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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, 2009



| ̈ | 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.)

160 Gould Street, Needham, MA
02494

(Address of Principal Executive Offices, Including Zip Code)

(781) 851-8000

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈.

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈                                                |  | Accelerated Filer         |  |  ̈
|                        |  |                                                  | 
|Non-Accelerated Filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | 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 |  | 16,816,735 shares               
|Class                                    |  | Outstanding at February 12, 2010









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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

INDEX



|                                |  |                                                                                                          |  |     
|------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|                                |  |                                                                                                          |  | Page
|                                | 
|Part I. - Financial Information |  |                                                                                                         
|                                |  |                                                                                                         
|Item 1.                         |  | Financial Statements                                                                                     |  |     
|                                |  |                                                                                                         
|                                |  | Consolidated Balance Sheets-December 31, 2009 (unaudited) and March 31, 2009                             |  | 3   
|                                |  |                                                                                                         
|                                |  | Consolidated Statements of Operations-Three and Nine Months Ended December 31, 2009 and 2008
(unaudited) |  | 4   
|                                |  |                                                                                                         
|                                |  | Consolidated Statement of Changes in Stockholders EquityNine Months Ended December 31, 2009 (unaudited) |  | 5   
|                                |  |                                                                                                         
|                                |  | Consolidated Statements of Cash Flows Nine Months Ended December 31, 2009 and 2008 (unaudited)          |  | 6   
|                                |  |                                                                                                         
|                                |  | Notes to the Unaudited Consolidated Financial Statements                                                 |  | 7   
|                                |  |                                                                                                         
|Item 2.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 23  
|                                |  |                                                                                                         
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 36  
|                                |  |                                                                                                         
|Item 4.                         |  | Controls and Procedures                                                                                  |  | 36  
|                                | 
|Part II. - Other Information    |  |                                                                                                         
|                                |  |                                                                                                         
|Item 1.                         |  | Legal Proceedings                                                                                        |  | 37  
|                                |  |                                                                                                         
|Item 1A.                        |  | Risk Factors                                                                                             |  | 37  
|                                |  |                                                                                                         
|Item 2.                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 38  
|                                |  |                                                                                                         
|Item 4.                         |  | Other Information                                                                                        |  | 38  
|                                |  |                                                                                                         
|Item 5.                         |  | Exhibits                                                                                                 |  | 38  
|                                | 
|Signatures                      |  | 39                                                                                                      



2



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PART I.

FINANCIAL INFORMATION



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

SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                        |  | December 31,2009 |         |   | March 31,2009 |  
|                                                                                                                                                        |  | (unaudited)      |         |   |               |  
|Assets                                                                                                                                                  |  |                  |         |   |               |   |         |  
|Current assets:                                                                                                                                         |  |                  |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                               |  | $                | 11,225  |   |               | $ | 21,085  |  
|Accounts receivable, less allowance for doubtful accounts of $291 and $170, at December 31, 2009 and March 31, 2009,
respectively                       |  |                  | 8,069   |   |               |   | 6,040   |  
|Prepaid expenses and other current assets                                                                                                               |  |                  | 1,627   |   |               |   | 1,558   |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total currents assets before funds held for clients                                                                                                     |  |                  | 20,921  |   |               |   | 28,683  |  
|Funds held for clients                                                                                                                                  |  |                  | 10,388  |   |               |   | 12,964  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total current assets                                                                                                                                    |  |                  | 31,309  |   |               |   | 41,647  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|                                                                                                                                                        |  |                 
|Property, equipment and software, net                                                                                                                   |  |                  | 2,213   |   |               |   | 3,025   |  
|Amortizable intangible assets, net                                                                                                                      |  |                  | 14,000  |   |               |   | 16,112  |  
|Other intangible assets                                                                                                                                 |  |                  | 935     |   |               |   | 1,504   |  
|Goodwill                                                                                                                                                |  |                  | 17,176  |   |               |   | 14,734  |  
|Restricted cash                                                                                                                                         |  |                  | 1,126   |   |               |   | 1,125   |  
|Other assets                                                                                                                                            |  |                  | 255     |   |               |   | 554     |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total assets                                                                                                                                            |  | $                | 67,014  |   |               | $ | 78,701  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|                                                                                                                                                        |  |                 
|Liabilities and Stockholders Equity                                                                                                                    |  |                  |         |   |               |   |         |  
|Current liabilities:                                                                                                                                    |  |                  |         |   |               |   |         |  
|Accounts payable                                                                                                                                        |  | $                | 3,406   |   |               | $ | 1,379   |  
|Accrued compensation                                                                                                                                    |  |                  | 224     |   |               |   | 963     |  
|Accrued expenses and other current liabilities                                                                                                          |  |                  | 5,934   |   |               |   | 3,300   |  
|Revolving credit facility                                                                                                                               |  |                  | 2,525   |   |               |   | 8,125   |  
|Deferred revenue, current portion                                                                                                                       |  |                  | 28,632  |   |               |   | 26,556  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total current liabilities before client funds obligations                                                                                               |  |                  | 40,721  |   |               |   | 40,323  |  
|                                                                                                                                                        |  |                 
|Client funds obligations                                                                                                                                |  |                  | 10,388  |   |               |   | 12,964  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total current liabilities                                                                                                                               |  |                  | 51,109  |   |               |   | 53,287  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|                                                                                                                                                        |  |                 
|Deferred revenue, less current portion                                                                                                                  |  |                  | 2,707   |   |               |   | 1,729   |  
|Other long-term liabilities                                                                                                                             |  |                  | 1,675   |   |               |   | 1,742   |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total liabilities                                                                                                                                       |  |                  | 55,491  |   |               |   | 56,758  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|                                                                                                                                                        |  |                 
|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; 16,373,888 and 16,104,454 issued and outstanding at
December 31, 2009 and March 31, 2009 |  |                  | 2       |   |               |   | 2       |  
|Additional paid-in capital                                                                                                                              |  |                  | 92,417  |   |               |   | 89,372  |  
|Accumulated deficit                                                                                                                                     |  |                  | (80,221 | ) |               |   | (66,452 | )
|Accumulated other comprehensive loss                                                                                                                    |  |                  | (675    | ) |               |   | (979    | )
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total stockholders equity                                                                                                                              |  |                  | 11,523  |   |               |   | 21,943  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                                                              |  | $                | 67,014  |   |               | $ | 78,701  |  
|                                                                                                                                                        |  |                  |         |   |               |   |         |  



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SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Three Months EndedDecember 31, |        |   | Nine Months EndedDecember 31, |  
|                                                        |  | 2009                           |        |   | 2008                          |   |        | 2009 |  |   | 2008    |  
|                                                        |  | (unaudited)                    |        |   | (unaudited)                   |  
|                                                        |  |                                |        |  
|Revenue:                                                |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Subscription revenues                                   |  | $                              | 11,312 |   |                               | $ | 10,267 |      |  | $ | 32,506  |   |  | $ | 29,115  |  
|Advertising revenues                                    |  |                                | 561    |   |                               |   | 735    |      |  |   | 2,369   |   |  |   | 2,048   |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                          |  |                                | 11,873 |   |                               |   | 11,002 |      |  |   | 34,875  |   |  |   | 31,163  |  
|                                                        |  |                                |        |  
|Cost of revenues                                        |  |                                | 3,746  |   |                               |   | 2,961  |      |  |   | 11,125  |   |  |   | 9,333   |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                            |  |                                | 8,127  |   |                               |   | 8,041  |      |  |   | 23,750  |   |  |   | 21,830  |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                |        |  
|Operating expenses:                                     |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                |  |                                | 2,436  |   |                               |   | 2,211  |      |  |   | 7,137   |   |  |   | 6,317   |  
|Sales and marketing                                     |  |                                | 5,250  |   |                               |   | 6,715  |      |  |   | 16,525  |   |  |   | 20,357  |  
|General and administrative                              |  |                                | 3,643  |   |                               |   | 3,749  |      |  |   | 11,413  |   |  |   | 11,726  |  
|Amortization of intangible assets                       |  |                                | 763    |   |                               |   | 495    |      |  |   | 2,257   |   |  |   | 1,288   |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                |  |                                | 12,092 |   |                               |   | 13,170 |      |  |   | 37,332  |   |  |   | 39,688  |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                |        |  
|Loss from operations                                    |  |                                | (3,965 | ) |                               |   | (5,129 | )    |  |   | (13,582 | ) |  |   | (17,858 | )
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                |        |  
|Other income (expense), net:                            |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                         |  |                                |       |   |                               |   | 61     |      |  |   | 11      |   |  |   | 518     |  
|Other expense, net                                      |  |                                | 21     |   |                               |   | (52    | )    |  |   | (136    | ) |  |   | (109    | )
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total other income (expense), net                       |  |                                | 21     |   |                               |   | 9      |      |  |   | (125    | ) |  |   | 409     |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Loss before provision for income taxes                  |  |                                | (3,944 | ) |                               |   | (5,120 | )    |  |   | (13,707 | ) |  |   | (17,449 | )
|Provision for income taxes                              |  |                                | 16     |   |                               |   | 36     |      |  |   | 62      |   |  |   | 179     |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                |  | $                              | (3,960 | ) |                               | $ | (5,156 | )    |  | $ | (13,769 | ) |  | $ | (17,628 | )
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                |        |  
|Net loss per share - basic and diluted                  |  | $                              | (0.24  | ) |                               | $ | (0.31  | )    |  | $ | (0.84   | ) |  | $ | (1.09   | )
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                |        |  
|Weighted average shares outstanding - basic and diluted |  |                                | 16,512 |   |                               |   | 16,601 |      |  |   | 16,313  |   |  |   | 16,229  |  
|                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  



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SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except share data, unaudited)



|                                                              |  |              |   |                    |        |   |             |   |        |                                 |  |   |                     |   |  |        |      |   |  |   |         |  
|------------------------------------------------------------- |  | ------------ | - | ------------------ | ------ | - | ----------- | - | ------ | ------------------------------- |  | - | ------------------- | - |  | ------ | ---- | - |  | - | ------- | -
|                                                              |  | Common Stock |   | Additional Paid-In |        |   | Accumulated |   |        | Accumulated Other Comprehensive |  |   | Total Stockholders |  
|                                                              |  | Shares       |   |                    | Amount |   | Capital     |   |        | Deficit                         |  |   | Loss                |   |  | Equity |     
|                                                              |  |              |   |                    |        |  
|Balance at March 31, 2009                                     |  | 16,104,454   |   |                    | $      | 2 |             | $ | 89,372 |                                 |  | $ | (66,452             | ) |  | $      | (979 | ) |  | $ | 21,943  |  
|                                                              |  |              |   |                    |        |  
|Issuance of common stock for option and warrant exercises     |  | 324,716      |   |                    |        |  |             |   | 243    |                                 |  |   |                    |   |  |        |     |   |  |   | 243     |  
|Net restricted stock awards issued and vested                 |  | 457,198      |   |                    |        |  |             |   | (507   | )                               |  |   |                    |   |  |        |     |   |  |   | (507    | )
|Vesting of early exercise stock options                       |  | 173,307      |   |                    |        |  |             |   | 40     |                                 |  |   |                    |   |  |        |      |   |  |   | 40      |  
|Issuance of common stock for Board of Director fees           |  | 94,849       |   |                    |        |  |             |   | 217    |                                 |  |   |                    |   |  |        |     |   |  |   | 217     |  
|Issuance of common stock for the employee stock purchase plan |  | 126,537      |   |                    |        |  |             |   | 160    |                                 |  |   |                    |   |  |        |     |   |  |   | 160     |  
|                                                              |  |              |   |                    |        |  
|Repurchase and retirement of common stock                     |  | (1,154,316   | ) |                    |        |  |             |   | (2,452 | )                               |  |   |                     |   |  |        |      |   |  |   | (2,452  | )
|                                                              |  |              |   |                    |        |  
|Issuance of common stock for bonuses                          |  | 246,643      |   |                    |        |  |             |   | 692    |                                 |  |   |                     |   |  |        |      |   |  |   | 692     |  
|Stock-based compensation expense                              |  |             |   |                    |        |  |             |   | 4,652  |                                 |  |   |                    |   |  |        |     |   |  |   | 4,652   |  
|Comprehensive loss:                                           |  |              |   |                    |        |  |             |   |        |                                 |  |   |                     |   |  |        |      |   |  |   |         |  
|Cumulative translation adjustment                             |  |             |   |                    |        |  |             |   |       |                                 |  |   |                     |   |  |        | 304  |   |  |   | 304     |  
|Net loss                                                      |  |             |   |                    |        |  |             |   |       |                                 |  |   | (13,769             | ) |  |        |     |   |  |   | (13,769 | )
|                                                              |  |              |   |                    |        |   |             |   |        |                                 |  |   |                     |   |  |        |      |   |  |   |         |  
|Comprehensive loss                                            |  |             |   |                    |        |  |             |   |       |                                 |  |   |                    |   |  |        |     |   |  |   | (13,465 | )
|                                                              |  |              |   |                    |        |   |             |   |        |                                 |  |   |                     |   |  |        |      |   |  |   |         |  
|Balance at December 31, 2009                                  |  | 16,373,388   |   |                    | $      | 2 |             | $ | 92,417 |                                 |  | $ | (80,221             | ) |  | $      | (675 | ) |  | $ | 11,523  |  
|                                                              |  |              |   |                    |        |   |             |   |        |                                 |  |   |                     |   |  |        |      |   |  |   |         |  



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SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                               |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Nine months endedDecember 31, |        
|                                                                                          |  | 2009                          |         |   | 2008 |  
|                                                                                          |  | (unaudited)                   |        
|Cash flows from operating activities:                                                     |  |                               |         |  
|                                                                                          |  |                              
|Net loss                                                                                  |  | $                             | (13,769 | ) |      | $ | (17,628 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                               |         |   |      |   |         |  
|Depreciation and amortization of property, equipment and software                         |  |                               | 1,317   |   |      |   | 926     |  
|Amortization of intangible assets                                                         |  |                               | 3,526   |   |      |   | 2,513   |  
|Stock-based compensation                                                                  |  |                               | 4,652   |   |      |   | 6,142   |  
|Board of Directors fees paid in common stock                                              |  |                               | 217     |   |      |   | 278     |  
|Consulting fees paid in common stock                                                      |  |                               |        |   |      |   | 250     |  
|Increase (reduction) in provision for doubtful accounts                                   |  |                               | 121     |   |      |   | (132    | )
|Loss on sale or disposal of property, equipment, and software                             |  |                               | 14      |   |      |   |        |  
|Changes in operating assets and liabilities:                                              |  |                               |         |   |      |   |         |  
|(Increase) decrease in:                                                                   |  |                               |         |   |      |   |         |  
|Accounts receivable                                                                       |  |                               | (2,105  | ) |      |   | (1,440  | )
|Prepaid expenses and other current assets                                                 |  |                               | (69     | ) |      |   | 10      |  
|Other assets                                                                              |  |                               | 298     |   |      |   | (538    | )
|Increase (decrease) in:                                                                   |  |                               |         |   |      |   |         |  
|Accounts payable                                                                          |  |                               | 2,093   |   |      |   | 3       |  
|Accrued expense and other current liabilities                                             |  |                               | 777     |   |      |   | (120    | )
|Other long-term liabilities                                                               |  |                               | (53     | ) |      |   | (8      | )
|Deferred revenue                                                                          |  |                               | 2,894   |   |      |   | 2,940   |  
|Deferred tax liabilities                                                                  |  |                               | 63      |   |      |   |        |  
|                                                                                          |  |                               |         |   |      |   |         |  
|Net cash used in operating activities                                                     |  |                               | (24     | ) |      |   | (6,804  | )
|                                                                                          |  |                               |         |   |      |   |         |  
|                                                                                          |  |                              
|Cash flows from investing activities:                                                     |  |                               |         |   |      |   |         |  
|Cash paid for acquisition of business                                                     |  |                               | (121    | ) |      |   | (12,661 | )
|Cash paid for acquisition of data                                                         |  |                               | (39     | ) |      |   | (23     | )
|Cash paid for other intangible assets                                                     |  |                               | (417    | ) |      |   | (9      | )
|Increase in restricted cash                                                               |  |                               | (1      | ) |      |   | (383    | )
|Purchases of property, equipment and software                                             |  |                               | (162    | ) |      |   | (1,533  | )
|Proceeds on sale of property, equipment, and software                                     |  |                               | 23      |   |      |   |        |  
|Capitalization of software development costs                                              |  |                               | (219    | ) |      |   | (97     | )
|Net decrease (increase) in assets held to satisfy client funds obligations                |  |                               | 2,576   |   |      |   | (7,509  | )
|                                                                                          |  |                               |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                       |  |                               | 1,640   |   |      |   | (22,215 | )
|                                                                                          |  |                               |         |   |      |   |         |  
|                                                                                          |  |                              
|Cash flows from financing activities:                                                     |  |                               |         |   |      |   |         |  
|Proceeds from revolving credit facility                                                   |  |                               | 13,475  |   |      |   | 7,300   |  
|Repayments of revolving line of credit and note payable                                   |  |                               | (19,277 | ) |      |   | (129    | )
|Proceeds from exercise of common stock options and warrants                               |  |                               | 243     |   |      |   | 212     |  
|Repurchase of unvested exercised stock options                                            |  |                               | (30     | ) |      |   | (32     | )
|Repurchase and retirement of common and restricted stock                                  |  |                               | (2,965  | ) |      |   | (38     | )
|Net (decrease) increase in client funds obligations                                       |  |                               | (2,576  | ) |      |   | 7,509   |  
|                                                                                          |  |                               |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                       |  |                               | (11,130 | ) |      |   | 14,822  |  
|                                                                                          |  |                               |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                               | (346    | ) |      |   | (56     | )
|                                                                                          |  |                               |         |   |      |   |         |  
|                                                                                          |  |                              
|Net decrease in cash and cash equivalents                                                 |  |                               | (9,860  | ) |      |   | (14,253 | )
|Cash and cash equivalents, beginning of year                                              |  |                               | 21,085  |   |      |   | 37,727  |  
|                                                                                          |  |                               |         |   |      |   |         |  
|Cash and cash equivalents, end of year                                                    |  | $                             | 11,225  |   |      | $ | 23,474  |  
|                                                                                          |  |                               |         |   |      |   |         |  



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Salary.com, Inc. (the Company) is a leading provider of on-demand talent management, payroll and compensation solutions in the human capital software-as-a-service (SaaS) market. The Companys software, services
and proprietary content help businesses and individuals manage pay and performance, as well as automate, streamline and optimize critical talent management processes. The Companys products include: CompAnalyst ® , a suite of on-demand compensation management applications that integrates the Companys data, third-party
survey data and a customers own pay data with a complete analytics offering; TalentManager ® , the
Companys employee lifecycle performance management software suite which helps businesses automate performance reviews, streamline compensation planning, perform succession planning, and link employee pay to performance; and IPAS ® , a global compensation technology survey with coverage of technology jobs from clerk to chief executive officer in
more than 80 countries. The Company also offers one of the largest libraries of leadership and job-specific competencies and a leading job-competency model to manage competencies by position. The Company was incorporated in Delaware in 1999 and its
principal operations are located in Needham, Massachusetts. Since December of 2006, the Company has operated a facility in Shanghai, China, primarily for research and development activities. In August 2008, the Company acquired Infobasis Limited,
now known as Salary.com Limited, a competency-based, learning and development software company, located in Abingdon, United Kingdom. On December 17, 2008, the Company acquired Genesys Software Systems, Inc. (Genesys), a leading provider of
on-demand HRMS, benefits and payroll services. 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. The Company has evaluated all subsequent events through the date the financial statements were issued on February 16, 2010 and it is not aware of any subsequent events
which would require recognition or disclosure in the financial statements.

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 the General Principles Topic
of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 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, 2009.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (US GAAP) 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, goodwill and intangible assets,
acquisition accounting, income taxes, allowance for doubtful accounts, stock-based compensation and capitalization of software development costs. 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.



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Principles of Consolidation

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

Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Note 2 to the
consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on June 29, 2009, with the exception of net loss attributable to common stockholders per
share as noted below.

Net Loss Attributable to Common Stockholders per Share

Net loss attributable to common stockholders per share is presented in accordance with the Earnings per Share Topic of FASB ASC, 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 unless the effect is antidilutive.

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



|                                                                                                  |  |              |  |          
|------------------------------------------------------------------------------------------------- |  | ------------ |  | ---------
|                                                                                                  |  | December 31,
|                                                                                                  |  | 2009         |  | 2008     
|                                                                                                  |  | (unaudited) 
|                                                                                                  |  |             
|Options to purchase common stock                                                                  |  | 1,337,639    |  | 2,038,541
|Warrants to purchase common stock                                                                 |  | 53,612       |  | 53,612   
|Restricted stock awards                                                                           |  | 2,000,084    |  | 2,096,399
|                                                                                                  |  |              |  |          
|Total options, warrants, and restricted stock awards exercisable or convertible into common stock |  | 3,391,335    |  | 4,188,552
|                                                                                                  |  |              |  |          

If the outstanding options and warrants 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.



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As required by the Earnings per Share Topic of FASB ASC, the Company adopted literature
in April 2009 which states that instruments granted in share-based payment transactions that met a certain criteria are considered to be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method described in the Earnings per Share Topic. The Company determined that the restricted stock outstanding that is related to the early exercise of stock options should be included in the
computation of earnings per share. The following table sets forth the impact in earnings per share for the three months ended December 31, 2009 and 2008, respectively:



|                                                                        |  |                                                     |        |   |                   |        |                 |   |       |          |  |   |        |   |                 |        |  |   |       |  
|----------------------------------------------------------------------- |  | --------------------------------------------------- | ------ | - | ----------------- | ------ | --------------- | - | ----- | -------- |  | - | ------ | - | --------------- | ------ |  | - | ----- | -
|                                                                        |  | Three months ended                                  |       
|                                                                        |  | December 31, 2009                                   |        |   | December 31, 2008 |       
|                                                                        |  | (unaudited, in thousands except for per share data) |       
|                                                                        |  | Net Loss                                            |        |   | Shares            |        | Per ShareAmount |   |       | Net Loss |  |   | Shares |   | Per ShareAmount |       
|                                                                        |  |                                                     |        |   |                   |       
|Reported net loss per share - basic and diluted                         |  | $                                                   | (3,960 | ) |                   | 16,082 |                 | $ | (0.25 | )        |  | $ | (5,156 | ) |                 | 15,643 |  | $ | (0.33 | )
|Weighted-average restricted stock included in computation upon adoption |  |                                                     |       |   |                   | 430    |                 |   | 0.01  |          |  |   |       |   |                 | 958    |  |   | 0.02  |  
|                                                                        |  |                                                     |        |   |                   |        |                 |   |       |          |  |   |        |   |                 |        |  |   |       |  
|Adjusted net loss per share - basic and diluted                         |  | $                                                   | (3,960 | ) |                   | 16,512 |                 | $ | (0.24 | )        |  | $ | (5,156 | ) |                 | 16,601 |  | $ | (0.31 | )
|                                                                        |  |                                                     |        |   |                   |        |                 |   |       |          |  |   |        |   |                 |        |  |   |       |  

The following table sets forth the impact in earnings per share for the nine months
ended December 31, 2009 and 2008, respectively:



|                                                                        |  |                                                     |         |   |                   |        |                 |   |       |          |  |   |         |   |                 |        |  |   |       |  
|----------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | - | ----------------- | ------ | --------------- | - | ----- | -------- |  | - | ------- | - | --------------- | ------ |  | - | ----- | -
|                                                                        |  | Nine months ended                                   |        
|                                                                        |  | December 31, 2009                                   |         |   | December 31, 2008 |       
|                                                                        |  | (unaudited, in thousands except for per share data) |        
|                                                                        |  | Net Loss                                            |         |   | Shares            |        | Per ShareAmount |   |       | Net Loss |  |   | Shares  |   | Per ShareAmount |       
|                                                                        |  |                                                     |         |   |                   |       
|Reported net loss per share - basic and diluted                         |  | $                                                   | (13,769 | ) |                   | 15,778 |                 | $ | (0.87 | )        |  | $ | (17,628 | ) |                 | 15,130 |  | $ | (1.17 | )
|Weighted-average restricted stock included in computation upon adoption |  |                                                     |        |   |                   | 535    |                 |   | 0.03  |          |  |   |        |   |                 | 1,099  |  |   | 0.08  |  
|                                                                        |  |                                                     |         |   |                   |        |                 |   |       |          |  |   |         |   |                 |        |  |   |       |  
|Adjusted net loss per share - basic and diluted                         |  | $                                                   | (13,769 | ) |                   | 16,313 |                 | $ | (0.84 | )        |  | $ | (17,628 | ) |                 | 16,229 |  | $ | (1.09 | )
|                                                                        |  |                                                     |         |   |                   |        |                 |   |       |          |  |   |         |   |                 |        |  |   |       |  

Fair Value of Financial Instruments

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

Recent Accounting
Pronouncements

On April 1, 2009, the Company adopted new accounting guidance for business combinations as issued
by the Financial Accounting Standards Board (FASB). The new accounting guidance establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from previous guidance resulting from this new guidance include the expansion of the definitions of a
business and a business combination. For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill,
generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and; for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related
transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. The new accounting guidance also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the
business combination. The adoption of this accounting guidance did not have a material impact on the Companys consolidated financial statements.



9



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On April 1, 2009, the Company adopted new accounting guidance as issued by the FASB
which delayed the effective date of fair value accounting for all nonfinancial assets and nonfinancial liabilities by one year, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of this
accounting guidance did not have a material impact on the Companys consolidated financial statements.

On April 1,
2009, the Company adopted new accounting guidance for assets acquired and liabilities assumed in a business combination as issued by the FASB. The new guidance amends the provisions previously issued by the FASB related to the initial recognition
and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The new guidance eliminates the distinction between contractual and non-contractual contingencies,
including the initial recognition and measurement. The adoption of this accounting guidance did not have a material impact on the Companys consolidated financial statements.

On April 1, 2009, the Company adopted three related sets of accounting guidance as issued by the FASB. The accounting guidance sets
forth rules related to determining the fair value of financial assets and financial liabilities when the activity levels have significantly decreased in relation to the normal market, guidance related to the determination of other-than-temporary
impairments to include the intent and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment exists and interim disclosure requirements for the fair value of financial instruments. The adoption of
the three sets of accounting guidance did not have a material impact on the Companys consolidated financial statements.

On April 1, 2009, the Company adopted new accounting guidance for the determination of the useful life of intangible assets as issued by the FASB. The new guidance amends the factors that should be considered in developing the renewal
or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance also requires expanded disclosure regarding the determination of intangible asset useful lives. The adoption of this accounting guidance
did not have a material impact on the Companys consolidated financial statements.

On April 1, 2009, the Company
adopted new accounting guidance related to subsequent events as issued by the FASB. The new requirement establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available
to be issued. See Basis of Presentation included in Note 1  Summary of Significant Accounting Policies for the related disclosure. The adoption of this accounting guidance did not have a material impact on the
Companys consolidated financial statements.

On July 1, 2009, the Company adopted the new Accounting Standards
Codification (ASC) as issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC
did not have a material impact on the Companys consolidated financial statements.

In August 2009, the FASB issued new
accounting guidance related to measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value
utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation
technique that is consistent with the existing principles of the authoritative accounting guidance, such as an income approach or market approach. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The Companys adoption of this accounting guidance in the third quarter of fiscal
2010 did not have a material impact on the Companys consolidated financial statements.

In September 2009, the FASB
issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined,
companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method.



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SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal 2012. Early adoption is allowed. The Company is currently evaluating the impact
of this accounting guidance on the Companys consolidated financial statements. The Company expects this guidance may have a significant impact on the Companys revenue recognition policy and financial statements, however, the Company has
not determined the impact as of December 31, 2009.

In September 2009, the FASB issued new accounting guidance related to
certain revenue arrangements that include software elements. Previously, companies that sold tangible products with more than incidental software were required to apply software revenue recognition guidance. This guidance often delayed
revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are essential to the functionality of the tangible product will be excluded from the software
revenue recognition guidance. The new guidance will include factors to help companies determine what is essential to the functionality. Software-enabled products will now be subject to other revenue guidance and will likely follow the
guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with earlier application permitted. If the Company elects earlier application and the first reporting period of adoption is not the first reporting period in the Companys fiscal year, the guidance must be applied through
retrospective application from the beginning of the Companys fiscal year and the Company must disclose the effect of the change to those previously reported periods. The Company is currently evaluating the impact of this accounting guidance on
the Companys consolidated financial statements. The Company expects this guidance may have a significant impact on the Companys revenue recognition policy and, to a lesser extent, the Companys financial statements, however, the
Company has not determined the impact as of December 31, 2009.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets as of December 31, 2009 and March 31, 2009, consist of the following:



|                                                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|----------------------------------------------------------- |  | ------------------------- | ------ | -------------- | - | -------- |  | ---- | ------ | ------------ | - | -------- |  | - | ----- |  | - | ------
|                                                            |  | (in thousands, unaudited)
|                                                            |  | December 31, 2009         |        | March 31, 2009
|                                                            |  |                           |        | Accumulated    |   | Carrying |  |      |        | Accumulated  |   | Carrying
|                                                            |  | Cost                      |        | Amortization   |   | Amount   |  | Cost |        | Amortization |   | Amount  
|Amortizable intangible assets:                              |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|Non-compete agreements (5 years)                            |  | $                         | 1,846  |                | $ | 1,303    |  | $    | 543    |              | $ | 1,826    |  | $ | 898   |  | $ | 928   
|Customer relationships (5-7 years)                          |  |                           | 9,258  |                |   | 3,327    |  |      | 5,931  |              |   | 9,059    |  |   | 2,090 |  |   | 6,969 
|Developed technology (5-7 years)                            |  |                           | 5,602  |                |   | 946      |  |      | 4,656  |              |   | 5,094    |  |   | 297   |  |   | 4,797 
|Other intangible assets (5-18 years)                        |  |                           | 367    |                |   | 197      |  |      | 170    |              |   | 326      |  |   | 164   |  |   | 162   
|Trade name (5-7 years)                                      |  |                           | 1,387  |                |   | 227      |  |      | 1,160  |              |   | 750      |  |   | 43    |  |   | 707   
|Data acquisition costs (1-3 years)                          |  |                           | 4,683  |                |   | 3,143    |  |      | 1,540  |              |   | 4,643    |  |   | 2,094 |  |   | 2,549 
|                                                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|Total amortizable intabgible assets                         |  |                           | 23,143 |                | $ | 9,143    |  |      | 14,000 |              |   | 21,698   |  | $ | 5,586 |  |   | 16,112
|                                                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|Unamortizable intangible assets:                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|Goodwill                                                    |  |                           | 17,176 |                |   |          |  |      | 17,176 |              |   | 14,734   |  |   |       |  |   | 14,734
|Other indefinite lived intangible assets                    |  |                           | 935    |                |   |          |  |      | 935    |              |   | 1,504    |  |   |       |  |   | 1,504 
|                                                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|Total goodwill and other indefinite lived intangible assets |  |                           | 18,111 |                |   |          |  |      | 18,111 |              |   | 16,238   |  |   |       |  |   | 16,238
|                                                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       
|Total intangible assets                                     |  | $                         | 41,254 |                |   |          |  | $    | 32,111 |              | $ | 37,936   |  |   |       |  | $ | 32,350
|                                                            |  |                           |        |                |   |          |  |      |        |              |   |          |  |   |       |  |   |       

The Companys indefinite-lived acquired intangible assets consist of trade names
and domain names. 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 months ended December 31, 2009 and 2008 was approximately $1,191,000 and $898,000, respectively, of which $427,000 and $404,000, respectively, is included in cost of revenues. Acquired intangible asset amortization for the nine



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



months ended December 31, 2009 and 2008 was approximately $3,526,000 and $2,513,000, respectively, of which $1,269,000 and $1,226,000, respectively, is included in cost of revenues.
Amortization for the data acquisition costs begins once the acquired data is integrated into the related product and that product is available to the Companys customers.

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



|     |  |                |      
|---- |  | -------------- | -----
|     |  | Year ending   
|     |  | March 31,     
|     |  | (in thousands)
|     | 
|2010 |  | $              | 4,703
|2011 |  |                | 3,938
|2012 |  |                | 2,959
|2013 |  |                | 2,065
|2014 |  |                | 1,540

The changes in the
carrying amount of goodwill for the nine months ended December 31, 2009 are as follows:



|                                                          |  |                |       
|--------------------------------------------------------- |  | -------------- | ------
|                                                          |  | (in thousands)
|                                                          | 
|Balance as of March 31, 2009                              |  | $              | 14,734
|Increase to goodwill from acquisitions                    |  |                | 47    
|Increase to goodwill from contingent consideration earned |  |                | 2,086 
|Increase to goodwill due to foreign exchange              |  |                | 309   
|                                                          |  |                |       
|Balance as of December 31, 2009                           |  | $              | 17,176
|                                                          |  |                |       

In December 2009, the Company lost a significant, but
not material, payroll customer as a result of a breach of contract by the customer. As a result of the breach, the Company terminated its agreement with the customer which the Company believes constituted a triggering event in accordance with the
Intangibles-Goodwill and Other Topic of FASB ASC. This event led the Company to revise its expectations of future invoicing, revenues and operating profit margins for the payroll/HRMS reporting unit. As a result of the factors described above, in
accordance with the Intangibles-Goodwill and Other Topic of FASB ASC, the Company, with the assistance of a third-party independent appraiser, re-evaluated the goodwill associated with the payroll/HRMS reporting unit for impairment as of December
31, 2009. The Company used a combination of an income approach and a market approach to determine the fair value of the reporting unit. As a result of this goodwill impairment testing, the Company determined that the reporting units goodwill
was not impaired.

The Company first calculated the fair value of the reporting unit using both discounted cash flows and
guideline company methodologies. The Company then performed Step 1 and compared the weighted average fair value of the reporting unit of accounting to its carrying value as of December 31, 2009.

The process of evaluating goodwill for impairment requires several judgments and assumptions to be made to determine the fair value of the
reporting unit, including the method used to determine fair value, discount rates, expected levels of cash flows, revenues and earnings, and the selection of comparable companies used to develop market based assumptions. The Company employed an
eight year discounted cash flow methodology to arrive at the fair value of the reporting unit. In calculating the fair value, the Company derived the projected eight year cash flows for the reporting unit. This process starts with the projected cash
flows of the reporting unit and then the cash flows are discounted. The Company also employed a guideline company method which indicates value for the reporting unit by comparison to similar publicly traded companies. The Company identified a set of
comparable companies to derive market multiples for the latest twelve months and next fiscal year revenue. The revenue multiples for the reporting unit were based on size, profitability, and comparability of the reporting units products as
services relative to those of the selected guideline companies. From the enterprise values determined using these revenue multiples, the Company applied a control premium in order to estimate the equity value of the reporting unit.

The discounted cash flows used to estimate the fair value was based on assumptions regarding the reporting units estimated projected
future cash flows and estimated weighted-average cost of capital that a market participant would use in evaluating the reporting unit in a purchase transaction. The estimated weighted-average cost of capital was based on the risk-free interest rate
and other factors such as equity risk premiums and the ratio of total debt to equity capital. In performing the impairment test, the Company took steps to ensure appropriate and reasonable cash flow projections and assumptions were used. The rate
used to discount the estimated future cash flows for the reporting unit was 25%.



The Companys projections for the next eight years included increased revenue and operating expenses, in line with the expected revenue growth over the period based on current market and economic
conditions and the Companys historical and expected knowledge of the reporting unit. The Company projected growth for the reporting unit ranging from 5% to 30% annually. The Company estimated the operating expenses based on a rate consistent
with the current experience for the reporting unit and estimated revenue growth over the next eight years. The failure of this reporting unit to execute as forecasted over the next eight years could have an adverse affect on the Companys
impairment tests. Future adverse changes in market conditions or poor operating results of the reporting unit could result in losses or an inability to recover the carrying value of the investments in the reporting unit, thereby possibly requiring
an impairment charge in the future.

The Company determined that based on Step 1 of the Companys goodwill
test, the fair value of the reporting unit exceeded its carrying value as of December 31, 2009 by approximately 20%.

In
conjunction with the testing noted above, the Company also re-evaluated the long-lived assets associated within this reporting unit in accordance with the Property, Plant and Equipment Topic of FASB ASC. The Company used an income approach to
determine if the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets exceeded the carrying values of those assets. The Company determined that based on its analysis these assets were not impaired
as of December 31, 2009.

4. ACQUISITION OF BUSINESS

Genesys Software Systems, Inc.

On December 17, 2008, the
Company acquired all issued and outstanding shares of Genesys Software Systems, Inc. (Genesys), a leading provider of on-demand and licensed human resources management systems and payroll solutions. Under the terms of the agreement, the
Company paid the former owners of Genesys $6.0 million, net of



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cash acquired and converted approximately $1.1 million of options to purchase Genesys common stock into options to purchase approximately 519,492 shares of the Companys common stock. In
addition, the Genesys shareholders and option holders are eligible to earn additional consideration of up to $2.0 million which would be paid in cash or shares of the Companys common stock, at the Companys option, based on Genesys
meeting certain performance targets during the eighteen months after the closing of the acquisition. As of December 31, 2009, the $2.0 million of additional consideration had been earned and recorded as goodwill. Such amounts are due to be
settled in June 2010 at the Companys option in either cash or stock. The purchase price allocated for financial accounting purposes was approximately $9.4 million, which includes $1.1 million of options to purchase the Companys common
stock and approximately $1.9 million of net liabilities assumed. Accordingly, the purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. The Company allocated $4.1 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 Genesys will be complementary to the Companys
on-demand software suites. The results of operations include the impact of this acquisition since December 17, 2008.

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



|                                                     |  |        |        |  
|---------------------------------------------------- |  | ------ | ------ | -
|                                                     |  | Amount |       
|                                                     | 
|Assets acquired, primarily accounts receivable       |  | $      | 5,299  |  
|Assumed liabilities                                  |  |        | (7,154 | )
|                                                     |  |        |        |  
|Net liabilities acquired                             |  |        | (1,855 | )
|                                                     |  |        |        |  
|                                                     | 
|Non-compete agreement (amortization period 5 years)  |  |        | 60     |  
|Customer relationships (amortization period 7 years) |  |        | 2,400  |  
|Developed technology (amortization period 7 years)   |  |        | 4,000  |  
|Trade name (amortization period 5 years)             |  |        | 750    |  
|Goodwill (not deductible for tax purposes)           |  |        | 4,077  |  
|                                                     |  |        |        |  
|Total purchase price                                 |  | $      | 9,432  |  
|                                                     |  |        |        |  

5. STOCK-BASED COMPENSATION

Stock-based compensation by line item in the statement of operations for the three and nine months ended December 31, 2009 and 2008 was
as follows:



|                           |  |                                |       |                               |   |       |  |      |       |  |   |      
|-------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                           |  | Three months endedDecember 31, |       | Nine months endedDecember 31,
|                           |  |                               
|                           |  | 2009                           |       | 2008                          |   | 2009  |  | 2008
|                           |  | (in thousands)                 |       | (in thousands)               
|                           |  |                                |       |                              
|Cost of revenues           |  | $                              | 200   |                               | $ | 298   |  | $    | 630   |  | $ | 1,105
|Research and development   |  |                                | 288   |                               |   | 282   |  |      | 826   |  |   | 1,070
|Marketing and sales        |  |                                | 537   |                               |   | 574   |  |      | 1,705 |  |   | 2,011
|General and administrative |  |                                | 646   |                               |   | 523   |  |      | 1,491 |  |   | 1,956
|                           |  |                                |       |                               |   |       |  |      |       |  |   |      
|                           |  | $                              | 1,671 |                               | $ | 1,677 |  | $    | 4,652 |  | $ | 6,142
|                           |  |                                |       |                               |   |       |  |      |       |  |   |      



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Stock Options

Stock option activity, under all plans, during the nine months ended December 31, 2009 and 2008 was as follows:



|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     
|--------------------------------- |  | ---------------------------------- | - | ---------------------------------- | ---------------------------- | ---- | ---------------- | --------- | - | ---------------------------- | - | ----
|                                  |  | Nine Months EndedDecember 31, 2009 |   | Nine Months EndedDecember 31, 2008
|                                  |  | Number ofOptions                   |   |                                    | WeightedAverageExercisePrice |      | Number ofOptions |           |   | WeightedAverageExercisePrice
|Outstanding - beginning of period |  | 1,886,042                          |   |                                    | $                            | 5.40 |                  | 1,645,699 |   |                              | $ | 6.74
|Granted                           |  |                                   |   |                                    |                              |      |                  |          |   |                              |   |     
|Assumed in acquisition            |  |                                   |   |                                    |                              |      |                  | 519,492   |   |                              |   | 0.73
|Exercised                         |  | (321,745                           | ) |                                    |                              | 0.73 |                  | (28,676   | ) |                              |   | 0.33
|Canceled                          |  | (226,658                           | ) |                                    |                              | 7.42 |                  | (97,974   | ) |                              |   | 6.37
|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     
|Outstanding - end of period       |  | 1,337,639                          |   |                                    | $                            | 6.19 |                  | 2,038,541 |   |                              | $ | 5.32
|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     
|                                  |  |                                    |   |                                   
|Exercisable - end of period       |  | 916,516                            |   |                                    | $                            | 5.63 |                  | 1,259,375 |   |                              | $ | 4.47
|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     

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 a subscription payable of $92,000 as of December 31, 2009, which is included in Accrued expenses and other current
liabilities. Upon vesting of the restricted shares, the subscription payable is relieved and recorded in equity. As of December 31, 2009 and 2008, there were 403,520 and 857,020 restricted shares outstanding, respectively, which resulted
from the exercise of unvested stock options.

As of December 31, 2009, there was approximately $1.8 million of total
unrecognized compensation expense related to stock options. That cost is expected to be recognized over a weighted average period of 2.4 years.

Compensation expense related to stock options included in the statement of operations for the three and nine months ended December 31, 2009 was approximately $285,000 and $887,000, respectively.
Compensation expense related to stock options included in the statement of operations for the three and nine months ended December 31, 2008 was approximately $379,000 and $1,237,000, 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. The Compensation  Stock Compensation Topic of FASB ASC requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.

Restricted Stock Awards

On January 12, 2007, the Board of Directors of the Company approved forms of stock option agreements and restricted stock
agreements for use under the Companys 2007 Stock Option and Incentive Plan (the 2007 Plan) pursuant to which the Company has granted stock options and restricted stock awards. On May 5, 2008, the Board of Directors of the
Company approved a form of deferred stock award agreement for use under the 2007 Plan pursuant to which the Company has granted deferred stock awards. The shares of restricted stock and deferred stock



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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 and deferred stock awards is amortized over the applicable vesting period, generally 3 years, using the straight-line method. Unrecognized compensation expense related to restricted stock and deferred
stock awards was $6.2 million as of December 31, 2009. This cost is expected to be recognized over a weighted-average period of 1.4 years. During the nine months ended December 31, 2009, the Company issued common stock with a value of $1.1
million as payment for fiscal year 2010 and 2009 employee bonuses. During the nine months ended December 31, 2008, the Company issued common stock with a value of $1.7 million as payment for fiscal year 2008 employee bonuses and other incentive
programs. The expense for these bonus and incentive programs is classified as payroll compensation in the respective period in which it was earned.

The following table presents a summary of the restricted stock and deferred stock award activity for the three and six months ended December 31, 2009 and 2008.



|                                       |  |                                    |   |                                    |                                    |      |        |           |   |                                    |   |      
|-------------------------------------- |  | ---------------------------------- | - | ---------------------------------- | ---------------------------------- | ---- | ------ | --------- | - | ---------------------------------- | - | -----
|                                       |  | Nine months endedDecember 31, 2009 |   | Nine months endedDecember 31, 2008
|                                       |  | Shares                             |   |                                    | WeightedAverageGrantDate FairValue |      | Shares |           |   | WeightedAverageGrantDate FairValue
|Unvested balance - beginning of period |  | 2,508,915                          |   |                                    | $                                  | 5.48 |        | 1,565,143 |   |                                    | $ | 10.86
|Awarded                                |  | 915,482                            |   |                                    |                                    | 2.89 |        | 2,084,546 |   |                                    |   | 4.81 
|Vested                                 |  | (1,230,155                         | ) |                                    |                                    | 4.89 |        | (995,460  | ) |                                    |   | 6.61 
|Canceled                               |  | (194,158                           | ) |                                    |                                    | 4.78 |        | (557,830  | ) |                                    |   | 9.05 
|                                       |  |                                    |   |                                    |                                    |      |        |           |   |                                    |   |      
|Unvested balance - end of period       |  | 2,000,084                          |   |                                    | $                                  | 4.72 |        | 2,096,399 |   |                                    | $ | 7.34 
|                                       |  |                                    |   |                                    |                                    |      |        |           |   |                                    |   |      

The Company recorded compensation expense of
approximately $1,365,000 and $3,701,000 related to restricted stock and deferred stock awards during the three and nine months ended December 31, 2009, respectively. The Company recorded compensation expense of approximately $1,272,000 and
$4,827,000 related to restricted stock and deferred stock awards during the three and nine months ended December 31, 2008, respectively.

Shares Available for Grant

The following is a summary of all stock
option and restricted stock award activity and shares available for grant under the 2007 Plan and for the nine months ended December 31, 2009 and 2008.



|                                           |  |                   |   |  |            |  
|------------------------------------------ |  | ----------------- | - |  | ---------- | -
|                                           |  | Nine Months Ended |  
|                                           |  | December 31,      |  
|Shares available for grant                 |  | 2009              |   |  | 2008       |  
|                                           |  |                  
|Balance - beginning of period              |  | 2,483,409         |   |  | 1,567,183  |  
|Increase in shares available               |  |                  |   |  | 2,800,000  |  
|Restricted stock awards granted            |  | (915,482          | ) |  | (2,084,546 | )
|Stock options canceled/forfeited           |  | 331,672           |   |  | 239,913    |  
|Restricted stock awards canceled/forfeited |  | 194,158           |   |  | 557,830    |  
|                                           |  |                   |   |  |            |  
|Balance - end of period                    |  | 2,093,757         |   |  | 3,080,380  |  
|                                           |  |                   |   |  |            |  



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Distribution and Dilutive Effect of Options and Restricted Shares



|                                                             |  |                               |   |  |            |  
|------------------------------------------------------------ |  | ----------------------------- | - |  | ---------- | -
|                                                             |  | Nine Months EndedDecember 31, |  
|                                                             |  | 2009                          |   |  | 2008       |  
|                                                             |  |                              
|Shares of common stock outstanding                           |  | 16,373,888                    |   |  | 15,835,857 |  
|                                                             |  |                              
|Restricted stock awards granted                              |  | 915,482                       |   |  | 2,084,546  |  
|Stock options canceled/forfeited                             |  | (331,672                      | ) |  | (239,913   | )
|Restricted stock awards canceled/forfeited                   |  | (194,158                      | ) |  | (557,830   | )
|                                                             |  |                               |   |  |            |  
|Net options/restricted stock granted                         |  | 389,652                       |   |  | 1,286,803  |  
|                                                             |  |                               |   |  |            |  
|Grant dilution (1)                                           |  | 2.4                           | % |  | 8.1        | %
|                                                             |  |                              
|Stock options exercised                                      |  | 321,745                       |   |  | 28,676     |  
|Restricted stock awards vested                               |  | 1,230,155                     |   |  | 995,460    |  
|                                                             |  |                               |   |  |            |  
|Total stock options exercised/restricted stock awards vested |  | 1,551,900                     |   |  | 1,024,136  |  
|                                                             |  |                               |   |  |            |  
|Exercised dilution (2)                                       |  | 9.5                           | % |  | 6.5        | %



|(1) | The percentage for grant dilution is computed based on net options and restricted stock awards granted as a percentage of shares of common stock outstanding.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The percentage for exercise dilution is computed based on net options exercised as a percentage of shares of common stock outstanding.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

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 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. The Company recorded compensation expense of approximately $21,000 and $65,000
related to shares issued under our employee stock purchase plan for the three and nine months ended December 31, 2009, respectively. The Company recorded compensation expense of approximately $26,000 and $78,000 related to shares issued under
our employee stock purchase plan for the three and nine months ended December 31, 2008, respectively.

Warrants

As of December 31, 2009, the Company had outstanding warrants to purchase 53,612 shares of common stock at
exercise prices ranging from $0.09 to $6.61 per share.



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|                                  |  |                                    |  |                              |     
|--------------------------------- |  | ---------------------------------- |  | ---------------------------- | ----
|                                  |  | Nine Months EndedDecember 31, 2009
|                                  |  | Number ofWarrants                  |  | WeightedAverageExercisePrice
|                                  |  |                                   
|Outstanding - beginning of period |  | 53,612                             |  | $                            | 1.74
|Granted                           |  |                                   |  |                              |     
|Exercised                         |  |                                   |  |                              |     
|Canceled                          |  |                                   |  |                              |     
|                                  |  |                                    |  |                              |     
|Outstanding - end of period       |  | 53,612                             |  | $                            | 1.74
|                                  |  |                                    |  |                              |     
|Exercisable - end of period       |  | 53,612                             |  | $                            | 1.74
|                                  |  |                                    |  |                              |     

Stock Repurchase Program

On December 15, 2008, the Board of Directors authorized the repurchase by the Company of up to $2.5 million of its common stock from
time to time at prevailing prices in the open market or in negotiated transactions off the market. On April 17, 2009, the Companys Board of Directors increased the size of its share repurchase program from $2.5 million to $7.5 million.
During the three and nine months ended December 31, 2009, the Company repurchased and retired 113,262 and 1,154,316 shares, respectively, with a total value of approximately $0.3 million and $2.5 million, respectively, pursuant to this
repurchase program. Since the inception of the repurchase program through December 31, 2009, 1,348,140 shares with a total value of approximately $2.8 million have been repurchased and retired by the Company.

6. COMMITMENTS AND CONTINGENCIES

Vendor Financing Agreement

In June 2008, the Company entered into an agreement with a vendor to finance
the purchase of perpetual software licenses in the amount of approximately $738,000. The Company will make quarterly payments of approximately $64,000 for a term of 36 months.

Equipment Leaseline

On April 17, 2008, the Company entered into a leaseline agreement (Leaseline #4) with a maximum available commitment of $350,000. The lease term began on July 1, 2008 and runs for a term of 36
months. As of December 31, 2009, the Company had leased approximately $173,000 of equipment under the terms of this leaseline. On July 24, 2008, the Company entered into a leaseline agreement (Leaseline #5) with a maximum available
commitment of $200,000. The lease term began on October 1, 2008 and runs for a term of 36 months. In addition, at December 31, 2009, the Company had approximately $1.1 million in a restricted cash account as collateral for equipment with a
value of approximately $1.1 million in accordance with its master lease agreements.



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Litigation and Claims

From time to time the Company is subject to legal proceedings and claims in the ordinary course of business. In December 2009, the Company
lost a significant, but not material, payroll customer as a result of a breach of contract by the customer. As a result of the breach, the Company terminated its agreement with the customer and has commenced litigation procedures in order to recover
certain amounts billed to the customer and uncollected as well as termination penalties. The Company has approximately $0.9 million of outstanding billings to the customer for services performed which have been reported in Accounts
receivable and Deferred revenue, current portion on the Consolidated Balance Sheet as of December 31, 2009. 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

The Company follows the provisions of the Income Taxes Topic of FASB ASC, which clarifies the accounting for uncertainty in
income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before being recognized as a benefit in the financial statements. The Income Taxes Topic of FASB ASC also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions.

The amount of unrecognized tax benefits as of December 31, 2009 was $118,000, which, if ultimately recognized, will reduce the Companys annual effective tax rate. The Company does not expect
any material change in unrecognized tax benefits within the next twelve 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, 2009, the Company has not accrued any interest and penalties for unrecognized tax benefits in its statement of operations.

As of December 31, 2009, the Company is subject to tax in the U.S. Federal, state and foreign jurisdictions. The Company is open to examination for tax years 2007 through 2009. As of
December 31, 2009, the Company had net operating loss carryforwards of approximately $35.0 million for state and $39.0 million federal tax purposes which had a full valuation allowance against them. 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. The Company is not currently under examination by U.S. Federal and state tax authorities or the foreign taxing authorities.

8. REVOLVING CREDIT FACILITY

On August 8, 2008, the Company entered into a modification of its existing credit facility with Silicon Valley Bank to modify certain of the financial covenants and extend the term of the agreement
to September 23, 2008. On September 17, 2008, the Company entered into a second modification of its credit facility to extend the term of the agreement to October 8, 2008. On October 8, 2008, the Company entered into a third
modification of its credit facility to extend the term of this credit facility for two years to October 8, 2010 and increased the line of credit from $5.0 million to $10.0 million. On March 16, 2009, the Company entered into a fourth
modification of its agreement, which added Genesys as a guarantor to the Companys obligations under the credit facility. On June 29, 2009, the Company entered into a fifth modification to its agreement which increased the interest rate
and certain fees payable, amended certain financial covenants, and increased the amount of stock the Company can repurchase under its repurchase plans. On October 15, 2009, the Company entered into a sixth modification to its agreement
decreasing the line of credit to $5.0 million, modifying the interest rate and amending certain financial covenants. Following the sixth modification, up to $5 million is available under this credit facility and the facility is collateralized by
substantially all of the Companys assets and expires on October 8, 2010. Up to $5 million of the line of credit may be used to secure letters of credit and cash management services, and up to $5 million of the line of credit may be
used in connection with foreign exchange forward contracts. The line of credit is subject to financial covenants that require the Company to maintain a ratio of assets to liabilities (net of deferred revenue) that is not less than 1.4 to 1. As of
December 31, 2009, there was $2.5 million outstanding under the credit facility and the Company was in compliance with its financial covenants.



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9. FUNDS HELD FOR CLIENTS AND CLIENT FUND OBLIGATIONS

Funds held for clients represent assets that are restricted for use solely for the purpose of satisfying the obligations to remit funds
relating to the Companys payroll and payroll tax filing services, which are classified as a current asset under the caption funds held for clients on the Consolidated Balance Sheets. Funds held for clients are invested in overnight money
market securities and had a balance of $10.4 million at December 31, 2009.

Client funds obligations represent the
Companys contractual obligations to remit funds to satisfy clients payroll and tax payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds
obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client funds obligations of $10.4 million as a current liability on the Consolidated Balance Sheet as of December 31,
2009. The amount of collected but not yet remitted funds for the Companys payroll and payroll tax filing and other services will vary significantly during the fiscal year.

The Company has reported the cash flows related to the clients funding on a net basis within net increase in assets held to
satisfy client funds obligations in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net
increase in client funds obligations in the financing section of the Statements of Consolidated Cash Flows.

10. RESTRUCTURING
CHARGES

On January 7, 2009, the Company implemented and completed a workforce reduction of approximately 100
employees, representing approximately sixteen percent (16%) of the Companys workforce. The Company implemented this workforce reduction in response to the current and anticipated macro-economic uncertainties. As a result of the workforce
reduction, the Company recorded restructuring charges of approximately $3.1 million in fiscal year 2009. These charges were comprised of $1.8 million in stock compensation charges associated with the accelerated vesting of unvested awards, $1.2
million in severance payments, and $0.1 million in various other costs. In addition to these restructuring charges and related payments, during the first quarter of fiscal 2010, the Company paid one-time severance benefits of approximately $0.1
million to former employees as a result of termination actions not directly associated with our January 7, 2009 workforce reduction.

During the nine months ended December 31, 2009, the Company recorded restructuring charges of approximately $0.2 million related to severance payments to six employees terminated by the Company.
During the fourth quarter of fiscal 2010, the Company anticipates an additional $0.3 million of restructuring charges.



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A summary of the accrued restructuring balance for the nine months ended
December 31, 2009 is as follows:



|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|--------------------------------------------------- |  | -------------- | ---- | - | ----------------- | - | ----- |  | - | ----- | - |  | - | ---- | -
|                                                    |  | (in thousands) |     
|                                                    |  | Severance      |      |   | StockCompensation |   | Other |  |   | Total |  
|                                                    |  |                |      |  
|Accrued restructuring balance at March 31, 2009     |  | $              | 268  |   |                   | $ |      |  | $ | 31    |   |  | $ | 299  |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|                                                    |  |                |      |  
|Cash payments                                       |  |                | (266 | ) |                   |   |      |  |   | (21   | ) |  |   | (287 | )
|Non-cash charges                                    |  |                |     |   |                   |   |      |  |   |      |   |  |   |     |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|                                                    |  |                |      |  
|Accrued restructuring balance at June 30, 2009      |  | $              | 2    |   |                   | $ |      |  | $ | 10    |   |  | $ | 12   |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|                                                    |  |                |      |  
|Cash payments                                       |  | $              | (112 | ) |                   | $ |      |  | $ | (10   | ) |  | $ | (122 | )
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|Non-cash charges                                    |  |                | 118  |   |                   |   |      |  |   |      |   |  |   | 118  |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|                                                    |  |                |      |  
|Accrued restructuring balance at September 30, 2009 |  | $              | 8    |   |                   | $ |      |  | $ |      |   |  | $ | 8    |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|                                                    |  |                |      |  
|Cash payments                                       |  | $              | (122 | ) |                   | $ |      |  | $ |      |   |  | $ | (122 | )
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|Non-cash charges                                    |  |                | 114  |   |                   |   |      |  |   |      |   |  |   | 114  |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  
|                                                    |  |                |      |  
|Accrued restructuring balance at December 31, 2009  |  | $              |     |   |                   | $ |      |  | $ |      |   |  | $ |     |  
|                                                    |  |                |      |   |                   |   |       |  |   |       |   |  |   |      |  



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SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



11. SEGMENT AND RELATED INFORMATION

The following tables summarize selected financial information of the Companys operations by geographic locations:

Revenues by geographic location consist of the following:



|                    |  |                                |        |                               |   |        |  |      |        |  |   |       
|------------------- |  | ------------------------------ | ------ | ----------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                    |  | Three months endedDecember 31, |        | Nine months endedDecember 31,
|                    |  | 2009                           |        | 2008                          |   | 2009   |  | 2008
|                    |  | (in thousands)                 |        | (in thousands)               
|                    |  |                                |        |                              
|Revenues:           |  |                                |        |                               |   |        |  |      |        |  |   |       
|United States       |  | $                              | 11,026 |                               | $ | 10,166 |  | $    | 32,606 |  | $ | 29,213
|All other countries |  |                                | 846    |                               |   | 837    |  |      | 2,269  |  |   | 1,950 
|                    |  |                                |        |                               |   |        |  |      |        |  |   |       
|Total Revenues      |  | $                              | 11,872 |                               | $ | 11,003 |  | $    | 34,875 |  | $ | 31,163
|                    |  |                                |        |                               |   |        |  |      |        |  |   |       

Long-lived assets as of December 31, 2009 and March 31, 2009 by geographic
location consist of the following:



|                        |  |                  |        |               |   |       
|----------------------- |  | ---------------- | ------ | ------------- | - | ------
|                        |  | December 31,2009 |        | March 31,2009
|                        |  | (in thousands)  
|                        |  |                 
|Long-lived assets:      |  |                  |        |               |   |       
|United States           |  | $                | 39,315 |               | $ | 29,976
|United Kingdom          |  |                  | 6,000  |               |   | 5,784 
|All other countries     |  |                  | 779    |               |   | 1,294 
|                        |  |                  |        |               |   |       
|Total long-lived assets |  | $                | 46,094 |               | $ | 37,054
|                        |  |                  |        |               |   |       



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SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12. SUPPLEMENTAL CASH FLOW INFORMATION



|                                               |  |                               |      |   |      |   |        |  
|---------------------------------------------- |  | ----------------------------- | ---- | - | ---- | - | ------ | -
|                                               |  | Nine months endedDecember 31, |     
|                                               |  | 2009                          |      |   | 2008 |  
|                                               |  | (in thousands, unaudited)     |     
|                                               |  |                              
|Supplemental cash flow information:            |  |                               |      |   |      |   |        |  
|Cash paid for interest                         |  | $                             | 114  |   |      | $ |       |  
|                                               |  |                              
|Noncash operating activities:                  |  |                               |      |   |      |   |        |  
|Bonus paid in common stock                     |  | $                             | 692  |   |      | $ | 1,607  |  
|Incentive compensation paid in common stock    |  |                               |     |   |      |   | 118    |  
|Board of Directors fees paid in common stock   |  |                               | 217  |   |      |   | 278    |  
|Consulting fees paid in common stock           |  |                               |     |   |      |   | 250    |  
|                                               |  |                              
|Noncash investing activities                   |  |                               |      |   |      |   |        |  
|Liabilities assumed on acquisition of business |  | $                             |     |   |      | $ | (2,423 | )
|                                               |  |                              
|Noncash financing activities                   |  |                               |      |   |      |   |        |  
|Vendor financed equipment purchases            |  | $                             |     |   |      | $ | 674    |  
|Options assumed in acquisition                 |  |                               |     |   |      |   | 1,110  |  
|                                               |  |                              
|Cash paid for acquisition of business          |  |                               |      |   |      |   |        |  
|Net assets acquired (liabilities assumed)      |  | $                             |     |   |      | $ | (2,673 | )
|Goodwill and intangible assets                 |  |                               |     |   |      |   | 16,815 |  
|Direct acquisition related costs               |  |                               |     |   |      |   | 167    |  
|Deferred/contingent consideration payments     |  |                               | (121 | ) |      |   | 952    |  
|                                               |  |                               |      |   |      |   |        |  
|Total cost of acquisitions                     |  |                               | (121 | ) |      |   | 15,261 |  
|Less:                                          |  |                               |      |   |      |   |        |  
|Options assumed in acquisition and other       |  |                               |     |   |      |   | (1,110 | )
|Cash acquired                                  |  |                               |     |   |      |   | (1,490 | )
|                                               |  |                               |      |   |      |   |        |  
|                                               |  |                              
|Cash paid for acquisition of business          |  | $                             | (121 | ) |      | $ | 12,661 |  
|                                               |  |                               |      |   |      |   |        |  



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

Forward Looking Statements

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;
| | - |  | ----------------------------------------------------------



| |  |  | a highly competitive market for compensation management, talent management and HRMS/payroll solutions;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | 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 generate additional revenues from investments in sales and marketing;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | --------------------------



| |  |  | unfavorable economic and market conditions caused by the recent financial crisis in the credit markets; 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.

Overview

We are a leading provider of on-demand talent management, payroll, and compensation solutions in the human capital software-as-a-service
(SaaS) market. We offer software and services that are tightly integrated with our proprietary data sets to help businesses and individuals manage pay and performance. Companies of all sizes turn to us to effectively and efficiently
compensate, promote and manage their employees. With our help, companies can put the right talent in the right roles to deliver business objectives and individuals at all levels can determine their worth.

Our highly configurable software applications, proprietary content and our consulting services help executives, line managers and
compensation professionals automate, streamline and optimize critical talent management processes, such as market pricing, compensation planning, performance management, competency management (a competency is a set of demonstrated behaviors, skills
and proficiencies that determine performance in a given role) and succession planning. Compensation and competency content are at the core of our solutions, which deliver productive and cost-effective ways for employers to manage and inspire their
most important assettheir people.

We integrate our comprehensive SaaS applications with our proprietary content to
automate the essential elements of our customers compensation and performance management processes. Our approach links pay to performance and aligns employees with corporate goals to drive business results. As a result, our solutions can
significantly improve the effectiveness of our customers compensation spending and help them become more productive in managing their employees. We enable 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. Our customers report gains in productivity, reduction in personnel hours to administer pay and
performance programs, and improvements in employee retention.

Our data sets contain base, bonus and
incentive pay data for positions held by employees and top executives in thousands of public companies. Our flagship offering is CompAnalyst®, a suite of on-demand compensation management applications that integrates our data, third-party survey data and a customers own pay data with a complete
analytics offering. In 2008, we expanded our CompAnalyst market data and added new geographic coverage in the Canadian market. Our Canadian content continues to attract a diverse set of customers across multiple industries. We continue to build our
IPAS® global compensation technology survey with coverage of technology jobs in more than 80 countries.

Our on-demand performance management solutions offer our customers effective and measurable ways to
attract and inspire employee performance. TalentManager ®, our employee lifecycle performance management
software suite, helps businesses automate performance reviews, streamline compensation planning, perform succession planning, and link employee pay to performance. TalentManager helps employers gain visibility into their performance cycle and drive
employee engagement in the process through a configurable, easy to use interface that can be personalized by users. Using TalentManager, we believe that employers can improve their performance management systems and model the critical jobs skills
they need to achieve their business goals.

With our fiscal 2009 acquisitions of InfoBasis Limited, now known as Salary.com
Limited, and Genesys Software Systems, Inc. (Genesys), we further expanded our addressable market. Salary.com Limited provides customers with competency-based learning and development software and Genesys offers a broad range of on-demand and
licensed human resources management systems and payroll solutions, including benefits and tax filing services. These acquisitions have also given us the ability to offer our customers a bundled package that includes our HR data and point solution
tools for compensation and competency management, our strategic talent management solutions for performance management, compensation and succession planning, and learning and development and our transactional HR solutions for payroll, tax, benefits,
human resource management systems (HRMS) and employee self service. We are working to further leverage the synergies among our different products by developing a single, integrated product suite that will contain all of these elements.
We believe that an integrated product suite will offer a cost effective way to automate performance and develop a strong internal pipeline of leaders beyond what can be achieved through bundling our products.



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We were organized as a Delaware corporation in 1999. As of December 31, 2009, our
enterprise subscriber base has grown to more than 3,600 companies who spend from $2,000 to more than $100,000 annually. We have achieved 35 consecutive quarters of revenue growth since April 2001. During the three months ended December 31,
2009, we incurred an operating loss of $4.0 million compared to an operating loss of $4.6 million in the three months ended September 30, 2009. During the nine months ended December 31, 2009, we experienced operating cash outflows of
$24,000 compared to operating cash outflows $0.9 million in the nine months ended September 30, 2009. As of December 31, 2009, we had an accumulated deficit of $80.2 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, 2009 and 2008, subscription revenues
accounted for 95% and 93%, respectively, of our total revenues and for the three months ended December 31, 2009 and 2008, advertising revenues accounted for 5% and 7%, 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, sales of payroll perpetual licenses, maintenance and hosting services including related implementation and consulting
services, 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, 2009, approximately 60% of our contracts were more than one year in length. We generally invoice our customers annually
in advance of their subscription (for both new sales 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.

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. Although we took significant
expense-reducing measures in fiscal 2009, we continue to implement and support our new and existing products and expand our data sets and 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 our
addition of HRMS/payroll solutions to our line of products will require us to focus additional research and development efforts on creating a single integrated product suite that encompasses all of our solutions. 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.



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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. The direct sales commissions for our subscription sales are capitalized 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 fiscal 2009, we invested substantially in sales and marketing, which resulted in increased sales
and marketing expenses. We do not expect to make similar expenditures in the near-term and, as a result, we expect that our sales and marketing expenses will be relatively consistent for the balance of the current fiscal year and into fiscal 2011.

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, including rent and depreciation expense.

Results of Operations

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



|                                        |  |                              |        |   |      |   |        |  
|--------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Nine Months EndedDecember 31 |       
|                                        |  | 2009                         |        |   | 2008 |  
|                                        |  | (in thousands)               |       
|                                        |  |                             
|Total deferred revenue at end of period |  | $                            | 31,339 |   |      | $ | 27,303 |  
|Net cash used in operating activities   |  |                              | (24    | ) |      |   | (6,804 | )

Three Months Ended
December 31, 2009 compared to Three Months Ended December 31, 2008

Revenues. Revenues for the
third quarter of fiscal 2010 were $11.9 million, an increase of $0.9 million, or 8%, compared to revenues of $11.0 million for the third quarter of fiscal 2009. Subscription revenues were $11.3 million for the third quarter of fiscal 2010, an
increase of $1.0 million, or 10%, compared to subscription revenues of $10.3 million for the third quarter of fiscal 2009. The growth in subscription revenues was due primarily to our acquisitions during fiscal 2009. Advertising revenues
were $560,000 for the third quarter of fiscal 2010 compared to advertising revenues of $735,000 for the third quarter of fiscal 2009. The decrease in advertising revenues was directly related to reduced volume within certain advertising programs
during the third quarter of the fiscal year. We believe this decrease is temporary and that we will see advertising revenue increase in the fourth quarter as customers increase their budgets and we monetize our page-view and unique visitor counts.
Total deferred revenue as of December 31, 2009 was $31.3 million, representing an increase of $4.0 million, or 15%, compared to total deferred revenue of $27.3 million as of December 31, 2008.

Cost of Revenues. Cost of revenues for the third quarter of fiscal 2010 was $3.7 million, an increase of $0.8 million, or 27%,
compared to cost of revenues of $3.0 million for the third quarter of fiscal 2009. The increase in cost of revenues was primarily due to a $0.8 million increase of payroll and benefit related costs attributable to the timing of the Genesys
acquisition, which we completed on December 17, 2008, and incentive compensation charges, an increase of $0.1 million related to consulting costs at Genesys, partially offset by a decrease of $0.1 million in stock-based compensation as a result
of the reduction in workforce implemented in the fourth quarter of fiscal 2009. As a percent of total revenues, cost of revenues increased from 27% in the third quarter of fiscal 2009 to 32% in the third quarter of fiscal 2010.

Research and Development Expenses. Research and development expenses for the third quarter of fiscal 2010 were $2.4 million, an
increase of $0.2 million, or 10%, compared to research and development expenses of $2.2 million for the third quarter of fiscal 2009. The increase in research and development expenses was primarily



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due to an increase of payroll and benefit related costs attributable to the timing of the Genesys acquisition, which we completed on December 17, 2008, increased headcount at our Shanghai
facility and incentive compensation charges. Research and development expenses increased from 20% of total revenues in the third quarter of fiscal 2009 compared to 21% of total revenues in the third quarter of fiscal 2010.

Sales and Marketing Expenses. Sales and marketing expenses for the third quarter of fiscal 2010 were $5.2 million, a decrease of
$1.5 million, or 22%, compared to sales and marketing expenses of $6.7 million for the third quarter of fiscal 2009. The decrease was primarily due to decreases of $0.9 million in payroll and benefit related costs and incentive compensation due to
the reduction in workforce implemented in the fourth quarter of fiscal 2009, a decrease of $0.3 million in advertising and trade show expenses, a decrease of $0.2 million of outside service costs primarily consisting of marketing expenses, and an
additional $0.1 million decrease in advertising and media costs attributable to partnership agreements. In the first half of fiscal 2009, we invested substantially in sales and marketing, which resulted in increased sales and marketing expenses.
Subsequent to our reduction in workforce in January 2009, we do not expect to make similar expenditures in the near-term and, as a result, we expect that our sales and marketing expenses will remain relatively consistent for the balance of the
fiscal year. Sales and marketing expenses decreased from 61% of total revenues in the third quarter of fiscal 2009 to 44% of total revenues in the third quarter of fiscal 2010.

General and Administrative Expenses. General and administrative expenses were $3.6 million for the third quarter of fiscal
2010, a decrease of $0.1 million, or 3%, compared to $3.7 million for the third quarter of fiscal 2009. The decrease was primarily due to a decrease of $0.2 million in rent expense associated with the relocation of our corporate offices, a decrease
of $0.1 million related to advisory and outside service fees primarily associated with the Genesys acquisition, partially offset by increases of $0.1 million in stock based compensation costs related to current quarter awards granted and $0.1
million in office and maintenance related costs. General and administrative expenses decreased to 31% of total revenues in the third quarter of fiscal 2010 compared to 34% in the third quarter of fiscal 2009.

Amortization of Intangible Assets. Amortization of intangible assets for the third quarter of fiscal 2010 was $764,000 compared
to $495,000 in the third quarter of fiscal 2009. The increase in amortization was primarily due to the amortization of intangible assets acquired as part of the acquisition Genesys in December 2008.

Other Income/Expense. Other income for the third quarter of fiscal 2010 was $22,000 compared to other income of $9,000 in the third
quarter of fiscal 2009. The increase in income primarily related to a reduction in interest expense as a result of a decrease in borrowings against our revolving credit facility.

Provision for Income Taxes. The provision for income taxes for the third quarter of fiscal 2010 was $16,000 compared to $36,000 in
the third quarter of fiscal 2009. The provision for income taxes consisted primarily of a deferred tax liability arising from timing differences between book and tax income related to goodwill and intangible asset amortization related to our
business acquisitions.

Nine Months Ended December 31, 2009 compared to Nine Months Ended December 31, 2008

Revenues. Revenues for the nine months ended December 31, 2009 were $34.9 million, an increase of
$3.7 million, or 12%, compared to revenues of $31.2 million for the nine months ended December 31, 2008. Subscription revenues were $32.5 million for the nine month period ended December 31, 2009, an increase of $3.4 million, or
12%, compared to subscription revenues of $29.1 million for the nine months ended December 31, 2008. The growth in subscription revenues was due primarily to our acquisitions during fiscal 2009. Advertising revenues were $2.4 million for
the nine months ended December 31, 2009 compared to advertising revenues of $2.0 million for the nine months ended December 31, 2008.

Cost of Revenues. Cost of revenues for the nine months ended December 31, 2009 was $11.1 million, an increase of $1.8 million, or 19%, compared to cost of revenues of $9.3 million for the
nine months ended December 31, 2008. The increase in cost of revenues was primarily due to a $1.5 million increase in payroll and related benefits primarily related to the acquisitions of Salary.com Limited and Genesys, an increase of $0.6
million in consulting costs related to our payroll related products and a $0.2 million increase in incentive compensation, partially offset by a decrease of $0.4 million in stock-based compensation due to the reduction in workforce



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implemented in the fourth quarter of fiscal 2009. As a percent of total revenues, cost of revenues increased from 30% of total revenues for the nine months ended December 31, 2008 to 32% of
total revenues for the nine months ended December 31, 2009.

Research and Development Expenses. Research and
development expenses for the nine months ended December 31, 2009 were $7.1 million, an increase of $0.8 million, or 13%, compared to research and development expenses of $6.3 million for nine months ended December 31, 2008. The increase in
research and development expenses was primarily due to increases of $0.7 million and $0.2 million in payroll and related benefits and travel costs, respectively, attributable to the addition of research and development personnel within our Shanghai
facility and the acquisition of Genesys, a $0.1 million increase in technology related service costs partially offset by a $0.2 million decrease in stock-based compensation. As a percent of total revenues, research and development costs remained
consistent at 20% for the nine months ended December 31, 2009 and 2008.

Sales and Marketing Expenses. Sales
and marketing expenses for the nine months ended December 31, 2009 were $16.5 million, a decrease of $3.8 million, or 19%, compared to sales and marketing expenses of $20.4 million for the nine months ended December 31, 2008. The decrease
was primarily due to decreases of $1.6 million and $0.3 million in payroll and benefit related costs and stock-based compensation, respectively, due to the reduction in workforce implemented in the fourth quarter of fiscal 2009, a decrease of $1.1
million in advertising and trade show expenses, and an additional $1.0 million of outside service costs primarily consisted of marketing expenses, partially offset by a $0.2 million increase of facility costs attributable to fiscal 2009 acquisitions
and our Montego Bay facility. In the first half of fiscal 2009, we invested substantially in sales and marketing, which resulted in increased sales and marketing expenses. Subsequent to our reduction in workforce in January 2009, we do not expect to
make similar expenditures in the near-term and, as a result, we expect that our sales and marketing expenses will remain relatively consistent for the balance of the fiscal year. Sales and marketing expenses decreased from 65% of total revenues for
the nine months ended December 31, 2008 to 47% of total revenues for the nine months ended December 31, 2009.

General and Administrative Expenses. General and administrative expenses were $11.4 million for the nine months ended December 31, 2009, a decrease of $0.3 million, or 3%, compared to $11.7 million for the nine months
ended December 31, 2008. The decrease was primarily due to decreases of $0.5 million in stock-based compensation due to the reduction in workforce implemented in the fourth quarter of fiscal 2009, a decrease of $0.4 million due to the timing of
incentive compensation, a decrease of $0.4 million in rent expense primarily associated with the relocation of our corporate offices, and a decrease of $0.1 million in directors fees, partially offset by increases of $0.4 million in legal and
accounting related costs, an increase of $0.4 million in depreciation expense, an increase of $0.4 million of facility and technology related costs. General and administrative expenses decreased to 33% of total revenues for the nine months ended
December 31, 2009 compared to 38% for the nine months ended December 31, 2008.

Amortization of Intangible
Assets. Amortization of intangible assets for the nine months ended December 31, 2009 was $2.3 million compared to $1.3 million for the nine months ended December 31, 2008. The increase in amortization was primarily due to the
amortization of intangible assets acquired as part of the acquisition of Salary.com Limited in August 2008 and Genesys in December 2008.

Other Expense/Income. Other expense for the nine months ended December 31, 2009 was $125,000 compared to other income of $409,000 for the nine months ended December 31, 2008. The increase
in expense consisted primarily of a decrease in interest income due to a decrease in invested cash balances and a decrease in interest rates associated with invested balances.

Provision for Income Taxes. The provision for income taxes for the nine months ended December 31, 2009 was $62,000 compared to
$179,000 for the nine months ended December 31, 2008. The provision for income taxes consisted primarily of a deferred tax liability arising from timing differences between book and tax income related to goodwill and intangible asset
amortization related to our business acquisitions.



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Acquisition of Business

Genesys Software Systems, Inc.

On December 17, 2008, we acquired all issued and outstanding shares of Genesys, a leading provider of on-demand and licensed human resources management systems and payroll solutions. Under the terms
of the agreement, we paid the former owners of Genesys $6.0 million, net of cash acquired and converted approximately $1.1 million of options to purchase Genesys common stock into options to purchase approximately 519,492 shares of our common stock.
In addition, the former Genesys security holders are eligible to earn additional consideration of up to $2.0 million which would be paid in cash or shares of our common stock, at our option, based on Genesys meeting certain performance targets
during the eighteen months after the closing of the acquisition. As of December 31, 2009, the $2.0 million of additional consideration had been earned and recorded as additional goodwill. Such amounts are due to be settled in June 2010 at our
option in either cash or stock. The purchase price allocated for financial accounting purposes was approximately $9.4 million, which includes $1.1 million of options to purchase our common stock and approximately $1.9 million of net liabilities
assumed. Accordingly, the purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. We allocated $4.1 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 and services offered by Genesys will be complementary to our on-demand software suites. The results of operations include the impact of this acquisition since
December 17, 2008.

ITG Competency Group

On August 3, 2007, we 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, we paid the owner of ITG $2.1 million in cash and shares of our common stock valued at $0.5 million. ITG was also 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, 2009, all $1.1 million of the additional consideration had been earned and recorded as goodwill. Of the additional consideration earned, $0.9 million was paid to
the owner of ITG in cash and shares during fiscal 2009, an additional $0.1 million was paid in cash in October 2009 and the final $0.1 million was paid in stock in January 2010.

Liquidity and Capital Resources

At December 31, 2009, our principal sources of liquidity were cash and cash equivalents totaling $11.2 million and accounts receivable, net of allowance for doubtful accounts of
$8.1 million, compared to cash and cash equivalents of $21.1 million and accounts receivable, net of allowance for doubtful accounts of $6.0 million at March 31, 2009. Our working capital as of December 31, 2009 was a negative $19.8
million compared to negative working capital of $11.6 million as of March 31, 2009. The reduction in our working capital was primarily due to cash outflows and contingent consideration earned related to our fiscal 2009 acquisition of Genesys,
an increase in the current portion of deferred revenues of $2.1 million and payments related to our stock repurchase program of $2.5 million. During the nine months ended December 31, 2009, we borrowed against our revolving credit facility and,
as of December 31, 2009, we had an outstanding balance of $2.5 million against our line.

Cash used by operating
activities for the nine months ended December 31, 2009 was $24,000. This amount resulted from a net loss of $13.8 million, adjusted for non-cash charges of $9.8 million and a $3.9 million net increase in operating assets and liabilities since
the beginning of fiscal 2010. Non-cash items primarily consisted of $1.3 million of depreciation and amortization of property, equipment and software, $3.5 million of amortization of intangible assets and $4.7 million of stock-based
compensation. The net increase in operating assets and liabilities since the beginning of fiscal 2010 of $3.9 million was primarily comprised of increases in accounts payable and



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accrued expenses and other current liabilities since the beginning of fiscal 2010 of $2.1 million and $0.8 million, respectively, deferred revenue of $2.9 million, and $2.1 million in accounts
receivable. The increase in accounts payable and accrued expenses and other current liabilities was primarily due to the timing of accrued payroll benefits in addition to payments to vendors. The increase in deferred revenue since the beginning of
fiscal 2010 is primarily the result of increased invoicing less revenue recognition from our subscription customers for the nine months ended December 31, 2009. The growth in invoicing, which also led to the increase in accounts receivable, was
primarily due to the impact of our recent acquisitions and increased subscription renewals and increased sales to existing customers. 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 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
provided by investing activities was $1.6 million and consisted primarily of a decrease of $2.6 million of funds obtained from payroll customers to be used in satisfying related obligations partially offset by $0.4 million paid for purchases of
intangible assets, $0.2 million paid for software development costs, $0.2 million paid for purchases of data sets and property, equipment and software and $0.1 million paid for the acquisition of businesses. 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 used in financing activities was $11.1 million, which consisted primarily of $5.8 million of repayments of our revolving line of credit
net of current fiscal year borrowings, $3.0 million of repurchases of our stock, and $2.6 million related to decreases in payroll customer related obligations.

On August 3, 2007, we acquired the assets of ITG. Under the terms of the agreement, the former owners of ITG are 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. As of December 31, 2009, all $1.1 million of the additional consideration has been
earned and recorded as additional goodwill. Of the additional consideration earned, $0.9 million was paid to the owner of ITG in cash and shares during fiscal 2009, an additional $0.1 million was paid in cash in October 2009 and the final $0.1
million was paid in stock in January 2010.

On December 21, 2007, we acquired the assets of Schoonover Associates, Inc.
Schoonover will 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 vesting on the 112,646 shares of common stock issued at the closing of the acquisition, which were valued at $1.5 million, which are eligible to vest ratably over such five-year period. As of December 31,
2009, 20% of the issued shares had vested and $200,000 of the additional consideration has been earned. Of the additional consideration earned, $0.1 million was paid in cash in January 2010 and the remaining $0.1 million is expected to be paid in
the first quarter of fiscal 2011.

On April 17, 2008, we entered into a leaseline agreement (Leaseline #4) with a maximum
available commitment of $350,000. The lease term began on July 1, 2008 and runs for a term of 36 months. As of December 31, 2009, we had leased approximately $173,000 of equipment under the terms of this leaseline. On July 24, 2008,
we entered into a leaseline agreement (Leaseline #5) with a maximum available commitment of $200,000. The lease term began on October 1, 2008 and runs for a term of 36 months. In addition, at December 31, 2009, we had approximately $1.1
million in a restricted cash account as collateral for equipment with a value of approximately $1.1 million in accordance with all of its master lease agreements.

In June 2008, we entered into an agreement with a vendor to finance the purchase of perpetual software licenses in the amount of approximately $738,000. We will make quarterly payments of approximately
$64,000 for a term of 36 months.

On August 8, 2008, we entered into a modification of our existing credit facility with
Silicon Valley Bank to modify certain of the financial covenants and extend the term of the agreement to September 23, 2008. On September 17, 2008, we entered into a second modification of our credit facility to extend the term of the
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to October 8, 2008. On October 8, 2008, we entered into a third modification of our credit facility to extend the term of this credit facility for two years to October 8, 2010 and
increased the line of credit from $5,000,000 to $10,000,000. On March 16, 2009, we entered into a fourth modification of our agreement, which added Genesys as a guarantor to our obligations under the credit facility. On June 29, 2009, we
entered into a fifth modification to our credit facility which increased the interest rate and certain fees payable, amended certain financial covenants, and increased the amount of stock we can repurchase under our repurchase plans. On
October 15, 2009, we entered into a sixth modification to our credit facility decreasing the line of credit to $5.0 million, modifying the interest rate and amending certain financial covenants. Following the sixth modification, up to $5
million is available under this credit facility and the facility is collateralized by substantially all of our assets and expires on October 8, 2010. Up to $5 million of the line of credit may be used to secure letters of credit and cash
management services, and up to $5 million of the line of credit may be used in connection with foreign exchange forward contracts. The line of credit is subject to financial covenants that require us to maintain a ratio of assets to liabilities
(net of deferred revenue) that is not less than 1.4 to 1. As of December 31, 2009, there was $2.5 million outstanding under the credit facility.

On August 21, 2008, we acquired the share capital of Salary.com Limited. Under the terms of the agreement, the former employee owners of Salary.com Limited will be eligible to earn additional
consideration based on meeting certain performance targets during each of the five twelve month periods ending August 31, 2009, 2010, 2011, 2012 and 2013. The additional consideration, if earned, consists of cash payments of a maximum of
$200,000 per year for 5 years, allocated proportionately amongst the former employee owners.

In October 2008, we entered into
a new office lease for our subsidiary in Shanghai, China. The lease is for approximately 2,900 square meters and has an initial term of three years, commencing in January 2009. We can extend the lease for an additional three years at the end of the
initial term. Rental payments under the lease are 365,000 Chinese Yuan RMB per month (approximately $54,000 per month).

On
December 15, 2008, the Board of Directors authorized the repurchase by us of up to $2.5 million of our common stock from time to time at prevailing prices in the open market or in negotiated transactions off the market. On April 17, 2009,
our Board of Directors increased the size of its share repurchase program from $2.5 million to $7.5 million. As of December 31, 2009, we had repurchased and retired 1,348,140 shares with a total value of approximately $2.8 million pursuant to
this repurchase program.

On December 17, 2008, we acquired all issued and outstanding shares of Genesys. Under the terms
of the agreement, the Genesys shareholders and optionholders are eligible to earn additional consideration of up to $2.0 million which would be paid in June 2010 in cash or shares of our common stock, at our option, based on Genesys meeting certain
performance targets during the first year after the closing of the merger. As of December 31, 2009, the $2.0 million of additional consideration had been earned and recorded as goodwill. Such amounts are due to be settled in June 2010 at our
option in either cash or stock.

On January 7, 2009, we implemented and completed a workforce reduction of approximately
100 employees, representing approximately 16% of our workforce. We implemented this workforce reduction in response to the current and anticipated macro-economic uncertainties. As a result of the workforce reduction, we recorded restructuring
charges of approximately $3.1 million in fiscal 2009. These charges were comprised of $1.8 million in stock compensation charges associated with the accelerated vesting of unvested awards, $1.2 million in severance payments, and $0.1 million in
various other costs. During the nine months ended December 31, 2009, we recorded restructuring charges of approximately $0.2 million related to severance payments and anticipate an additional $0.3 million of restructuring charges in the fourth
quarter of the current fiscal year.

In February 2009, we entered into a new office lease for our wholly foreign owned
enterprise in Montego Bay, Jamaica. The lease is for approximately 511 square meters and has an initial term of two years, commencing in November 2008. We can extend the lease for an additional year at the end of the initial term. Rental payments
under the lease are 760,000 Jamaican dollars per month (approximately $8,500 per month).

In April 2009, we entered into a new
office sublease for our corporate offices in Needham, Massachusetts. The lease is for approximately 36,288 square feet and has an initial term of twenty-one months, commencing in May 2009. Rental payments under the lease are $54,000 per month.



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Given our current cash and accounts receivable, 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 recent 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 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, 2009.

Off-Balance-Sheet Arrangements

As required by the General Principles Topic of Financial Accounting Standards Board Accounting Standards Codification, or FASB ASC, 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.

Critical Accounting Policies

Our financial statements are prepared in accordance with the General Principles Topic of FASB ASC. 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 materially 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 in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, 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 the Revenue Topic of FASB ASC, 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 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 the Revenue Topic of FASB ASC, 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 of the Revenue Topic of FASB ASC, we determined that we do not have objective and



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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. Additionally, we license software under non-cancelable license agreements and provide services including implementation, consulting, training services and postcontract customer support (PCS). On certain
software license arrangements, we have established vendor-specific objective evidence (VSOE) for postcontract customer support, using the substantive renewal rate method. For arrangements for which we have established VSOE, we allocate revenue using
VSOE for the postcontract customer support (PCS) and the residual method for the other elements and accounts for other elements as a single unit of accounting. The revenue related to the postcontract customer support for which we have established
VSOE is recognized ratably from the delivery date of the license through the contract period. If we are not able to establish VSOE on postcontract customer support, and postcontract customer support is the only undelivered element, then all revenue
from the arrangement is recognized ratably over the contract period. However, if VSOE is not established but PCS has been delivered, then all revenue from the arrangement is recognized ratably over the contract period once the last element is
delivered.

Income Taxes. We account for income taxes in accordance with the Income Taxes Topic of FASB ASC 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. The Income Taxes Topic of FASB ASC 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, 2009, we have a valuation allowance of $20.2 million against our deferred tax assets.

The Income Taxes Topic of FASB ASC also clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition
threshold and measurement requirements a tax position must meet before being recognized as a benefit in the financial statements. The Income Taxes Topic of FASB ASC also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting for interim periods and disclosures for uncertain tax positions.

Software Development
Costs. We capitalize certain internal software development costs under the provisions of the Software Topic of FASB ASC. The Software Topic of FASB ASC 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.

Stock-Based Compensation. We follow the provisions of the Compensation  Stock Compensation Topic of FASB ASC, 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



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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.

We have
historically estimated our expected volatility based on that of our publicly traded peer companies as we determined that we did not have adequate historical data from our traded share price. Until February 2007, we were a private company and
therefore lacked sufficient company-specific historical and implied volatility information. We did not grant any new stock options during the fiscal year ended March 31, 2009; however, previously granted stock option awards were modified in
connection with our workforce reduction on January 7, 2009. The modification of the awards consisted of acceleration of the respective awards vesting schedule. For the modified awards issued during the year ended March 31, 2009, we
determined we have adequate historical data from our traded share price; as such, expected volatilities utilized in the model are based on the historic volatility of our stock price.

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. The
Compensation  Stock Compensation Topic of FASB ASC 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. 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 the Compensation  Stock Compensation Topic of FASB ASC in the amount of $4.7 million and $6.1 million in the nine months ended December 31, 2009 and 2008, respectively. As of December 31, 2009, we had $8.1 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 1.6 years.

Valuation of Goodwill and Intangible Assets.We follow the guidance of the Business Combination Topic of FASB ASC. In accordance with
the Business Combination Topic of FASB ASC, 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.



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In December 2009, we lost a significant, but not material, payroll customer as a result of a
breach of contract by the customer. As a result of the breach, we terminated our agreement with the customer which we believe constituted a triggering event in accordance with the Intangibles-Goodwill and Other Topic of FASB ASC. This event led us
to revise our expectation of future invoicing, revenues and operating profit margins for the payroll/HRMS reporting unit. As a result of the factors described above, in accordance with the Intangibles-Goodwill and Other Topic of FASB ASC, we, with
the assistance of a third-party independent appraiser, re-evaluated the goodwill associated with the payroll/HRMS reporting unit for impairment as of December 31, 2009. We used a combination of an income approach and a market approach to determine
the fair value of the reporting unit. As a result of this goodwill impairment testing, we determined that the reporting units goodwill was not impaired.

We first calculated the fair value of the reporting unit using both discounted cash flows and guideline company methodologies. We then performed Step 1 and compared the weighted average fair
value of the reporting unit of accounting to its carrying value as of December 31, 2009.

The process of evaluating goodwill
for impairment requires several judgments and assumptions to be made to determine the fair value of the reporting unit, including the method used to determine fair value, discount rates, expected levels of cash flows, revenues and earnings, and the
selection of comparable companies used to develop market based assumptions. We employed an eight year discounted cash flow methodology to arrive at the fair value of the reporting unit. In calculating the fair value, we derived the projected eight
year cash flows for the reporting unit. This process starts with the projected cash flows of the reporting unit and then the cash flows are discounted. We also employed a guideline company method which indicates value for the reporting unit by
comparison to similar publicly traded companies. We identified a set of comparable companies to derive market multiples for the latest twelve months and next fiscal year revenue. The revenue multiples for the reporting unit were based on size,
profitability, and comparability of the reporting units products as services relative to those of the selected guideline companies. From the enterprise values determined using these revenue multiples, we applied a control premium in order to
estimate the equity value of the reporting unit.

The discounted cash flows used to estimate the fair value was based on
assumptions regarding the reporting units estimated projected future cash flows and estimated weighted-average cost of capital that a market participant would use in evaluating the reporting unit in a purchase transaction. The estimated
weighted-average cost of capital was based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt to equity capital. In performing the impairment test, we took steps to ensure appropriate and
reasonable cash flow projections and assumptions were used. The rate used to discount the estimated future cash flows for the reporting unit was 25%.

Our projections for the next eight years included increased revenue and operating expenses, in line with the expected revenue growth over the period based on current market and economic conditions and our
historical and expected knowledge of the reporting unit. We projected growth for the reporting unit ranging from 5% to 30% annually. We estimated the operating expenses based on a rate consistent with the current experience for the reporting unit
and estimated revenue growth over the next eight years. The failure of this reporting unit to execute as forecasted over the next eight years could have an adverse affect on our impairment tests. Future adverse changes in market conditions or poor
operating results of the reporting unit could result in losses or an inability to recover the carrying value of the investments in the reporting unit, thereby possibly requiring an impairment charge in the future.

We determined that based on Step 1 of our goodwill test, the fair value of the reporting unit exceeded its carrying value as of
December 31, 2009 by approximately 20%.

In conjunction with the testing noted above, we also re-evaluated the long-lived
assets associated within this reporting unit in accordance with the Property, Plant and Equipment Topic of FASB ASC. We used an income approach to determine if the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the assets exceeded the carrying values of those assets. We determined that based on our analysis these assets were not impaired as of December 31, 2009.

New Accounting Pronouncements

On April 1, 2009, we adopted new
accounting guidance for business combinations as issued by the Financial Accounting Standards Board (FASB). The new accounting guidance establishes principles and requirements for how an acquirer in a business combination recognizes and measures in
its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from previous guidance resulting from this new guidance include
the expansion of the definitions of a business and a business combination. For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the
acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and; for certain arrangements, changes in fair value will be recognized in earnings until
settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. The new accounting guidance also establishes disclosure requirements to enable users to evaluate the
nature and financial effects of the business combination. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On April 1, 2009, we adopted new accounting guidance as issued by the FASB which delayed the effective date of fair value accounting
for all nonfinancial assets and nonfinancial liabilities by one year, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of this accounting guidance did not have a material impact on our
consolidated financial statements.

On April 1, 2009, we adopted new accounting guidance for assets acquired and
liabilities assumed in a business combination as issued by the FASB. The new guidance amends the provisions previously issued by the FASB related to the initial recognition and measurement, subsequent measurement and accounting and disclosures for
assets and liabilities arising from contingencies in business combinations. The new guidance eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement. The adoption of this
accounting guidance did not have a material impact on our consolidated financial statements.

On April 1, 2009, we
adopted three related sets of accounting guidance as issued by the FASB. The accounting guidance sets forth rules related to determining the fair value of financial assets and financial liabilities when the activity levels have significantly
decreased in relation to the normal market, guidance related to the determination of other-than-temporary impairments to include the intent and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment
exists and interim disclosure requirements for the fair value of financial instruments. The adoption of the three sets of accounting guidance did not have a material impact on our consolidated financial statements.



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On April 1 2009, we adopted new accounting guidance for the determination of the useful
life of intangible assets as issued by the FASB. The new guidance amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance
also requires expanded disclosure regarding the determination of intangible asset useful lives. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On April 1, 2009, we adopted new accounting guidance related to subsequent events as issued by the FASB. The new requirement
establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See Basis of Presentation included in Note 1  Summary of
Significant Accounting Policies for the related disclosure. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On July 1, 2009, we adopted the new Accounting Standards Codification (ASC) as issued by the FASB. The ASC has become the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC did not have a material impact on our consolidated financial statements.

In August 2009, the FASB issued new accounting guidance related to measuring the fair value of a liability in circumstances
in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical
liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of the authoritative
accounting guidance, such as an income approach or market approach. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the liability. Our adoption of this accounting guidance in the third quarter of fiscal 2010 did not have a material impact on our consolidated financial statements.

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new
guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and
allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal 2012. Early adoption is allowed. We are currently
evaluating the impact of this accounting guidance on our consolidated financial statements. We expect that this guidance may have a significant impact on our revenue recognition policy and financial statements, however, we have not determined the
impact as of December 31, 2009.

In September 2009, the FASB issued new accounting guidance related to certain revenue
arrangements that include software elements. Previously, companies that sold tangible products with more than incidental software were required to apply software revenue recognition guidance. This guidance often delayed revenue
recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are essential to the functionality of the tangible product will be excluded from the software revenue
recognition guidance. The new guidance will include factors to help companies determine what is essential to the functionality. Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance
for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with earlier application permitted. If we elect earlier application and the first reporting period of adoption is not the first reporting period in our fiscal year, the guidance must be applied through retrospective application from the
beginning of our fiscal year and we must disclose the effect of the change to those previously reported periods. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements. We expect that this
guidance may have a significant impact on our revenue recognition policy and, to a lesser extent, our financial statements, however, we have not determined the impact as of December 31, 2009.



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

Foreign Currency Exchange Risk. Substantially all sales to customers and arrangements with vendors provide for pricing and
payment in United States dollars, thereby reducing the impact of foreign exchange rate fluctuations on our results. A small percentage of our consolidated revenues and operational expenses consist of international revenues and operational expenses
which are denominated in foreign currencies. Exchange rate volatility could negatively or positively impact those revenues and operating costs. For the nine months ended December 31, 2009, we incurred foreign exchange losses of $32,000.
Fluctuations in currency exchange rates could have a greater effect on our business in the future to the extent our expenses increasingly become denominated in foreign currencies.

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
|------- | -----------------------

(a)Evaluation of disclosure controls and procedures. The Companys management evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this quarterly report on Form 10-Q. G. Kent Plunkett, our Chief Executive Officer, and Bryce Chicoyne, our Chief Financial Officer,
reviewed and participated in this evaluation. Based upon that evaluation, Messrs. Plunkett and Chicoyne concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this report.

(b)Changes in internal controls over financial reporting.We continue to review our internal controls over financial
reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts have led to various changes in our internal controls over financial reporting. As a
result of the evaluation completed by the Companys management, and in which Messrs. Plunkett and Chicoyne participated, the Company has concluded that there were no changes during the fiscal quarter ended December 31, 2009 in our internal
controls over financial reporting, which have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



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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.



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

We have not identified any material changes from the risk factors as previously disclosed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended
March 31, 2009.



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

Issuer Purchases of Equity Securities

Pursuant to the terms of our 2000 Stock Option Plan and our 2004 Stock Option 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. In addition, in December 2008, our Board of Directors authorized an ongoing
stock repurchase program with a total repurchase authority granted to us of $2.5 million. The objective of the stock repurchase program is to improve stockholders returns. On April 17, 2009, our Board of Directors increased the size of
our share repurchase program to $7.5 million. At December 31, 2009, approximately $4.7 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased by us were retired as of December 31,
2009. Our credit facility with Silicon Valley Bank currently limits repurchases under our $7.5 million stock repurchase program to $2.5 million over a rolling twelve month period. 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, 2009:



|                |  |                                        |  |                            |      |                                                                                  |         |                                                                                                         |   |          
|--------------- |  | -------------------------------------- |  | -------------------------- | ---- | -------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------------------------- | - | ---------
|Period          |  | Total Number of SharesPurchased
(1)(3) |  | Average PricePaid
perShare |      | Total Number of SharesPurchased as
Part ofPublicly AnnouncedPlans or Programs(2) |         | Maximum Number (orApproximate
DollarValue) of Shares thatMay Yet Be PurchasedUnder the Plans orPrograms
|                |  |                                        |  |                           
|October 1  31  |  | 64,298                                 |  | $                          | 2.76 |                                                                                  | 56,934  |                                                                                                         | $ | 4,868,457
|                |  |                                        |  |                           
|November 1  30 |  | 147,782                                |  | $                          | 2.85 |                                                                                  | 39,162  |                                                                                                         | $ | 4,756,081
|                |  |                                        |  |                           
|December 1  31 |  | 84,087                                 |  | $                          | 2.54 |                                                                                  | 17,166  |                                                                                                         | $ | 4,707,467
|                |  |                                        |  |                           
|Total           |  | 296,167                                |  | $                          | 2.74 |                                                                                  | 113,262 |                                                                                                         | $ | 4,707,467



|(1) | Includes shares 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents shares received under our stock repurchase programs. We expended approximately $0.3 million during the quarter ended December 31, 2009 for repurchases
of our common stock. For more information see Note 5 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes shares reacquired in connection with the surrender of shares to cover the minimum taxes on vesting of restricted stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------

Unregistered Sale of Securities

On January 18, 2010, we issued 32,921 shares of our common stock to the former owner of ITG. These shares were issued in respect of the additional $0.1 million of consideration earned by the former
owner of ITG through the achievement of certain performance targets. The issuance of these shares was pursuant to Section 4 (2) of the Securities Act of 1933, as a transaction by an issuer not involving a public offering.

ITEM 4  OTHER INFORMATION

Termination of 10b5-1 Plans

Our policy governing transactions in
our securities by our directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that
Yong Zhang, our Chief Technology Officer, Chief Operating Officer and President of Global Operations, terminated his prior trading plan in January 2010 and that Bryce Chicoyne, our Chief Financial Officer, terminated his
trading plan in the second quarter of fiscal 2010. We have been further advised that neither of these officers has entered into a new trading plan. The Company undertakes no obligation to update or revise the information provided herein,
including for revision or termination of an established trading plan.

ITEM 5  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 16, 2010 |  | /S/    BRYCE
CHICOYNE                                                                          
|                        |  | Bryce Chicoyne                                                                                 
|                        |  | Chief Financial Officer (Authorizing Officer and Principal Financial Officer of the registrant)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                              
|            | 
|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).



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