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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: September 30, 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 |  | 16,482,665 shares              
|Class                                    |  | Outstanding at November 5, 2009









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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 - September 30, 2009 (unaudited) and March 31, 2009                            |  | 3   
|                                |  |          | 
|                                |  |          |  | Consolidated Statements of Operations - Three and Six Months Ended September 30, 2009 and 2008 (unaudited) |  | 4   
|                                |  |          | 
|                                |  |          |  | Consolidated Statement of Changes in Stockholders Equity Six Months Ended September 30, 2009 (unaudited)  |  | 5   
|                                |  |          | 
|                                |  |          |  | Consolidated Statements of Cash Flows - Three and Six Months Ended September 30, 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                      |  | 22  
|                                |  |          | 
|                                |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 34  
|                                |  |          | 
|                                |  | Item 4.  |  | Controls and Procedures                                                                                    |  | 34  
|                                | 
|Part II. - Other Information    |  |         
|                                |  |          | 
|                                |  | Item 1.  |  | Legal Proceedings                                                                                          |  | 35  
|                                |  |          | 
|                                |  | Item 1A. |  | Risk Factors                                                                                               |  | 35  
|                                |  |          | 
|                                |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 37  
|                                |  |          | 
|                                |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                        |  | 38  
|                                |  |          | 
|                                |  | Item 6.  |  | Exhibits                                                                                                   |  | 38  
|                                | 
|Signatures                      |  | 39      



2



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##### Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements:

SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                    |  | September 302009 |         |   | March 31,2009 |  
|                                                                                                                                                    |  | (unaudited)      |         |   |               |  
|Assets                                                                                                                                              |  |                  |         |   |               |   |         |  
|Current assets:                                                                                                                                     |  |                  |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                           |  | $                | 16,080  |   |               | $ | 21,085  |  
|Accounts receivable, less allowance for doubtful accounts of $263 and $170, at September 30, 2009 and March 31, 2009,
respectively                  |  |                  | 6,626   |   |               |   | 6,040   |  
|Prepaid expenses and other current assets                                                                                                           |  |                  | 1,599   |   |               |   | 1,558   |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total currents assets before funds held for clients                                                                                                 |  |                  | 24,305  |   |               |   | 28,683  |  
|Funds held for clients                                                                                                                              |  |                  | 9,401   |   |               |   | 12,964  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total current assets                                                                                                                                |  |                  | 33,706  |   |               |   | 41,647  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|                                                                                                                                                    |  |                 
|Property, equipment and software, net                                                                                                               |  |                  | 2,515   |   |               |   | 3,025   |  
|Amortizable intangible assets, net                                                                                                                  |  |                  | 15,182  |   |               |   | 16,112  |  
|Other intangible assets                                                                                                                             |  |                  | 935     |   |               |   | 1,504   |  
|Goodwill                                                                                                                                            |  |                  | 17,175  |   |               |   | 14,734  |  
|Restricted cash                                                                                                                                     |  |                  | 1,126   |   |               |   | 1,125   |  
|Other assets                                                                                                                                        |  |                  | 257     |   |               |   | 554     |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total assets                                                                                                                                        |  | $                | 70,896  |   |               | $ | 78,701  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|                                                                                                                                                    |  |                 
|Liabilities and Stockholders Equity                                                                                                                |  |                  |         |   |               |   |         |  
|Current liabilities:                                                                                                                                |  |                  |         |   |               |   |         |  
|Accounts payable                                                                                                                                    |  | $                | 3,032   |   |               | $ | 1,379   |  
|Accrued compensation                                                                                                                                |  |                  | 872     |   |               |   | 963     |  
|Accrued expenses and other current liabilities                                                                                                      |  |                  | 6,082   |   |               |   | 3,300   |  
|Revolving credit facility                                                                                                                           |  |                  | 6,025   |   |               |   | 8,125   |  
|Deferred revenue, current portion                                                                                                                   |  |                  | 27,280  |   |               |   | 26,556  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total current liabilities before client funds obligations                                                                                           |  |                  | 43,291  |   |               |   | 40,323  |  
|Client funds obligations                                                                                                                            |  |                  | 9,401   |   |               |   | 12,964  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total current liabilities                                                                                                                           |  |                  | 52,692  |   |               |   | 53,287  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|                                                                                                                                                    |  |                 
|Deferred revenue, less current portion                                                                                                              |  |                  | 2,585   |   |               |   | 1,729   |  
|Other long-term liabilities                                                                                                                         |  |                  | 1,768   |   |               |   | 1,742   |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total liabilities                                                                                                                                   |  |                  | 57,045  |   |               |   | 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; 15,872,626 and 16,104,454 issued and outstanding at June 30,
2009 and March 31, 2009 |  |                  | 2       |   |               |   | 2       |  
|Additional paid-in capital                                                                                                                          |  |                  | 90,739  |   |               |   | 89,372  |  
|Accumulated deficit                                                                                                                                 |  |                  | (76,261 | ) |               |   | (66,452 | )
|Accumulated other comprehensive loss                                                                                                                |  |                  | (629    | ) |               |   | (979    | )
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total stockholders equity                                                                                                                          |  |                  | 13,851  |   |               |   | 21,943  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                                                          |  | $                | 70,896  |   |               | $ | 78,701  |  
|                                                                                                                                                    |  |                  |         |   |               |   |         |  



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SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                        |  | Three Months Ended |        |   | Six Months Ended |  
|                                                        |  | September 30,      |        |   | September 30,    |  
|                                                        |  | 2009               |        |   | 2008             |   |        | 2009 |  |   | 2008   |  
|                                                        |  | (unaudited)        |        |   | (unaudited)      |  
|Revenue:                                                |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Subscription revenues                                   |  | $                  | 10,750 |   |                  | $ | 9,858  |      |  | $ | 21,194 |   |  | $ | 18,848  |  
|Advertising revenues                                    |  |                    | 895    |   |                  |   | 688    |      |  |   | 1,808  |   |  |   | 1,313   |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Total revenues                                          |  |                    | 11,645 |   |                  |   | 10,546 |      |  |   | 23,002 |   |  |   | 20,161  |  
|                                                        |  |                    |        |  
|Cost of revenues                                        |  |                    | 3,746  |   |                  |   | 3,131  |      |  |   | 7,379  |   |  |   | 6,372   |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Gross profit                                            |  |                    | 7,899  |   |                  |   | 7,415  |      |  |   | 15,623 |   |  |   | 13,789  |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|                                                        |  |                    |        |  
|Operating expenses:                                     |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Research and development                                |  |                    | 2,438  |   |                  |   | 2,296  |      |  |   | 4,701  |   |  |   | 4,105   |  
|Sales and marketing                                     |  |                    | 5,559  |   |                  |   | 7,153  |      |  |   | 11,275 |   |  |   | 13,643  |  
|General and administrative                              |  |                    | 3,735  |   |                  |   | 3,941  |      |  |   | 7,770  |   |  |   | 7,937   |  
|Amortization of intangible assets                       |  |                    | 756    |   |                  |   | 444    |      |  |   | 1,494  |   |  |   | 823     |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Total operating expenses                                |  |                    | 12,488 |   |                  |   | 13,834 |      |  |   | 25,240 |   |  |   | 26,508  |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|                                                        |  |                    |        |  
|Loss from operations                                    |  |                    | (4,589 | ) |                  |   | (6,419 | )    |  |   | (9,617 | ) |  |   | (12,719 | )
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Other income (expense), net:                            |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Interest income                                         |  |                    | 4      |   |                  |   | 206    |      |  |   | 11     |   |  |   | 457     |  
|Other expense, net                                      |  |                    | (56    | ) |                  |   | (30    | )    |  |   | (157   | ) |  |   | (57     | )
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Total other income (expense), net                       |  |                    | (52    | ) |                  |   | 176    |      |  |   | (146   | ) |  |   | 400     |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Loss before provision for income taxes                  |  |                    | (4,641 | ) |                  |   | (6,243 | )    |  |   | (9,763 | ) |  |   | (12,319 | )
|Provision for income taxes                              |  |                    | 20     |   |                  |   | 56     |      |  |   | 46     |   |  |   | 143     |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                |  | $                  | (4,661 | ) |                  | $ | (6,299 | )    |  | $ | (9,809 | ) |  | $ | (12,462 | )
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|                                                        |  |                    |        |  
|Net loss per share - basic and diluted                  |  | $                  | (0.29  | ) |                  | $ | (0.39  | )    |  | $ | (0.61  | ) |  | $ | (0.78   | )
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|                                                        |  |                    |        |  
|Weighted average shares outstanding - basic and diluted |  |                    | 16,165 |   |                  |   | 16,247 |      |  |   | 16,212 |   |  |   | 16,041  |  
|                                                        |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  



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SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except share data, unaudited)



|                                                              |  |              |   |         |        |   |             |   |        |               |  |   |               |   |  |        |      |   |  |   |        |  
|------------------------------------------------------------- |  | ------------ | - | ------- | ------ | - | ----------- | - | ------ | ------------- |  | - | ------------- | - |  | ------ | ---- | - |  | - | ------ | -
|                                                              |  |              |   |         |        |   |             |   |        |               |  |   | Accumulated   |   |  |        |     
|                                                              |  |              |   |         |        |   | Additional  |   |        |               |  |   | Other         |   |  | Total  |     
|                                                              |  | Common Stock |   | Paid-In |        |   | Accumulated |   |        | Comprehensive |  |   | 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     |  | 196,548      |   |         |        |  |             |   | 167    |               |  |   |              |   |  |        |     |   |  |   | 167    |  
|Net restricted stock awards issued and vested                 |  | 274,102      |   |         |        |  |             |   | (259   | )             |  |   |              |   |  |        |     |   |  |   | (259   | )
|Vesting of early exercise stock options                       |  | 140,642      |   |         |        |  |             |   | 32     |               |  |   |              |   |  |        |      |   |  |   | 32     |  
|Issuance of common stock for Board of Director fees           |  | 54,349       |   |         |        |  |             |   | 217    |               |  |   |              |   |  |        |     |   |  |   | 217    |  
|Issuance of common stock for the employee stock purchase plan |  | 45,460       |   |         |        |  |             |   | 59     |               |  |   |              |   |  |        |     |   |  |   | 59     |  
|                                                              |  |              |   |         |        |  
|Repurchase and retirement of common stock                     |  | (1,041,054   | ) |         |        |  |             |   | (2,111 | )             |  |   |               |   |  |        |      |   |  |   | (2,111 | )
|                                                              |  |              |   |         |        |  
|Issuance of common stock for bonuses                          |  | 98,125       |   |         |        |  |             |   | 281    |               |  |   |               |   |  |        |      |   |  |   | 281    |  
|Stock-based compensation expense                              |  |             |   |         |        |  |             |   | 2,981  |               |  |   |              |   |  |        |     |   |  |   | 2,981  |  
|Comprehensive loss:                                           |  |              |   |         |        |  |             |   |        |               |  |   |               |   |  |        |      |   |  |   |        |  
|Cumulative translation adjustment                             |  |             |   |         |        |  |             |   |       |               |  |   |               |   |  |        | 350  |   |  |   | 350    |  
|Net loss                                                      |  |             |   |         |        |  |             |   |       |               |  |   | (9,809        | ) |  |        |     |   |  |   | (9,809 | )
|                                                              |  |              |   |         |        |   |             |   |        |               |  |   |               |   |  |        |      |   |  |   |        |  
|Comprehensive loss                                            |  |             |   |         |        |  |             |   |       |               |  |   |              |   |  |        |     |   |  |   | (9,459 | )
|                                                              |  |              |   |         |        |   |             |   |        |               |  |   |               |   |  |        |      |   |  |   |        |  
|Balance at September 30, 2009                                 |  | 15,872,626   |   |         | $      | 2 |             | $ | 90,739 |               |  | $ | (76,261       | ) |  | $      | (629 | ) |  | $ | 13,851 |  
|                                                              |  |              |   |         |        |   |             |   |        |               |  |   |               |   |  |        |      |   |  |   |        |  



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SALARY.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                  |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Six months ended |        
|                                                                                          |  | September 30,    |        
|                                                                                          |  | 2009             |         |   | 2008 |  
|Cash flows from operating activities:                                                     |  | (unaudited)      |        
|Net loss                                                                                  |  | $                | (9,809  | ) |      | $ | (12,462 | )
|Adjustments to reconcile net loss to net cash provided (used in) by operating activities: |  |                  |         |   |      |   |         |  
|Depreciation and amortization of property, equipment and software                         |  |                  | 918     |   |      |   | 576     |  
|Amortization of intangible assets                                                         |  |                  | 2,335   |   |      |   | 1,607   |  
|Stock-based compensation                                                                  |  |                  | 2,981   |   |      |   | 4,465   |  
|Board of Directors fees paid in common stock                                              |  |                  | 217     |   |      |   | 244     |  
|Consulting fees paid in common stock                                                      |  |                  |        |   |      |   | 250     |  
|Increase (reduction) in provision for doubtful accounts                                   |  |                  | 93      |   |      |   | (5      | )
|Loss on sale or disposal of property, equipment, and software                             |  |                  | 19      |   |      |   |        |  
|Changes in operating assets and liabilities:                                              |  |                  |         |   |      |   |         |  
|(Increase) decrease in:                                                                   |  |                  |         |   |      |   |         |  
|Accounts receivable                                                                       |  |                  | (632    | ) |      |   | (37     | )
|Prepaid expenses and other current assets                                                 |  |                  | (43     | ) |      |   | (152    | )
|Other assets                                                                              |  |                  | 297     |   |      |   | (48     | )
|Increase (decrease) in:                                                                   |  |                  |         |   |      |   |         |  
|Accounts payable                                                                          |  |                  | 1,571   |   |      |   | 364     |  
|Accrued expense and other current liabilities                                             |  |                  | 1,102   |   |      |   | 684     |  
|Other long-term liabilities                                                               |  |                  | (10     | ) |      |   | 140     |  
|Deferred revenue                                                                          |  |                  | 1,420   |   |      |   | 1,306   |  
|Deferred tax liabilities                                                                  |  |                  | 47      |   |      |   |        |  
|                                                                                          |  |                  |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                  | 506     |   |      |   | (3,068  | )
|                                                                                          |  |                  |         |   |      |   |         |  
|                                                                                          |  |                 
|Cash flows from investing activities:                                                     |  |                  |         |   |      |   |         |  
|Cash paid for acquisition of business                                                     |  |                  | (46     | ) |      |   | (5,637  | )
|Cash paid for acquisition of data                                                         |  |                  | (39     | ) |      |   | (23     | )
|Cash paid for other intangible assets                                                     |  |                  | (345    | ) |      |   | (9      | )
|Increase in restricted cash                                                               |  |                  | (1      | ) |      |   | (378    | )
|Purchases of property, equipment and software                                             |  |                  | (145    | ) |      |   | (548    | )
|Proceeds on sale of property, equipment, and software                                     |  |                  | 3       |   |      |   |        |  
|Capitalization of software development costs                                              |  |                  | (173    | ) |      |   | (79     | )
|Net decrease in assets held to satisfy client funds obligations                           |  |                  | 3,563   |   |      |   |        |  
|                                                                                          |  |                  |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                       |  |                  | 2,817   |   |      |   | (6,674  | )
|                                                                                          |  |                  |         |   |      |   |         |  
|                                                                                          |  |                 
|Cash flows from financing activities:                                                     |  |                  |         |   |      |   |         |  
|Proceeds from revolving credit facility                                                   |  |                  | 11,975  |   |      |   |        |  
|Repayments of revolving line of credit and note payable                                   |  |                  | (14,202 | ) |      |   | (64     | )
|Proceeds from exercise of common stock options and warrants                               |  |                  | 226     |   |      |   | 111     |  
|Repurchase of unvested exercised stock options                                            |  |                  | (27     | ) |      |   | (16     | )
|Repurchase and retirement of common and restricted stock                                  |  |                  | (2,545  | ) |      |   |        |  
|Net decrease in client funds obligations                                                  |  |                  | (3,563  | ) |      |   |        |  
|                                                                                          |  |                  |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                       |  |                  | (8,136  | ) |      |   | 31      |  
|                                                                                          |  |                  |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                  | (192    | ) |      |   | 2       |  
|                                                                                          |  |                  |         |   |      |   |         |  
|                                                                                          |  |                 
|Net decrease in cash and cash equivalents                                                 |  |                  | (5,005  | ) |      |   | (9,709  | )
|Cash and cash equivalents, beginning of year                                              |  |                  | 21,085  |   |      |   | 37,727  |  
|                                                                                          |  |                  |         |   |      |   |         |  
|Cash and cash equivalents, end of year                                                    |  | $                | 16,080  |   |      | $ | 28,018  |  
|                                                                                          |  |                  |         |   |      |   |         |  



6



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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; however, it expects to continue to expand its international business in the future.

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. We have evaluated all subsequent events through the date the financial statements were issued on November 12, 2009 and we are 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.



7



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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:



|                                                                                                                    |  |               |  |          
|------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ---------
|                                                                                                                    |  | September 30,
|                                                                                                                    |  | 2009          |  | 2008     
|                                                                                                                    |  | (unaudited)  
|                                                                                                                    |  |              
|Options to purchase common stock                                                                                    |  | 1,471,051     |  | 1,595,674
|Warrants to purchase common stock                                                                                   |  | 53,612        |  | 53,612   
|Restricted stock awards                                                                                             |  | 2,013,106     |  | 2,608,003
|Restricted shares                                                                                                   |  | 449,838       |  | 1,018,723
|                                                                                                                    |  |               |  |          
|Total options, warrants, restricted stock awards and restricted shares exercisable or convertible into common
stock |  | 3,987,607     |  | 5,276,012
|                                                                                                                    |  |               |  |          

If the outstanding options and warrants were exercised or converted into common stock
or the restricted stock awards and restricted shares 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.



8



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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 required by the
Earnings per Share Topic of FASB ASC. The accounting guidance addresses whether instruments granted in share-based payment transactions are 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 weighted average restricted stock outstanding that is related to the early exercise of stock options 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 September 30, 2009 and 2008, respectively:



|                                                       |  |                                                     |        |   |                    |        |                 |   |       |          |  |   |        |   |                 |        |  |   |       |  
|------------------------------------------------------ |  | --------------------------------------------------- | ------ | - | ------------------ | ------ | --------------- | - | ----- | -------- |  | - | ------ | - | --------------- | ------ |  | - | ----- | -
|                                                       |  | Three months ended                                  |       
|                                                       |  | September 30, 2009                                  |        |   | September 30, 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        |  | $                                                   | (4,661 | ) |                    | 15,653 |                 | $ | (0.30 | )        |  | $ | (6,299 | ) |                 | 15,144 |  | $ | (0.42 | )
|Restricted stock included in computation upon adoption |  |                                                     |       |   |                    | 512    |                 |   | 0.01  |          |  |   |       |   |                 | 1,103  |  |   | 0.03  |  
|                                                       |  |                                                     |        |   |                    |        |                 |   |       |          |  |   |        |   |                 |        |  |   |       |  
|Adjusted net loss per share - basic and diluted        |  | $                                                   | (4,661 | ) |                    | 16,165 |                 | $ | (0.29 | )        |  | $ | (6,299 | ) |                 | 16,247 |  | $ | (0.39 | )
|                                                       |  |                                                     |        |   |                    |        |                 |   |       |          |  |   |        |   |                 |        |  |   |       |  

The following table sets forth the impact in earnings per share for the six months
ended September 30, 2009 and 2008, respectively:



|                                                       |  |                                                     |        |   |                    |        |                 |   |       |          |  |   |         |   |                 |        |  |   |       |  
|------------------------------------------------------ |  | --------------------------------------------------- | ------ | - | ------------------ | ------ | --------------- | - | ----- | -------- |  | - | ------- | - | --------------- | ------ |  | - | ----- | -
|                                                       |  | Six months ended                                    |       
|                                                       |  | September 30, 2009                                  |        |   | September 30, 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        |  | $                                                   | (9,809 | ) |                    | 15,625 |                 | $ | (0.63 | )        |  | $ | (12,462 | ) |                 | 14,872 |  | $ | (0.84 | )
|Restricted stock included in computation upon adoption |  |                                                     |       |   |                    | 587    |                 |   | 0.02  |          |  |   |        |   |                 | 1,169  |  |   | 0.06  |  
|                                                       |  |                                                     |        |   |                    |        |                 |   |       |          |  |   |         |   |                 |        |  |   |       |  
|Adjusted net loss per share - basic and diluted        |  | $                                                   | (9,809 | ) |                    | 16,212 |                 | $ | (0.61 | )        |  | $ | (12,462 | ) |                 | 16,041 |  | $ | (0.78 | )
|                                                       |  |                                                     |        |   |                    |        |                 |   |       |          |  |   |         |   |                 |        |  |   |       |  

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.

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.



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 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 accounting guidance will be effective for the Companys financial statements beginning October 1, 2009 and is not expected to have a
significant impact on the Companys 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 2011. Early adoption is allowed. The Company is currently evaluating the impact of this accounting guidance on its consolidated financial statements.

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 its consolidated financial statements.



10



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



3. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets as of September 30, 2009 and March 31, 2009, consist of the following:



|                                                            |  |                           |        |                         |   |                |  |      |        |                         |   |                |  |   |       |  |   |       
|----------------------------------------------------------- |  | ------------------------- | ------ | ----------------------- | - | -------------- |  | ---- | ------ | ----------------------- | - | -------------- |  | - | ----- |  | - | ------
|                                                            |  | (in thousands, unaudited)
|                                                            |  | September 30, 2009        |        | March 31, 2009         
|                                                            |  | Cost                      |        | AccumulatedAmortization |   | CarryingAmount |  | Cost |        | AccumulatedAmortization |   | CarryingAmount
|Amortizable intangible assets:                              |  |                           |        |                         |   |                |  |      |        |                         |   |                |  |   |       |  |   |       
|Non-compete agreements (5 years)                            |  | $                         | 1,854  |                         | $ | 1,176          |  | $    | 678    |                         | $ | 1,826          |  | $ | 898   |  | $ | 928   
|Customer relationships (5-7 years)                          |  |                           | 9,258  |                         |   | 2,921          |  |      | 6,337  |                         |   | 9,059          |  |   | 2,090 |  |   | 6,969 
|Developed technology (5-7 years)                            |  |                           | 5,611  |                         |   | 737            |  |      | 4,874  |                         |   | 5,094          |  |   | 297   |  |   | 4,797 
|Other intangible assets (5-18 years)                        |  |                           | 363    |                         |   | 186            |  |      | 177    |                         |   | 326            |  |   | 164   |  |   | 162   
|Trade name (5-7 years)                                      |  |                           | 1,388  |                         |   | 165            |  |      | 1,223  |                         |   | 750            |  |   | 43    |  |   | 707   
|Data acquisition costs (1-3 years)                          |  |                           | 4,683  |                         |   | 2,790          |  |      | 1,893  |                         |   | 4,643          |  |   | 2,094 |  |   | 2,549 
|                                                            |  |                           |        |                         |   |                |  |      |        |                         |   |                |  |   |       |  |   |       
|Total amortizable intangible assets                         |  |                           | 23,157 |                         | $ | 7,975          |  |      | 15,182 |                         |   | 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                                     |  | $                         | 41,268 |                         |   |                |  | $    | 33,293 |                         | $ | 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 September 30, 2009 and 2008 was approximately $1,183,000 and $869,000, respectively, of which $428,000 and $425,000, respectively, is included in cost of revenues. Acquired intangible asset amortization for the six months
ended September 30, 2009 and 2008 was approximately $2,335,000 and $1,645,000, respectively, of which $842,000 and $822,000, 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 endingMarch 31,
|     |  | (in thousands)      
|     | 
|2010 |  | $                    | 4,687
|2011 |  |                      | 3,943
|2012 |  |                      | 2,960
|2013 |  |                      | 2,070
|2014 |  |                      | 1,542



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The changes in the carrying amount of goodwill for the six months ended
September 30, 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 September 30, 2009                          |  | $              | 17,176
|                                                          |  |                |       

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 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 September 30, 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 to be 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 preliminary purchase price was allocated based upon the fair value of assets
acquired and liabilities assumed. The Company preliminarily 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 allocation of the purchase price is preliminary and subject to change. The results of operations
include the impact of this acquisition since December 17, 2008.



12



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                     |  |        |        |  
|---------------------------------------------------- |  | ------ | ------ | -
|                                                     |  | Amount |       
|                                                     | 
|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 Options

Stock-based compensation by line item in the statement of operations for the three and six months ended September 30, 2009 and 2008 was as follows:



|                           |  |                                |       |                              |   |       |  |      |       |  |   |      
|-------------------------- |  | ------------------------------ | ----- | ---------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                           |  | Three months endedSeptember 30 |       | Six months endedSeptember 30
|                           |  | 2009                           |       | 2008                         |   | 2009  |  | 2008
|                           |  | (in thousands)                 |       | (in thousands)              
|                           |  |                                |       |                             
|Cost of revenues           |  | $                              | 205   |                              | $ | 407   |  | $    | 430   |  | $ | 807  
|Research and development   |  |                                | 278   |                              |   | 521   |  |      | 538   |  |   | 788  
|Marketing and sales        |  |                                | 587   |                              |   | 720   |  |      | 1,168 |  |   | 1,437
|General and administrative |  |                                | 426   |                              |   | 829   |  |      | 845   |  |   | 1,433
|                           |  |                                |       |                              |   |       |  |      |       |  |   |      
|                           |  | $                              | 1,496 |                              | $ | 2,477 |  | $    | 2,981 |  | $ | 4,465
|                           |  |                                |       |                              |   |       |  |      |       |  |   |      



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock option activity, under all plans, during the three and six months ended
September 30, 2009 and 2008 was as follows:



|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     
|--------------------------------- |  | ---------------------------------- | - | ---------------------------------- | ---------------------------- | ---- | ---------------- | --------- | - | ---------------------------- | - | ----
|                                  |  | Six Months EndedSeptember 30, 2009 |   | Six Months EndedSeptember 30, 2008
|                                  |  | Number ofOptions                   |   |                                    | WeightedAverageExercisePrice |      | Number ofOptions |           |   | WeightedAverageExercisePrice
|                                  |  |                                    |   |                                   
|Outstanding - beginning of period |  | 1,886,042                          |   |                                    | $                            | 5.40 |                  | 1,645,699 |   |                              | $ | 6.74
|Granted                           |  |                                   |   |                                    |                              |      |                  |          |   |                              |   |     
|Exercised                         |  | (194,176                           | ) |                                    |                              | 0.81 |                  | (21,583   | ) |                              |   | 0.37
|Canceled                          |  | (220,815                           | ) |                                    |                              | 7.54 |                  | (28,442   | ) |                              |   | 6.08
|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     
|Outstanding - end of period       |  | 1,471,051                          |   |                                    | $                            | 5.69 |                  | 1,595,674 |   |                              | $ | 6.84
|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     
|                                  |  |                                    |   |                                   
|Exercisable - end of period       |  | 1,021,359                          |   |                                    | $                            | 5.01 |                  | 631,620   |   |                              | $ | 6.85
|                                  |  |                                    |   |                                    |                              |      |                  |           |   |                              |   |     

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 $100,000 as of September 30, 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 September 30, 2009 and 2008, there were 449,838 and 1,018,723 restricted shares outstanding, respectively, which
resulted from the exercise of unvested stock options.

As of September 30, 2009, there was approximately $2.1 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 six months ended September 30, 2009 was approximately $306,000 and $602,000, respectively.
Compensation expense related to stock options included in the statement of operations for the three and six months ended September 30, 2008 was approximately $438,000 and $858,000, 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 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 $6.7 million as of September 30, 2009. This cost is expected to be recognized over a
weighted-average period of 1.4 years. During the second quarter of fiscal 2010 and first quarter of fiscal 2009, the Company issued common stock with a value of $0.5 million and $1.7 million as payment for the fiscal year 2009 and 2008 employee
bonuses and other incentive programs, respectively. The expense for the fiscal 2010 and 2009 bonus and incentive programs is classified as payroll compensation in the respective period in which it was earned.



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table presents a summary of the restricted stock and deferred stock award
activity for the three and six months ended September 30, 2009 and 2008.



|                                       |  |                                    |   |                                    |                                    |      |        |           |   |                                    |   |      
|-------------------------------------- |  | ---------------------------------- | - | ---------------------------------- | ---------------------------------- | ---- | ------ | --------- | - | ---------------------------------- | - | -----
|                                       |  | Six months endedSeptember 30, 2009 |   | Six months endedSeptember 30, 2008
|                                       |  | Shares                             |   |                                    | WeightedAverageGrantDate FairValue |      | Shares |           |   | WeightedAverageGrantDate FairValue
|Unvested balance - beginning of period |  | 2,508,915                          |   |                                    | $                                  | 5.48 |        | 1,565,143 |   |                                    | $ | 10.86
|Awarded                                |  | 305,518                            |   |                                    |                                    | 2.78 |        | 2,084,546 |   |                                    |   | 4.81 
|Vested                                 |  | (666,122                           | ) |                                    |                                    | 5.00 |        | (674,941  | ) |                                    |   | 6.25 
|Cancelled                              |  | (135,205                           | ) |                                    |                                    | 4.43 |        | (366,745  | ) |                                    |   | 9.94 
|                                       |  |                                    |   |                                    |                                    |      |        |           |   |                                    |   |      
|Unvested balance - end of period       |  | 2,013,106                          |   |                                    | $                                  | 5.30 |        | 2,608,003 |   |                                    | $ | 7.35 
|                                       |  |                                    |   |                                    |                                    |      |        |           |   |                                    |   |      

The Company recorded compensation expense of approximately $1,192,000 and $2,336,000
related to restricted stock and deferred stock awards during the three and six months ended September 30, 2009, respectively. The Company recorded compensation expense of approximately $2,011,000 and $3,556,000 related to restricted stock and
deferred stock awards during the three and six months ended September 30, 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 six months ended September 30, 2009 and 2008.



|                                            |  |                               |   |  |            |  
|------------------------------------------- |  | ----------------------------- | - |  | ---------- | -
|                                            |  | Six Months EndedSeptember 30, |  
|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             |  | (305,518                      | ) |  | (2,084,546 | )
|Stock options cancelled/forfeited           |  | 312,176                       |   |  | 96,391     |  
|Restricted stock awards cancelled/forfeited |  | 135,205                       |   |  | 366,745    |  
|                                            |  |                               |   |  |            |  
|Balance - end of period                     |  | 2,625,272                     |   |  | 2,745,773  |  
|                                            |  |                               |   |  |            |  



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Distribution and Dilutive Effect of Options and Restricted Shares



|                                                             |  |                               |   |  |            |  
|------------------------------------------------------------ |  | ----------------------------- | - |  | ---------- | -
|                                                             |  | Six Months EndedSeptember 30, |  
|                                                             |  | 2009                          |   |  | 2008       |  
|Shares of common stock outstanding                           |  | 15,872,626                    |   |  | 15,311,792 |  
|                                                             |  |                              
|Restricted stock awards granted                              |  | 305,518                       |   |  | 2,084,546  |  
|Stock options cancelled/forfeited                            |  | (312,176                      | ) |  | (96,391    | )
|Restricted stock awards cancelled/forfeited                  |  | (135,205                      | ) |  | (366,745   | )
|                                                             |  |                               |   |  |            |  
|Net options/restricted stock granted                         |  | (141,863                      | ) |  | 1,621,410  |  
|                                                             |  |                               |   |  |            |  
|Grant dilution (1)                                           |  | -0.9                          | % |  | 10.6       | %
|                                                             |  |                              
|Stock options exercised                                      |  | 194,176                       |   |  | 21,583     |  
|Restricted stock awards vested                               |  | 666,122                       |   |  | 674,941    |  
|                                                             |  |                               |   |  |            |  
|Total stock options exercised/restricted stock awards vested |  | 860,298                       |   |  | 696,524    |  
|                                                             |  |                               |   |  |            |  
|Exercised dilution (2)                                       |  | 5.4                           | % |  | 4.5        | %



|(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 $44,000 and $51,000
related to shares issued under our employee stock purchase plan for the six months ended September 30, 2009 and 2008, respectively.

Warrants

As of September 30, 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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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                  |  |                                    |  |                              |     
|--------------------------------- |  | ---------------------------------- |  | ---------------------------- | ----
|                                  |  | Six Months EndedSeptember 30, 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 six months ended September 30, 2009 the Company repurchased and retired 178,648 and 1,041,054 shares, respectively, with a total value of approximately $0.5 million and $2.1 million, respectively, pursuant to this
repurchase program. Since the inception of the repurchase program through September 30, 2009, 1,234,878 shares with a total value of approximately $2.5 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 September 30, 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 September 30, 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.

Litigation and Claims

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



17



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 September 30,
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 September 30, 2009, the Company has not accrued any interest and penalties for unrecognized tax benefits in its
statement of operations.

As of September 30, 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 2005 through 2008. As of September 30, 2009, the Company had net operating loss carryforwards of approximately $37.7 million for state and federal tax purposes. 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. As of September 30, 2009, there was $6.0 million outstanding under the credit facility. On
October 5, 2009, the Company paid all but $1.0 million of the outstanding amounts due under its credit facility.

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.

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 $9.4 million at
September 30, 2009.



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##### Table of Contents

SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 $9.4 million as a current liability on the Consolidated Balance Sheet as of September 30, 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 change in cash flows related to the clients funding 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 change in cash flows related to the cash received from and paid on behalf of clients 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.

On July 13, 2009, the Company recorded restructuring charges of approximately $0.1 million related to
severance payments to four employees terminated by the Company.



19



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##### Table of Contents

SALARY.COM. INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A summary of the accrued restructuring balance for the six months ended
September 30, 2009 is as follows:



|                                                    |  |                |      |   |              |   |       |  |   |       |   |  |   |      |  
|--------------------------------------------------- |  | -------------- | ---- | - | ------------ | - | ----- |  | - | ----- | - |  | - | ---- | -
|                                                    |  | (in thousands) |     
|                                                    |  |                |      |   | Stock        |   |       |  |   |       |  
|                                                    |  | Severance      |      |   | Compensation |   | 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    |  
|                                                    |  |                |      |   |              |   |       |  |   |       |   |  |   |      |  

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 ended |        | Six months ended
|                    |  | September 30       |        | September 30    
|                    |  | 2009               |        | 2008             |   | 2009   |  | 2008
|                    |  | (in thousands)     |        | (in thousands)  
|                    |  |                    |        |                 
|Revenues:           |  |                    |        |                  |   |        |  |      |        |  |   |       
|United States       |  | $                  | 10,854 |                  | $ | 10,116 |  | $    | 21,582 |  | $ | 19,049
|All other countries |  |                    | 791    |                  |   | 430    |  |      | 1,420  |  |   | 1,112 
|                    |  |                    |        |                  |   |        |  |      |        |  |   |       
|Total Revenues      |  | $                  | 11,645 |                  | $ | 10,546 |  | $    | 23,002 |  | $ | 20,161
|                    |  |                    |        |                  |   |        |  |      |        |  |   |       

Long-lived assets as of September 30, 2009 and March 31, 2009 by geographic
location consist of the following:



|                        |  |                |        |           |   |       
|----------------------- |  | -------------- | ------ | --------- | - | ------
|                        |  | September 30,  |        | March 31,
|                        |  | 2009           |        | 2009     
|                        |  | (in thousands)
|                        |  |               
|Long-lived assets:      |  |                |        |           |   |       
|United States           |  | $              | 39,503 |           | $ | 29,976
|All other countries     |  |                | 7,088  |           |   | 7,078 
|                        |  |                |        |           |   |       
|Total long-lived assets |  | $              | 46,591 |           | $ | 37,054
|                        |  |                |        |           |   |       



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SALARY.COM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12. SUPPLEMENTAL CASH FLOW INFORMATION



|                                               |  |                               |     |      |   |        |  
|---------------------------------------------- |  | ----------------------------- | --- | ---- | - | ------ | -
|                                               |  | Six months endedSeptember 30, |    
|                                               |  | 2009                          |     | 2008 |  
|                                               |  | (in thousands, unaudited)     |    
|Supplemental cash flow information:            |  |                               |     |      |   |        |  
|Cash paid for interest                         |  | $                             | 83  |      | $ |       |  
|                                               |  |                              
|Noncash operating activities:                  |  |                               |     |      |   |        |  
|Bonus paid in common stock                     |  |                               | 282 |      |   | 1,607  |  
|Incentive compensation paid in common stock    |  |                               |    |      |   | 118    |  
|Board of Directors fees paid in common stock   |  |                               | 217 |      |   | 244    |  
|Consulting fees paid in common stock           |  |                               |    |      |   | 250    |  
|                                               |  |                              
|Noncash investing activities                   |  |                               |     |      |   |        |  
|Liabilities assumed on acquisition of business |  |                               |    |      |   | (2,341 | )
|                                               |  |                              
|Noncash financing activities                   |  |                               |     |      |   |        |  
|Vendor financed equipment purchases            |  |                               |    |      |   | 674    |  
|                                               |  |                              
|Cash paid for acquisition of business          |  |                               |     |      |   |        |  
|Net assets acquired (liabilities assumed)      |  | $                             |    |      | $ | (2,341 | )
|Goodwill and intangible assets                 |  |                               |    |      |   | 7,560  |  
|Direct acquisition related costs               |  |                               |    |      |   | 168    |  
|Deferred/contingent consideration payments     |  |                               | 46  |      |   | 250    |  
|                                               |  |                               |     |      |   |        |  
|Cash paid for acquisition of business          |  | $                             | 46  |      | $ | 5,637  |  
|                                               |  |                               |     |      |   |        |  



21



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##### Table of Contents

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

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. Our TalentManager succession planning application was named 2008 product of the year by a leading human resources industry publication.

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 September 30, 2009, our
enterprise subscriber base has grown to more than 3,500 companies who spend from $2,000 to more than $100,000 annually. We have achieved 34 consecutive quarters of revenue growth since April 2001. During the three months ended September 30,
2009, we incurred an operating loss of $4.6 million compared to an operating loss of $5.0 million in the three months ended June 30, 2009. During the six months ended September 30, 2009, we experienced operating cash inflows of $0.5
million compared to operating cash outflows $1.3 million in the six months ended June 30, 2009. As of September 30, 2009, we had an accumulated deficit of $76.3 million.

Sources of Revenues

We derive our revenues primarily from subscription fees and, to a lesser extent, through advertising on our website. For the three months ended September 30, 2009 and 2008, subscription revenues
accounted for 92% and 93%, respectively, of our total revenues and for the three months ended September 30, 2009 and 2008, advertising revenues accounted for 8% 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 September 30, 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



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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.

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 decrease in the upcoming fiscal year.

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.



|                                                    |  |                              |        |      |   |        |  
|--------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | -
|                                                    |  | Six Months EndedSeptember 30 |       
|                                                    |  | 2009                         |        | 2008 |  
|                                                    |  | (in thousands)               |       
|Total deferred revenue at end of period             |  | $                            | 29,865 |      | $ | 23,953 |  
|Net cash provided by (used in) operating activities |  |                              | 506    |      |   | (3,068 | )

Three Months Ended September 30, 2009 compared to Three Months Ended
September 30, 2008

Revenues. Revenues for the second quarter of fiscal 2010 were $11.6 million, an
increase of $1.1 million, or 10%, compared to revenues of $10.5 million for the second quarter of fiscal 2009. Subscription revenues were $10.8 million for the second quarter of fiscal 2010, an increase of $0.9 million, or 9%, compared to
subscription revenues of $9.9 million for the second quarter of fiscal 2009. The growth in subscription revenues was due primarily to our acquisitions during fiscal 2009. Advertising revenues were $895,000 for the second quarter of fiscal 2010
compared to advertising revenues of $688,000 for the second quarter of fiscal 2009. Total deferred revenue as of September 30, 2009 was $29.9 million, representing an increase of $5.9 million, or 25%, compared to total deferred revenue of $24.0
million as of September 30, 2008.

Cost of Revenues. Cost of revenues for the second quarter of fiscal 2010
was $3.7 million, an increase of $0.6 million, or 20%, compared to cost of revenues of $3.1 million for the second quarter of fiscal 2009. The increase in cost of revenues was primarily due to a $1.2 million increase of costs attributable to the
Genesys acquisition, partially offset by decreases of $0.4 million and $0.2 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.
As a percent of total revenues, cost of revenues increased from 30% in the second quarter of fiscal 2009 to 32% in the second quarter of fiscal 2010.



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Research and Development Expenses. Research and development expenses for the
second quarter of fiscal 2010 were $2.4 million, an increase of $0.1 million, or 6%, compared to research and development expenses of $2.3 million for the second quarter of fiscal 2009. The increase in research and development expenses was primarily
due to a $0.3 million increase of costs attributable to the acquisition of Genesys partially offset by a $0.2 million decrease in stock-based compensation due to the reduction in workforce implemented in the fourth quarter of fiscal 2009. Research
and development expenses decreased from 22% of total revenues in the second quarter of fiscal 2009 compared to 21% of total revenues in the second quarter of fiscal 2010.

Sales and Marketing Expenses. Sales and marketing expenses for the second quarter of fiscal 2010 were $5.6 million, a decrease of $1.6 million, or 22%, compared to sales and marketing expenses
of $7.2 million for the second quarter of fiscal 2009. The decrease was primarily due to decreases of $0.7 million and $0.1 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 $0.5 million of outside service costs primarily consisting of marketing expenses, and an additional $0.3 million in advertising and trade show expenses, partially offset by a $0.1
million increase of costs attributable to fiscal 2009 acquisitions. 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 68% of total revenues in the second quarter of fiscal 2009 to 48% of total revenues in the second quarter of fiscal 2010.

General and Administrative Expenses. General and administrative expenses were $3.7 million for the second quarter of fiscal 2010, a decrease of $0.2 million, or 5%, compared to $3.9
million for the second quarter of fiscal 2009. The decrease was primarily due to decreases of $0.1 million and $0.4 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 and a decrease of $0.1 million in rent expense associated with the relocation of our corporate offices, partially offset by increases of $0.2 million in legal, accounting and insurance related costs,
an increase of $0.1 million in depreciation expense and $0.1 million increase in costs attributable to the acquisition of Genesys. General and administrative expenses decreased to 32% of total revenues in the second quarter of fiscal 2010 compared
to 37% in the second quarter of fiscal 2009.

Amortization of Intangible Assets. Amortization of intangible assets
for the second quarter of fiscal 2010 was $756,000 compared to $444,000 in the second quarter of fiscal 2009. 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 second quarter of
fiscal 2010 was $52,000 compared to other income of $176,000 in the second quarter of fiscal 2009. The increase in expense consisted primarily of a decrease in interest income due to a decrease in invested cash balances, a decrease in interest rates
associated with invested balances, and an increase in interest expense primarily due to borrowings against our revolving credit facility.

Provision for Income Taxes. The provision for income taxes for the second quarter of fiscal 2010 was $20,000 compared to $56,000 in the second 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.

Six Months Ended September 30, 2009 compared to Six Months Ended September 30, 2008

Revenues. Revenues for the six months ended September 30, 2009 were $23.0 million, an increase of $2.8 million, or 14%,
compared to revenues of $20.2 million for the six months ended September 30, 2008. Subscription revenues were $21.2 million for the six month period ended September 30, 2009, an increase of $2.3 million, or 12%, compared to
subscription revenues of $18.8 million for the six months ended September 30, 2008. The growth in subscription revenues was due primarily to our acquisitions during fiscal 2009. Advertising revenues were $1.8 million for the six months
ended September 30, 2009 compared to advertising revenues of $1.3 million for the six months ended September 30, 2008.

Cost of Revenues. Cost of revenues for the six months ended September 30, 2009 was $7.4 million, an increase of $1.0 million, or 16%, compared to cost of revenues of $6.4 million for the six months ended September 30,
2008. The increase in cost of revenues was primarily due to a $2.5 million increase of costs attributable to the Genesys acquisition, partially offset by decreases of $0.6 million and $0.4 million in payroll and benefit related costs



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and stock-based compensation, respectively, due to the reduction in workforce implemented in the fourth quarter of fiscal 2009, a decrease of $0.3 million related to consulting costs associated
with our compensation products. As a percent of total revenues, cost of revenues remained consistent at 32% for the six months ended September 30, 2009 and 2008.

Research and Development Expenses. Research and development expenses for the six months ended September 30, 2009 were $4.7 million, an increase of $0.6 million, or 15%, compared to
research and development expenses of $4.1 million for six months ended September 30, 2008. The increase in research and development expenses was primarily due to a $0.5 million increase of costs attributable to the acquisition of Genesys, a net
increase of $0.2 million in payroll and related travel costs due to the addition of research and development personnel within our Shanghai facility, and a $0.1 million 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 six months ended September 30, 2009 and 2008.

Sales and Marketing Expenses. Sales and marketing expenses for the six months ended September 30, 2009 were $11.3 million,
a decrease of $2.3 million, or 17%, compared to sales and marketing expenses of $13.6 million for the six months ended September 30, 2008. The decrease was primarily due to decreases of $1.1 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 $0.8 million of outside service costs primarily consisted of marketing expenses, and an
additional $0.7 million in advertising and trade show expenses, partially offset by a $0.4 million increase of costs attributable to fiscal 2009 acquisitions and our Montego Bay facility and $0.1 million of travel and departmental related costs. 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 68% of total revenues for the six months ended
September 30, 2008 to 49% of total revenues for the six months ended September 30, 2009.

General and
Administrative Expenses. General and administrative expenses were $7.8 million for the six months ended September 30, 2009, a decrease of $0.1 million, or 2%, compared to $7.9 million for the six months ended September 30,
2008. The decrease was primarily due to decreases of $0.6 million and $0.6 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
and a decrease of $0.3 million in rent expense primarily associated with the relocation of our corporate offices, partially offset by increases of $0.5 million in legal, accounting and insurance related costs, an increase of $0.3 million in
depreciation expense, an increase of $0.2 million of employee related costs, a $0.2 million increase in costs attributable to the acquisition of Genesys, and a $0.1 million increase associated with office relocation costs. General and administrative
expenses decreased to 34% of total revenues for the six months ended September 30, 2009 compared to 39% for the six months ended September 30, 2008.

Amortization of Intangible Assets. Amortization of intangible assets for the six months ended September 30, 2009 was $1.5 million compared to $0.8 million for the six months ended
September 30, 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 six months ended September 30, 2009 was $146,000 compared to other income of
$400,000 for the six months ended September 30, 2008. The increase in expense consisted primarily of a decrease in interest income due to a decrease in invested cash balances, a decrease in interest rates associated with invested balances, and
an increase in interest expense primarily due to borrowings against our revolving credit facility.

Provision for Income
Taxes. The provision for income taxes for the six months ended September 30, 2009 was $46,000 compared to $143,000 for the six months ended September 30, 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 September 30, 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 the
Companys option in either cash or stock. The purchase price to be 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 preliminary purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. We preliminarily 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 allocation of the
purchase price is preliminary and subject to change. 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 September 30, 2009, approximately $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 year 2009, an additional $0.1 million was paid in cash in October 2009 and $0.1 million has not
yet been paid.

Liquidity and Capital Resources

At September 30, 2009, our principal sources of liquidity were cash and cash equivalents totaling $16.1 million and accounts
receivable, net of allowance for doubtful accounts of $6.6 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 September 30, 2009 was a negative $19.0 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 which occurred in December 2008, and payments related to our stock repurchase program of $2.1 million. During the six months ended September 30, 2009, we borrowed against our revolving
credit facility and, as of September 30, 2009, we had an outstanding balance of $6.0 million against our line. On October 5, 2009, we paid all but $1.0 million of the outstanding amounts due under our credit facility.

Cash provided by operating activities for the six months ended September 30, 2009 was $0.5 million. This amount resulted from a net
loss of $9.8 million, adjusted for non-cash charges of $6.6 million and a $3.8 million net increase in operating assets and liabilities since the beginning of fiscal 2010. Non-cash items primarily consisted of $0.9 million of depreciation and
amortization of property, equipment and software, $2.3 million of amortization of intangible assets and $3.0 million of stock-based compensation. The net increase in operating assets and liabilities since the beginning of fiscal 2010 of $3.8
million was primarily comprised of increases in accounts payable and accrued expenses and other current liabilities since the beginning of fiscal 2010 of $1.6 million and $1.1 million, respectively, and deferred revenue of $1.4 million;
partially offset by an increase in accounts receivable of $0.6 million. The increase in accounts payable and accrued expenses and other current liabilities was primarily due to the timing of accrued incentive compensation charges in addition to
payments to vendors. The increase in deferred revenue since the beginning of fiscal 2010 is primarily the result of



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increased invoicing less revenue recognition from our subscription customers for the six months ended September 30, 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 $2.8 million and consisted primarily of a decrease of $3.6 million of funds obtained from payroll customers to be used in satisfying related obligations partially offset by $0.3 million paid for
purchases of intangible assets, $0.2 million paid for software development costs and $0.2 million paid for purchases of data sets and property, equipment and software. 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 $8.1 million, which consisted primarily of $2.2 million of repayments of our revolving line of credit
net of current fiscal year borrowings, $2.5 million of repurchases of our stock, and $3.6 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 September 30, 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 year 2009, an additional $0.1 million was paid in cash in October 2009 and $0.1
million has not yet been paid.

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. As of September 30, 2009, the 20% of the issued shares had vested and $100,000 of the additional
consideration has been earned. The additional cash consideration earned is expected to be paid in the fiscal quarter ended December 31, 2009.

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 September 30, 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 September 30, 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 agreement 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. As of September 30, 2009, there was $6.0 million outstanding under the credit facility. On October 5, 2009, we paid all but $1.0 million of the
outstanding amounts due under our credit facility.



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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 contains 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.

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 September 30, 2009, we had repurchased and retired 1,234,878 shares with a total value of approximately $2.5 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 September 30, 2009, the $2.0 million of additional consideration had been earned and recorded as goodwill.

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.

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.

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.



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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 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.



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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 September 30, 2009, we have a valuation allowance of $19.4 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 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 lack 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.



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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 $3.0 million and $4.5 million in the six months ended September 30, 2009 and 2008, respectively. As of
September 30, 2009, we had $8.8 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 1.7 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.

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,



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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.

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. The accounting guidance will be effective for our financial
statements beginning October 1, 2009 and is not expected to have a significant impact on our 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 2011. Early adoption is allowed. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements.

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.



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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 six months ended September 30, 2009, we incurred foreign exchange
losses of $37,000. 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 September 30, 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

The following
information updates, and should be read in conjunction with, the information disclosed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

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



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| |  |  | 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.

Our operating results may be adversely affected by
unfavorable economic and market conditions and the uncertain geopolitical environment

Recent turmoil in the
geopolitical environment in many parts of the world and changes in energy costs may continue to put pressure on global economic conditions. Our operating results may also be affected by uncertain or changing economic conditions, such as the
challenges that are currently affecting the credit markets and economic conditions in the United States. If global economic and market conditions, or economic conditions in the United States, remain uncertain or persist, spread, or deteriorate
further, we may experience material impacts on our business, operating results, and financial condition.

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

We have incurred operating
losses in the past and we expect to incur operating losses in the future. As of September 30, 2009, our accumulated deficit is approximately $76.3 million. Our recent operating losses were $9.8 million for the six months ended
September 30, 2009, $26.5 million for the fiscal year ended March 31, 2009, $12.3 million for the fiscal year ended March 31, 2008, and $8.3 million for the fiscal year ended March 31, 2007. We have not been profitable since
our inception, and we may not become profitable. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses exceed our expectations, our financial performance could be adversely
affected. If our revenue does not grow to offset these increased expenses, we may not become profitable. You should not consider recent revenue growth as indicative of our future performance. In fact, in future periods, we may not have any revenue
growth, or our revenue could decline.

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

As of September 30, 2009, we had net operating loss carryforwards of approximately $37.7 million for
state and federal tax purposes. These loss carryforwards expire at various dates through 2028. To the extent available, we intend to use these net operating loss carryforwards to reduce the U.S. corporate income tax liability associated with our
operations. Section 382 of the U.S. Internal Revenue Code of 1986 generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant
changes in stock ownership. Our ability to utilize net operating loss carryforwards may be limited by the issuance of common stock in our initial public offering. To the extent our use of net operating loss carryforwards is significantly limited,
our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.



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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 September 30, 2009, approximately $5.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased by us were retired as of
September 30, 2009. Effective October 15, 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 September 30, 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
|                 |  |                                        |  |                           
|July 1  31      |  | 148,733                                |  | $                          | 2.20 |                                                                                  | 101,984 |                                                                                                         | $ | 5,265,257
|                 |  |                                        |  |                           
|August 1  31    |  | 76,371                                 |  | $                          | 2.59 |                                                                                  | 47,826  |                                                                                                         | $ | 5,128,528
|                 |  |                                        |  |                           
|September 1  30 |  | 118,406                                |  | $                          | 2.33 |                                                                                  | 28,838  |                                                                                                         | $ | 5,044,072
|                 |  |                                        |  |                           
|Total            |  | 343,510                                |  | $                          | 2.33 |                                                                                  | 178,648 |                                                                                                         | $ | 5,044,072



|(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 $0.5 million during the quarter ended September 30, 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 September 30, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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

The following matters were submitted to the stockholders at our Annual Meeting of Stockholders held on September 17,
2009. Each of the matters was approved by the requisite vote.

(1) The following individuals were re-elected to the Board of
Director for three-year terms as Class III directors:



|                   |  |            |  |               
|------------------ |  | ---------- |  | --------------
|Name               |  | Votes For  |  | Votes Withheld
|Edward F. McCauley |  | 10,471,545 |  | 4,288,257     
|Kent Plunkett      |  | 8,696,990  |  | 6,062,812     
|John R. Sumser     |  | 10,306,727 |  | 4,453,075     

(2) To ratify the appointment of Grant Thornton LLP as our independent registered
public accounting firm for the year ending March 31, 2010:



|                 |  |           
|---------------- |  | ----------
|Votes For        |  | 13,779,955
|Votes Against    |  | 442       
|Votes Abstain    |  | 979,405   
|Broker Non-Votes |  | 0         

(3) To approve a stockholder proposal to retain the services of a nationally
recognized investment banking firm to explore a possible sale or merger of the Company in order to enhance the value of the Company and maximize shareholder value:



|                 |  |          
|---------------- |  | ---------
|Votes For        |  | 3,057,628
|Votes Against    |  | 8,771,572
|Votes Abstain    |  | 53,953   
|Broker Non-Votes |  | 2,876,649

ITEM 6  EXHIBITS

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



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.



|                        |  |  |  |                                                                        
|----------------------- |  |  |  | -----------------------------------------------------------------------
|                        |  |  |  | SALARY.COM, INC.                                                       
|                        |  | 
|Date: November 12, 2009 |  |  |  | /S/    BRYCE
CHICOYNE                                                  
|                        |  |  |  | Bryce Chicoyne                                                         
|                        |  |  |  | Chief Financial Officer                                                
|                        |  |  |  | (Authorizing Officer and Principal Financial Officer of the registrant)



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                              
|           | 
|10.1       |  | Sixth Loan Modification Agreement, dated as of October 15, 2009, by and between Salary.com, Inc. and Silicon Valley Bank (filed herewith).                                                               
|           | 
|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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