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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the Quarterly Period Ended: June 30, 2007



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

For the Transition Period from  to

Commission file number 1-33312



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SALARY.COM,
INC.

(Exact Name of Registrant as Specified in its Charter)



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

195 West Street, Waltham, Massachusetts 02451

(Address of Principal Executive Offices, Including Zip Code)

(781) 464-7300

(Registrants Telephone Number, Including Area Code)



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

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

Large Accelerated Filer ̈Accelerated Filer ̈Non-Accelerated Filer  x

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

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



|                                         |  |                              
|---------------------------------------- |  | -----------------------------
|Common Stock, par value $.0001 per share |  | 15,452,122                   
|Class                                    |  | Outstanding at August 7, 2007



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##### Table of Contents

SALARY.COM, INC.

INDEX



|                                |  |                                                                                       |  |   
|------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|                                |  | Page                                                                                 
|Part I. - Financial Information |  |                                                                                      
|                                |  |                                                                                      
|Item 1.                         |  | Consolidated Financial Statements (unaudited)                                         |  |   
|                                |  |                                                                                      
|                                |  | Consolidated Balance Sheets- June 30, 2007 and March 31, 2007                         |  | 3 
|                                |  |                                                                                      
|                                |  | Consolidated Statements of Operations- Three Months Ended June 30, 2007 and 2006      |  | 4 
|                                |  |                                                                                      
|                                |  | Consolidated Statements of Cash Flows  Three Months Ended June 30, 2007 and 2006     |  | 5 
|                                |  |                                                                                      
|                                |  | Notes to Unaudited Consolidated Financial Statements                                  |  | 6 
|                                |  |                                                                                      
|Item 2.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|                                |  |                                                                                      
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 28
|                                |  |                                                                                      
|Item 4.                         |  | Controls and Procedures                                                               |  | 28
|                                | 
|Part II. - Other Information    |  |                                                                                      
|                                |  |                                                                                      
|Item 1.                         |  | Legal Proceedings                                                                     |  | 30
|                                |  |                                                                                      
|Item 1A.                        |  | Risk Factors                                                                          |  | 30
|                                |  |                                                                                      
|Item 2.                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 33
|                                |  |                                                                                      
|Item 6.                         |  | Exhibits                                                                              |  | 34
|                                | 
|Signatures                      |  | 35                                                                                   



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##### Table of Contents

PART I.

FINANCIAL INFORMATION



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

SALARY.COM, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                                                                                                                                                 |  | June 30, 2007 |             |   | March 31, 2007 |  
|                                                                                                                                                                                                                 |  | (unaudited)   |             |   |                |  
|Assets                                                                                                                                                                                                           |  |               |             |   |                |   |             |  
|Current assets:                                                                                                                                                                                                  |  |               |             |   |                |   |             |  
|Cash and cash equivalents                                                                                                                                                                                        |  | $             | 39,928,841  |   |                | $ | 49,016,389  |  
|Accounts receivable, less allowance for doubtful accounts of $273,232 and $179,712, at June 30, 2007 and March 31, 2007,
respectively                                                                            |  |               | 3,690,123   |   |                |   | 3,364,931   |  
|Prepaid expenses and other current assets                                                                                                                                                                        |  |               | 604,226     |   |                |   | 891,483     |  
|Deferred customer acquisition costs, current portion                                                                                                                                                             |  |               | 853,176     |   |                |   | 870,224     |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total current assets                                                                                                                                                                                             |  |               | 45,076,366  |   |                |   | 54,143,027  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Property, equipment and software, net                                                                                                                                                                            |  |               | 1,992,205   |   |                |   | 1,937,250   |  
|Intangible assets, net                                                                                                                                                                                           |  |               |             |   |                |   |             |  
|Non-compete agreements, net                                                                                                                                                                                      |  |               | 867,140     |   |                |   | 292,002     |  
|Customer relationships, net                                                                                                                                                                                      |  |               | 3,216,044   |   |                |   | 96,000      |  
|Other intangible assets                                                                                                                                                                                          |  |               | 159,164     |   |                |   | 35,630      |  
|Trademarks                                                                                                                                                                                                       |  |               | 290,000     |   |                |   |            |  
|Data acquisition costs, net                                                                                                                                                                                      |  |               | 1,813,991   |   |                |   | 1,500,000   |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total intangible assets, net                                                                                                                                                                                     |  |               | 6,346,339   |   |                |   | 1,923,632   |  
|Goodwill                                                                                                                                                                                                         |  |               | 6,038,651   |   |                |   | 266,000     |  
|Deferred customer acquisition costs, net of current portion                                                                                                                                                      |  |               | 49,657      |   |                |   | 48,856      |  
|Security deposits                                                                                                                                                                                                |  |               | 365,776     |   |                |   | 341,708     |  
|Other assets                                                                                                                                                                                                     |  |               | 25,000      |   |                |   | 15,000      |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|                                                                                                                                                                                                                 |  |               | 14,817,628  |   |                |   | 4,532,446   |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total assets                                                                                                                                                                                                     |  | $             | 59,893,994  |   |                | $ | 58,675,473  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|                                                                                                                                                                                                                 |  |              
|Liabilities and Stockholders Equity                                                                                                                                                                             |  |               |             |   |                |   |             |  
|Current liabilities:                                                                                                                                                                                             |  |               |             |   |                |   |             |  
|Accounts payable                                                                                                                                                                                                 |  | $             | 1,063,118   |   |                | $ | 607,782     |  
|Accrued compensation                                                                                                                                                                                             |  |               | 2,488,556   |   |                |   | 1,898,529   |  
|Accrued expenses and other current liabilities                                                                                                                                                                   |  |               | 1,365,332   |   |                |   | 1,104,714   |  
|Subscription payable                                                                                                                                                                                             |  |               | 628,089     |   |                |   | 693,638     |  
|Deferred revenue, current portion                                                                                                                                                                                |  |               | 16,082,157  |   |                |   | 15,506,966  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total current liabilities                                                                                                                                                                                        |  |               | 21,627,252  |   |                |   | 19,811,629  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Deferred revenue, net of current portion                                                                                                                                                                         |  |               | 902,953     |   |                |   | 880,688     |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total liabilities                                                                                                                                                                                                |  |               | 22,530,205  |   |                |   | 20,692,317  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Commitments and contingencies (Note 6)                                                                                                                                                                           |  |               |            |   |                |   |            |  
|                                                                                                                                                                                                                 |  |              
|Stockholders equity:                                                                                                                                                                                            |  |               |             |   |                |   |             |  
|Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                                                       |  |               |            |   |                |   |            |  
|Common stock, $.0001 par value; 100,000,000 shares authorized at June 30, 2007 and March 31, 2007, respectively; 13,417,464 issued
and outstanding at June 30, 2007 and 13,315,580 outstanding at March 31, 2007 |  |               | 1,341       |   |                |   | 1,331       |  
|Additional paid-in capital                                                                                                                                                                                       |  |               | 68,125,184  |   |                |   | 67,378,802  |  
|Accumulated other comprehensive loss                                                                                                                                                                             |  |               | (1,392      | ) |                |   | (666        | )
|Accumulated deficit                                                                                                                                                                                              |  |               | (30,761,344 | ) |                |   | (29,396,311 | )
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total stockholders equity                                                                                                                                                                                       |  |               | 37,363,789  |   |                |   | 37,983,156  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                       |  | $             | 59,893,994  |   |                | $ | 58,675,473  |  
|                                                                                                                                                                                                                 |  |               |             |   |                |   |             |  

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



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##### Table of Contents

SALARY.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                         |  |                             |            |   |      |   |           |  
|------------------------------------------------------------------------ |  | --------------------------- | ---------- | - | ---- | - | --------- | -
|                                                                         |  | Three Months Ended June 30, |           
|                                                                         |  | 2007                        |            |   | 2006 |  
|                                                                         |  | (unaudited)                 |           
|Revenue:                                                                 |  |                             |            |   |      |   |           |  
|Subscription revenues                                                    |  | $                           | 6,758,499  |   |      | $ | 4,441,198 |  
|Advertising revenues                                                     |  |                             | 780,508    |   |      |   | 714,408   |  
|                                                                         |  |                             |            |   |      |   |           |  
|Total revenues                                                           |  |                             | 7,539,007  |   |      |   | 5,155,606 |  
|                                                                         |  |                            
|Cost of revenues (1)                                                     |  |                             | 1,622,312  |   |      |   | 1,051,548 |  
|                                                                         |  |                             |            |   |      |   |           |  
|Gross profit                                                             |  |                             | 5,916,695  |   |      |   | 4,104,058 |  
|                                                                         |  |                             |            |   |      |   |           |  
|Operating expenses:                                                      |  |                             |            |   |      |   |           |  
|Research and development (1)                                             |  |                             | 882,267    |   |      |   | 727,658   |  
|Sales and marketing (1)                                                  |  |                             | 3,898,480  |   |      |   | 2,687,204 |  
|General and administrative (1)                                           |  |                             | 2,927,139  |   |      |   | 1,447,856 |  
|Amortization of intangible assets                                        |  |                             | 134,818    |   |      |   | 53,249    |  
|                                                                         |  |                             |            |   |      |   |           |  
|Total operating expenses                                                 |  |                             | 7,842,704  |   |      |   | 4,915,967 |  
|                                                                         |  |                             |            |   |      |   |           |  
|Loss from operations                                                     |  |                             | (1,926,009 | ) |      |   | (811,909  | )
|                                                                         |  |                             |            |   |      |   |           |  
|Other income (expense):                                                  |  |                             |            |   |      |   |           |  
|Interest income                                                          |  |                             | 560,675    |   |      |   | 4,385     |  
|Interest expense                                                         |  |                             |           |   |      |   | (24,268   | )
|Other income (expense)                                                   |  |                             | 297        |   |      |   | (2,500    | )
|                                                                         |  |                             |            |   |      |   |           |  
|Total other income (expense)                                             |  |                             | 560,972    |   |      |   | (22,383   | )
|                                                                         |  |                             |            |   |      |   |           |  
|Net loss                                                                 |  |                             | (1,365,037 | ) |      |   | (834,292  | )
|Accretion of preferred stock                                             |  |                             |           |   |      |   | (128,999  | )
|                                                                         |  |                             |            |   |      |   |           |  
|Net loss attributable to common stockholders                             |  | $                           | (1,365,037 | ) |      | $ | (963,291  | )
|                                                                         |  |                             |            |   |      |   |           |  
|Net loss attributable to common stockholders per sharebasic and diluted |  | $                           | (0.10      | ) |      | $ | (0.20     | )
|                                                                         |  |                             |            |   |      |   |           |  
|Weighted average shares outstandingbasic and diluted                    |  |                             | 13,358,488 |   |      |   | 4,724,163 |  
|(1)    Amounts include
stock-based compensation expense, as follows:     |  |                             |            |   |      |   |           |  
|                                                                         | 
|                                                                         |  | Three Months Ended June 30, |           
|                                                                         |  | 2007                        |            |   | 2006 |  
|                                                                         |  | (unaudited)                 |           
|Cost of revenues                                                         |  | $                           | 94,806     |   |      | $ | 28,295    |  
|Research and development                                                 |  |                             | 2,126      |   |      |   | 19,236    |  
|Sales and marketing                                                      |  |                             | 201,918    |   |      |   | 69,373    |  
|General and administrative                                               |  |                             | 375,173    |   |      |   | 126,562   |  
|                                                                         |  |                             |            |   |      |   |           |  
|                                                                         |  | $                           | 674,023    |   |      | $ | 243,466   |  
|                                                                         |  |                             |            |   |      |   |           |  

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



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SALARY.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                             |             |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                          |  | Three months ended June 30, |            
|                                                                                          |  | 2007                        |             |   | 2006 |  
|                                                                                          |  | (unaudited)                 |            
|Cash flows from operating activities:                                                     |  |                             |             |   |      |   |            |  
|Net loss                                                                                  |  | $                           | (1,365,037  | ) |      | $ | (834,292   | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |             |   |      |   |            |  
|Depreciation and amortization of property, equipment and software                         |  |                             | 263,150     |   |      |   | 168,883    |  
|Amortization of intangible assets                                                         |  |                             | 140,827     |   |      |   | 53,249     |  
|Stock-based compensation                                                                  |  |                             | 674,023     |   |      |   | 243,466    |  
|Provision for doubtful accounts                                                           |  |                             | 59,070      |   |      |   | 49,589     |  
|Changes in operating assets and liabilities, net of acquisition:                          |  |                             |             |   |      |   |            |  
|(Increase) decrease in:                                                                   |  |                             |             |   |      |   |            |  
|Accounts receivable                                                                       |  |                             | (225,287    | ) |      |   | (603,212   | )
|Prepaid expenses and other current assets                                                 |  |                             | 287,257     |   |      |   | (182,049   | )
|Deferred customer acquisition costs                                                       |  |                             | 16,248      |   |      |   | (63,899    | )
|Security deposits                                                                         |  |                             | (24,068     | ) |      |   | 120,719    |  
|Other assets                                                                              |  |                             | (10,000     | ) |      |   |           |  
|Increase (decrease) in:                                                                   |  |                             |             |   |      |   |            |  
|Accounts payable                                                                          |  |                             | 455,336     |   |      |   | 228,638    |  
|Accrued expense and other current liabilities                                             |  |                             | 814,491     |   |      |   | (414,410   | )
|Deferred revenue                                                                          |  |                             | 526,569     |   |      |   | 575,266    |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Net cash provided by (used in) operating activities                                       |  |                             | 1,612,579   |   |      |   | (658,052   | )
|                                                                                          |  |                             |             |   |      |   |            |  
|                                                                                          |  |                            
|Cash flows from investing activities:                                                     |  |                             |             |   |      |   |            |  
|Cash paid for acquisition of business                                                     |  |                             | (10,197,962 | ) |      |   | (367,500   | )
|Cash paid for acquisition of data                                                         |  |                             | (200,000    | ) |      |   |           |  
|Cash paid for other intangible assets                                                     |  |                             | (14,152     | ) |      |   |           |  
|Purchases of property and equipment                                                       |  |                             | (115,404    | ) |      |   | (311,071   | )
|Capitalization of software development costs                                              |  |                             | (162,392    | ) |      |   | (93,156    | )
|                                                                                          |  |                             |             |   |      |   |            |  
|Net cash used in investing activities                                                     |  |                             | (10,689,910 | ) |      |   | (771,727   | )
|                                                                                          |  |                             |             |   |      |   |            |  
|                                                                                          |  |                            
|Cash flows from financing activities:                                                     |  |                             |             |   |      |   |            |  
|Proceeds from exercise of common stock options and warrants                               |  |                             | 3,037       |   |      |   | 3,000      |  
|Repurchase of unvested exercised stock options                                            |  |                             | (12,529     | ) |      |   | (1,873     | )
|Proceeds from subscription receivable                                                     |  |                             |            |   |      |   | 160,843    |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Net cash provided by (used in) financing activities                                       |  |                             | (9,492      | ) |      |   | 161,970    |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                             | (725        | ) |      |   |           |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Net decrease in cash and cash equivalents                                                 |  |                             | (9,087,548  | ) |      |   | (1,267,809 | )
|Cash and cash equivalents, beginning of period                                            |  |                             | 49,016,389  |   |      |   | 1,813,715  |  
|                                                                                          |  |                             |             |   |      |   |            |  
|Cash and cash equivalents, end of period                                                  |  | $                           | 39,928,841  |   |      | $ | 545,906    |  
|                                                                                          |  |                             |             |   |      |   |            |  
|                                                                                          |  |                            
|Supplemental disclosure of cash flow information:                                         |  |                             |             |   |      |   |            |  
|Cash paid for interest                                                                    |  | $                           |            |   |      | $ | 25,213     |  
|                                                                                          |  |                             |             |   |      |   |            |  
|                                                                                          |  |                            
|Supplemental disclosure of noncash investing activities:                                  |  |                             |             |   |      |   |            |  
|Liabilities assumed on acquisition of business                                            |  | $                           | 133,000     |   |      | $ | 120,000    |  
|                                                                                          |  |                             |             |   |      |   |            |  
|                                                                                          |  |                            
|Supplemental disclosure of noncash financing activities:                                  |  |                             |             |   |      |   |            |  
|Accretion and dividends on redeemable preferred stock                                     |  | $                           |            |   |      | $ | 128,999    |  
|                                                                                          |  |                             |             |   |      |   |            |  

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



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##### Table of Contents

SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of
Presentation

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

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

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

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



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##### Table of Contents

SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Cash and Cash Equivalents

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

Deferred Customer Acquisition Costs

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

Goodwill and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142). Under SFAS No. 142, goodwill and certain other intangible assets with indefinite lives are no longer amortized, but instead are reviewed for impairment annually or more frequently if
impairment indicators arise. The Company reviews the carrying value of its goodwill by comparing the carrying value of the related business component to its estimated fair value. The fair value is based on managements estimate of the future
discounted cash flows to be generated by the respective business component. Changes in the underlying business could affect these estimates, which in turn could affect the recoverability of goodwill. If goodwill becomes impaired, some or all of the
goodwill could be written off as a charge to operations. No circumstances arose during the three months ended June 30, 2007 which would indicate that the carrying value of goodwill has become impaired. Intangible assets subject to amortization
are amortized on a straight-line basis over their estimated useful lives or contract periods, as applicable.

Software Development Costs

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

The Company incurs software development costs related to its applications developed for subscription
services and for management information systems. Costs are incurred in three stages of development: the preliminary project stage, the application development stage, and the post-implementation stage. Costs incurred during the preliminary project
stage and the post-implementation stage are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during
configuration, coding, and testing activities. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, it is probable that the
project will be completed, the software will be used to perform the function intended and technical feasibility has been determined. These costs are amortized using the straight-line method over the estimated useful life of the software, which is
generally three years. All other development costs are expensed as incurred.

Revenue Recognition

The Company derives its revenues from subscription fees and, to a lesser extent, through advertising on its website and syndication fees. Subscription
revenues are comprised primarily of subscription fees from enterprise and small business customers who pay a bundled fee for the Companys on-demand software applications and data products and implementation services related to the
Companys subscription products, as well as syndication fees from the Companys website partners and premium membership subscriptions sold primarily to individuals. To a lesser extent, subscription revenues also include fees for discrete
professional services which are not bundled with the Companys subscription products and revenue from the sale of the Companys Compensation Market Study and



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Salary.com Survey products, which are not sold on a subscription basis. These discrete professional services generally represent stand-alone compensation
related to consulting and benchmarking of specific jobs. Because the Company provides its application as a service, the Company follows the provisions of SEC Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in
the Financial Statements, as amended by No. 104,Revenue Recognition. Revenue is recognized ratably over the contractual period and amounts are earned when all of the following conditions are satisfied: (1) there is
persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of fees from the customer is probable.

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

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

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

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

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

Fair Value of Financial Instruments

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



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Comprehensive Loss

Comprehensive loss was as follows:



|                                             |  |                             |            |   |      |   |          |  
|-------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | -------- | -
|                                             |  | Three months ended June 30, |           
|                                             |  | 2007                        |            |   | 2006 |  
|                                             |  | (unaudited)                 |           
|Net loss attributable to common stockholders |  | $                           | (1,365,037 | ) |      | $ | (963,291 | )
|Other comprehensive loss:                    |  |                             |            |   |      |   |          |  
|Currency translation adjustments             |  |                             | (725       | ) |      |   |         |  
|                                             |  |                             |            |   |      |   |          |  
|Other comprehensive loss                     |  |                             | (725       | ) |      |   |         |  
|                                             |  |                             |            |   |      |   |          |  
|Comprehensive loss                           |  | $                           | (1,365,762 | ) |      | $ | (963,291 | )
|                                             |  |                             |            |   |      |   |          |  

Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based upon the temporary differences between the financial reporting and tax bases of liabilities and assets, using enacted tax rates in effect in the years in which the differences are expected to reverse.
Realization of the Companys net deferred tax assets is contingent upon generation of future taxable income. Due to the uncertainty of realization of the tax benefits, the Company has provided a valuation allowance for the full amount of its
net deferred tax assets.

Other Taxes

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

Net Loss Attributable to Common Stockholders per Share

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

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



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                            |  |                            |  |          
|----------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ---------
|                                                                                                            |  | Three months endedJune 30,
|                                                                                                            |  | 2007                       |  | 2006     
|Options to purchase common stock                                                                            |  | 1,886,831                  |  | 630,572  
|Warrants to purchase common or preferred stock                                                              |  | 147,868                    |  | 108,666  
|Shares of common stock into which outstanding preferred stock is convertible                                |  |                           |  | 1,758,599
|Restricted stock awards                                                                                     |  | 159,689                    |  |         
|Restricted shares (1)                                                                                       |  | 1,838,815                  |  | 3,457,063
|                                                                                                            |  |                            |  |          
|Total options, warrants, restricted shares and preferred stock exercisable or convertible into common stock |  | 4,033,203                  |  | 5,954,900
|                                                                                                            |  |                            |  |          

---

|(1) | Represents stock options that have been exercised, but unvested as of the reporting date.
|--- | -----------------------------------------------------------------------------------------

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

Recent Accounting Pronouncements

In February
2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115(SFAS 159), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact of adopting SFAS 159 on its financial
statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the
impact of adopting SFAS 157 on its financial statements.

3. ACQUISITION OF BUSINESSES

ICR

On May 15, 2007, the Company acquired all of the membership interests of ICR
Limited, L.C. and all of the outstanding share capital of ICR International Ltd. (collectively, ICR), a leading provider of industry-specific market intelligence for employee pay and benefits for the global technology and specialty
consumer goods markets. Pursuant to the terms of the purchase agreements, the Company paid $10.3 million to the owners of ICR, of which $1 million has been placed in escrow for 12 months. The escrow fund will be available to compensate the Company
for any losses the Company may incur as a result of any breach of the representations or warranties by the owners of ICR contained in the purchase agreements, and certain liabilities arising out of the ownership or operation of ICR prior to the
acquisition. The total cost of the acquisition, including legal fees of $20,000, was approximately $10.3 million. Accordingly, the purchase price was allocated based upon the fair value of assets acquired and liabilities assumed. The Company
allocated $5.8 million of the purchase price to goodwill based upon the estimated fair value of the assets acquired in the acquisition. Goodwill from the acquisition resulted from our belief that the products developed by ICR will be complementary
to our on-demand software suites. The allocation of the purchase price is preliminary and subject to change. The results of operations for the three months ended June 30, 2007 include the impact of this acquisition since May 15, 2007. The
pro forma effects of this acquisition would not have been material to the current and prior interim periods.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



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



|                                                     |  |        |            |  
|---------------------------------------------------- |  | ------ | ---------- | -
|                                                     |  | Amount |           
|Non-compete (amortization period 3 years)            |  | $      | 620,000    |  
|Customer relationships (amortization period 5 years) |  |        | 3,210,000  |  
|Compensation data (amortization period 3 years)      |  |        | 120,000    |  
|IPAS interface tool (amortization period 5 years)    |  |        | 110,000    |  
|Trademarks                                           |  |        | 290,000    |  
|Assets acquired                                      |  |        | 298,000    |  
|Assumed liabilities                                  |  |        | (133,000   | )
|Goodwill                                             |  |        | 5,773,000  |  
|                                                     |  |        |            |  
|Total purchase price                                 |  | $      | 10,288,000 |  
|                                                     |  |        |            |  

eComp Data Services

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

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



|                                                     |  |        |          |  
|---------------------------------------------------- |  | ------ | -------- | -
|                                                     |  | Amount |         
|Non-compete (amortization period 5 years)            |  | $      | 365,000  |  
|Customer relationships (amortization period 5 years) |  |        | 120,000  |  
|Hosting and servicing (amortization period 2 months) |  |        | 29,000   |  
|Assumed liabilities                                  |  |        | (120,000 | )
|Goodwill                                             |  |        | 266,000  |  
|                                                     |  |        |          |  
|Total purchase price                                 |  | $      | 660,000  |  
|                                                     |  |        |          |  



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



4. INTANGIBLE ASSETS

Intangible assets as of June 30, 2007 and March 31, 2007, consist of the following:



|                                     |  |               |           |                          |   |                 |  |      |           |                          |   |                 |  |   |         |  |   |          
|------------------------------------ |  | ------------- | --------- | ------------------------ | - | --------------- |  | ---- | --------- | ------------------------ | - | --------------- |  | - | ------- |  | - | ---------
|                                     |  | June 30, 2007 |           | March 31, 2007          
|                                     |  | Cost          |           | Accumulated Amortization |   | Carrying Amount |  | Cost |           | Accumulated Amortization |   | Carrying Amount
|Non-compete agreements (5 years)     |  | $             | 985,000   |                          | $ | 117,860         |  | $    | 867,140   |                          | $ | 365,000         |  | $ | 72,998  |  | $ | 292,002  
|Customer relationships (5 years)     |  |               | 3,330,000 |                          |   | 113,956         |  |      | 3,216,044 |                          |   | 120,000         |  |   | 24,000  |  |   | 96,000   
|Other intangible assets (5-18 years) |  |               | 166,928   |                          |   | 7,764           |  |      | 159,164   |                          |   | 42,776          |  |   | 7,146   |  |   | 35,630   
|Trademarks (Indefinite)              |  |               | 290,000   |                          |   |                |  |      | 290,000   |                          |   |                |  |   |        |  |   |         
|Data acquisition costs (1-3 years)   |  |               | 1,820,000 |                          |   | 6,009           |  |      | 1,813,991 |                          |   | 1,500,000       |  |   |        |  |   | 1,500,000
|                                     |  |               |           |                          |   |                 |  |      |           |                          |   |                 |  |   |         |  |   |          
|                                     |  | $             | 6,591,928 |                          | $ | 245,589         |  | $    | 6,346,339 |                          | $ | 2,027,776       |  | $ | 104,144 |  | $ | 1,923,632
|                                     |  |               |           |                          |   |                 |  |      |           |                          |   |                 |  |   |         |  |   |          

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 June 30, 2007 was approximately $141,000, of which $6,000 is included in cost of
revenues. Amortization for the data acquisition costs will begin once the acquired data is integrated into the related product and that product is available to our customers.

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



|     |  |                       |          
|---- |  | --------------------- | ---------
|     |  | Year ending March 31,
|2008 |  | $                     | 1,468,493
|2009 |  |                       | 1,551,805
|2010 |  |                       | 1,476,805
|2011 |  |                       | 914,742  
|2012 |  |                       | 666,472  
|     |  |                       |          
|     |  | $                     | 6,078,317
|     |  |                       |          

5. STOCK-BASED COMPENSATION

Stock Options

Stock option activity, under all plans, during the three months ended
June 30, 2007 was as follows:



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                |  |                                  |  |                                 |        |                  |           |   |                                 |   |        
|------------------------------- |  | -------------------------------- |  | ------------------------------- | ------ | ---------------- | --------- | - | ------------------------------- | - | -------
|                                |  | Three Months Ended June 30, 2007
|                                |  | Restricted Shares (1)            |  | Weighted Average Exercise Price |        | Number ofOptions |           |   | Weighted Average Exercise Price
|Outstandingbeginning of period |  |                                 |  |                                 |        |                  | 1,941,103 |   |                                 | $ | 6.3465 
|Granted                         |  |                                 |  |                                 |        |                  | 38,860    |   |                                 |   | 10.5700
|Exercised                       |  | 1,838,815                        |  | $                               | 0.3416 |                  | (3,605    | ) |                                 |   | 1.2061 
|Canceled                        |  |                                 |  |                                 |        |                  | (89,527   | ) |                                 |   | 6.4785 
|                                |  |                                  |  |                                 |        |                  |           |   |                                 |   |        
|Outstandingend of period       |  | 1,838,815                        |  | $                               | 0.3416 |                  | 1,886,831 |   |                                 | $ | 6.4493 
|                                |  |                                  |  |                                 |        |                  |           |   |                                 |   |        
|Exercisableend of period       |  |                                  |  |                                 |        |                  | 344,694   |   |                                 | $ | 4.2950 
|                                |  |                                  |  |                                 |        |                  |           |   |                                 |   |        

---

|(1) | Represents stock options that have been exercised, but unvested as of the reporting date.
|--- | -----------------------------------------------------------------------------------------

The weighted average grant date fair value of options granted during the three months ended June 30, 2007 was $5.979. There were no stock options
granted in the three months ended June 30, 2006. The total intrinsic value of options exercised during the three months ended June 30, 2007 and 2006 was approximately $37,000 and $1,000, respectively.

Under the 2000 Plan and 2004 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 Stock, which is then subject to vesting under the respective options vesting schedule. Restricted Stock is 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 Stock 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 Stock upon the cessation of employment, the Company has recognized this potential liability for repurchase on the balance sheet as Subscription
Payable. Upon vesting of the restricted shares, the Subscription Payable is relieved and recorded in equity.

A summary of the
Companys unvested shares, included unvested stock options and shares of unvested restricted stock, as of June 30, 2007, and changes during the three months ended June 30, 2007, is presented below:



|                                    |  |                                        |   |  |                                             |       |        |       |         |                                        |  |           |                                             |  |        |       |  |                                        |            |   |                                            |           |        |  |   |       |  |   |            |  
|----------------------------------- |  | -------------------------------------- | - |  | ------------------------------------------- | ----- | ------ | ----- | ------- | -------------------------------------- |  | --------- | ------------------------------------------- |  | ------ | ----- |  | -------------------------------------- | ---------- | - | ------------------------------------------ | --------- | ------ |  | - | ----- |  | - | ---------- | -
|                                    |  | APB 25                                 |   |  | SFAS 123R                                   |       |        | Total |        
|                                    |  | Unvested Options And Restricted Shares |   |  | Weighted Average Grant Date Intrinsic Value |       | Amount |       |         | Unvested Options And Restricted Shares |  |           | Weighted Average Grant Date Intrinsic Value |  | Amount |       |  | Unvested Options And Restricted Shares |            |   | Weighted Average Grant DateIntrinsic Value |           | Amount | 
|Unvested Options and Restricted     |  |                                        |   |  |                                             |       |        |       |         |                                        |  |           |                                             |  |        |       |  |                                        |            |   |                                            |           |        |  |   |       |  |   |            |  
|Shares outstanding at March 31,2007 |  | 433,619                                |   |  | $                                           | 0.449 |        | $     | 194,658 |                                        |  | 3,219,464 |                                             |  | $      | 3.688 |  | $                                      | 11,873,393 |   |                                            | 3,653,083 |        |  | $ | 3.304 |  | $ | 12,068,051 |  
|Granted                             |  |                                       |   |  |                                             |      |        |       |        |                                        |  | 38,860    |                                             |  |        | 5.979 |  |                                        | 232,361    |   |                                            | 38,860    |        |  |   | 5.979 |  | $ | 232,361    |  
|Vested                              |  | (55,332                                | ) |  |                                             | 0.358 |        |       | (19,793 | )                                      |  | (108,941  | )                                           |  |        | 1.058 |  |                                        | (115,216   | ) |                                            | (164,273  | )      |  |   | 0.822 |  | $ | (135,009   | )
|Canceled                            |  | (2,452                                 | ) |  |                                             | 0.369 |        |       | (906    | )                                      |  | (142,811  | )                                           |  |        | 3.199 |  |                                        | (456,863   | ) |                                            | (145,263  | )      |  |   | 3.151 |  | $ | (457,769   | )
|                                    |  |                                        |   |  |                                             |       |        |       |         |                                        |  |           |                                             |  |        |       |  |                                        |            |   |                                            |           |        |  |   |       |  |   |            |  
|Unvested Options and Restricted     |  |                                        |   |  |                                             |       |        |       |         |                                        |  |           |                                             |  |        |       |  |                                        |            |   |                                            |           |        |  |   |       |  |   |            |  
|Shares outstanding at June 30, 2007 |  | 375,835                                |   |  | $                                           | 0.463 |        | $     | 173,959 |                                        |  | 3,006,572 |                                             |  | $      | 3.836 |  | $                                      | 11,533,675 |   |                                            | 3,382,407 |        |  | $ | 3.461 |  | $ | 11,707,634 |  
|                                    |  |                                        |   |  |                                             |       |        |       |         |                                        |  |           |                                             |  |        |       |  |                                        |            |   |                                            |           |        |  |   |       |  |   |            |  



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



As of June 30, 2007 and March 31, 2007, there were 1,838,815 and 1,991,585 shares of
unvested restricted stock outstanding.

As of June 30, 2007, there was approximately $8.8 million of total unrecognized compensation
expense related to unvested share-based compensation arrangements granted under the Companys Stock Option Plans (relating to the effect of SFAS 123R and APB 25). That cost is expected to be recognized over a weighted average period of 3.1
years. The total fair value of shares vested during the 3 months ended June 30, 2007 was approximately $586,000.

Effective
April 1, 2005, the Company adopted SFAS 123R using the prospective method of application, which requires the Company to recognize compensation expense on a prospective basis; therefore, prior period financial statements have not been restated.
Compensation expense recognized includes the expense of stock options granted on and subsequent to April 1, 2005. Stock options granted by the Company prior to that time are specifically excluded from SFAS 123R and will continue to be accounted
for in accordance with APB 25. These options were valued using the minimum value method.

Beginning in fiscal year 2006, the Company has
used the Black-Scholes option-pricing model to value 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.

The Company estimates expected volatility based on that of the Companys publicly-traded peer companies and expects to continue to do
so until such time as the Company has adequate historical data from its traded share price. Management believes that the historical volatility of the Companys stock price does not best represent the expected volatility of the stock price.
Prior to the Companys initial public offering in February 2007, the Company was a private company and therefore lacked company-specific historical and implied volatility information. The Company intends to continue to consistently use the same
group of publicly-traded peer companies to determine volatility in the future until such time that it has accumulated sufficient historical information regarding the volatility of the Companys now publicly traded share price.

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

The expected term of the options granted was determined based upon review of the period that the Companys 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 and expectations of employee exercise behavior.

SFAS 123R also requires that the Company recognize compensation expense for only the portion of options that are expected to vest. Therefore, the Company
has estimated expected forfeitures of stock options with the adoption of SFAS 123R. In developing a forfeiture rate estimate, the Company considered its historical experience, its growing employee base and the limited liquidity of its 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.

The following table provides the assumptions used in determining the fair value of the share-based awards for the three months ended June 30, 2007. No stock options were granted during the three months ended
June 30, 2006.



|                        |  |                                  |  
|----------------------- |  | -------------------------------- | -
|                        |  | Three Months Ended June 30, 2007 |  
|Risk-Free Rate          |  | 4.96                             | %
|Expected Life           |  | 5 years                          |  
|Expected Volatility     |  | 61.03                            | %
|Expected Dividend Yield |  | 0                                | %



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Compensation expense related to the adoption of SFAS 123R amounted to approximately $586,000 and
$185,000, which is included in the statement of operations for the three months ended June 30, 2007 and 2006, respectively, and is based on awards ultimately expected to vest and reflects an estimate of awards that will be forfeited. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS 123R, forfeitures were recorded as they occurred.

In connection with the preparation of the financial statements for the Companys initial public offering and solely for the purposes of
accounting for stock-based compensation for financial statement purposes, the Companys management reassessed the fair value of the Companys common stock for the equity awards granted on or after April 1, 2004 through March 31,
2006. Based upon this reassessment of the fair value of the Companys common stock, the Company recorded stock-based compensation expense to the extent that the reassessed value of the Companys common stock at the date of the grant
exceeded the exercise price of the equity awards. Reassessed values are inherently uncertain and highly subjective. For stock options granted prior to March 31, 2004, no expense was recorded as management determined that the estimated fair
value of the Companys stock at the date of grant did not exceed the exercise price. The stock-based compensation is being amortized on a straight-line basis over the stock option vesting period of generally five years. During the three months
ended June 30, 2007 and 2006, the Company recognized approximately $53,000 and $37,000 of stock-based compensation expense related to options granted to employees during fiscal 2006 and 2005, respectively based on the reassessed values of the
underlying common stock.

During fiscal 2006 and 2005, the Company offered certain holders of stock options the limited opportunity to
exercise their options at a price equal to the deemed fair value of the Companys stock at the time of the offer. To the extent that the offer was not accepted, the affected options retained their original exercise price. However, because of
the Companys offer, these options became subject to variable accounting as prescribed in FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)(FIN 44). The majority of these awards became fixed upon exercise under the bonus offer during March 2006, as described in the following paragraph, which was accounted for as a modification under SFAS 123R. Compensation expense
related to these options has been recognized during fiscal 2007, 2006 and 2005, since the modified option exercise prices were below the reassessed per share fair value of the Companys common stock at that time. The Company recorded
compensation expense amounting to approximately $36,000 and $21,000 for the three months ended June 30, 2007 and 2006, respectively.

During March 2006, the Company offered certain holders of stock options, totaling 143 employees, the limited opportunity to receive a cash bonus to exercise all of their outstanding stock options. As part of this offer, unvested stock
options could be exercised into restricted stock. This offer was accounted for as a modification under SFAS 123R. The additional compensation expense for the modification was deemed immaterial to the Companys financial statements. There are
1,838,815 shares of common stock subject to restriction as of June 30, 2007 related to this offer.

Restricted Stock Awards

On January 12, 2007, the Compensation Committee of the Board of Directors of the Company approved a form of restricted stock agreement for use under
the Companys 2007 Stock Plan pursuant to which the Company has granted stock options and restricted stock awards. The shares of restricted stock awards have a per share price of $0.0001 which equals the par value. The fair value is measured
based upon the closing NASDAQ market price of the underlying Company stock as of the date of grant. Compensation expense from the restricted stock awards is amortized over the applicable vesting period, generally 3 years, using the straight-line
method. Unamortized compensation cost was $1.6 million as of June 30, 2007. This cost is expected to be recognized over a weighted-average period of 2.9 years. The following table presents a summary of the restricted stock award activity for
the three months ended June 30, 2007.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|                                   |  |         |  |                                        |      
|---------------------------------- |  | ------- |  | -------------------------------------- | -----
|                                   |  | Shares  |  | Weighted Average Grant Date Fair Value
|Unvested balance at March 31, 2007 |  |        |  |                                        |      
|Awarded                            |  | 159,689 |  | $                                      | 10.57
|Vested                             |  |        |  |                                        |      
|Canceled                           |  |        |  |                                        |      
|                                   |  |         |  |                                        |      
|Unvested balance at June 30, 2007  |  | 159,689 |  | $                                      | 10.57
|                                   |  |         |  |                                        |      

The Company recorded approximately $41,000 of compensation expense related to restricted stock awards during the
three months ended June 30, 2007.

Warrants

As of June 30, 2007, the Company had outstanding warrants to purchase 147,868 shares of common stock at exercise prices ranging from $0.09 to $6.61 per share.



|                                |  |                                  |  |                                 |      
|------------------------------- |  | -------------------------------- |  | ------------------------------- | -----
|                                |  | Three Months Ended June 30, 2007
|                                |  | Number of Warrants               |  | Weighted Average Exercise Price
|Outstandingbeginning of period |  | 147,868                          |  | $                               | 2.148
|Granted                         |  |                                 |  |                                 |      
|Exercised                       |  |                                 |  |                                 |      
|Canceled                        |  |                                 |  |                                 |      
|                                |  |                                  |  |                                 |      
|Outstandingend of period       |  | 147,868                          |  | $                               | 2.148
|                                |  |                                  |  |                                 |      
|Exercisableend of period       |  | 147,868                          |  | $                               | 2.148
|                                |  |                                  |  |                                 |      



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



6. COMMITMENTS AND CONTINGENCIES

Employment Agreements

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

Litigation and Claims

On December 29,
2006, the Company commenced a declaratory judgment action in the Superior Court of Suffolk County, Massachusetts against a former independent consultant to the Company. The former consultant was under contract to Salary.com and assisted the Company
in completing a strategic partnership in 2000. The contract expired by its terms in November 2000. Pursuant to that contract, the former consultant was entitled to a success fee consisting of a right to purchase 33,600 shares of the Companys
common stock at a price of thirty-six cents per share, which at the time represented approximately three percent of the Companys capital stock. In November 2006, after the Company commenced its initial public offering, the former consultant
informed the Company that he was in possession of a version of a contract that allegedly gave him the right to purchase three percent of the Companys equity as of an unspecified date at a price of thirty-six cents per share. The basis for this
claim appears to be certain hand-written changes to the expired contract that the Company did not make or authorize, and had never seen until the former consultant sent the Company a copy of a contract containing these changes in November 2006. In
the court action, the Company is seeking to have the court declare that the consultant is not entitled to anything other than the 33,600 options described in the expired contract. In addition, the Company is seeking damages due to the former
consultants attempt to defraud the Company and its stockholders by making these hand-written changes subsequent to the contracts execution and without the Companys knowledge or consent. The Company also is seeking damages for
tortious interference with business relations as well as for unfair and deceptive business acts and practices. At this time, the Company cannot predict the outcome or the amount of gain or loss, if any, from these proceedings.

On February 1, 2007, Mercer filed a Complaint against the Company in the United States District Court for the Southern District of New York. The
Complaint alleges copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations. Specifically, the Complaint asserts that the Companys use of Mercer surveys
infringes upon Mercers copyrights, that the Company has breached, and induced its customers to breach, license agreements with Mercer, that the Company has attempted to deceive Mercer in connection with the Companys acquisition of Mercer
surveys, and that the Company has misrepresented its rights to use Mercers surveys to the Companys current and potential customers. The Complaint seeks injunctive relief and monetary damages. The Company believes that its purchase and
use of all third party surveys (including Mercers) complies with copyright law and any applicable license agreements and the Company intends to vigorously defend the claims by Mercer. The Company has filed several counterclaims against Mercer
in the New York action, including claims for tortious interference with business relations, breach of contract and misrepresentation. Although Mercer has made similar assertions to the Company in the past, the Company has not received any
correspondence from Mercer since 2004 on these issues and the Company has not purchased any Mercer data since that time. This previously acquired data comprises a very small portion of the data used to generate the Companys proprietary data
sets. Those proprietary data sets are not reliant on any one data source and the Company could remove the data it historically purchased from Mercer from such data sets and regenerate them without materially affecting the quality of the data sets.
In a separate action, the Company filed a Complaint against Mercer in the United States District Court for the District of Massachusetts on May 15, 2007. That Complaint alleges copyright infringement, unfair competition, breach of contract and
antitrust violations by Mercer based on the unlawful spidering of the Companys proprietary database and the repeated unauthorized use of the Companys proprietary data sets by Mercer employees. At this time, the Company cannot predict the
outcome or the amount of gain or loss, if any, from these proceedings.



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SALARY.COM, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



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

7. INCOME TAXES

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

As of April 1, 2007, the Company had $185,000 of unrecognized tax benefits
(before consideration of any valuation allowance). This amount includes $185,000 of unrecognized tax benefits that, if recognized, will affect the Companys effective tax rate. The Company does not believe that there will be any material
changes in its unrecognized tax positions over the next 12 months.

The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax positions as a component of income tax expense, if any. As of June 30, 2007, the Company has not accrued any interest and penalties for unrecognized tax benefits in its statement of operations.

As of April 1, 2007, the Company is subject to tax in the U.S. Federal, state and foreign jurisdictions. The Company is open to examination for tax years
2003 through 2006. Additionally, since the Company has net operating loss and tax credit carryforwards available for future years, those years are also subject to review by the taxing authorities.

8. SUBSEQUENT EVENTS

On August 3, 2007 the
Company acquired the assets of ITG Competency Group, LLC (ITG). ITG is a provider of off-the-shelf competency models and implementation services designed to accelerate performance or learning management initiative. Under the terms of the
agreement, the Company has paid the owner of ITG $1.8 million in cash and newly issued shares of the Companys common stock valued at $500,000. ITG will receive an additional $0.25 million in April 2008 and will also be eligible to earn up to
$1.0 million in additional consideration based on meeting certain performance targets during the first two years after the closing of the acquisition, and can earn additional consideration in this period if these targets are exceeded.



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

Introduction and Business Outlook

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

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

We were organized as a Delaware corporation in 1999. As of
June 30, 2007, our enterprise subscriber base has grown to more than 2,100 companies who spend from $2,000 to more than $100,000 annually. We have achieved 25 consecutive quarters of revenue growth since April 2001. However, during that time,
we have consistently incurred operating losses. During the three months ended June 30, 2007, we incurred an operating loss of $1.9 million compared to an operating loss of $4.3 million in the three months ended March 31, 2007. During the
three months ended June 30, 2007, we achieved positive operating cash flows of $1.6 million compared to $1.1 million in the three months ended March 31, 2007. As of June 30, 2007, we had an accumulated deficit of $30.8 million.

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

Acquisition of Businesses

On August 3, 2007 we acquired the assets of ITG Competency Group, LLC, or ITG. ITG is a
provider of off-the-shelf competency models and implementation services designed to accelerate performance or learning management initiatives. Under the terms of the agreement, we have paid the owner of ITG $1.8 million in cash and newly issued
shares of our common stock valued at $500,000. ITG will receive an additional $0.25 million in April 2008 and will also be eligible to earn up to $1.0 million in additional consideration based on meeting certain performance targets during the first
two years after the closing of the acquisition, and can earn additional consideration if these targets are exceeded.

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



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Pursuant to the terms of the purchase agreements, we paid $10.3 million to the owners of ICR, of which $1 million has been placed in escrow for 12 months.
The escrow fund will be available to compensate us for any losses we may incur as a result of any breach of the representations or warranties by the owners of ICR contained in the purchase agreements, and certain liabilities arising out of the
ownership or operation of ICR prior to the acquisition.

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
June 30, 2007 and 2006, subscription revenues accounted for 90% and 86%, respectively, of our total revenues and for the three months ended June 30, 2007 and 2006, advertising revenues accounted for 10% and 14%, respectively, of our total
revenues.

Subscription revenues are comprised primarily of subscription fees from enterprise and small business customers who pay a
bundled fee for our on-demand software applications and data products and implementation services related to our subscription products, as well as syndication fees from our website partners and premium membership subscriptions sold primarily to
individuals. Subscription revenues are primarily recognized ratably over the contract period as they are earned. Our subscription agreements for our enterprise subscription customer base are typically one to five years in length, and as of
June 30, 2007, approximately 50% of our contracts were more than one year in length. We generally invoice our customers annually in advance of their subscription (for both new products and renewals), with payment 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. 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 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 and amortization of capitalized software costs. As we continue
to implement and support our new and existing products and expand our data sets, we expect that over the next few years cost of revenues will continue to increase as a percentage of revenue and on an absolute dollar basis. Over the longer term, we
expect our cost of revenues to decrease as a percentage of revenue as our business grows and our new data products gain market acceptance.

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

Sales and Marketing. Sales and marketing expenses
consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We capitalize our sales commissions at the time a subscription agreement is executed by a customer
and we recognize the initial year sales commission expense ratably over one year. In the case of multi-year agreements, upon billing the customer for each additional year, we incur a subsequent sales commission and recognize the expense for such
commission over the applicable year. Typically, a majority of the sales commission is recognized in the initial year of the subscription term. In order to add new customers and increase sales to our existing customers, we plan to continue to invest



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heavily in our sales efforts by increasing the number of direct sales personnel. We also plan to expand our marketing activities in order to extend brand
awareness and generate additional leads for our sales staff. As a result, we expect that our sales and marketing expenses will increase on an absolute dollar basis as we grow our business.

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

Critical Accounting Policies

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

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

Revenue Recognition. In accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104,
Revenue Recognition, we recognize revenues from subscription agreements for our on-demand software and related services when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of
the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue. Our subscription agreements generally contain multiple
service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training. Except under limited circumstances, our subscription agreements do not provide customers the
right to take possession of the software at any time.

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

Income
Taxes. We account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes, or SFAS 109, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the
effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of all of the
deferred tax asset will not be realized. The realization of the deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. As of June 30, 2007, the Company has a
full valuation allowance against its deferred tax assets.

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

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



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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.
Effective April 1, 2005, we adopted FASB Statement No. 123-revised, Share-Based Payment or SFAS 123R, which revises SFAS No. 123, Accounting for Stock-Based Compensation or SFAS 123 and supersedes
Accounting Principles Board or APB Opinion No. 25, Accounting for Stock Issued to Employees or APB 25. SFAS 123R requires that all stock-based compensation be recognized as an expense in the financial statements over the
vesting period and that such expense be measured at the fair value of the award.

We adopted SFAS 123R using the prospective method of
application, which requires us to recognize compensation expense on a prospective basis; therefore, prior period financial statements have not been restated. Compensation expense recognized includes the expense of stock options granted on and
subsequent to April 1, 2005. Stock options granted by us prior to that time are specifically excluded from SFAS 123R and will continue to be accounted for in accordance with APB 25. These options were valued using the minimum value
method.

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

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

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



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

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

We recognized stock-based compensation pursuant to SFAS 123R in the amount of $586,000 in the
three months ended June 30, 2007. As of June 30, 2007, 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 3.1 years.

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

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

Results of Operations

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



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|                                  |  |                             |    |  |      |   
|--------------------------------- |  | --------------------------- | -- |  | ---- | --
|                                  |  | Three Months Ended June 30, |   
|                                  |  | 2007                        |    |  | 2006 |   
|Revenues:                         |  |                             |    |  |      |   
|Subscription Revenues             |  | 90                          | %  |  | 86   | % 
|Advertising Revenues              |  | 10                          |    |  | 14   |   
|                                  |  |                             |    |  |      |   
|Total Revenues                    |  | 100                         |    |  | 100  |   
|Cost of Revenues                  |  | 22                          |    |  | 20   |   
|                                  |  |                             |    |  |      |   
|Gross Profit                      |  | 78                          |    |  | 80   |   
|Operating Expenses:               |  |                             |    |  |      |   
|Research and Development          |  | 11                          |    |  | 14   |   
|Sales and Marketing               |  | 52                          |    |  | 52   |   
|General and Administrative        |  | 38                          |    |  | 28   |   
|Amortization of Intangible Assets |  | 2                           |    |  | 1    |   
|                                  |  |                             |    |  |      |   
|Total Operating Expenses          |  | 103                         |    |  | 95   |   
|Loss from Operations              |  | (25                         | )  |  | (15  | ) 
|Other Income (Expense), Net       |  | 7                           |    |  | (1   | ) 
|                                  |  |                             |    |  |      |   
|Net Loss                          |  | (18                         | )% |  | (16  | )%
|                                  |  |                             |    |  |      |   

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



|                                                    |  |                            |            |      |   |            |  
|--------------------------------------------------- |  | -------------------------- | ---------- | ---- | - | ---------- | -
|                                                    |  | Three Months Ended June 30 |           
|                                                    |  | 2007                       |            | 2006 |  
|Total revenue                                       |  | $                          | 7,539,007  |      | $ | 5,155,606  |  
|Total deferred revenue at end of period             |  |                            | 16,985,110 |      |   | 11,243,350 |  
|Net cash provided by (used in) operating activities |  |                            | 1,612,579  |      |   | (658,052   | )

Three Months Ended June 30, 2007 compared to Three Months Ended June 30, 2006

Revenues. Revenues for the first quarter of fiscal 2008 were $7.5 million, an increase of $2.4 million, or 46%, compared to revenues of $5.2
million for the first quarter of fiscal 2007. Subscription revenues were $6.8 million for the first quarter of fiscal 2008, an increase of $2.3 million, or 52%, compared to subscription revenues of $4.4 million for the first quarter
of fiscal 2007. The growth in subscription revenues was due principally to an increase of $0.8 million in renewal revenues to existing subscription customers, an increase of $0.9 million in revenues to new subscription customers and an increase of
$0.6 million in revenues from additional products sold to existing customers in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. A contributing factor in the increase in total revenues was the result of our hiring of
additional sales personnel focused on retaining existing customers, adding new customers and selling additional products to existing customers. Advertising revenues were $781,000 for the first quarter of fiscal 2008, an increase of $67,000, or 9%,
compared to advertising revenues of $714,000 for the first quarter of fiscal 2007. The growth in advertising revenues was primarily due to increased advertising volume. Total deferred revenue as of June 30, 2007 was $17.0 million, representing
an increase of $5.7 million, or 51%, compared to total deferred revenue of $11.3 million as of June 30, 2006.

Cost of
Revenues. Cost of revenues for the first quarter of fiscal 2008 was $1.6 million, an increase of $0.5 million, or 54%, compared to cost of revenues of $1.1 million for fiscal 2007. The increase in cost of revenues was



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primarily due to a $0.3 million increase in payroll and benefit related costs due to the addition of 5 personnel for our compensation and professional
service teams in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007, a $0.1 million increase in stock-based compensation expense as well as $0.1 million of additional costs associated with sales of our CompAnalyst
Executive Product due to the new SEC proxy rules, which were not in effect during the first quarter of fiscal 2007. As a percent of total revenues, cost of revenues increased to 22% in the first quarter of fiscal 2008 compared to 20% in the first
quarter of fiscal 2007. The increase was primarily the result of an increase in the number of professional service personnel in order to provide implementation services to our increasing number of customers.

Research and Development Expenses. Research and development expenses for the first quarter of fiscal 2008 were $0.9 million, an increase of
$0.2 million, or 21%, compared to research and development expenses of $0.7 million for the first quarter of fiscal 2007. The increase in research and development expenses was primarily due to a $0.2 million increase in expenses related to the
Companys subsidiary in Shanghai, China, which was established in December 2006 and is engaged primarily in research and development activities. Research and development expenses decreased to 11% of total revenues in the first quarter of fiscal
2008 compared to 14% of total revenues in the first quarter of fiscal 2007 due to the fact that our revenue growth outpaced our increasing investment in research and development. Our research and development headcount increased by 54 employees in
the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 as we hired additional personnel to upgrade and expand our on-demand software product suite.

Sales and Marketing Expenses. Sales and marketing expenses for the first quarter of fiscal 2008 were $3.9 million, an increase of $1.2 million, or 45%, compared to sales and marketing expenses of $2.7
million for the first quarter of fiscal 2007. The increase was primarily due to a $0.7 million increase in payroll and benefit related costs due to the addition of 29 sales and marketing personnel in the first quarter of fiscal 2008 compared to
the first quarter of fiscal 2007, a $0.2 million increase in sales commissions as a result of increased sales, and a $0.1 million increase in stock-based compensation expense. Sales and marketing expenses was 52% of total revenues in both the first
quarter of fiscal 2008 and the first quarter of fiscal 2007. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.

General and Administrative Expenses. General and administrative expenses for the first quarter of fiscal 2008 were $2.9 million, an
increase of $1.5 million, or 102%, compared to general and administrative expenses of $1.4 million for the first quarter of fiscal 2007. The increase in general and administrative expenses was due to an increase of $0.2 increase in stock-based
compensation expense, $0.4 million increase in payroll and benefit related costs due to the addition of 10 information technology, accounting and legal employees, and a $0.5 million increase in legal and accounting expenses. The overall increase in
our general and administrative expenses, other than stock compensation expense, is primarily the result of additional expenses that the Company has incurred which are related to being a publicly traded company that we did not incur as a privately
owned company in the first quarter of fiscal 2007. General and administrative expenses were 38% of total revenues in the first quarter of fiscal 2008 compared to 28% in the first quarter of fiscal 2007.

Amortization of Intangible Assets. Amortization of intangible assets for the first quarter of fiscal 2008 was $135,000 compared to $53,000 in
the first quarter of fiscal 2007. The increase in amortization was primarily due to the amortization of intangible assets acquired as part of the acquisition of ICR in May 2007.

Interest Income. Interest income for the first quarter of fiscal 2008 was $561,000 compared to $4,000 in the first quarter of fiscal 2007. The
increase in interest income was due to interest earned on higher invested cash balances resulting from the proceeds from the Companys initial public offering in February 2007.



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Liquidity and Capital Resources

At June 30, 2007, our principal sources of liquidity were cash and cash equivalents totaling $39.9 million and accounts receivable, net of allowance for doubtful accounts of $3.7 million compared to
cash and cash equivalents of $49.0 million and accounts receivable, net of allowance for doubtful accounts of $3.4 million at March 31, 2007. Our working capital as of June 30, 2007 was $23.4 million compared to working capital of $34.3
million as of March 31, 2007.

Cash provided by operating activities for the three months ended June 30, 2007 was $1.6 million.
This amount resulted from a net loss of $1.4 million, adjusted for net non-cash charges of $1.1 million and a $1.8 million net increase in working capital accounts. Non-cash items primarily consisted of $0.3 million of depreciation and amortization
of property, equipment and software, $0.1 million of amortization of intangible assets and $0.7 million of stock-based compensation. The net increase in working capital of $1.8 million was primarily comprised of increases in accounts receivable
of $0.2 million, accounts payable of $0.5 million, accrued expenses and other current liabilities of $0.8 million and deferred revenue of $0.5 million, offset slightly by a decrease in prepaid expense and other current assets of $0.3 million. The
increase in accounts receivable is primarily due to an overall increase in invoicing during the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. The decrease in prepaid expenses and other current assets is due to the pro
rata expensing of prepaid insurance expense during the first quarter of fiscal 2008. The increase in accounts payable is due primarily to our continued growth in the first quarter of fiscal 2008. The increase in accrued expenses is primarily due to
an increase in accrued incentive compensation. The increase in deferred revenue is primarily due to increased invoicing less revenue recognition from our subscription customers in the first quarter of fiscal 2008 compared to the first quarter of
fiscal 2007. The growth in the invoiced amounts was primarily due to sales to new customers, increased sales to existing customers, the introduction of new products, and the enhancement of existing products. Currently, payment for the majority of
our subscription agreements is due upon invoicing. Because revenue is generally recognized ratably over the subscription period, payments received at the beginning of the subscription period result in an increase to accounts receivable and deferred
revenue. Changes in deferred revenue generally indicate the trend for subscription revenues over the following year as the current portion of deferred revenue is expected to be recognized within 12 months.

Cash used in investing activities was $10.7 million and consisted primarily of $10.2 million paid for the acquisition ICR in May 2007, net of cash
acquired of $0.1 million, $0.2 million paid for the acquisition of data underlying certain of our products, $0.1 million paid for purchases of property and equipment for new offices, network infrastructure and computer equipment to support our
growth in employee headcount and $0.2 million of payments capitalized for the payment of software development costs. We intend to continue to invest in our content data sets, software development and network infrastructure to ensure our continued
ability to enhance our existing software, expand our data sets, introduce new products, and maintain the reliability of our network.

Cash
used in financing activities was $9,000, which consisted primarily of $12,000 in payments made to buy back unvested common stock related to the early exercise of employee stock options, offset slightly by $3,000 received from the exercise of common
stock options.

In August 2006, we entered into a $5,000,000 credit facility with Silicon Valley Bank. The line, which expires in August
2008, provides for a term loan up to $1,000,000 and a $4,000,000 revolving working capital line of credit. Borrowings on the term loan bear interest at the banks prime rate plus 1.00% and interest is payable on a monthly basis. Borrowings on
the revolving line bear interest at the banks prime rate plus 0.25%. The credit facility is collateralized by substantially all of our assets. In addition, the facility carries an unused revolving line facility fee of 0.375% of the balance
available, but not drawn down. As of June 30, 2007, there were no outstanding borrowings under this credit facility.

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



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On May 15, 2007, we acquired the membership interests of ICR, a leading provider of
industry-specific market intelligence for employee pay and benefits for the global technology and specialty consumer goods markets. Pursuant to the terms of the purchase agreements, we paid $10.3 million to the owners of ICR, of which $1 million has
been placed in escrow for 12 months.

On June 27, 2007, we entered into a master equipment lease agreement with a maximum commitment
of $300,000. The lease term begins on September 1, 2007 and runs for a term of 36 months.

On August 3, 2007 we acquired the
assets of ITG. ITG is a provider of off-the-shelf competency models and implementation services designed to accelerate performance or learning management initiatives. Under the terms of the agreement, we have paid the owner of ITG $1.8 million in
cash and newly issued shares of our common stock valued at $500,000. ITG will receive an additional $0.25 million in April 2008 and will also be eligible to earn up to $1.0 million in additional consideration based on meeting certain performance
targets during the first two years after the closing of the acquisition, and can earn additional consideration if these targets are exceeded.

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

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

Off-Balance-Sheet Arrangements

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

New Accounting Pronouncements

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115(SFAS 159), which
permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact of
adopting SFAS 159 on its financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS
157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. We
have not yet determined the impact of adopting SFAS 157 on its financial statements.



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

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

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



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

Evaluation of the Effectiveness of
Disclosure Controls and Procedures

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

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

Remediation of Prior YearSignificant Deficiencies

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

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

We have hired personnel resources with knowledge and experience dealing with SFAS 123R including outside consultants with expertise in GAAP, including SFAS 123R. Furthermore, the Company has instituted a control in
which the work performed by outside consultants is reviewed by the Director of Accounting and Financial Reporting and/or the Director of Finance for reasonableness and consistency. However this deficiency will not be completely remediated until we
have implemented a new software system and related controls to track stock option activity and calculate stock compensation expense in accordance with SFAS 123R. During the fiscal year ended March 31, 2007, we began the implementation of new
on-demand stock option management software. This automated software will significantly reduce the potential for errors inherent in a spreadsheet based process. Although the implementation of this system began in fiscal year 2007, it has not been
completed as of the date of this report. We continue our remediation efforts in this area in fiscal 2008.



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

During the fiscal year ended March 31, 2007, we began the implementation of our new accounting
system and related controls, which we believe will alleviate the revenue accounting issues identified during the fiscal year ended March 31, 2006. This new accounting system will fully integrate our revenue accounting and general ledger systems (as
compared to our current accounting system which is not integrated with the three other systems we use to record customer transactions and activities and the calculation of amounts recognized as revenue) and is more sophisticated in the manner in
which it handles complex revenue transactions. Although the implementation of this system began in fiscal year 2007, it has not been completed as of the date of this report. During the quarter ended June 30, 2007, we enhanced the documentation of
our revenue recognition policy to support how we recognize revenue in accordance with GAAP to encompass a broader range of transactions.

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

Although we have
the appropriate personnel who are knowledgeable and experienced with regard to the recording and reporting of sophisticated debt and equity financing transactions and we did not enter into any high dollar value equity and debt financing transactions
during the first quarter of fiscal 2008, we have not yet implemented a formal policy or procedures for the recording and reporting of these types of transactions as of the date of this report.

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

Changes to Internal Control Over Financial
Reporting

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

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



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PART II.

OTHER INFORMATION



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

See Item 3 of Part I of our
Annual Report on Form 10-K for the fiscal year ended March 31, 2007 for a description of certain legal proceedings involving Salary.com. There have been no material changes in such proceedings since the date of such Form 10-K.

We are not currently, nor have been in the past, subject to any other 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, 2007.

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



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



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



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



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



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



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



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



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



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



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

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

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

We have incurred operating losses in the past and we expect to incur operating losses in the future. As of June 30, 2007, our
accumulated deficit is approximately $30.8 million. Our recent operating losses were $8.3 million for the fiscal year ended March 31, 2007, $3.0 million for the fiscal year ended March 31, 2006, and $1.9 million for the
fiscal year ended March 31, 2005. We have not been profitable since our inception, and we may not become profitable. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses
exceed our expectations, our financial performance could be adversely affected. If our revenue does not grow to offset these increased expenses, we may not become profitable. You should not consider recent revenue growth as indicative of our future
performance. In fact, in future periods, we may not have any revenue growth, or our revenue could decline.

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

Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure.
Between March 31, 2004 and June 30, 2007, the number of our full time equivalent employees increased from 68 to 276. We anticipate that additional growth will be required in order to increase our customer base and handle an increase in the
volume of our business.

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



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

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

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

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



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



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



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



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



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



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

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

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

As of June 30, 2007, we had net operating loss carryforwards of approximately $17.9 million for federal tax purposes. These loss carryforwards expire
at various dates through 2027. 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



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

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

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

Beginning with our annual report for the year ending March 31, 2008, Section 404 of
Sarbanes-Oxley requires us to include an internal control report with our annual report on Form 10-K. That report must include managements assessment of the effectiveness of our internal control over financial reporting as of the end of the
fiscal year. Additionally, beginning with our annual report on Form 10-K for the year ending March 31, 2009, our independent registered public accounting firm will be required to issue a report on its evaluation of the operating effectiveness
of our internal control over financial reporting. The significant deficiencies and any other deficiencies in internal control that we currently have identified and that we may identify in the future will need to be addressed as part of the
evaluation of our internal control over financial reporting and may impair our ability to comply with Section 404. If we are not able to successfully implement internal control over financial reporting, we may not be able to accurately and
timely report on our financial position, results of operations or cash flows, which could adversely affect our business and investor confidence in us.

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

Future sales, or the availability for sale, of our common stock may cause our stock price to decline.

A total of
approximately 6.9 million shares of common stock may be sold in the public market by existing stockholders on or about August 17, 2007, subject to applicable volume and other limitations imposed under federal securities law. Sales of
substantial amounts of our common stock in the public market on or after such date, or the perception that such sales could occur, could adversely affect the market price of our common stock and could materially impair our future ability to raise
capital through offerings of our common stock.

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

Unregistered Sales of Equity Securities

Reference is made to Item 1.01 of our Current Report on Form 8-K dated July 31, 2007 and Item 2.01 of our Current Report
on Form 8-K dated August 9, 2007, which were previously filed with the Securities and Exchange Commission, regarding the issuance of common stock in connection with our acquisition of substantially all of the assets of ITG.



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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. The following table provides information with respect to purchases made by us of
shares of our common stock during the three month period ended June 30, 2007:



|             |  |                                      |  |                             |       |                                                                                  |   |                                                                                                              |  
|------------ |  | ------------------------------------ |  | --------------------------- | ----- | -------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------ | -
|Period       |  | Total Number of Shares Purchased (1) |  | Average PricePaid per Share |       | Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs |   | Maximum Number (or Approximate Dollar Value) of Shares
that May Yet Be Purchased Under the Plans or Programs
|April 1  30 |  | 20,132                               |  | $                           | 0.223 |                                                                                  |  |                                                                                                              | 
|May 1  31   |  | 2,128                                |  | $                           | 0.223 |                                                                                  |  |                                                                                                              | 
|June 1  30  |  | 30,556                               |  | $                           | 0.223 |                                                                                  |  |                                                                                                              | 
|Total        |  | 52,816                               |  | $                           | 0.223 |                                                                                  |  |                                                                                                              | 

---

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

ITEM 6  EXHIBITS

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



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SIGNATURES

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



|                      |  |  |  |                                                                        
|--------------------- |  |  |  | -----------------------------------------------------------------------
|                      |  |  |  | SALARY.COM, INC.                                                       
|                      |  | 
|Date: August 14, 2007 |  |  |  | /s/ Kenneth S. Goldman                                                 
|                      |  |  |  | Kenneth S. Goldman                                                     
|                      |  |  |  | Chief Financial Officer                                                
|                      |  |  |  | (Authorizing Officer and Principal Financial Officer of the registrant)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                    
|2.1         |  | Membership Interest Purchase Agreement dated as of May 15, 2007 by and among Salary.com, Inc., ICR Limited, L.C., Joseph Duggan and Roger Sturtevant Jr. (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed on May 15, 2007 (SEC File No. 001-33312)).
|            | 
|2.2         |  | Share Purchase Agreement dated as of May 15, 2007, by and among Salary.com, Inc., John Cunnell and Valerie Cunnell (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on May 15, 2007 (SEC File No. 001-33312)).                                      
|            | 
|2.3         |  | Asset Purchase Agreement dated as of July 31, 2007 by and among Salary.com, Inc., ITG Competency Group, LLC and Douglas W. Crisman (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed on July 31, 2007 (SEC File No. 001-33312)).                     
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).                                                                                                                                               
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).                                                                                                                                               
|            | 
|32.1        |  | Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).                                                                                      



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