliminary project stage and the post-implementation stage are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property,
equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and
commits to the funding of the software project, it is probable that the project will be completed, the software will be used to perform the function



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



intended and technical feasibility has been determined. These costs are amortized using the straight-line method over the estimated useful life of the
software, which is generally three years. All other development costs are expensed as incurred.

Revenue Recognition

The Company derives its revenues from subscription fees and, to a lesser extent, through advertising on its website and syndication fees. Subscription
revenues are comprised primarily of subscription fees from enterprise and small business customers who pay a bundled fee for the Companys on-demand software applications and data products and implementation services related to the
Companys subscription products, as well as syndication fees from the Companys website partners and premium membership subscriptions sold primarily to individuals. To a lesser extent, subscription revenues also include fees for discrete
professional services which are not bundled with the Companys subscription products, revenues from sales of job competency models and related implementation and consulting services and revenue from the sale of the Companys Compensation
Market Study and Salary.com Survey products, which are not sold on a subscription basis. These discrete professional services generally represent stand-alone compensation related to consulting and benchmarking of specific jobs. The Company follows
the provisions of SEC Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in the Financial Statements, as amended by No. 104,Revenue Recognition. Revenue is recognized when all of the
following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the
collection of fees from the customer is probable.

Subscription revenue is recognized ratably over the contract period. Customers are
generally billed for the subscription on an annual basis. For all customers, regardless of their billing method, subscription revenue is initially recorded as deferred revenue in the accompanying balance sheets. As services are performed, the
Company recognizes subscription revenue over the applicable service period. For selected products where an implementation process occurs prior to the on-demand applications becoming useful to customers, revenue recognition is deferred until after
the product has been implemented and then recognized as revenue ratably over the remaining applicable subscription period.

Subscription
agreements that are related to the Companys TalentManager suite of products may contain multiple service elements and deliverables. These elements include access to the Companys on-demand software and often specify initial services
including configuration and training. Except when the Company becomes the subject of a bankruptcy proceeding which is not dismissed within 60 days of filing or the Company makes an assignment for the benefit of its creditors, these particular
subscription agreements do not provide customers the right to take possession of the software at any time. In May 2003, the Financial Accounting Standards Board issued Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 was issued to address how companies should determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying the guidance in EITF 00-21, the Company
determined that it does not have objective and reliable evidence for the fair value of the TalentManager subscription fees after delivery of specified initial services, consisting of configuration and training. The Company cannot establish the fair
value of the TalentManager subscription element of the contract due to the variability of the sales price between different customers for the subscription element of the contract. Furthermore, the initial services do not have stand-alone value to
the customer without being bundled with the subscription element of the contract because the Company does not sell the initial services separately and because such services are not provided by a third party. The Company therefore accounts for these
subscriptions arrangements and its related service fees as a single unit of accounting.

Revenues from the Companys sales of job
competency models and related implementation services may contain multiple service elements and deliverables. These elements include delivery of the job competency models, implementation services, consulting services and post contract customer
support. The Company recognizes revenue for these transactions in accordance with EITF 00-21. Except for the post contract customer support services, the Company does not have objective and reliable evidence for the fair value of the deliverables in
these types of transactions, primarily due to the variability of the sales price between different customers. Revenue from the sales of post contract customer support services is recognized ratably over the contract period, generally one year, upon
delivery of the job competency models. The Company accounts for the job competency models, implementation services and consulting services as a single unit of accounting.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Discrete professional services represent a separate earnings process and revenue is recognized as
services are performed. Professional services engagements are generally priced on a fixed-fee basis. Revenue under fixed-fee arrangements is recognized proportionally to the performance of the services utilizing milestones, if present in the
arrangement, or at the completion of the project.

Revenues for the Companys Compensation Market Study and Survey products, which are
not sold on a subscription basis, are recognized only when persuasive evidence of an arrangement exists, delivery of the study or survey has occurred, risk of ownership has passed to the customer, the price is fixed and determinable, and collection
is reasonably assured.

Advertising revenues are comprised of revenues that the Company generates through agreements to display third party
advertising on the Companys website for a fixed period of time or fixed number of impressions. Advertising revenues are recognized as the advertising is displayed on the website.

Stock-Based Compensation

The Company follows the provisions of Financial Accounting Standards
Board (FASB) Statement No. 123-revised, Share-Based Payment (SFAS 123R) which revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board
No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires that all stock-based compensation be recognized as an expense in the financial statements over the vesting period and that such expense be measured at
the fair value of the award.

We estimate our expected volatility based on that of our publicly traded peer companies and expect to
continue to do so until such time as we have adequate historical data from our traded share price. Management believes that the historical volatility of our stock price does not best represent the expected volatility of the stock price. Until
February 2007, we were a private company and therefore lack sufficient company-specific historical and implied volatility information. We intend to continue to consistently use the same group of publicly-traded peer companies to determine volatility
in the future until such time that sufficient information regarding the volatility of our share price becomes available or that the selected companies are no longer suitable for this purpose.

The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar
expected life.

The expected term of the options granted was determined based upon review of the period that our share-based awards are
expected to be outstanding and is estimated based on historical experience of similar awards, giving consideration to the contractual term of the awards, vesting schedules, employee turnover and expectations of employee exercise behavior.

The stock price volatility and expected terms utilized in the calculation of fair values involve managements best estimates at that
time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period of the option. SFAS 123R also requires that we recognize
compensation expense for only the portion of options that are expected to vest. Therefore, we have estimated expected forfeitures of stock options with the adoption of SFAS 123R. In developing a forfeiture rate estimate, we have considered our
historical experience, our growing employee base and the historical limited liquidity of our common stock.

The following table provides
the assumptions used in determining the fair value of the share-based awards for the nine months ended December 31, 2007 and 2006.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                        |  |                                   |   |  |                                   |  
|----------------------- |  | --------------------------------- | - |  | --------------------------------- | -
|                        |  | Nine Months EndedDecember 31,2007 |   |  | Nine Months EndedDecember 31,2006 |  
|Risk-Free Rate          |  | 4.51 - 4.96                       | % |  | 4.45 - 4.61                       | %
|Expected Life           |  | 5 years                           |   |  | 5 years                           |  
|Expected Volatility     |  | 56.10 - 61.03                     | % |  | 63.94 - 65.00                     | %
|Expected Dividend Yield |  | 0                                 | % |  | 0                                 | %

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from our customers inability to pay us. The provision is based on our
historical experience and for specific customers that, in our opinion, are likely to default on our receivables from them. In order to identify these customers, we perform ongoing reviews of all customers that have breached their payment terms, as
well as those that have filed for bankruptcy or for whom information has become available indicating a significant risk of non-recoverability. In addition, we have experienced significant growth in the number of our customers, and we have less
payment history to rely upon with these customers. We rely on historical trends of bad debt as a percentage of total revenue and apply these percentages to the accounts receivable associated with new customers and evaluate these customers over time.

Fair Value of Financial Instruments

The carrying value of the Companys financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of their short-term nature.

Comprehensive Loss

Comprehensive loss was as
follows:



|                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Three months endedDecember 31, |            |   | Nine months endedDecember 31, |  
|                                             |  | 2007                           |            |   | 2006                          |   |            | 2007 |  |   | 2006       |  
|Net loss attributable to common stockholders |  | $                              | (3,084,243 | ) |                               | $ | (2,176,344 | )    |  | $ | (6,959,504 | ) |  | $ | (4,414,632 | )
|Other comprehensive loss:                    |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Currency translation adjustments             |  |                                | (2,911     | ) |                               |   |           |      |  |   | (3,236     | ) |  |   |           |  
|                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Other comprehensive loss:                    |  |                                | (2,911     | ) |                               |   |           |      |  |   | (3,236     | ) |  |   |           |  
|                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Comprehensive loss                           |  | $                              | (3,087,154 | ) |                               | $ | (2,176,344 | )    |  | $ | (6,962,740 | ) |  | $ | (4,414,632 | )
|                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  

Income Taxes

For the nine months ended December 31, 2007 and 2006, the Company recorded a provision for income taxes of $138,900 and $0, respectively. The provision for income taxes in the nine months ended December 31,
2007 consisted primarily of a deferred tax liability arising from timing differences between book and tax income related to goodwill from the Companys business acquisitions.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Other Taxes

Non-income taxes such as sales tax are presented on a net basis.

Net Loss Attributable to Common Stockholders per
Share

Net loss attributable to common stockholders per share is presented in accordance with SFAS No. 128, Earnings per
Share, which requires the presentation of basic earnings (loss) per share and diluted earnings (loss) per share. Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable
to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders per share includes the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.

The following summarizes the potential outstanding common stock of the
Company as of the end of each period:



|                                                                                                            |  |                               |  |          
|----------------------------------------------------------------------------------------------------------- |  | ----------------------------- |  | ---------
|                                                                                                            |  | Nine months endedDecember 31,
|                                                                                                            |  | 2007                          |  | 2006     
|Options to purchase common stock                                                                            |  | 1,696,703                     |  | 1,282,131
|Warrants to purchase common or preferred stock                                                              |  | 56,985                        |  | 153,666  
|Shares of common stock into which outstanding preferred stock is convertible                                |  |                              |  | 1,758,599
|Restricted stock awards                                                                                     |  | 947,906                       |  |         
|Restricted shares (1)                                                                                       |  | 1,511,843                     |  | 3,060,497
|                                                                                                            |  |                               |  |          
|Total options, warrants, restricted shares and preferred stock exercisable or convertible into common stock |  | 4,213,437                     |  | 6,254,893
|                                                                                                            |  |                               |  |          



|(1) | Represents stock options that have been exercised, but unvested as of the reporting date. As such, the related common stock is legally issued and outstanding. Per FAS 128,
Earnings per Share, these shares will not be considered outstanding for accounting purposes until the contingency related to vesting has been resolved through the rendering of the required service or the shares are cancelled upon
termination of the respective employee.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If the outstanding options, warrants and preferred stock were exercised or converted
into common stock or the restricted stock awards were to vest, the result would be anti-dilutive. Therefore, basic and diluted net loss attributable to common stockholders per share is the same for all periods presented in the accompanying
consolidated statements of operations.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51, (SFAS 160), which improves the relevance, comparability, and transparency of the financial information
that a reporting entity provides in its consolidated financial statements. The provisions of SFAS 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is in the
process of determining what effect, if any, the adoption of SFAS 160 will have on its consolidated financial statements.

In December 2007,
the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS 141R), which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides
in its financial reports about a business combination and its effects. The provisions of SFAS 141R are effective for which the acquisition date is on or after the beginning of the first annual reporting



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



period beginning on or after December 15, 2008. The Company is in the process of determining what effect, if any, the adoption of SFAS 160 will have on
its consolidated financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115(SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS
159 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating whether it will elect the option provided for in SFAS 159, and whether the adoption will have an impact on its consolidated financial
statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair value,
establishes a fair value hierarchy that prioritizes the information used to develop those assumptions and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15,
2007, with early adoption permitted. The Company is in the process of determining what effect, if any, the adoption of SFAS 157 will have on its consolidated financial statements.

3. ACQUISITION OF BUSINESSES

Schoonover Associates

On December 21, 2007, the Company acquired the assets of Schoonover Associates, Inc. (Schoonover). Schoonover is a provider of competency
management data and consulting services with over 20 years of experience helping clients maximize their human capital. Under the terms of the agreement, the Company has paid the owner of Schoonover $3.7 million in cash of which $0.2 million reflects
payments made by the company in connection with a pre-existing license agreement by and between the parties. In addition, the Company will pay another $0.2 million in cash during the fourth quarter of fiscal 2008 pursuant to the terms of the
aforementioned license agreement and another $0.5 million of cash will be held in escrow until one year from the anniversary of the closing. The escrow fund will be available to compensate the Company for any losses the Company may incur as a result
of any breach of the representations or warranties by Schoonover or its founder, Dr. Stephen C. Schoonover, contained in the purchase agreement, and certain liabilities arising out of the ownership or operation of Schoonover prior to the
acquisition. Schoonover will also be eligible to earn additional consideration based on meeting certain performance targets during the first five fiscal years beginning on April 1, 2008. The additional consideration, if earned, consists of cash
payments of a maximum of $100,000 per year for 5 years and 112,646 newly issued shares of common stock valued at $1.5 million which are eligible to vest ratably over such five-year period. The total cost of the acquisition was approximately $4.4
million. Accordingly, the purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. The Company allocated $2.6 million of the purchase price to goodwill based upon the estimated fair value of the assets
acquired in the acquisition. Goodwill from the acquisition resulted from the Companys belief that the products and services offered by Schoonover will be complementary to our existing competency business and on-demand software suites. The
allocation of the purchase price is preliminary and subject to change. The results of operations include the impact of this acquisition since December 21, 2007. The pro forma effects of this acquisition would not have been material to the
current and prior interim periods and therefore, were not presented.

The Company has allocated the purchase price on a preliminary basis
based upon the estimated fair value of the net assets acquired, as follows:



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                                     |  |        |           |  
|---------------------------------------------------- |  | ------ | --------- | -
|                                                     |  | Amount |          
|Non-compete agreement (amortization period 3 years)  |  | $      | 600,000   |  
|Customer relationships (amortization period 5 years) |  |        | 250,000   |  
|Customer backlog (amortization period 2 months)      |  |        | 10,000    |  
|Competency data                                      |  |        | 290,000   |  
|Trade name                                           |  |        | 170,000   |  
|Assets acquired, primarily accounts receivable       |  |        | 488,000   |  
|Assumed liabilities                                  |  |        | (30,000   | )
|Goodwill                                             |  |        | 2,610,000 |  
|                                                     |  |        |           |  
|Total purchase price                                 |  | $      | 4,388,000 |  
|                                                     |  |        |           |  

ITG Competency Group

On August 3, 2007, the Company acquired the assets of ITG Competency Group, LLC (ITG). ITG is a provider of off-the-shelf competency models and related implementation services used in a wide range of
industries. Under the terms of the agreement, the Company has paid the owner of ITG $1.8 million in cash and newly issued shares of the Companys common stock valued at $500,000. ITG will receive an additional $0.25 million in April 2008 and
will also be eligible to earn up to $1.0 million in additional consideration based on meeting certain performance targets during the first two years after the closing of the acquisition, and can earn additional consideration if these targets are
exceeded. The additional consideration, if earned, will be paid 50% in cash and 50% in common stock. As of December 31, 2007, approximately $297,000 of the additional consideration has been earned and recorded as goodwill. The total cost of the
acquisition was approximately $2.7 million. Accordingly, the purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. The Company allocated $0.7 million of the purchase price to goodwill based upon the
estimated fair value of the assets acquired in the acquisition and the value of the contingent consideration earned as of December 31, 2007. Goodwill from the acquisition resulted from the Companys belief that the products developed by
ITG will be complementary to our on-demand software suites. The allocation of the purchase price is preliminary and subject to change. The results of operations include the impact of this acquisition since August 3, 2007.

The Company has allocated the purchase price on a preliminary basis based upon the estimated fair value of the net assets acquired, as follows:



|                                                     |  |        |           |  
|---------------------------------------------------- |  | ------ | --------- | -
|                                                     |  | Amount |          
|Non-compete agreement (amortization period 3 years)  |  | $      | 10,000    |  
|Customer relationships (amortization period 5 years) |  |        | 1,240,000 |  
|Customer backlog (amortization period 3 years)       |  |        | 60,000    |  
|Job position data (amortization period 5 years)      |  |        | 310,000   |  
|Assets acquired, primarily accounts receivable       |  |        | 552,170   |  
|Assumed liabilities                                  |  |        | (238,136  | )
|Goodwill                                             |  |        | 744,953   |  
|                                                     |  |        |           |  
|Total purchase price                                 |  | $      | 2,678,987 |  
|                                                     |  |        |           |  

ICR

On May 15, 2007, the Company acquired all of the membership interests of ICR Limited, L.C. and all of the outstanding share capital of ICR International Ltd. (collectively, ICR), a leading provider of
industry-specific market intelligence for employee pay and benefits for the global technology and specialty consumer goods markets.



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Pursuant to the terms of the purchase agreements, the Company paid $10.3 million to the owners of ICR, of which $1.0 million has been placed in escrow for 12
months. The escrow fund will be available to compensate the Company for any losses the Company may incur as a result of any breach of the representations or warranties by the owners of ICR contained in the purchase agreements, and certain
liabilities arising out of the ownership or operation of ICR prior to the acquisition. The total cost of the acquisition, including legal fees of $20,000, was approximately $10.3 million. Accordingly, the purchase price was allocated based upon the
fair value of assets acquired and liabilities assumed. The Company allocated $5.8 million of the purchase price to goodwill based upon the estimated fair value of the assets acquired in the acquisition. Goodwill from the acquisition resulted from
our belief that the products developed by ICR will be complementary to our on-demand software suites. The allocation of the purchase price is preliminary and subject to change. The results of operations include the impact of this acquisition since
May 15, 2007.

The Company has allocated the purchase price on a preliminary basis based upon the estimated fair value of the net
assets acquired, as follows:



|                                                     |  |        |            |  
|---------------------------------------------------- |  | ------ | ---------- | -
|                                                     |  | Amount |           
|Non-compete agreements (amortization period 3 years) |  | $      | 620,000    |  
|Customer relationships (amortization period 5 years) |  |        | 3,210,000  |  
|Compensation data (amortization period 3 years)      |  |        | 120,000    |  
|IPAS interface tool (amortization period 5 years)    |  |        | 110,000    |  
|Trademarks                                           |  |        | 290,000    |  
|Assets acquired                                      |  |        | 298,000    |  
|Assumed liabilities                                  |  |        | (133,000   | )
|Goodwill                                             |  |        | 5,761,534  |  
|                                                     |  |        |            |  
|Total purchase price                                 |  | $      | 10,276,534 |  
|                                                     |  |        |            |  

eComp Data Services

On April 3, 2006, the Company acquired certain assets of the eComp Data Services Division (eComp) from Aon Consulting, Inc., a global human capital consulting firm located in New York City. eComp Data
Services is a leading provider of executive compensation data. The assets acquired included the eComp database and certain software and proprietary assets, including all intellectual property rights. Pursuant to the terms of the agreement, the
Company paid $585,000 with $292,500 due at the closing date of April 3, 2006, and the remaining balance was paid in September 2006. Included in the acquisition was an additional $75,000 paid by the Company to a former principal of eComp for a
non-compete agreement. Accordingly, the purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. The Company allocated $266,000 of the purchase price to goodwill based upon the estimated fair value of the
assets acquired in the acquisition. The results of operations include the impact of this acquisition since April 3, 2006.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



4. INTANGIBLE ASSETS

Intangible assets as of December 31, 2007 and March 31, 2007, consist of the following:



|                                      |  |                   |            |                         |   |                |  |      |            |                         |   |                |  |   |         |  |   |          
|------------------------------------- |  | ----------------- | ---------- | ----------------------- | - | -------------- |  | ---- | ---------- | ----------------------- | - | -------------- |  | - | ------- |  | - | ---------
|                                      |  | December 31, 2007 |            | March 31, 2007         
|                                      |  | Cost              |            | AccumulatedAmortization |   | CarryingAmount |  | Cost |            | AccumulatedAmortization |   | CarryingAmount
|Non-compete agreements (5 years)      |  | $                 | 1,595,000  |                         | $ | 265,373        |  | $    | 1,329,627  |                         | $ | 365,000        |  | $ | 72,998  |  | $ | 292,002  
|Customer relationships (5 years)      |  |                   | 5,010,000  |                         |   | 568,114        |  |      | 4,441,886  |                         |   | 120,000        |  |   | 24,000  |  |   | 96,000   
|Other intangible assets (5-18 years)  |  |                   | 185,682    |                         |   | 22,861         |  |      | 162,821    |                         |   | 42,776         |  |   | 7,146   |  |   | 35,630   
|Trademarks and tradenames(Indefinite) |  |                   | 460,000    |                         |   |               |  |      | 460,000    |                         |   |               |  |   |        |  |   |         
|Data acquisition costs (1-3 years)    |  |                   | 4,186,000  |                         |   | 291,233        |  |      | 3,894,767  |                         |   | 1,500,000      |  |   |        |  |   | 1,500,000
|                                      |  |                   |            |                         |   |                |  |      |            |                         |   |                |  |   |         |  |   |          
|                                      |  | $                 | 11,436,682 |                         | $ | 1,147,581      |  | $    | 10,289,101 |                         | $ | 2,027,776      |  | $ | 104,144 |  | $ | 1,923,632
|                                      |  |                   |            |                         |   |                |  |      |            |                         |   |                |  |   |         |  |   |          

In September 2007, the Company entered into an agreement with a vendor to obtain additional data
sets for $2,350,000. However, as of December 31, 2007, only $1,936,000 associated with the data sets have been delivered and are reflected as an intangible asset. The $414,000 associated with the data sets that have not been delivered as of
December 31, 2007 has been recorded as an Other Asset on the consolidated balance sheet.

All of the Companys finite-lived
acquired intangible assets are subject to amortization over their estimated useful lives. No residual value is estimated for these intangible assets. Acquired intangible asset amortization for the three and nine months ended December 31, 2007
was approximately $593,000 and $1,043,000, respectively, of which $272,000 and $307,000, respectively, is included in cost of revenues. Amortization for the data acquisition costs will begin once the acquired data is integrated into the related
product and that product is available to our customers.

Estimated annual amortization expense for the next five years related to
intangible assets is as follows:



|     |  |                      |          
|---- |  | -------------------- | ---------
|     |  | Year endingMarch 31,
|2008 |  | $                    | 1,810,000
|2009 |  |                      | 3,021,000
|2010 |  |                      | 2,865,000
|2011 |  |                      | 2,154,000
|2012 |  |                      | 1,183,000



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



5. STOCK-BASED COMPENSATION

Stock Options

Stock option activity, under all plans, during the nine months ended
December 31, 2007 was as follows:



|                                  |  |                                    |   |  |                              |        
|--------------------------------- |  | ---------------------------------- | - |  | ---------------------------- | -------
|                                  |  | Nine Months EndedDecember 31, 2007
|                                  |  | Number ofOptions                   |   |  | WeightedAverageExercisePrice
|Outstanding - beginning of period |  | 1,941,103                          |   |  | $                            | 6.3465 
|Granted                           |  | 43,340                             |   |  |                              | 10.8532
|Exercised                         |  | (101,705                           | ) |  |                              | 1.8753 
|Canceled                          |  | (186,035                           | ) |  |                              | 6.5382 
|                                  |  |                                    |   |  |                              |        
|Outstanding - end of period       |  | 1,696,703                          |   |  | $                            | 6.7174 
|                                  |  |                                    |   |  |                              |        
|Exercisable - end of period       |  | 380,633                            |   |  | $                            | 5.2965 
|                                  |  |                                    |   |  |                              |        

Under the Companys 2000 Stock Option and Incentive Plan and 2004 Stock Option and Incentive
Plan, option recipients (Option Holders) are permitted to exercise options in advance of vesting. Any options exercised in advance of vesting result in the Option Holder receiving restricted shares, which are then subject to vesting
under the respective options vesting schedule. Restricted shares are subject to a right of repurchase by the Company and if any Option Holder who is an employee leaves the Company (either voluntarily or involuntarily), the Company has the
right (but not the obligation) to repurchase the restricted shares at the original price paid by the Option Holder at the time the options were exercised. Because the Company has the right to repurchase the restricted shares upon the cessation of
employment, the Company has recognized this potential liability for repurchase on the balance sheet as Subscription Payable. Upon vesting of the restricted shares, the Subscription Payable is relieved and recorded in equity. As of
December 31, 2007 and March 31, 2007, there were 1,511,843 and 1,991,585 restricted shares outstanding, respectively, which resulted from the exercise of unvested stock options.

As of December 31, 2007, there was approximately $6.8 million of total unrecognized compensation expense related to stock options. That cost is
expected to be recognized over a weighted average period of 2.9 years.

Compensation expense related to stock options that is included in
the statement of operations for the three months ended December 31, 2007 and 2006 was approximately $737,000 and $999,000, respectively. Compensation expense related to stock options that is included in the statement of operations for the nine
months ended December 31, 2007 and 2006 was approximately $1,932,000 and $1,487,000, respectively. Compensation expense related to stock options is based on awards ultimately expected to vest and reflects an estimate of awards that will be
forfeited. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Restricted Stock Awards

On January 12, 2007, the Compensation Committee of the Board of Directors of the Company approved a form of restricted stock agreement for use under the Companys 2007 Stock Plan pursuant to which the
Company has granted stock options and restricted stock awards. The shares of restricted stock awards have a per share price of $0.0001 which equals the par value. The fair value is measured based upon the closing NASDAQ market price of the
underlying Company stock as of the date of grant. Compensation expense from the restricted stock awards is amortized over the applicable vesting period, generally 3 years, using the straight-line method. Unamortized compensation cost related to
restricted stock awards was $9.8 million as of December 31, 2007. This cost is expected to be recognized over a weighted-average period of 1.9 years. The following table presents a summary of the restricted stock award activity for the nine
months ended December 31, 2007.



|                                      |  |           |   |  |                                    |        
|------------------------------------- |  | --------- | - |  | ---------------------------------- | -------
|                                      |  | Shares    |   |  | WeightedAverageGrantDate FairValue
|Unvested balance at March 31, 2007    |  |          |   |  | $                                  |       
|Awarded                               |  | 1,169,381 |   |  |                                    | 12.5752
|Vested                                |  | (189,035  | ) |  |                                    | 12.4895
|Canceled                              |  | (32,440   | ) |  |                                    | 13.0311
|                                      |  |           |   |  |                                    |        
|Unvested balance at December 31, 2007 |  | 947,906   |   |  | $                                  | 12.5767
|                                      |  |           |   |  |                                    |        

The Company recorded approximately $895,000 and $1,531,000 of compensation expense related to restricted stock
awards during the three and nine months ended December 31, 2007, respectively.

Employee Stock Purchase Plan

On January 17, 2007, the Companys Board of Directors and stockholders approved the adoption of the 2007 Employee Stock Purchase Plan
(ESPP). Stock purchase rights are granted to eligible employees during six month offering periods with purchase dates at the end of each offering period. The offering periods generally commence each April 1 and October 1.
Shares are purchased through payroll deductions at purchase prices equal to 90% of the lesser of the fair market value of the Companys common stock at either the first day or the last day of the offering period, whichever is lower. For the
ESPP, the Company recorded approximately $11,000 and $26,000 of compensation expense for the three and nine months ended December 31, 2007, respectively.

Warrants

As of December 31, 2007, the Company had outstanding warrants to purchase 56,985 shares of common
stock at exercise prices ranging from $0.09 to $6.61 per share.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                  |  |                                    |   |  |                              |      
|--------------------------------- |  | ---------------------------------- | - |  | ---------------------------- | -----
|                                  |  | Nine Months EndedDecember 31, 2007
|                                  |  | Number ofWarrants                  |   |  | WeightedAverageExercisePrice
|Outstanding - beginning of period |  | 147,868                            |   |  | $                            | 2.148
|Granted                           |  |                                   |   |  |                              |      
|Exercised                         |  | (90,883                            | ) |  |                              | 2.384
|Canceled                          |  |                                   |   |  |                              |      
|                                  |  |                                    |   |  |                              |      
|Outstanding - end of period       |  | 56,985                             |   |  | $                            | 1.769
|                                  |  |                                    |   |  |                              |      
|Exercisable - end of period       |  | 56,985                             |   |  | $                            | 1.769
|                                  |  |                                    |   |  |                              |      

6. COMMITMENTS AND CONTINGENCIES

Employment Agreements

Certain members of the Companys management have employment
agreements that provide for the continuation of salary and benefits, for a period of time, upon ceasing to be an employee as a result of either termination from or a change in ownership of the Company.

Litigation and Claims

On December 29,
2006, the Company commenced a declaratory judgment action in the Superior Court of Suffolk County, Massachusetts against a former independent consultant to the Company. The action related to a dispute between the Company and the former consultant
over a contract which expired by its terms in November 2000. Pursuant to that contract, the former consultant was entitled to a success fee consisting of a right to purchase 33,600 shares of the Companys common stock at a price of thirty-six
cents per share. On August 23, 2007, the Company entered into a settlement agreement with the former consultant. Pursuant to the settlement agreement, the Company and the former consultant exchanged mutual releases and the Company agreed to
dismiss the pending court action. As part of the settlement, the Company permitted the former consultant to exercise and sell his options to purchase 33,600 shares of Salary.com common stock and to forego the $12,000 exercise cost. The Company also
paid the former consultant $250,000 and issued 18,000 shares of Salary.com common stock, valued at approximately $225,000 to an affiliate of the former consultant.

On February 1, 2007, Mercer (US) Inc. (formerly Mercer Human Resource Consulting, Inc.) (Mercer) filed a Complaint against the Company in the United States District Court for the Southern District of
New York relating to, among other things, the Companys use of Mercers products and data. The Company filed several counterclaims against Mercer in the New York action, and filed a separate action against Mercer in the United States
District Court for the District of Massachusetts on May 15, 2007, relating to, among other things, Mercers use of the Companys products and data. On September 27, 2007, the Company entered into a Settlement Agreement with
Mercer under which the Company and Mercer settled all ongoing litigation and exchanged mutual releases. No payments were made by either party under the settlement agreement. Both the action filed by Mercer against the Company in New York
and the action filed by the Company against Mercer in Massachusetts were dismissed. As part of the settlement agreement, Mercer confirmed that customers which have purchased compensation surveys from Mercer have the right to use the
Companys Survey Center product to load and manage their Mercer surveys, as well as other third party surveys.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



In addition to the matters noted above, from time to time the Company is subject to legal proceedings
and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any other current legal proceedings and claims will not have a material adverse effect on the Companys financial
position or results of operations.

7. INCOME TAXES

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting
for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before recognized a benefit in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Companys adoption of FIN 48 on
April 1, 2007 did not result in the recognition of a tax liability for any previously unrecognized tax benefits and did not have an effect on its financial position or results of operations as the Company has a full valuation allowance against
its deferred tax assets.

Following the adoption of FIN 48, the Company had $185,000 of unrecognized tax benefits (before consideration of
any valuation allowance). This amount includes $185,000 of unrecognized tax benefits that, if recognized, will affect the Companys effective tax rate. There were no significant changes to these amounts during the three or nine months ended
December 31, 2007. The Company does not believe that there will be any material changes in its unrecognized tax positions over the next 12 months.

The Companys policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense, if any. As of December 31, 2007, the Company has not accrued any
interest and penalties for unrecognized tax benefits in its statement of operations.

As of December 31, 2007, the Company is subject
to tax in the U.S. Federal, state and foreign jurisdictions. The Company is open to examination for tax years 2004 through 2006. Additionally, since the Company has net operating loss and tax credit carryforwards available for future years, those
years are also subject to review by the taxing authorities.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

Introduction and Business Outlook

Salary.com is a leading provider of on-demand compensation and
talent management solutions helping businesses and individuals manage pay and performance. We provide companies of all sizes comprehensive on-demand software applications that are tightly integrated with our proprietary compensation data sets to
automate the essential elements of our customers compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers compensation spending. We enable employers of all sizes to
replace or supplement inefficient and expensive traditional approaches to compensation management, including the use of paper-based surveys, consultants, internally developed software applications and spreadsheets.

Our on-demand solutions, which incorporate market compensation intelligence from our proprietary
data sets, enable companies to determine how much to pay new and existing employees and to manage overall compensation and talent management programs. Our data sets contain base, bonus and incentive pay data for positions held by more than 74% of
U.S. employees and similar data for the top executives in over 10,000 U.S. public companies. Our flagship offering is CompAnalyst®, a suite of compensation management applications that
integrates our data, third party survey data and a customers own pay data in a complete analytics offering. In the third quarter of fiscal 2008, we released an update to CompAnalyst®
which included a complete rewrite of the products user interface and incorporates our new enterprise application platform. We also offer TalentManager®, an employee life-cycle
performance management application that links employee pay to performance. In addition, we provide job competency models and related implementation and consulting services. We offer these solutions principally on an annual or multi-year subscription
basis. In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a
cost-effective, real-time basis.

We were organized as a Delaware corporation in 1999. As of December 31, 2007, our enterprise
subscriber base has grown to more than 2,700 companies who have subscriptions from $2,000 to more than $100,000 annually. We have achieved 27 consecutive quarters of revenue growth since April 2001. However, during that time, we have consistently
incurred operating losses. During the three months ended December 31, 2007, we incurred an operating loss of $3.6 million compared to an operating loss of $3.0 million in the three months ended September 30, 2007. During the three months
ended December 31, 2007, we achieved positive operating cash flows of $2.3 million compared to $1.5 million in the three months ended September 30, 2007. As of December 31, 2007, we had an accumulated deficit of $36.4 million.

Effective December 31, 2007, Kenneth S. Goldman resigned as Chief Financial Officer of Salary.com, Inc., and effective
January 2, 2008, Chris Power was named Salary.coms new Chief Financial Officer. From April 2002 until August 2007, Mr. Power served in various senior finance roles, culminating in Chief Financial Officer - Global Operations, at
Monster Worldwide, Inc., a provider of global online employment solutions.

The following information should be read in conjunction with
the unaudited consolidated financial statements and notes thereto included in this quarterly report and the audited consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007. We maintain a website where copies of our reports filed with SEC may be accessed, as well as other information concerning our business,
products and news releases. The address of our website is www.salary.com. Our website is included as a textual reference only and the information on our website is not incorporated by reference into this Quarterly Report on Form 10-Q.

Acquisition of Businesses

On December 21, 2007,
we acquired the assets of Schoonover Associates, Inc. (Schoonover). Schoonover is a provider of competency management data and consulting services with over 20 years of experience helping clients maximize their human capital. Under the
terms of the agreement, we have paid the owner of Schoonover $3.7 million in cash, of which $0.2 million reflects payments made by us in connection with a pre-existing license agreement by and between the parties. In addition, we will pay another
$0.2 million in cash during the fourth quarter of fiscal 2008 pursuant to the terms of the aforementioned license agreement and another $0.5 million of cash will be held in escrow until one year from the anniversary of the closing. The escrow



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fund will be available to compensate us for any losses we may incur as a result of any breach of the representations or warranties by Schoonover or its
founder, Dr. Stephen C. Schoonover, contained in the purchase agreement, and certain liabilities arising out of the ownership or operation of Schoonover prior to the acquisition. Schoonover will also be eligible to earn additional
consideration based on meeting certain performance targets during the first five fiscal years after March 31, 2008. The additional consideration, if earned, consists of cash payments of no more than $100,000 per year for 5 years and 112,646
newly issued shares of common stock valued at $1.5 million, which are eligible to vest ratably over such five-year period. The total cost of the acquisition was approximately $4.4 million.

On August 3, 2007, we acquired the assets of ITG Competency Group, LLC, or ITG. ITG is a provider of off-the-shelf competency models and related
implementation services used in a wide range of industries. Under the terms of the agreement, we have paid the owner of ITG $1.8 million in cash and newly issued shares of our common stock valued at $500,000. ITG will receive an additional $0.25
million in April 2008 and will also be eligible to earn up to $1.0 million in additional consideration based on meeting certain performance targets during the first two years after the closing of the acquisition, and can earn additional
consideration if these targets are exceeded. The additional consideration, if earned, will be paid 50% in cash and 50% in common stock. As of December 31, 2007, approximately $297,000 of the additional consideration has been earned. The total
cost of the acquisition was approximately $2.7 million.

On May 15, 2007, we acquired all of the membership interests of ICR Limited,
L.C. and all of the outstanding share capital of ICR International Ltd., collectively referred to as ICR, a leading provider of industry-specific market intelligence for employee pay and benefits for the global technology and specialty consumer
goods markets. Pursuant to the terms of the purchase agreements, we paid $10.3 million to the owners of ICR, of which $1.0 million has been placed in escrow for 12 months. The escrow fund will be available to compensate us for any losses we may
incur as a result of any breach of the representations or warranties by the owners of ICR contained in the purchase agreements, and certain liabilities arising out of the ownership or operation of ICR prior to the acquisition. The total cost of the
acquisition, including legal fees of $20,000, was approximately $10.3 million.

Sources of Revenues

We derive our revenues primarily from subscription fees and, to a lesser extent, through advertising on our website. For the three months ended
December 31, 2007 and 2006, subscription revenues accounted for 93% and 91%, respectively, of our total revenues and for the three months ended December 31, 2007 and 2006, advertising revenues accounted for 7% and 9%, respectively, of our
total revenues.

Subscription revenues are comprised primarily of subscription fees from enterprise and small business customers who
pay a bundled fee for our on-demand software applications and data products and implementation services related to our subscription products, as well as syndication fees from our website partners and premium membership subscriptions sold primarily
to individuals. Subscription revenues are primarily recognized ratably over the contract period as they are earned. Our subscription agreements for our enterprise subscription customer base are typically one to five years in length, and as of
December 31, 2007, approximately 50% of our contracts were more than one year in length. We generally invoice our customers annually in advance of their subscription (for both new products and renewals), with the majority of the payments
typically due upon receipt of invoice. Deferred revenue consists primarily of billings or payments received in advance of revenue recognition from our subscription agreements and is recognized over time as the revenue recognition criteria are met.
Deferred revenue does not include the unbilled portion of multi-year customer contracts, which is held off the balance sheet. Changes in deferred revenue generally indicate the trend for subscription revenues over the following year as the current
portion of deferred revenue is expected to be recognized as revenue within 12 months. To a lesser extent, subscription revenues also include fees for professional services which are not bundled with our subscription products, revenues from sales of
job competency models and related implementation services and revenue from the sale of our Compensation Market Study and Salary.com Survey products, which are not sold on a subscription basis.

Advertising revenues are comprised of revenues that we generate through agreements to display third party advertising on our website for a fixed
period of time or fixed number of impressions. Advertising revenues are recognized as the advertising is displayed on the website.



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Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of costs for data acquisition and data development, fees paid to our network provider
for the hosting and managing of our servers, related bandwidth costs, compensation costs for the support and implementation of our products, compensation costs related to our consulting and professional services business and amortization of
capitalized software costs. As we continue to implement and support our new and existing products and expand our data sets, we expect that over the next few years cost of revenues will continue to increase as a percentage of revenue and on an
absolute dollar basis. Over the longer term, we expect our cost of revenues to decrease as a percentage of revenue as our business grows and our new data products gain market acceptance.

Research and Development. Research and development expenses consist primarily of compensation for our software and data application
development personnel. We have historically focused our research and development efforts on improving and enhancing our existing on-demand software and data offerings as well as developing new features, functionality and products. We expect that in
the future, research and development expenses will increase on an absolute dollar basis as we upgrade and extend our service offerings and develop new technologies.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We
capitalize our sales commissions at the time a subscription agreement is executed by a customer and we recognize the initial year sales commission expense ratably over one year. In the case of multi-year agreements, upon billing the customer for
each additional year, we incur a subsequent sales commission and recognize the expense for such commission over the applicable year. Typically, a majority of the sales commission is recognized in the initial year of the subscription term. In order
to add new customers and increase sales to our existing customers, we plan to continue to invest heavily in our sales efforts by increasing the number of direct sales personnel. We also plan to expand our marketing activities in order to extend
brand awareness and generate additional leads for our sales staff. As a result, we expect that our sales and marketing expenses will increase on an absolute dollar basis as we grow our business.

General and Administrative. General and administrative expenses consist of compensation expenses for executive, finance, accounting, human
resources, administrative and management information systems personnel, professional fees and other corporate expenses.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The
preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and
assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our
significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment, complexity and effect on materiality. A critical accounting policy is one that is
both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations.
Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition. In accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104,
Revenue Recognition, we recognize revenues from subscription agreements for our on-demand software and related services when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of
the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue. Our subscription agreements generally contain multiple



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service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training.
Except under limited circumstances, our subscription agreements do not provide customers the right to take possession of the software at any time.

In accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21, issued by the Emerging Issues Task Force of the Financial Accounting Standards Board, or FASB, in May 2003, we
define all elements in our multiple element subscription agreements as a single unit of accounting, and accordingly, recognize all associated revenue over the subscription period, which is typically one to five years in length. In the event
professional services relating to implementation are required, we generally do not recognize revenue until such implementation is complete. In applying the guidance in EITF 00-21, we determined that we do not have objective and reliable evidence of
the fair value of the subscription to our on-demand software after delivery of specified initial services. We therefore account for our subscription arrangements and our related service fees as a single unit.

Income Taxes. We account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes, or SFAS 109,
which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than not that some portion of all of the deferred tax asset will not be realized. The realization of the deferred tax assets is evaluated quarterly by assessing the valuation allowance and by
adjusting the amount of the allowance, if necessary. As of December 31, 2007, we have a full valuation allowance against its deferred tax assets.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting
for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before recognized a benefit in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. Our adoption of FIN 48 on April 1,
2007 did not result in the recognition of a tax liability for any previously unrecognized tax benefits and did not have an effect on our financial position or results of operations as we have a full valuation allowance against its deferred tax
assets.

Software Development Costs. We capitalize certain internal software development costs under the provisions of
Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires computer software costs associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met.Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application
development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when the preliminary project stage is complete,
management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended. These costs are amortized
using the straight-line method over the estimated useful life of the software, generally three years.

Allowance for Doubtful
Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers inability to pay us. The provision is based on our historical experience and for specific customers that, in our opinion, are
likely to default on our receivables from them. In order to identify these customers, we perform ongoing reviews of all customers that have breached their payment terms, as well as those that have filed for bankruptcy or for whom information has
become available indicating a significant risk of non-recoverability. In addition, we have experienced significant growth in the number of our customers, and we have less payment history to rely upon with these customers. We rely on historical
trends of bad debt as a percentage of total revenue and apply these percentages to the accounts receivable associated with new customers and evaluate these customers over time. To the extent that our future collections differ from our assumptions
based on historical experience, the amount of our bad debt and allowance recorded may be different.



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Stock-Based Compensation. We follow the provisions of FAS 123R which requires that all stock-based
compensation be recognized as an expense in the financial statements over the vesting period and that such expense be measured at the fair value of the award.

Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based payment awards
and stock price volatility. Beginning in fiscal year 2006, we have used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. The assumptions used in calculating the fair value of
stock-based payment awards represent managements best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. Prior to the adoption of SFAS 123R, we had adopted SFAS 123, but in accordance with SFAS 123, we had elected not to apply fair value-based accounting for awards under
our employee stock incentive plan through March 31, 2005. Instead, we measured compensation expense for our stock plans using the intrinsic value method prescribed by APB 25 and related interpretations and provided pro forma disclosures as
permitted under SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure an amendment of SFAS 123.

We estimate our expected volatility based on that of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data from our traded share price. Management
believes that the historical volatility of our stock price does not best represent the expected volatility of the stock price. Until February 2007, we were a private company and therefore lack sufficient company-specific historical and implied
volatility information. We intend to continue to consistently use the same group of publicly-traded peer companies to determine volatility in the future until such time that sufficient information regarding the volatility of our share price becomes
available or that the selected companies are no longer suitable for this purpose.

The risk-free interest rate used for each grant is equal
to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

The expected term of the
options granted was determined based upon review of the period that our share-based awards are expected to be outstanding and is estimated based on historical experience of similar awards, giving consideration to the contractual term of the awards,
vesting schedules, employee turnover and expectations of employee exercise behavior.

The stock price volatility and expected terms
utilized in the calculation of fair values involve managements best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized
over the vesting period of the option. SFAS 123R also requires that we recognize compensation expense for only the portion of options that are expected to vest. Therefore, we have estimated expected forfeitures of stock options with the
adoption of SFAS 123R. In developing a forfeiture rate estimate, we have considered our historical experience, our growing employee base and the historical limited liquidity of our common stock. If the actual number of forfeitures differs from
those estimated by management, additional adjustments to compensation expense may be required in future periods.

We recognized stock-based
compensation pursuant to SFAS 123R in the amount of $1,604,000 and $3,351,000 in the three and nine months ended December 31, 2007, respectively. As of December 31, 2007, we had $16.6 million of total unrecognized compensation
cost related to nonvested stock-based compensation awards granted under our equity plans. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.3 years.



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Goodwill and Intangible Assets. We follow the guidance of SFAS No. 142, Goodwill
and Other Intangible Assets or SFAS 142. In accordance with SFAS No. 142, goodwill and certain intangible assets are no longer amortized, but instead we assess the impairment of goodwill and identifiable intangible assets on at least an
annual basis and whenever events or changes in circumstances indicate that the carrying value of the goodwill or intangible asset is greater than its fair value. Factors we consider important that could trigger an impairment review include
significant underperformance relative to historically or projected future operating results, identification of other impaired assets within a reporting unit, the disposition of a significant portion of a reporting unit, significant adverse changes
in business climate or regulations, significant changes in senior management, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a
significant decline in our stock price for a sustained period, a decline in our credit rating, or a reduction of our market capitalization relative to net book value. Determining whether a triggering event has occurred includes significant judgment
from management.

The estimation of the fair values of goodwill and the reporting units to which it pertains requires the use of discounted
cash flow valuation models. Those models require estimates of future revenue, profits, capital expenditures and working capital for each unit. These estimates will be determined by evaluating historical trends, current budgets, operating plans and
industry data. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.

Results of Operations

The following tables set forth selected statements of operations data for each
of the periods indicated as a percentage of total revenues.



|                                  |  |                                |    |  |                               |    |  |      |    |  |      |   
|--------------------------------- |  | ------------------------------ | -- |  | ----------------------------- | -- |  | ---- | -- |  | ---- | --
|                                  |  | Three Months EndedDecember 31, |    |  | Nine Months EndedDecember 31, |   
|                                  |  | 2007                           |    |  | 2006                          |    |  | 2007 |    |  | 2006 |   
|Revenues:                         |  |                                |    |  |                               |    |  |      |    |  |      |   
|Subscription Revenues             |  | 93                             | %  |  | 91                            | %  |  | 91   | %  |  | 89   | % 
|Advertising Revenues              |  | 7                              |    |  | 9                             |    |  | 9    |    |  | 11   |   
|                                  |  |                                |    |  |                               |    |  |      |    |  |      |   
|Total Revenues                    |  | 100                            |    |  | 100                           |    |  | 100  |    |  | 100  |   
|Cost of Revenues                  |  | 24                             |    |  | 25                            |    |  | 23   |    |  | 22   |   
|                                  |  |                                |    |  |                               |    |  |      |    |  |      |   
|Gross Profit                      |  | 76                             |    |  | 75                            |    |  | 77   |    |  | 78   |   
|Operating Expenses:               |  |                                |    |  |                               |    |  |      |    |  |      |   
|Research and Development          |  | 15                             |    |  | 20                            |    |  | 14   |    |  | 17   |   
|Sales and Marketing               |  | 57                             |    |  | 56                            |    |  | 54   |    |  | 54   |   
|General and Administrative        |  | 39                             |    |  | 33                            |    |  | 40   |    |  | 30   |   
|Amortization of Intangible Assets |  | 3                              |    |  |                              |    |  | 3    |    |  | 1    |   
|                                  |  |                                |    |  |                               |    |  |      |    |  |      |   
|Total Operating Expenses          |  | 114                            |    |  | 109                           |    |  | 111  |    |  | 102  |   
|Loss from Operations              |  | (38                            | )  |  | (34                           | )  |  | (34  | )  |  | (24  | ) 
|Other Income, Net                 |  | 4                              |    |  |                              |    |  | 6    |    |  |     |   
|                                  |  |                                |    |  |                               |    |  |      |    |  |      |   
|Net Loss                          |  | (34                            | )% |  | (34                           | )% |  | (28  | )% |  | (24  | )%
|                                  |  |                                |    |  |                               |    |  |      |    |  |      |   

The following table sets forth our total revenue, deferred revenue and net cash provided by
operating activities for each of the periods indicated.



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|                                          |  |                               |            |                              |   |            |  |      |            |  |   |           
|----------------------------------------- |  | ----------------------------- | ---------- | ---------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                          |  | Three Months EndedDecember 31 |            | Nine Months EndedDecember 31
|                                          |  | 2007                          |            | 2006                         |   | 2007       |  | 2006
|Total revenue                             |  | $                             | 9,186,238  |                              | $ | 6,037,557  |  | $    | 25,193,414 |  | $ | 16,634,811
|Total deferred revenue at end of period   |  |                               | 20,908,855 |                              |   | 15,370,776 |  |      | 20,908,855 |  |   | 15,370,776
|Net cash provided by operating activities |  |                               | 2,306,323  |                              |   | 1,407,888  |  |      | 5,412,403  |  |   | 1,977,017 



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Three Months Ended December 31, 2007 compared to Three Months Ended December 31, 2006

Revenues. Revenues for the third quarter of fiscal 2008 were $9.2 million, an increase of $3.2 million, or 52%, compared to revenues of $6.0
million for the third quarter of fiscal 2007. Subscription revenues were $8.5 million for the third quarter of fiscal 2008, an increase of $3.0 million, or 55%, compared to subscription revenues of $5.5 million for the third quarter
of fiscal 2007. The growth in subscription revenues was due primarily to an increase of $1.3 million in renewal revenues from existing subscription customers, an increase of $1.0 million in revenues from new subscription customers and an increase of
$0.6 million in revenues from additional products sold to existing customers in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. Included in the growth in subscription revenues was the incremental revenue contribution
from acquisitions during fiscal year 2008. Also contributing to the increase in total revenues was the impact of our hiring of additional sales personnel focused on retaining existing customers, adding new customers and selling additional products
to existing customers. Also contributing to the increase in total revenues was the incremental revenue contribution from acquisitions during fiscal year 2008. Advertising revenues were $681,000 for the third quarter of fiscal 2008, an increase of
$127,000, or 23%, compared to advertising revenues of $554,000 for the third quarter of fiscal 2007. The growth in advertising revenues was primarily due to increased advertising volume driven by enhancements to our website design. Total deferred
revenue as of December 31, 2007 was $20.9 million, representing an increase of $5.5 million, or 36%, compared to total deferred revenue of $15.4 million as of December 31, 2006.

Cost of Revenues. Cost of revenues for the third quarter of fiscal 2008 was $2.2 million, an increase of $0.7 million, or 49%, compared to
cost of revenues of $1.5 million for the third quarter of fiscal 2007. The increase in cost of revenues was primarily due to a $0.3 million increase in payroll and benefit related costs due to the addition of 14 personnel for our compensation and
professional service teams in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007, a $0.2 million increase in amortization of intangible assets primarily from data acquisition costs as well as $0.1 million of additional
consulting fees. As a percent of total revenues, cost of revenues decreased to 24% in the third quarter of fiscal 2008 compared to 25% in the third quarter of fiscal 2007. The percentage decrease was primarily the result of an increase in total
revenues in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007.

Research and Development
Expenses. Research and development expenses for the third quarter of fiscal 2008 were $1.4 million, an increase of $0.2 million, or 16%, compared to research and development expenses of $1.2 million for the third quarter of fiscal 2007. The
increase in research and development expenses was primarily due to a $0.2 million increase in expenses related to our subsidiary in Shanghai, China, which was established in December 2006 and is engaged primarily in research and development
activities. Research and development expenses decreased to 15% of total revenues in the third quarter of fiscal 2008 compared to 20% of total revenues in the third quarter of fiscal 2007 due to the fact that our revenue growth outpaced our
increasing investment in research and development as well as cost savings realized by shifting the growth in research and development headcount to China. Our research and development headcount increased by 85 employees, virtually all in China, in
the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 as we hired additional personnel to upgrade and expand our on-demand software product suite.

Sales and Marketing Expenses. Sales and marketing expenses for the third quarter of fiscal 2008 were $5.2 million, an increase of $1.8 million, or 54%, compared to sales and marketing expenses of $3.4
million for the third quarter of fiscal 2007. The increase was primarily due to a $1.0 million increase in payroll and benefit related costs due to the addition of 32 sales and marketing personnel in the third quarter of fiscal 2008 compared to
the third quarter of fiscal 2007, a $0.3 million increase in sales commissions as a result of increased sales, and a $0.3 million increase in stock-based compensation expense. Sales and marketing expenses increased to 57% of total revenues in the
third quarter of fiscal 2008 compared to 56% of total revenues in the third quarter of fiscal 2007. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing
customers.

General and Administrative Expenses. General and administrative expenses for the third quarter of fiscal 2008 were
$3.6 million, an increase of $1.6 million, or 82%, compared to general and administrative expenses of $2.0 million for the third quarter of fiscal 2007. The increase in general and administrative expenses was primarily due to a $0.5
million increase in payroll and benefit related costs due to the addition of 6 information technology, accounting and legal employees. Included in the payroll and related expense increase was $0.2 million related to



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severance charges for the cash based payments to be made to our former CFO. Also contributing to the increase in general and administrative expenses was a
$0.3 million increase in accounting expenses related to our Sarbanes-Oxley compliance efforts, a $0.3 million increase in stock-based compensation expense and a $0.2 increase in employee acquisition expenses. General and administrative expenses
increased to 39% of total revenues in the third quarter of fiscal 2008 compared to 33% in the third quarter of fiscal 2007.

Amortization of Intangible Assets. Amortization of intangible assets for the third quarter of fiscal 2008 was $321,000 compared to $24,000 in the third quarter of fiscal 2007. The increase in amortization was primarily due to
the amortization of intangible assets acquired as part of the acquisition of ICR in May 2007, ITG in August 2007 and Schoonover in December 2007.

Interest Income. Interest income for the third quarter of fiscal 2008 was $495,000 compared to $348 in the third quarter of fiscal 2007. The increase in interest income was due to interest earned on higher invested cash balances
resulting from the proceeds from our initial public offering in February 2007.

Nine Months Ended December 31, 2007 compared to Nine Months Ended
December 31, 2006

Revenues. Revenues for the nine months ended December 31, 2007 were $25.2 million, an increase
of $8.6 million, or 51%, compared to revenues of $16.6 million for the year earlier period. Subscription revenues were $23.0 million for the nine months ended December 31, 2007, an increase of $8.3 million, or 56%, compared to
subscription revenues of $14.8 million for the year earlier period. The growth in subscription revenues was due primarily to an increase of $3.3 million in renewal revenues from existing subscription customers, an increase of $2.7 million in
revenues from new subscription customers and an increase of $1.8 million in revenues from additional products sold to existing customers in the nine months ended December 31, 2007 compared to the year earlier period. Included in the growth in
subscription revenues was the incremental revenue contribution from acquisitions during fiscal year 2008. Also contributing to in the increase in total revenues was the impact of our hiring of additional sales personnel focused on retaining existing
customers, adding new customers and selling additional products to existing customers. Also contributing to the increase in total revenues was the incremental revenue contribution from acquisitions during fiscal year 2008. Advertising revenues were
$2.1 million for the nine months ended December 31, 2007, an increase of $0.3 million, or 15%, compared to advertising revenues of $1.9 million for the year earlier period. The growth in advertising revenues was primarily due to increased
advertising volume driven by enhancements to our website design.

Cost of Revenues. Cost of revenues for the nine months ended
December 31, 2007 was $5.7 million, an increase of $2.0 million, or 56%, compared to cost of revenues of $3.7 million for the year earlier period. The increase in cost of revenues was primarily due to a $1.0 million increase in payroll and
benefit related costs due to the addition of 14 personnel for our compensation and professional service teams in the nine months ended December 31, 2007 compared to the year earlier period, a $0.3 million increase in stock-based compensation
expense as well as $0.2 million of additional costs associated with sales of our CompAnalyst Executive Product due to the new SEC proxy rules, which were not in effect during the nine months ended December 31, 2006. Also contributing to the
increase in cost of revenues was a $0.3 million increase in amortization of intangible assets relating to primarily from data acquisition costs as well as $0.1 million of additional consulting fees. As a percent of total revenues, cost of revenues
increased to 23% in the nine months ended December 31, 2007 compared to 22% in the year earlier period. The increase was primarily the result of the combined effect of the explanations detailed above.

Research and Development Expenses. Research and development expenses for the nine months ended December 31, 2007 were $3.5 million, an
increase of $0.7 million, or 24%, compared to research and development expenses of $2.8 million for the year earlier period. The increase in research and development expenses was primarily due to a $0.5 million increase in payroll and related
expenses and rent expense of $0.1 million related to our subsidiary in Shanghai, China, which was established in December 2006 and is engaged primarily in research and development activities. Research and development expenses decreased to 14% of
total revenues in the nine months ended December 31, 2007 compared to 17% of total revenues in the year earlier period due to the fact that our revenue growth outpaced our increasing investment in research and development as well as cost
savings realized by shifting the growth in research and development headcount to China. Our research and development headcount



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increased by 85 employees, virtually all in China, in the nine months ended December 31, 2007 compared to the year earlier period as we hired additional
personnel to upgrade and expand our on-demand software product suite.

Sales and Marketing Expenses. Sales and marketing
expenses for the nine months ended December 31, 2007 were $13.6 million, an increase of $4.6 million, or 50%, compared to sales and marketing expenses of $9.0 million for the year earlier period. The increase was primarily due to a
$2.7 million increase in payroll and benefit related costs due to the addition of 32 sales and marketing personnel in the nine months ended December 31, 2007 compared to the year earlier period, a $0.7 million increase in sales commissions
as a result of increased sales, a $0.8 million increase in stock-based compensation expense and a $0.1 million increase in travel expenses. Sales and marketing expenses were 54% of total revenues in both the nine months ended December 31, 2007
and 2006. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.

General and Administrative Expenses. General and administrative expenses for the nine months ended December 31, 2007 were $10.1 million, an increase of $5.1 million, or 104%, compared to general
and administrative expenses of $5.0 million for the year earlier period. The increase in general and administrative expenses was due to a $1.3 million increase in payroll, benefit and other employee related costs due to the addition of 6
information technology, accounting and legal employees as well as a $0.5 million increase in accrued incentive compensation. Also contributing to the increase in general and administrative expenses was a $0.8 million increase in legal expenses
consisting primarily of the settlement of the litigation with one of our former consultants, a $0.8 million increase in accounting related expenses due to the Companys Sarbanes-Oxley compliance efforts as well as increased audit fees, a $0.9
million increase in stock based compensation expense, a $0.5 million increase in employee acquisition expenses, a $0.2 million increase in insurance expense and a $0.2 million increase in rent expense. Most of these increased expenses are the result
and our continued growth and the fact that we are now a publicly traded company. General and administrative expenses were 40% of total revenues in the nine months ended December 31, 2007 compared to 30% in the year earlier period.

Amortization of Intangible Assets. Amortization of intangible assets for the nine months ended December 31, 2007 was $736,000
compared to $102,000 in the year earlier period. The increase in amortization was primarily due to the amortization of intangible assets acquired as part of the acquisition of ICR in May 2007, ITG in August 2007 and Schoonover in December 2007.

Interest Income. Interest income for the nine months ended December 31, 2007 was $1.6 million compared to $6,000 in the year
earlier period. The increase in interest income was due to interest earned on higher invested cash balances resulting from the proceeds from our initial public offering in February 2007.

Liquidity and Capital Resources

At December 31, 2007, our principal sources of liquidity were
cash and cash equivalents totaling $35.6 million and accounts receivable, net of allowance for doubtful accounts, of $5.7 million, compared to cash and cash equivalents of $49.0 million and accounts receivable, net of allowance for
doubtful accounts, of $3.4 million at March 31, 2007. Our working capital as of December 31, 2007 was $16.5 million compared to working capital of $34.3 million as of March 31, 2007.

Cash provided by operating activities for the nine months ended December 31, 2007 was $5.4 million. This amount resulted from a net loss of $7.0
million, adjusted for net non-cash charges of $5.7 million and a $6.7 million net increase in working capital accounts. Non-cash items primarily consisted of $0.8 million of depreciation and amortization of property, equipment and software,
$1.0 million of amortization of intangible assets, $3.5 million of stock-based compensation and $0.2 million from a legal settlement paid in common stock. The net increase in working capital of $6.7 million was primarily comprised of increases
in accounts receivable of $1.2 million, accounts payable of $0.2 million, accrued expenses and other current liabilities of $2.9 million and deferred revenue of $4.4 million, offset by a decrease in prepaid expense of $0.4 million. The increase in
accounts receivable is primarily due to an overall increase in invoicing during the nine months ended December 31, 2007 compared to the prior year. The decrease in prepaid expenses and other current assets is due to the pro rata expensing of
prepaid insurance expense during the nine months ended December 31, 2007. The increase in accounts payable is due primarily to our



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continued growth in the nine months ended December 31, 2007. The increase in accrued expenses is primarily due to an increase in accrued compensation of
$0.4 million, an increase of $1.0 million of acquisition related liabilities, an increase of $0.2 million in accrued severance related to the resignation of our former Chief Financial Officer with the remainder of the increase due to the overall
growth of the company since the beginning of the fiscal year and a higher level of expenses related to being a publicly traded company. The increase in deferred revenue is primarily due to increased invoicing less revenue recognition from our
subscription customers in the nine months ended December 31, 2007. The growth in the invoiced amounts was primarily due to sales to new customers, increased sales to existing customers, the introduction of new products, and the enhancement of
existing products. Currently, payment for the majority of our subscription agreements is due upon invoicing. Because revenue is generally recognized ratably over the subscription period, payments received at the beginning of the subscription period
result in an increase to accounts receivable and deferred revenue. Changes in deferred revenue generally indicate the trend for subscription revenues over the following year as the current portion of deferred revenue is expected to be recognized
within 12 months.

Cash used in investing activities was $19.3 million and consisted primarily of an aggregate of $15.7 million paid for
the acquisition of ICR in May 2007, ITG in August 2007 and Schoonover in December 2007, $2.4 million paid for the acquisition of data underlying certain of our products, an increase in restricted cash of $0.7 million, $0.2 million paid for purchases
of property and equipment for new offices, network infrastructure and computer equipment to support our growth in employee headcount and $0.3 million of payments capitalized for the payment of software development costs. We intend to continue to
invest in our content data sets, software development and network infrastructure to ensure our continued ability to enhance our existing software, expand our data sets, introduce new products, and maintain the reliability of our network.

Cash provided by financing activities was $464,000, which consisted primarily of $496,000 received from the issuance of common stock related to the
exercise of employee stock options, warrant and the employee stock purchase plan, offset slightly by $32,000 in payments made to buy back unvested common stock from terminated employees related to the early exercise of employee stock options.

In August 2006, we entered into a $5,000,000 credit facility with Silicon Valley Bank. The line, which expires in August 2008, provides
for a term loan up to $1,000,000 and a $4,000,000 revolving working capital line of credit. Borrowings on the term loan bear interest at the banks prime rate plus 1.00% and interest is payable on a monthly basis. Borrowings on the revolving
line bear interest at the banks prime rate plus 0.25%. The credit facility is collateralized by substantially all of our assets. In addition, the facility carries an unused revolving line facility fee of 0.375% of the undrawn balance. As of
December 31, 2007, there were no outstanding borrowings under this credit facility and the Company is in compliance with all related debt covenants.

On December 30, 2006, we entered into an agreement with a vendor to obtain additional data sets that runs for an initial one year term following the date of the initial delivery. The fee for the initial term was
$1.5 million. At the end of the initial term, the agreement shall automatically renew for up to six subsequent one year terms unless terminated by us. The annual fees due to the vendor related to years two through seven of the agreement are $0.5
million, $0.6 million, $0.6 million, $0.7 million, $0.8 million, and $0.9 million, respectively.

On May 15, 2007, we acquired the
membership interests of ICR, a leading provider of industry-specific market intelligence for employee pay and benefits for the global technology and specialty consumer goods markets. Pursuant to the terms of the purchase agreements, we paid $10.3
million to the owners of ICR, of which $1.0 million has been placed in escrow for 12 months.

On June 27, 2007, we entered into a
master equipment lease agreement (Leaseline #1) with a maximum commitment of $300,000. The lease term begins on September 1, 2007 and runs for a term of 36 months. On August 13, 2007, we increased the maximum commitment of
Leaseline #1 to $600,000. As of September 30, 2007, we had leased approximately $381,000 of equipment under the terms of Leaseline #1. On September 13, 2007, we entered into an additional lease commitment (Leaseline #2) with
the same lender with a maximum commitment of $350,000. On December 4, 2007, we increased the maximum commitment of Leaseline #2 to $400,000. The lease term begins on January 1, 2008 and runs for a term of 36 months. As of December 31, 2007, we had
leased approximately $391,000 of equipment under the terms of Leaseline #2. On January 17, 2008, we entered into a third lease commitment (Leaseline #3) with the same lender with a maximum commitment of $350,000. The lease term begins on
April 1, 2008 and runs for a term of 36 months. In addition, we have approximately $730,000 in a restricted cash account as collateral in accordance with the master lease agreements.



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On August 3, 2007 we acquired the assets of ITG. ITG is a provider of off-the-shelf competency
models and related implementation services used in a wide range of industries. Under the terms of the agreement, we have paid the owner of ITG $1.8 million in cash and newly issued shares of our common stock valued at $500,000. ITG will receive an
additional $0.25 million in April 2008 and will also be eligible to earn up to $1.0 million in additional consideration based on meeting certain performance targets during the first two years after the closing of the acquisition, and can earn
additional consideration if these targets are exceeded. The additional consideration, if earned, will be paid 50% in cash and 50% in common stock. As of December 31, 2007, approximately $297,000 of the additional consideration has been earned.

On December 21, 2007 we acquired the assets of Schoonover. Schoonover is a provider of competency management data and consulting
services with over 20 years of experience helping clients maximize their human capital. Under the terms of the agreement, we have paid the owner of Schoonover $3.7 million in cash of which $0.2 million reflects payments made by us in connection with
a pre-existing license agreement by and between the parties. In addition, we will pay another $0.2 million in cash during the fourth quarter of fiscal 2008, pursuant to the terms of the aforementioned license agreement, and another $0.5 million of
cash will be held in escrow until one year from the anniversary of the closing. Schoonover will also be eligible to earn additional consideration based on meeting certain performance targets during the first five fiscal years after March 31,
2008. The additional consideration, if earned, consists of cash payments of no more than $100,000 per year for 5 years and 112,646 newly issued shares of common stock valued at $1.5 million, which are eligible to vest ratably over such five-year
period.

Effective December 31, 2007, Kenneth S. Goldman resigned as Chief Financial Officer of Salary.com, Inc. In accordance with
Mr. Goldmans separation agreement, he will be paid a total $185,000 in semi-monthly installments through December 31, 2008. In the event that Mr. Goldman finds other full-time employment prior to the end of the one year
severance period, his remaining unpaid severance will be paid in restricted stock.

Given our current cash, accounts receivable and
available borrowings under our credit facility, we believe that we will have sufficient liquidity to fund our business and meet our contractual obligations for at least the next 12 months. However, we may need to raise additional funds in the future
in the event that we pursue acquisitions or investments in complementary businesses or technologies or experience operating losses that exceed our expectations. If we raise additional funds through the issuance of equity or convertible securities,
our stockholders may experience dilution. In the event that additional financing is required, we may not be able to obtain it on acceptable terms or at all.

During the last three fiscal years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the
foreseeable future.

Other than the increase in the maximum commitment under Leaseline #2 to $400,000 and the additional lease commitment
(Leaseline #3) of $350,000, as discussed above, there have been no material changes to our contractual obligations, as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

Off-Balance-Sheet Arrangements

Under GAAP, certain
obligations and commitments are not required to be included in the consolidated balance sheet. These obligations and commitments, while entered into in the normal course of business, may have a material impact on liquidity. We do not have any
relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

New Accounting Pronouncements

In December 2007, FASB
issued Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51, (SFAS 160), which improves the
relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. The provisions of



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SFAS 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are in the process
of determining what effect, if any, the adoption of SFAS 160 will have on its consolidated financial statements.

In December 2007, the
FASB issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS 141R), which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in
its financial reports about a business combination and its effects. The provisions of SFAS 141R are effective for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. We are in the process of determining what effect, if any, the adoption of SFAS 160 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115(SFAS 159), which permits entities
to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. We are currently evaluating whether or not we will elect the
option provided for in SFAS 159, and whether the adoption will have an impact on our consolidated financial statements.

In September 2006,
the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a fair value hierarchy that prioritizes the information used to develop those assumptions and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We are in the process of determining what effect, if any, the adoption of SFAS 157 will have on our
consolidated financial statements.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

Foreign Currency Exchange Risk. Our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates in any material respect.

Interest Rate Sensitivity. Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However,
based on the nature and current level of our investments, which are primarily cash and debt obligations, we believe that there is no material risk of exposure.



|Item 4. | Controls and Procedures.
|------- | ------------------------

Evaluation of the Effectiveness of
Disclosure Controls and Procedures

Our management evaluated, with the participation of the chief executive officer and chief financial
officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Our Board of Directors, acting through its Audit Committee, is responsible for the oversight of our accounting policies, financial reporting and internal
control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The independent registered public accounting firm has full and unlimited access to the Audit Committee, with and
without management, to discuss the adequacy of internal control over financial reporting, and any other matters that they believe should be brought to the attention of the Audit Committee.

Remediation of Prior Year Significant Deficiencies



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In connection with the audit of our financial statements as of and for the year ended March 31,
2006, our independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As discussed in greater detail in our Annual Report on Form 10-K for the year ended March 31,
2007, as a result of the remediation efforts during fiscal 2007, the three material weaknesses were classified as significant deficiencies. The status of the remediation of each is as follows:



| |  |  | Errors were detected in the calculation of stock compensation expense relating to the adoption of SFAS 123R Share Based Payments.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

We have hired personnel resources with knowledge and experience dealing with SFAS 123R including outside consultants
with expertise in Generally Accepted Accounting Principles, including SFAS 123R. Furthermore, we have instituted a control in which the work performed by outside consultants is reviewed by the Director of Accounting and Financial Reporting and/or
the Director of Finance for reasonableness and consistency. However this deficiency will not be completely remediated until we have implemented a new software system and related controls to track stock option activity and calculate stock
compensation expense in accordance with SFAS 123R. During the fiscal year ended March 31, 2007, we began the implementation of new on-demand stock option management software. This automated software will significantly reduce the potential for
errors inherent in a spreadsheet based process. Although the implementation of this system began in fiscal year 2007, it has not been completed as of the date of this report.



| |  |  | We also have a significant deficiency in the design and operation of our internal controls relating to revenue accounting. In particular, because of system
limitations, we did not have a process or policy to maintain a detailed deferred revenue listing by customer to support our deferred revenue balances. As a result of the identified deficiency, we recorded a material adjustment to reclassify from
short-term to long-term deferred revenue within the liability section of our balance sheet.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the fiscal year ended
March 31, 2007, we began the implementation of our new accounting system and related controls, which we believe will alleviate the revenue accounting issues identified during the fiscal year ended March 31, 2006. This new accounting system
will fully integrate our revenue accounting and general ledger systems (as compared to our current accounting system which is not integrated with the three other systems we use to record customer transactions and activities and the calculation of
amounts recognized as revenue) and is more sophisticated in the manner in which it handles complex revenue transactions. Although the implementation of this system began in fiscal year 2007, it has not been completed as of the date of this report.
We expect to complete the implementation of the new accounting system during the first quarter of fiscal 2009.

During the quarter ended
December 31, 2007, we hired an experienced consultant to serve as program manager to oversee and manage the implementation of the accounting and stock option management systems discussed above.



| |  |  | In prior years, we entered into sophisticated and high dollar value equity and debt financing transactions to finance our business, but did not have a formal policy
regarding the policies and procedures for the recording and reporting of these types of transactions (specifically related to the beneficial conversion feature of our preferred stock issuance).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since December 31, 2006, we have had the appropriate personnel who are knowledgeable and experienced with regard to the recording and reporting of
sophisticated debt and equity financing transactions and we did not enter into any high dollar value equity and debt financing transactions during the nine months ended December 31, 2007. During the quarter ended December 31, 2007 we
implemented a formal policy and procedures for the recording and reporting of these types of transactions.

While we expect to complete the
remediation of the significant deficiencies above, we cannot assure you that we will be able to do so, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows.



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Changes to Internal Control Over Financial Reporting

Our management has not identified any changes in our internal controls over financial reporting during our third quarter 2008 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except as discussed above.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected. Even effective internal control over financial
reporting can only provide reasonable assurance with respect to financial statement preparation. Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management,
including our President and Chief Executive Officer and Chief Financial Officer, does not expect that our controls and procedures will prevent all errors.

PART II.

OTHER INFORMATION



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

We are not currently subject to
any material legal proceedings. From time to time, however, we may be named as a defendant in legal actions arising from our normal business activities. These claims, even those that lack merit, could result in the expenditure of significant
financial and managerial resources. Please see our Annual Report on Form 10-K for the fiscal year ended March 31, 2007 for a description of our legal proceedings, as well as our Quarterly Reports on Form 10-Q for the quarters ended June 30 and
September 30, 2007 for updates regarding such legal proceedings and the settlements we entered into.



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

The following information updates,
and should be read in conjunction with, the information disclosed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

This Quarterly Report on Form 10-Q contains or incorporates a number of forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as
may, will, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes,
estimates, predicts, potential or continue or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject
to risks, uncertainties and other factors described in Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report. Accordingly, you should not rely
upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those
projected in the forward-looking statements. We have identified below some important factors that could cause our forward-looking statements to differ materially from actual results, performance or financial condition:



| |  |  | our ability to become profitable;
| | - |  | ---------------------------------



| |  |  | the ability of our solutions to achieve market acceptance;
| | - |  | ----------------------------------------------------------



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| |  |  | a highly competitive market for compensation management;
| | - |  | --------------------------------------------------------



| |  |  | failure of our customers to renew their subscriptions for our products;
| | - |  | -----------------------------------------------------------------------



| |  |  | our inability to adequately grow our operations and attain sufficient operating scale;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our ability to integrate acquired companies and businesses;
| | - |  | -----------------------------------------------------------



| |  |  | our inability to effectively protect our intellectual property and not infringe on the intellectual property of others;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to raise sufficient capital when necessary or at satisfactory valuations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the loss of key personnel; and
| | - |  | ------------------------------



| |  |  | other factors discussed elsewhere in this report.
| | - |  | -------------------------------------------------

The risks and uncertainties described in this Quarterly Report on Form 10-Q are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem
immaterial, may also impair our business. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking
statements after the date of this report.

We have incurred operating losses in the past and expect to incur operating losses in the future.

We have incurred operating losses in the past and we expect to incur operating losses in the future. As of December 31, 2007, our
accumulated deficit is approximately $36.4 million. Our recent operating losses were $8.3 million for the fiscal year ended March 31, 2007, $3.0 million for the fiscal year ended March 31, 2006, and $1.9 million for the
fiscal year ended March 31, 2005. We have not been profitable since our inception, and we may not become profitable. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses
exceed our expectations, our financial performance could be adversely affected. If our revenue does not grow to offset these increased expenses, we may not become profitable. You should not consider recent revenue growth as indicative of our future
performance. In fact, in future periods, we may not have any revenue growth, or our revenue could decline.

Our growth could strain our personnel and
infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure.
Between March 31, 2004 and December 31, 2007, the number of our full time equivalent employees increased from 76 to 343. We anticipate that additional growth will be required in order to increase our customer base and handle an increase in
the volume of our business.

Our success will depend in part upon the ability of our senior management to manage growth effectively. To do
so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our
anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, or if we are not successful
in retaining our existing employees, we may not be able to handle any increase in the volume of our business and our business may be harmed. As we continue to grow, we may outgrow our current space in Waltham, Massachusetts and Shanghai, China or
desire to open additional offices domestically and internationally, which will require us to expend additional financial resources and make it more difficult to manage employees not located at our principal headquarters and maintain uniform
standards, controls, procedures and policies across locations. If we determine that it is necessary or desirable to open additional offices, whether



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domestically or internationally, management resources will be allocated to integrating new offices, handling cultural and language issues arising from
international operations and managing costs associated with a multi-office organization. Such focus could divert managements attention from managing ongoing business operations.

To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and
our reporting systems and procedures. The additional headcount and capital investments we expect to add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in
the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

We may expand through acquisitions of,
investments in or through business relationships with other organizations, all of which may divert our managements attention, result in additional dilution to our stockholders, consume resources that are necessary to sustain our business and
may not result in the realization of the goals underlying the acquisition, investment or business relationship.

One of our business
strategies is to selectively pursue the acquisition of companies that would either expand the functionality of our compensation management and talent management solutions or provide access to new customers or markets, or both. In December 2007, we
acquired the assets of Schoonover, a provider of competency management data and consulting services. In August 2007, we acquired the assets of ITG, a leader in the competency model content business. In May 2007, we acquired ICR, a premier provider
of specialty consumer goods and global technology compensation data and software. In April 2006, we acquired the assets of the eComp division of Aon Consulting, Inc. Additionally, we also may enter into business relationships with other
organizations in order to expand our offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other organizations. An acquisition, investment or business relationship
may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the acquired organizations, technologies, products, personnel or operations of the acquired organizations,
particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing
business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from customers obtained through acquisitions than we
do from existing customers. Additionally, to the extent we expand into new facilities, we may have difficulty maintaining uniform standards, controls, procedures and policies across locations. Moreover, we cannot assure you that the anticipated
benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of these transactions, we may:



| |  |  | issue additional equity securities that would dilute our existing stockholders ownership;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | use cash that we may need in the future to operate our business;
| | - |  | ----------------------------------------------------------------



| |  |  | incur debt on terms unfavorable to us or that we are unable to repay;
| | - |  | ---------------------------------------------------------------------



| |  |  | incur large charges or substantial liabilities;
| | - |  | -----------------------------------------------



| |  |  | encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | become subject to adverse tax and accounting consequences.
| | - |  | ----------------------------------------------------------

Although we periodically engage in preliminary discussions with respect to acquisitions, we are not currently a party to any agreement or commitment, and we have no understandings with respect to any acquisition.

Our ability to use net operating loss carryforwards in the United States may be limited.

As of December 31, 2007, we had net operating loss carryforwards of approximately $25.9 million for state and federal tax purposes. These loss
carryforwards expire at various dates through 2027. To the extent available, we



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intend to use these net operating loss carryforwards to reduce the U.S. corporate income tax liability associated with our operations. Section 382 of
the U.S. Internal Revenue Code of 1986 generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. Our
ability to utilize net operating loss carryforwards may be limited by the issuance of common stock in our initial public offering. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to
U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

Being a
public company has increased and will continue to increase our administrative costs.

As a public company, we have incurred and will
continue to incur significant legal, accounting and other expenses that we did not incur as a private company. Sarbanes-Oxley, as well as new rules subsequently implemented by the SEC and the Nasdaq Global Market, have required changes in corporate
governance practices of public companies. These new rules and regulations have increased our legal and financial compliance costs, and have made some activities more time consuming and/or costly. For example, we are migrating our core financial
systems to our new accounting system and adopting additional internal controls and disclosure controls and procedures. We have also retained a transfer agent and a financial printer and adopted corporate governance policies. In addition, as a public
company we have all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. These new rules and regulations could also make it more difficult for us to
attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

Beginning with our Annual Report for the year ending March 31, 2008, Section 404 of Sarbanes-Oxley requires us to include an internal control report with our annual report on Form 10-K. That report must include managements
assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. Additionally, our independent registered public accounting firm will be required to issue a report on its evaluation of the operating
effectiveness of our internal control over financial reporting. The significant deficiencies and any other deficiencies in internal control that we currently have identified and that we may identify in the future will need to be addressed as part of
the evaluation of our internal control over financial reporting and may impair our ability to comply with Section 404. If we are not able to successfully implement internal control over financial reporting, we may not be able to accurately and
timely report on our financial position, results of operations or cash flows, which could adversely affect our business and investor confidence in us.

See Item 4, Controls and Procedures in this report and Item 9A, Controls and Procedures in our Annual Report on Form 10-K for the year ended March 31, 2007 for a description of
the significant deficiencies in our internal control over financial reporting identified by our independent registered public accounting firm and the status of our remediation efforts.

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

Unregistered Sales of Equity Securities

During the quarter ended December 31, 2007, we issued 29,059 shares of our common stock upon the exercise of outstanding warrants to
purchase common stock at a weighted average exercise price of $2.46 per share. The foregoing warrant exercises were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) under that act, as a transaction by an
issuer not involving a public offering.



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Reference is made to Item 2.01 of our Current Report on Form 8-K dated December 28, 2007, which
was previously filed with the Securities and Exchange Commission, regarding the issuance $1,500,000 in newly issued shares of common stock in connection with our acquisition of substantially all of the assets of Schoonover Associates, Inc. Based on
the average closing sales price of our common stock for the 10 trading days prior to the closing date, we issued 112,646 shares of our common stock to Dr. Stephen Schoonover which will vest over the first five years following the closing of the
acquisition, subject to the attainment of certain performance targets.

Issuer Purchases of Equity Securities

Pursuant to the terms of our 2000 Stock Option and Incentive Plan and our 2004 Stock Option and Incentive Plan (collectively referred to as our
Stock Plans), options may typically be exercised prior to vesting. We have the right to repurchase unvested shares from employees upon their termination, and it is generally our policy to do so. The following table provides information
with respect to purchases made by us of shares of our common stock during the three month period ended December 31, 2007:



|                |  |                                     |  |                            |       |                                                                               |   |                                                                                                         |  
|--------------- |  | ----------------------------------- |  | -------------------------- | ----- | ----------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------- | -
|Period          |  | Total Number of SharesPurchased (1) |  | Average PricePaid perShare |       | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs |   | Maximum Number (orApproximate DollarValue) of Shares thatMay Yet Be PurchasedUnder the Plans
orPrograms
|October 1  31  |  |                                    |  | $                          |      |                                                                               |  |                                                                                                         | 
|November 1  30 |  | 29,996                              |  | $                          | 0.223 |                                                                               |  |                                                                                                         | 
|December 1  31 |  |                                    |  | $                          |      |                                                                               |  |                                                                                                         | 
|Total           |  | 29,996                              |  | $                          | 0.223 |                                                                               |  |                                                                                                         | 



|(1) | All shares were originally purchased from us by employees pursuant to exercises of unvested stock options. During the months listed above, we routinely repurchased the shares from
our employees upon their termination of employment pursuant to our right to repurchase unvested shares at the original exercise price under the terms of our Stock Plans and the related stock option agreements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6  EXHIBITS

The exhibits listed in the Exhibits Index immediately preceding such exhibits are
filed as part of this report.



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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.



|                        |  |  |  |                                                                        
|----------------------- |  |  |  | -----------------------------------------------------------------------
|                        |  |  |  | SALARY.COM, INC.                                                       
|                        |  | 
|Date: February 14, 2008 |  |  |  | /s/ Chris G. Power                                                     
|                        |  |  |  | Chris G. Power                                                         
|                        |  |  |  | Chief Financial Officer                                                
|                        |  |  |  | (Authorizing Officer and Principal Financial Officer of the registrant)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                             
|2.1         |  | Asset Purchase Agreement, dated as of December 21, 2007, by and among Salary.com, Inc., Stephen C. Schoonover, Schoonover Associates, Inc. and Helen Schoonover (incorporated by reference to
Exhibit 2.1 to the Companys current report on Form 8-K filed December 28, 2007 (SEC file No. 001-33312)).
|            | 
|10.1        |  | Salary.com, Inc. Employment Offer Letter, dated as of December 12, 2007, by and between Salary.com, Inc. and Chris G. Power (filed herewith)*.                                                                                                                                                          
|            | 
|10.2        |  | Separation Agreement and Release, dated as of January 8, 2008, by and between Salary.com, Inc. and Kenneth S. Goldman (incorporated by reference to Exhibit 10.1 to the Companys current
report on Form 8-K filed January 11, 2008 (SEC file No. 001-33312)*.                                          
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).                                                                                                                                                        
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).                                                                                                                                                        
|            | 
|32.1        |  | Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).                                                                                               



|* | Compensatory plan or arrangement
|- | --------------------------------



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